Shell's output set to overtake pass BP's

Royal Dutch Shell, held back by almost seven years of falling production, is set to overtake BP after about $ 40 bn (EUR 28 bn) of investment from Qatar to Brazil.
Shell will boost its oil and gas output by a third, adding 1 mm bpd to capacity by the end of 2012, according to company estimates. That would push Shell to 4.25 mm, more than the 4.1 mm BP anticipates for 2012.

Record investment in 2009 let Shell Chief Executive Officer Peter Voser expand programs including an oil-sands venture in Canada and the Sakhalin-II project in Russia's Far East. The outlook may help revive Shell's London-listed shares, which have fallen this year even as competitors like BP gained.
"Shell will have so many start-ups in the coming five years that it will be impossible for European peers like BP to keep up," said Peter Heijen, an Amsterdam-based analyst at Theodoor Gilissen Bankiers. "Shell has the biggest spending program and that is paying off."

Shell, which reiterated the targets in a presentation, is Europe's biggest oil company by market value, yet trails BP in production after militant attacks hurt operations in Nigeria. The exploration and production division is the top earner for oil companies.
The Hague-based Shell's output averaged 3.25 mm barrels of oil equivalent a day last year, while BP pumped 3.84 mm. BP, which reversed two years of falling production in 2008, pushed output above 4 mm in the second quarter. Shell takes into account an annual decline rate of 5 % as fields mature.

Stock performance
Following a reserves scandal in 2004 when the company was forced to slash its proven reserve estimates, Shell accelerated investments into so-called unconventional projects such as a gas-to-liquids venture in Qatar. Shell predicts annual production growth of 2 to 3 % going into 2011 and 2012 after output was held back in recent years by OPEC cutbacks and the attacks in Nigeria, where it's the largest producer.
BP forecasts average annual output growth of 1 % to 2 % up until 2013, said David Nicholas, a company spokesman.

Total, Exxon
Total, Europe's third-biggest oil producer, predicts output will fall this year and expects projects in Africa to help boost production an average of 2 % through 2014.
ExxonMobil, the largest US oil company, warned it may not meet a 2 % production growth target this year. It still plans to boost output an average of 2 % to 3 % annually during the next half decade, Senior Vice President Mark Albers said Sept. 9.

Shell's share of the Sakhalin-II project in Russia will total 108,000 bpd of crude at peak production, while Athabasca will add another 60,000 barrels of oil equivalent a day from 2010. Liquefied natural gas projects in Qatar, Russia and Australia will boost output capacity to almost 26 mm tpy from 18.5 mm tons in the second quarter once the Gorgon project starts in 2014.
"The projects are enormous and it remains to be seen whether they can deliver on the growth target," said William Andrews, who holds Shell and BP stock among the $ 7 bn in assets he helps manage at C.S. McKee & Co. in Pittsburgh.

Debt concerns
Increased output at Shell will come at the price of higher debt, which is estimated by Standard & Poor's to exceed $ 35 bn by the end of 2010.
Expenses doubled between 2004 and 2008. The company estimates that Sakhalin-II will cost $ 20 bn, while the Pearl GTL venture in Qatar required investment of as much as $ 18 bn. The expansion of the Athabasca oil sands development may cost as much as $ 11.6 bn.

"Though Shell has some material projects starting up in the next few years, it also has a chunk of its production in high-cost resources," said Ivor Pether, a senior fund manager who helps manage the equivalent of about $ 9.9 bn at Royal London Asset Management.
"The market naturally has some concerns about the high capex and rise in debt."

Gearing, or the ratio of debt to equity, is set to triple by year-end as the company invests a record $ 32 bn. Voser pledged to cut capital expenditure in 2010 by about 10 % and implement "substantial" job cuts after oil prices fell from last year's record and the recession eroded demand.
S&P cited the prospect of "very sizeable debt increases" this year and next when it cut Shell's long-term credit rating one step to AA, the third-highest investment grade, this month.

No impact
The downgrade will have "no material impact" on Shell's funding needs, said David Williams, a company spokesman, adding that the "balance sheet is a tool we're using to underpin the investment program through the cycle." At the same time, S&P recognized that Shell's cash flow is set to improve by 2011 to 2012 because of "forecast major contributions from various large projects."
Shell has a 30 % stake in the QatarGas4 project, which will have peak production of 280,000 barrels of oil equivalent a day. The Perdido deepwater project in the Gulf of Mexico and the floating oil production unit at the BC-10 field in Brazil will add another 96,000 barrels of oil equivalent a day to output. Shell, the operator of both projects, has a 35 % stake in Perdido and a 50 % interest in BC-10.

Shell owns Pearl GTL, which will process 320,000 barrels of oil equivalent a day into 140,000 barrels of gas-to-liquids products and 120,000 bpd of ethane.
"Shell is clearly a must own stock by mid 2010," Alexandre Weinberg, a Brussels-based analyst at Petercam, said in August. "These assets should generate massive cash flow, while their plateau production characteristics should lower the decline rate from the current 5 % to 4 %."