Shell set to cut North Sea and Arctic operations after mega-deal

Oil major looks to focus on deep water exploration and liquefied natural gas after £47bn takeover of BG Group

Shell raised the prospect of withdrawing from the Arctic and scaling down its North Sea operations as it announced the largest deal in the industry for a decade – the £47bn takeover of BG Group, which will focus the business more narrowly on liquefied natural gas (LNG) and deep water oil and gas production.

As Shell took out an injunction against the six Greenpeace activists who boarded its Alaskan-bound drilling rig on Monday, its chief financial officer Simon Henry made the clearest statement yet that the company may  walk away from the region it has been pursuing for a decade.

The group also downplayed the significance of the North Sea in its operation because it does not fit into its key “themes” of LNG and Deep Water production.

Furthermore, Shell – which employs 2,400 workers in the North Sea – cautioned there would job losses worldwide as the new entity looks to cut $1bn a year from its combined costs. However, the Unite union warned Shell and BG not to engage in “crude cost cutting and job cuts” in a North Sea industry already facing thousands of redundancies after the oil price halved since the summer.

Shell is already in the process of cutting 500 jobs in the North Sea and was unable to rule out further losses following the merger. BG, the former exploration arm of British Gas, does not break down its staff although it is known to employ a total of about 1,500 people in the North Sea and at its Reading HQ.

Shell was forced to stop exploring for oil in Alaska after its rig ran aground on New Year’s Eve 2012. It is hoping to restart its campaign – which has cost it $5bn and has yet to find a drop of oil – in the summer although it is still waiting for various environmental permits before it can proceed.

Shell repeatedly emphasised that its focus would be on “integrated gas” – LNG and “gas-to-liquids” production – and deep water production yesterday, making Alaska less of a priority because its waters are typically shallow, at around 50m to 70m deep.

LNG is created by liquefying the gas at minus 60C, shrinking it to 1/600 th of its original size, while gas-to-liquids refers to turning gas into lubricants, diesel-like transport fuels and various chemicals.

Mr Henry said Shell would, of course, vigorously pursue Alaska if it is able to detect large volumes of oil but paved the way for an exit by indicating it could equally well walk away if tests failed to come up with a satisfactory result.

“Alaska is a key new frontier basin… But until you get into the reservoir, and we are able to drill this year to see what oil and gas is there, you really do not know the potential value,”  he said.

“If we are to drill this year, see what is in those reservoirs, it will change our thinking one way or another. It’s a bit of a binary outcome – but if the value is there it’s not something you walk away from….We’ll see where it goes…it’s only a small number of wells that will tell us what the potential of the play is,” Mr Henry said.

The biggest earners from yesterday’s mega-bid will be the investment banks

The North Sea will continue to play an important, but relatively small, part in the company because and the sale of some “mature” assets is likely because the economics of the region don’t stack up at the current oil price – just under $58 a barrel last night.

“Let’s say [the North Sea’s] at the lower end of the pecking order of logic [of this deal] which is integrated gas and deep water,” said Shell’s chief executive Ben van Beurden, adding that global cost cuts would include “some manpower savings across the world”.

Mr Henry added: “The North Sea was very challenged, fiscally and cost-wise… It’s relatively small in terms of likely contribution because it’s not a major value for our combined portfolio…. It’s likely to form part of the  divestment.”

The takeover prompted speculation that the  City could be in for a wave of deals in the oil and gas sector as low hydrocarbon prices have hit the share price of some companies particularly hard. It is the biggest deal since the late Nineties when BP merged with Amoco, Chevron combined with Texaco and Exxon and Mobil linked up. Shares in Tullow jumped 4 per cent while Ophir Energy rose 7 per cent.

Marc Kimsey, a senior trader at Accendo Markets, said: “The decline in oil prices in the past year has battered some stocks which are clearly now looking attractive.”

Mr van Beurden said the two companies were a “great fit”. The deal will boost Shell’s proved oil and gas reserves by 25 per cent and increase production by a fifth.

Shell will benefit from BG’s massive Australian LNG assets and deep-water oil exploration fields off the coast of Brazil. Under the terms of the deal, BG shareholders will receive £3.83 in cash and 0.45 Shell B shares for every BG share they own, and end up owning just under a fifth of the combined group. BG chief executive Helge Lund is expected to leave the company after the deal - potentially landing a £25m pay-off after joining two months ago.

Shell will sell about $30bn of assets between 2016 and 2018 and return most of the money to investors through share buybacks.

It started with ‘Sid’: The rise of BG

BG Group has half-a-million small shareholders, a legacy from its days as part of British Gas – the former state-owned institution that was privatised by Margaret Thatcher in the mid-1980s.

The company can trace its history back to the 1950s, when the UK’s Gas Council began looking at liquefied natural gas (LNG) as a replacement for manufactured gas. However, it was not until British Gas’s “Tell Sid” privatisation in 1986 that the firm really began to take shape.

It began developing its own LNG supplies in Trinidad and Tobago and Egypt in the mid-1990s and was spun off by British Gas in 1997, with Centrica becoming the retail business. 

In 2000, BG Group  demerged Lattice Group, a forefather of National Grid, which owns and operates electricity and gas networks across the UK and parts of the US. BG now has more than 5,200 employees, operations in over 20 countries and is one of the 15 largest companies in the FTSE 100.

Jamie Dunkley