Shell Makes FID on Shearwater Gas Hub, North Sea Back in Focus

Banking on the recovering energy landscape and improving North Sea prospects, Royal Dutch Shell plc RDS.A recently made its final investment decision (FID) on the Shearwater gas hub in the U.K. North Sea. Importantly, this marks the seventh FID of the company in the North Sea this year.

The Shearwater gas hub project is a joint venture between Exxon Mobil Corporation XOM, BP plc BP and Shell. Notably, dry gas produced from the Shearwater platform is currently transported to Bacton via the Shearwater Elgin Area Line pipeline. However, the company made the most recent plans to entail modification of the Shearwater platform and the construction of a 23-mile pipeline from the Fulmar Gas Line to the Shearwater hub. Importantly, the Shearwater hub has a production capacity of up to 400 million cubic feet of gas per day at its peak. The St Fergus plant in Scotland will process the gas and separate the natural gas liquids, which will be transported to the Fife Natural Gas Liquids plant and Fife Ethylene Plant.

Shell’s Slew of Sanctions in North Sea in 2018

Shell had a dominant presence in the North Sea for more than 40 years. The Penguins oil and gas field — a 50-50 joint venture between Shell and Exxon Mobil Corporation — represents a priority holding in Shell’s North Sea assets portfolio. This January, Shell gave a go-ahead to overhaul the Penguins Field in the ageing North Sea Basin. Notably, Shell hadn’t green lighted any North Sea project in the last six years prior to the announcement of Penguins development in January 2018. In April, the company greenlighted BP -operated Alligin project, wherein Shell holds 50% stake. Again, in June, Shell announced its intention to forge ahead with the development of the Fram natural gas field in the North Sea. Further, the oil giant also gave its go ahead for Arran, Gannet E fields along with the Gannet Export infrastructure investment during the year.

As such, the latest FID on Shearwater marks its seventh approval for a project in the North Sea. Shell reaped substantial benefits from cost-containment strategies adopted during the historic downturn period. Focus on realigning its business models to leaner and more efficient ones, so as to stay competitive in the long run, bodes well for the company. In fact, cashing in on operational efficiency and solid project execution, the Zacks Rank #3 (Hold) company intends to invest more in the North Sea region. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These developments highlight the significance of North Sea holdings in Shell’s upstream portfolio. Notably, the company, which has been in the process of reshaping its portfolio and unlocking new development opportunities with lower costs, intends to boost production from its core North Sea assets.

Is the Tide Turning for North Sea?

Production in the U.K. North Sea, which is one of the world’s oldest offshore basins, commenced in 1970s and achieved record levels in 1990s. However, output levels in the region have remained tepid since then. Thus, many oil majors have been facing troubles in generating profits. Further, during oil industry downturn, extracting oil from the North Sea had become extremely uneconomical, putting more pressure on companies’ margins, thereby denting investments in the region. The oil crash forced various oil majors to decrease their footprint in the expensive North Sea, in favor of reduced production cost elsewhere.

In fact, early last year, Shell offloaded a large chunk of its North Sea assets to smaller rival Chrysaor Holdings Ltd. for $3.8 billion. Various other major energy players like Chevron Corporation CVX, BP plc, Marathon Oil, Apache Corporation, among others, have been streamlining their portfolio and reducing their holdings in the North Sea, in a bid to sharpen their focus on lucrative shale exploration.

However, the region has started gaining momentum lately owing to several new projects including BP-operated Quad 204 field, in which Shell owns a 55% interest. Further, the introduction of transferable tax history by Chancellor Phillip Hammond will help to bring in a slew of contracts in the North Sea and thereby increase production. Notably, in November, BP commenced production at the Clair Ridge oil field in the U.K. North Sea. The field is considered as one of the country's biggest new oil developments in decades.

After successful portfolio optimization and favorable tax changes, companies like Shell, BP, ExxonMobil, among others, plan to ramp up its North Sea output through core production assets. In fact, Shell now intends to invest around $600-$800 million every year in a number of fresh projects in U.K. and especially the North Sea basin in the coming years.

The gradual uptick in crude prices along with efficient strides adopted by the companies during the slump period are now encouraging producers to rev up development in the region. The re-emerging confidence in the U.K. continental shelf can surely be gauged by various projects greenlighted of late.

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