(MarketWatch) – Royal Dutch Shell PLC said Monday it will quit a major gas development in the United Arab Emirates amid a broad shake up of the company’s strategy and the worst rout in energy prices since the 1980s.
The project is the latest casualty of Shell’s push to streamline its portfolio and cut costs as it prepares to close its blockbuster acquisition of BG Group PLC against a backdrop of oil prices that slid even further Monday to less than $28 a barrel, a 12-year low. The BG deal is intended to simplify the Anglo-Dutch oil giant’s interests, refocusing the company on its natural gas and deep water businesses.
According to Shell, the joint venture it entered into with the Abu Dhabi National Oil Co., or ADNOC, in 2013 to develop Abu Dhabi’s Bab sour gas reservoirs no longer fits the company’s strategy, “particularly in the economic climate prevailing in the energy industry.”
“Following a careful and thorough evaluation of technical challenges and costs, Shell has decided to exit the joint development of the Bab sour gas reservoirs with ADNOC in the emirate of Abu Dhabi, and to stop further joint work on the project,” the company said in a news release.
A spokesman for Shell said there would be no write downs associated with the decision, which was still in the planning stages and hadn’t received significant investment yet. Shell recorded charges of $7.9 billion in the third quarter after it abandoned a number of big ticket projects, including its ill-fated venture into Arctic waters off Alaska and a costly Canadian oil sands project called Carmon Creek .
Shell’s move comes as the entire oil industry is working to lower costs during a prolonged period of sharply lower oil prices. The global oil industry delayed or canceled projects worth up to $380 billion in 2015, according to Wood MacKenzie, the energy consultancy.
Analysts at Bernstein Research welcomed Shell’s decision to ditch the technically challenging project, saying it would lower the company’s costs and make it more resilient as the oil market searches for a bottom.
“We see this as a win today for shareholders as the list of high-cost, low-return technology focused deferrals/cancellations grows,” Bernstein said in a note.
Shell remains present in Abu Dhabi as a joint venture partner in the Abu Dhabi Company for Onshore Oil Operations, ADCO, and in Abu Dhabi Gas Industries Ltd, GASCO.
The UAE’s Oil Minister Suhail al Mazrouei played down the importance of Shell’s decision to pull out of the project, describing it as an “aspirational project” not yet included in the UAE’s plans for domestic gas supply and acknowledging the commercial difficulties surrounding development projects in the current price environment.
“This is something that we think could be a viable option in the future when the prices are right,” Mr. Mazrouei said on the sidelines of a conference in Abu Dhabi. “We are not worried about supply of gas. We are planning well, if the company is pulling out I’m not worried,” he added.
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