Saudi Arabia’s move to abandon its role as the balancing force in world oil markets has put the brakes on America’s energy boom, with Riyadh successfully pressuring US shale producers, according to the head of Royal Dutch Shell.
Ben van Beurden, chief executive of Shell, said in an interview that Opec, the oil producers’ cartel led by the Saudis, had reminded shale companies and their backers in the bond markets that “there is still risk in this business”.
Many in the industry, he said, had come to believe — wrongly — that there was no price risk any more, assuming that Opec would always adjust the oil volumes it supplied to meet global demand and keep crude prices at more than $100 a barrel.
Speaking to the Financial Times, Mr van Beurden said the plunge in oil prices after Opec’s landmark decision in November not to cut production in the face of soaring US output and weaker-than-expected demand had sent a “powerful” signal that Riyadh would not “underwrite the price” by using its supplies to balance the market.
“I think they [the Saudis] have been quite successful, if you like, in making it very clear to shale oil companies as well as their financiers that they cannot forget the price risk,” he said. “The industry will remember it for some time.”
Mr van Beurden stopped short of predicting a sharp slide in US output, arguing that companies’ efforts to cut costs and improve efficiency meant that production was likely to continue “for a while to come” at about current levels, until “the sweet spots start running out”.
“The shale environment in the US, a lot of people say it has shown remarkable resilience and that’s absolutely true,” he said. “It continues to grow in the face of relatively low prices.”
But, he added, if US crude prices remained in the $50 to $60 a barrel range, then it would be hard to justify substantial new spending on infrastructure and drilling. Extracting “more marginal” barrels would need higher oil prices, he said.
Some investors say Shell needs markedly higher oil prices to ensure success with the Anglo-Dutch group’s proposed blockbuster takeover of BG Group, which values the UK company at £55bn including debt.
The speed at which Mr van Beurden moved to agree terms with BG — Shell is thought to have swiftly raised its offer after an initial pitch was rebuffed — has stoked speculation he was anxious to avoid letting in ExxonMobil, another potential buyer.
But Mr van Beurden dismissed concerns among some investors that Shell was overpaying for BG by offering a 50 per cent premium to its market value. Mr van Beurden said investors had undervalued BG.
“If you look at where the value of the company really is, and how the market valued it, there was a big disconnect between the two,” he added. “If you add on top of that what we think we can do with the portfolio . . . that gives you the deal space. We ended up exactly in the sweet spot.
“There will always be people on one end of the spectrum or the other who say you pay not enough, or too much, but I think, in the main, we got it right.”
The transaction, Mr van Beurden said, worked with oil at $70, $90 and $110 a barrel — the benchmark Brent crude price levels at which Shell traditionally screened acquisitions. He described himself as “realistic” rather than “bullish” on the crude price.
Mr van Beurden has been Shell’s chief executive since January last year, and the BG deal shows his determination to reshape the 108-year-old company.
The transaction is the biggest global energy deal in more than a decade, and in a single stroke would turn Shell into the biggest supplier of cleaner-burning liquefied natural gas after Qatar, and the largest foreign oil company in Brazil, one of the world’s most highly-prized oil provinces. A wave of disposals — $30bn of asset sales — would follow between 2016 and 2018 as Shell sought to “higher grade” the portfolio.
Some analysts believe Shell-BG could be a trigger for wider industry consolidation, with bigger, better capitalised energy groups responding to the slide in oil prices by swooping on smaller, more vulnerable rivals.
Indeed, adding reserves through acquisition is exactly what Shell itself is doing and could be more cost-effective than spending billions on exploration — many large energy groups have cut back capital spending to protect dividends since the oil price plunge.
However, Mr van Beurden played down the prospects of transformative dealmaking similar to that of the 1990s which created today’s oil and gas supermajors, pointing to the recovery in Brent crude from January’s lows.
“There is a different type of pressure and tension in the industry now,” he said. “I think you will find companies can see a way forward at this sort of price level.”
He added: “In terms of the really large industry consolidations, there isn’t an awful lot of choice and there isn’t an awful lot of capacity, firepower on balance sheets to do something like this. I think we were one of the very few who could do it.”