Summary
The Rigzone Newsletter reported on March 17 that Royal Dutch Shell, as part of its annual review of strategy plans to invest $31-32 billion in 2009 to bolster upstream and downstream capacity. The company will focus on long-term fundamental investment even in the sharp decline of oil and gas prices. Jeroen van der Veer, CEO commented that “these are testing times” and while short-term measures are required, the long-term is positive. The upstream challenge is to replace reserves to offset natural oil field declines. Downstream, continued demand from customers and governments for cleaner products requires investment. The company did not begin new projects in 2007-08 because of high costs. Major projects include development of new oil fields which can produce 1 million bbl/day, new liquefied natural gas (LNG) capacity of 6.5 million tonnes/year and other upstream options to add more than 1 million bbl/day of capacity to support growth to 2020. Dividends this year will be increased 5%.
Analysis
With all due respect for Shell’s enthusiastic advertising campaigns that appear regularly, indeed almost daily on the major international TV channels touting the company’s many, many virtues, at heart the company is driven by the fundamental factors of prosperity. As Adam Smith accurately remarked in his: Inquiry into the Nature and Causes of the Wealth of Nations, “he intends only his own gain.” Royal Dutch Shell has one master to which it must be faithful. That master is the body of shareholders. Similarly, Shell’s sisters in international commerce are living by exactly the same dictate. And as Smith observed, it is inevitable that the general good of society obtains great benefit from this fierce competition. Shell looks ahead at least five years, reviewing its customer base and noting the products they now demand and making an educated guess as to what they will demand in the future of both existing products and those still on the drawing board. But their perspective is not restricted to the needs of present and future customers. Population growth, political tumult, new and ever changing fuel requirement, the vagaries of their concessionaires and most importantly, assuring a steady supply of crude oil and natural gas to keep their refineries and petrochemical plants humming all figure in the strategy. And this is exactly what their competitors are doing. All of them have long records of sustained profitability. Added together the five companies have at least than 500 years of operating history. All five have experienced several long-terms slumps in the petroleum industry. All five plan to be around for another 100 years. All five have essentially shrugged off today’s deep financial crisis as “just one of those things.” So it is spend the money, put the oil in the tanks, keep the corporate eyes fixed on the future and remember the shareholders.
