If all goes well with Shell’s takeover of BG, then in early 2016, BG’s flagship offices just off the Savannah on St. Clair Avenue will be flying Shell’s colours.
But unless the deepwater exploration takes off, I don’t believe Shell’s acquisition will bring about any noticeable change to the economy or the lives of most people in Trinidad and Tobago — a situation not dissimilar to when BP acquired Amoco.
BG’s offshore supply base in Chaguaramas could prove beneficial to any activity Shell may be considering in the Caribbean and in the deepwater resources off the northern coasts of South America.
If Shell takes advantage of this infrastructure, it could mean more work for local service providers — as was the case recently when Shell ran its French Guiana drilling operations from Trinidad.
Shell has a presence in French Guiana, Guyana, Colombia and Venezuela — although for the moment, we can forget Venezuela until it is able to extract itself from economic self-destruction and welcome back international investors other than the Chinese.
Up to 2013, using Trinidad as its base, Shell drilled four wells in the deep waters offshore French Guiana in its Guyane Maritime Permit. Unfortunately, it seems, all the wells were dry.
Nonetheless, with Shell having a permanent base in Chaguaramas, it will increase Trinidad and Tobago’s potential to become the operational hub of oil and gas deepwater services in the region and an opportunity for local businesses to expand Trinidad and Tobago’s oil and gas capabilities.
Investment decision-drivers are not different
Like the majority of large IOCs, BG and Shell make upstream investment decisions using very much the same criteria of proven and probable (1P and 2P) oil and gas reserve profiles while using similar commodity pricing assumptions, cost of capital and investment hurdle rates.
The T&T government will still apply the same taxes and, apart from naming Shell as the new “contractor,” BG’s current PSCs are cast in stone.
If the merger goes through, Shell would become the largest shareholder of Atlantic LNG, but this will not change Atlantic’s operational activities and business drivers one bit. Why? Because the governance of Atlantic’s four processing trains is conducted through shareholder agreements, which are not changing, nor will the ability of one party to influence decisions over another.
Ranking among other IOCs
Shell is a mammoth company, and the acquisition of BG Group will add 0.7 million barrels per day (mbbl/d) to its current production of 3.7 mbbl/d, giving it a daily production total of 4.4 mbbl/d.
This would leapfrog Shell from third place (tied with BP) over PetroChina into second place worldwide for IOCs, and close on the heels of ExxonMobil’s total of 4.7 mbbl/d.
In terms of worldwide industry rankings, this would make Shell a more financially important and capable company than BP, but I don’t think there will be an immediate Shell-versus-BP battle for “top dog,” as BP is too well-established and entrenched in Trinidad and Tobago, and Shell is unlikely to want to draw swords.
It will be interesting, however, to see how Shell handles Chevron, BG’s partner in ECMA, as they have had their differences in the past.
Shell has more muscle and experience in deepwater
Going forward a few years, Shell’s influence will be significant if the BHP-led deepwater exploration efforts prove fruitful.
The main reason is that Shell has a corporate strategy which is not hamstrung like BG Group’s strategic focus on just “Exploration and LNG.” Shell’s strategic goals are broader, more holistic and have no real financial constraints, with the likely outcome that Shell will increase its participation in the development phases of a deepwater project costing billions of dollars.
Many observers believe Trinidad and Tobago’s deepwater resources are just sitting there waiting to be found — and what a huge game-changer this would be for Trinidad.
If Exxon’s recent significant oil discovery 200 kilometres offshore Guyana in 1,700 metres of water is anything to go by, then future deepwater potential has just became more probable and exciting.
Shell is a world leader in deepwater drilling, and its experience in deepwater developments is equally impressive: Malaysia, Gumusut-Kakap floating platform; U.S. Gulf of Mexico, the Cardamom and Mars B developments; and Nigeria, the Bonga North West project.
Shell’s strategy for innovation is refreshing
Over the past 20 years or so, the IOCs, in their quest to hit declared performance targets and keep Wall Street and City of London analysts happy, have lost ground to the large service companies such as Schlumberger and Halliburton in terms of R&D and innovation.
This is a shortsighted, flawed and dangerous business strategy. It is refreshing that, unlike BG Group, Shell is one of the largest investors in R&D spending — $1.2 billion in 2014. (BG Group boasts an R&D commitment of just $66 million.)
For example, if it is gas rather than oil which may be discovered in the deepwater tracts, then Shell’s proprietary Floating LNG (FLNG) technology could mean Trinidad and Tobago may well see one of these monster processing plants positioned in the deep water 200 kilometres east of Galeota.
What it all means
Will Shell make a difference? Maybe, but not immediately. Operationally, though, Shell will bring its own management philosophy and style; this will likely make for some reasonably significant changes within the old BG offices and operations.
In the short term, Shell will consolidate its position, enjoy the cash flows from an established and solid business footing and then, if the deepwater plays are successful, both Shell and Trinidad and Tobago should reap economic benefits from BG Group’s demise.
Terry Follen FCMA CGMA: Principal, Hydrocarbon College | Owner, Oil and Gas in Trinidad and Tobago LinkedIn Group | VP Finance, Atlantic LNG, 2000-2003