Shell Eyes Chinese Gas Ventures

Royal Dutch Shell plc (RDS.A) is likely to invest $1 billion per year in next few years for commercial gas production in China, as said by the company’s chief financial officer in an interview session in Tianjin, China.

The contribution of natural gas to China’s total energy demand is expected to increase to 10% from the current 4% in a decade. Consequently, the European oil giant is looking forward to a joint initiative with PetroChina Co. (PTR), China’s largest oil company, to expand its gas acreage in mainland China.

Both the companies are not new to each other. The players have already signed a shale gas assessment agreement for the Fushun-Yongchuan block in Sichuan following a project at the Changbei gas field in Shaanxi province. The officer said Shell is expected to start drilling in both places anytime soon.

On the other side, Shell’s Gulf of Mexico (GoM) operations are facing challenges due to deepwater drill ban in the area. The company suspended development of six successful explorations and four if its rigs are currently idle in the GoM.

The company is also concerned about near-to-medium term refining margins due to continuous adding of crude processing capacity by developing economies such as China and India and struggling fuel demand in developed nations.

Shell has been able to boost returns and remain competitive in this difficult environment by embarking on aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization.

However, we maintain our Neutral recommendation (with the Zacks #3 Rank – Hold) for Shell ADRs, as the company faces the daunting task of bridging the gap with its super major peers in terms of reserve lives, upstream growth and financial returns.

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