A look at Royal Dutch/Shell's first-quarter results helps clarify its interest in returning to the business of growing U.S. natural gas production. Smart or not-so-smart speculation in Houston theorizes that Shell doesn't believe much gas is to come from the deepwater Gulf of Mexico in at least the near future, so it's looking for gas onshore, in pursuit of a bigger piece of high-gas-price profit. The conjecture concerning future Gulf gas production expands to include Kerr-McGee's plan to purchase Rockies gas producer HS Resources and its recent successful recruitment of Ocean Energy as a partner in half of its deepwater Gulf program. Other producers' divestments and acquisitions have been thrown into the theory as more fodder. Kerr-McGee says its acquisition of HS Resources creates another core operating area with significant growth opportunity. As for semi-divestment of some of its deepwater Gulf interests, it just wants to share in some costs while retaining a bulk of profit potential. As for Shell, its first-quarter results say a great deal about its current E&P position and where it wants to be. Its worldwide oil production declined 2.3%. For Shell, that's 52,000 barrels per day less, a few fewer liftings on the megamajor scale. But a decline in oil production is not something oil-company shareholders would want to hear. After all, the business is about growing reserves and output. Lucky for Shell management, worldwide oil and gas production grew 3% in the quarter. This was due to a 4.8% increase in gas production, to total 9.92 billion cubic feet per day. But none of this growth was in the U.S. Instead, its U.S. gas production declined, due to divestment and general field decline. This was while the company and others realized three times the first-quarter 2000 price for gas output. Outside the U.S., Shell realized 27% more, on average; worldwide, 65%. The additional gas production came from Oman, Egypt and the U.K., far from the red-hot North American market. So far this year, Shell is 0-for-1 at buying U.S. gas production and reserves, 0-for-1 in increasing its position in Australian LNG, and heading to 0-for-1 in increasing its exposure to the growing U.S. downstream gasoline profit margin. It was turned away by Denver-based gas producer Barrett Resources, rejected by the Australian government in its bid for control of Woodside Petroleum, and has reportedly bid one-third of Texaco's asking price for its interest in the Equilon and Motiva downstream gasoline joint ventures. It did win an increased E&P position in New Zealand, with the acquisition of Fletcher Challenge Energy in the first quarter, after the deal was initially rejected by the New Zealand government. Its other substantive first-quarter E&P news is that it has been awarded three exploration licenses in the eighth licensing round in Gabon, and significant discoveries were made in Oman, Nigeria and Brazil. In Kazakhstan, a second Kashagan exploration well has met with substantial hydrocarbons, also. The company has been successful too in winning exposure to upstream and downstream potential in China. It bought 14% of the initial public offering of offshore producer China National Offshore Oil Corp. (CNOOC) for $200 million earlier this year. Regarding the fourth-quarter 2000 IPO of integrated-oil Sinopec (China Petroleum & Chemical Corp.), Exxon Mobil purchased 19% of the IPO (4% of outstanding), and BP and Shell bought 31% combined (6% of outstanding). Of bidding more for Barrett, Shell E&P president and chief executive officer Walter van de Vijver, said, "We have no intention of abandoning our economic discipline and pursuing an acquisition at price levels that cease to add value for our shareholders just for the sake of making a deal." Shell will increase its hand in the U.S. natural gas marketplace, nevertheless, in an ironic way. While it lost its bid to increase its position in Woodside Petroleum, operator of the multibillion-dollar North West Shelf liquefied natural gas project in Western Australia, from 34% to more than 56%, it has still signed a purchase order for 3.7 million tonnes of LNG. The product is to be delivered to North America in a five-year period beginning in 2004. It is expected that the LNG will go to The Williams Cos.' recently acquired Cove Point terminal in Maryland. Williams was the winning bidder for Barrett.
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