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Analyzing Shell’s Upstream Segment Performance

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Jan. 14 2016, Updated 10:07 a.m. ET

Production from Shell’s upstream segment

Royal Dutch Shell (RDS.A) produced 2.9 MMboepd (million barrels of oil equivalent per day) in 3Q15 from its worldwide operations. It’s important to note that of the total production, 2.4 MMboepd, or 85%, is from international operations.

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Shell’s crude oil and natural gas realizations

Liquids account for 1.5 MMboepd, or 53%, of Shell’s total production. Oil and natural gas prices have fallen sharply in the past few quarters. Shell’s peer BP (BP) has also witnessed the impact of lower realizations. Shell’s average liquids realizations in the United States fell to $44 per barrel in 3Q15, from $91 per barrel in 3Q14. Shell’s (RDS.A) average international liquids realizations stood at $48 per barrel, marginally higher than its US realizations.

But Shell’s (RDS.A) natural gas realizations from international operations are almost two to three times higher than US operations. Average natural gas realizations from the United States stood at $2.4 per mcf (thousand cubic feet) in 3Q15. But international operations yielded $6 per mcf. Lower prices in the United States are due to a higher supply of natural gas in the country.

Shell’s upstream segment projects churned

Royal Dutch Shell (RDS.A) has taken tough steps toward reorganizing its upstream segment. In 3Q15, Shell ceased its Carmon Creek thermal project in Canada, which had 418 million barrels of bitumen proved reserves. Shell also completed the sale of 49% equity interest in Elba Liquefaction to Kinder Morgan. The company also announced the expiration of the Malaysia LNG (liquefied natural gas) Dua contract and handed over its interest to PETRONAS.

But Shell plans to continue its Appomattox deep-water project in the Gulf of Mexico. In the zone, Shell also had a successful appraisal of the Kaikias and the PowerNap oil discoveries. Going forward, the combined Shell-BG entity plans to grow its deep-water, integrated gas and LNG projects.

The iShares Global Energy ETF (IXC) has ~25% of combined exposure to Exxon Mobil (XOM) and Chevron (CVX).

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