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Shell (RDS.A) Eyes Fram Project, North Sea Regains Focus

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Royal Dutch Shell plc (RDS.A - Free Report) recently announced its intention to forge ahead with development of the Fram natural gas field in the North Sea. Banking on improving economics and recovering energy landscape, this is notably the second North Sea project approved by the European energy giant in the past six months.

Fram Project

Shell, along with Exxon Mobil Corporation (XOM - Free Report) , which is its co-partner in the Fram project, intends to produce around 13,000 barrels of oil equivalent per day (comprising about 41 million cubic feet of gas along with 5,300 barrels of liquids a day) from the two wells in the Fram field by 2020. This will increase the company’s output in the North Sea by 10%.

The Fram field, located 137 miles east of Aberdeen, will be connected using a subsea infrastructure to a processing facility, Shearwater, from which gas will be transported to the shore. Basically, the two wells will transport gas via a subsea pipeline to the Starling field, from which it will be further transported to the Shearwater platform through existing pipelines. Utilizing the existing infrastructure from the nearby hubs will result in huge cost savings associated with the development of new fields. Reduction in development costs has in fact prompted Shell to reinvest in projects in the U.K. once again.

Notably, Shell had abandoned the Fram project earlier, since the company found it commercially unviable. However, the company, which lowered its break-even price by huge levels, now finds the Fram project profitable at or even below $40 per barrel, making the project more promising. In fact, Shell intends to approve other deep-water projects, only if these are profitable within such price levels.

Shell reaped substantial benefits from cost-containment strategies adopted during the historic downturn period. Focus on realigning its business models to leaner and more efficient ones, so as to stay competitive in the long run bodes well for the company. In fact, cashing in on operational efficiency and solid project execution, the company intends to invest more in the North Sea region. Shell currently sports a Zacks rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Is the Tide Turning for North Sea?

Production in the U.K. North Sea, which is one of the world’s oldest offshore basins, commenced in 1970s and achieved record levels in 1990s. However, production in the North Sea has remained tepid since then. Thus, many oil majors have been facing trouble in generating profits. Further, during oil industry downturn, extracting oil from the North Sea had become extremely uneconomical, putting more pressure on companies’ margins, thereby making a dent in investments in the region. The oil crash forced various oil majors to decrease their footprint in the expensive North Sea, in favor of reduced production cost elsewhere.

In fact, early last year, Shell offloaded a large chunk of its North Sea assets to smaller rival Chrysaor Holdings Ltd. for $3.8 billion. The sold assets account for nearly half of Shell’s production in the North Sea and will resuscitate the ageing North Sea, where production has been declining since the late 1990s. BP plc (BP - Free Report) also divested 25% of stake in the Magnus Field to EnQuest PLC (ENQUF - Free Report) . However of late, the region has started gaining momentum owing to several new projects including BP-operated Quad 204 field, in which Shell also owns a 55% interest. Further, the introduction of transferable tax history by Chancellor Phillip Hammond will help to bring in a slew of contracts in the North Sea and thereby increase production.

Shell had a dominant presence in the North Sea for more than 40 years. The Penguins oil and gas field — a 50-50 joint venture between Shell and ExxonMobil — represents a priority holding in Shell’s North Sea assets portfolio. This January, Shell gave go-ahead to overhaul the Penguins Field in the ageing North Sea Basin. Located 150 miles northeast of Shetland Islands, the Penguins project will involve construction of the floating production, storage and offloading vessel (FPSO), which will have peak production capacity of 45,000 barrels of oil equivalent per day.

Notably, Shell hadn’t green lighted any North Sea project in the last six years prior to the announcement of Penguins development in January 2018. However, after successful portfolio optimization and favorable tax changes, the company plans to ramp up its North Sea output through core production assets. Shell now intends to invest around $600-$800 million every year in a number of fresh projects in U.K. and especially the North Sea basin in the coming years.

These developments highlight the significance of North Sea holdings in Shell’s upstream portfolio. Notably, the company, which has been in the process of reshaping its portfolio and unlocking new development opportunities with lower costs, intends to grow production from its core North Sea assets.

The gradual uptick in the crude prices along with efficient strides adopted by the companies during the slump period are now encouraging producers to rev up development in the region. The re-emerging confidence in the U.K. continental shelf can be gauged by these projects greenlighted of late. BP also sanctioned two North Sea projects (namely Alligin and Vorlich) a few months back, which would enable pumping out 30,000 barrels of oil per day. In fact, Shell also holds an equal 50% stake in the Alligin field.

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