Though Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has come a long way in improving its reputation, which was severely tarnished by the 2004 reserves overstatement scandal, it still has a long way to go before it can rest easy.
With CEO Peter Voser set to depart next year and downstream chief Ben van Beurden getting ready to take his place, let’s take a closer look at three major operational challenges Royal Dutch Shell plc (ADR) (NYSE:RDS.A) will need to right if it is to keep shareholders happy.
First up are Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s operations in Nigeria, which have been plagued by oil theft, vandalism, and attacks on oil infrastructure that resulted in the loss of some 100,000 barrels a day during the second quarter. Shell isn’t alone in this respect; the theft and sabotage issue in Nigeria has been so severe that several foreign companies have been forced to either scale back investment in the country or even retreat entirely.
For instance, Total SA (ADR) (NYSE:TOT) last year sold its 20% stake in an offshore Nigerian oil field to Chinese oil giant Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), while ConocoPhillips (NYSE:COP) sold its entire Nigeria unit to Toronto-listed Oando Energy Resources for roughly $1.79 billion in cash last December. And Chevron Corporation (NYSE:CVX) recently announced that it will sell five oil blocks in Nigeria’s shallow waters.
To combat these threats, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has decided to revamp its strategy in the country by divesting many of its onshore fields and instead focusing on offshore fields, where the threat of sabotage and theft is substantially lower. Over the past three years, the Hague-based company has sold eight licenses in the sabotage-prone Niger Delta region for a total of $1.8 billion and is currently reviewing the future of its 28 remaining leases in the country as it attempts to concentrate its “operating footprint into a small, more contiguous area.”
Another hurdle for Royal Dutch Shell plc (ADR) (NYSE:RDS.A) will be its Alaskan oil campaign, which has been beset by a host of regulatory and legal challenges as well as equipment failures. With shareholder outrage mounting at the more than $5 billion Shell has invested into the failed Arctic campaign, Shell recently reached a decision and said it would “pause” its Alaska drilling activities as it prepares “equipment and plans for a resumption of activity at a later stage.”
While it might appear at first glance that Shell is cutting its losses, I don’t think that’s the case. The company’s decision to shelve its Alaska project is the right one, given current regulatory and environmental uncertainties. And in any case, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has stated that it doesn’t expect to begin commercial production in Alaska before 2025 so, within that context, another year’s delay is insignificant. All that extra time should give it plenty of time to make sure that its equipment and personnel are ready to resume operations.