Slugcatcher calls in a queer eye for the Shell guys

IF the talk in the marketplace is right the new look Royal Dutch/Shell group is very close to exposing itself to the world – but before it does that two more very important steps are required in the makeover.

First is the matter of raising the $US12 billion that Shell management has previously said it required from asset sales, and the most obvious step in that direction remains an embarrassing 34% stake in Woodside Petroleum.

The second step, and the one which caught Slugcatcher’s eye after looking at the latest edition of Petroleum Intelligence Weekly, is finalisation of that other embarrassing issue, the over-booking of oil and gas reserves.

On the over-booking matter the normally well informed PIW reckons that Shell will soon announce that a final write down, in the “cross my heart and hope to die category”, will come in at the expected 900 million barrels, perhaps less.

Slugcatcher is relaxed about the over-booking matter because no matter how much finger pointing is done at the old Shell management team the truth is that (a) it was really always a timing and oil price issue, and (b) the new management knows that the oil is still in the ground, it’s just how you classify it.

The Woodside matter is, however, deliciously different because speculation is building that the most likely buyer of Shell’s 34% stake, the China National offshore Oil Company (CNOOC) is busy running a ruler over the U.S. oil producer, Unocal.

CNOOC may indeed have a tilt at Unocal but there remains a compelling logic behind it also keeping a sharp eye on Woodside.

For starters, it is already in bed with Woodside via its direct equity stake in the North West Shelf, plus a 25 year LNG purchase agreement. Second, Chinese companies have a genuine appetite for Australian raw materials for all the obvious reasons - long-term political and economic stability being at the top of the list. And thirdly, because Woodside (like Shell) has a vast inventory of stranded gas waiting to be developed – and CNOOC has the market.

Time will tell whether CNOOC goes for Unocal or Woodside. Slugcatcher, perhaps because he’s a naturally born contrarian, sees Woodside as the logical fit, and Unocal as a smokescreen.

And that takes us back to the question of how this all suits Shell, and how the new management team at Shell is enjoying the clean-up job.

PIW reports that some Shell executives believe the reserve cuts being go too far and that it is a case of lawyers telling reservoir engineers how to do their jobs. Slugcatcher can see more than a grain of truth in that observation.

But, worrying about the superfine detail of reserve levels, when you have 14 billion barrels in the resource category is also a bit of a smokescreen because the new boys at Shell are keen to not only appear to be whiter than white, than actually want to achieve that status by ridding the company of all stains and bad smells.

Hence, we come back to that Woodside stake. Shell knows it can never go beyond 34% because the Australia Government rates Woodside and its gas reserves as a national treasure. With this in mind, and with Woodside’s share price hovering around the $20 mark, there is a cool $US3.2 billion waiting to be plucked – about a quarter of Shell’s global asset sales target.

And if the sale is made to CNOOC it would be reasonable to expect something in exchange, such as a long-term gas purchase agreement from another Shell LNG project.

Slugcatcher has been around this mulberry bush before. What makes it more topical than ever is that events are starting to move quickly. There is the speculation about CNOOC going for Unocal. Shell management is accelerating the company’s write-down and clean-up.

Now is an ideal (high-priced) environment to be a seller of assets, and with one sweep of the pen the Woodside stain is removed, and a deal done which raises cash and underwrites a future gas sales contract.