Shell, peak oil and the situation in New Zealand - 2009

Infratil said it was working with the New Zealand Superannuation Fund to acquire Shell's New Zealand energy distribution and refining assets.

"If completed, the transaction would be attractively priced and result in control of an integrated downstream energy business in a stable market with earnings growth opportunities," Infratil said.

My take on this situation

Shell will have done the maths on this and predicts it can get more off the sale of the infrastructure (filling stations, tankers etc.) than it can from the profits off the sale of the liquid fuels to NZ consumers in the near future.

This must mean that Shell knows how much it is going to cost to supply to NZ market and realises that we won't be able to pay what they need to make it worth while. This is because:

  • As oil extraction declines the competition (between buyers) will push price out of our reach.
  • Used to be 1 barrel of oil energy invested in exploration, extraction etc would result in 100 barrels out. That's 99 barrels free to sell and make money on. Now it is down round 1 in 18 out and some cases (like the tar sands) 1 in and 1.5 out so as the return drops closer and closer to zero there is less and less "free" oil for them to sell and make profit.

The best thing to do when your business is faced with the loss of its core money earning ability is to look for new ones and to sell off any assets tied to the old way to extract your money from them before those assets (pumps, tankers etc.) are worthless. So you need to keep people thinking peak is far off otherwise no one wants to buy your asset. But you want to use it as long as you can to squeeze the maximum value out.

If you own 20% and you know what's coming because you need to and will have played out every scenario imaginable over the last decade or so to work out what is the best strategy for when the peak starts to become evident you will want to get your money out and either put it into another venture that has a future or turn into luxuries....

Shell have been working towards this exit for a while. Earliest report I saw was 2006 some time.
There was talk of Mobil (not BP) looking to exit but I haven't seen any more detail on that for a while.

It will be a sad state if the Superannuation Fund buys the setup....

Based on NZ proven reserves (89 million barrels) and current daily consumption (156,000 barrels) we could be theoretically be self sufficient in oil for 575 days.


Other indicators

It seems that Shell also owns 37% of Fulton Hogan (road construction / maintenance) as well as a stake (not sure how large) in an Australian equivalent.

Both of these shareholdings are being traded in, which lends even more weight to the idea that Shell thinks there is less money going to be coming from the automobile and related infrastructure...

Based on their NZ profits from 2003 ($63,835 million) and the current market value of the assets up for sale ($700 million to $1 billion) it would take 11-15 years to recover the purchase price. Conventional economic theory would suggest that as fuel supply declines due peak extraction the price will go up (assuming constant demand). So what is Shells motive here?

Assuming there is an immanent peak as so many convincingly argue and Shell have a sound business plan:

  • Is demand going to fall (due to reduced population or personal wealth) keeping the price / earnings low.
  • Are costs of getting the product to market going to push the price out of consumer reach, reducing overall sales.
  • Or are Shell simply moving their capital from one area of the market and going to reinvest it somewhere with higher return?

I really wonder what they (Shell management / directors / shareholders) know that we do not....

Another piece of the puzzle - We are not alone
Ireland energy: Shell to exit Irish fuel retail market (13 Jul 2005)

Shell has reportedly announced plans to exit the Irish fuel retail market.

Intensifying competition in the Irish fuel retailing market has seemingly prompted Shell to announce its departure from the country, hot on the heels of its exit from several other European markets. With Shell apparently set to focus its future downstream operation on emerging Asian markets, a trend could yet emerge whereby the oil majors quit Europe's forecourts altogether.

Shell's announcement that it will exit the Irish market, reported by the Irish Independent newspaper, is the latest in a series of departures in an effort to maximize downstream revenues. The move will involve the closure or sale of 52 of its own sites as well as many of its 160 dealer operated sites in both the Republic and Northern Ireland. Since 2004, the oil major has sold its filling stations in Spain, Portugal and, most recently in April 2005, Romania.



Additional information for What is Shell not telling us?


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