Weak global GDP growth, supply/demand imbalances, weigh on chems – Shell CEO

Tom Brown

30-Jan-2020

LONDON (ICIS)–A fourth-quarter net loss for chemicals division earnings for oil and gas major Shell was driven by weak global GDP growth and oversupply along key value chains, CEO Ben van Beurden said on Thursday, with global macroeconomic outlook still bearish.

The Netherlands-headquartered producer swung to a $65m net loss for chemicals during the closing months of 2019 compared to earnings of $296m during the fourth quarter 2018 on the back of higher maintenance activity and margin compression.

$ million Q4 2019 Q4 2018 % change 2019 total 2018 total % change
Chems earnings excluding identified items -65.0 296.0 -122.0 741.0 2,076.0 -64.3

Chemicals free cash flow (FCF) for the year stood at close to minus $3bn as a result of a weaker price environment and around $1bn in working capital adjustments, compared to $400m positive cashflow in 2018 and $1.1bn in 2017.

Cashflow for the division is expected to be nil this year, indicating expectations that conditions will improve from last year but remain subdued even compared to 2018, when conditions chilled dramatically during the second half of the year.

Chemicals is seen by the company as one of its key themes during the transition to a low-carbon economy, van Beurden said, alongside renewables, electric vehicles and energy storage, with around 50% of capital expenditure to be invested in transition sectors.

Chemicals division cashflow is expected to be characterised by peaks and troughs due to the scale of projects the company is pursuing in the space, particularly the compex under development in Pennsylvania, US, to capitalise on low-cost shale gas stocks.

“This business is one of our leading transition themes so there will be difference from year to year as we see Pennsylvania complex ramp up,” van Beurden said, speaking on an earnings call.

The Pennsylvania project is “right in the middle of execution”, according to van Beurden, with start-up still expected in the first half of the decade, while the company has no set timeline to make a final decision on a mooted China polycarbonates joint venture, there is “a strong and clear incentive to do it”, he added.

Under discussion at a site in Huizhou that Shell operates with the China National Offshore Oil Corporation (CNOOC), the facility would have a projected nameplate capacity of 260,000 tonnes/year, with support for the project going “all the way to the top hierarchy in Bejing”, van Beurden said.

A smaller-scale PC development unit is expected to come onstream at Shell’s Jurong Island, Singapore, facility in 2021, utilising advantaged technology placing it in the top quartile of competitiveness, Shell Chemicals head Thomas Casparie told ICIS earlier this month.

The company is seeking to select projects across group operations with a $30/bbl crude value break-even point or lower. The company projects an average oil price of $65/bbl in 2020, up by a dollar compared to 2019, but down from, $71/bbl in 2018.

Shell Chemical’s portfolio is centred a present around plastics, aromatics, glycols, polyols and olefins, with many of those value chains under pressure over much of the last year on the back of sharp increases in US output and economic weakness.

Market players have pointed to some more positive sentiment in the first weeks of 2020 compared to the previous quarter, with Dow CEO Jim Fitterling predicting an “inflection point” for the polyethylene market this year.

Economic forecasters such as the International Monetary Fund have noted some stabilisation to conditions – although increases in 2020-21 GDP are still expected to be driven by emerging markets – but that momentum for a rebound still seems weak.

“I think to be perfectly honest a lot of [the global market] is dominated by negative sentiment,” van Beurden said.

The company intends to spend a “disproportionate” amount of its capex budget over the next decade on its transition areas including chemicals.

Many oil and gas majors are making significant sustainability investments, and should be clearer about the work they are doing in those spaces by taking measures such as utilising similar metrics to measure progress to make comparisons easier, according to van Beurden.

He also warned against “demonising” oil and gas firms, saying their involvement was necessary for the energy transition to be successful.

“This is a system challenge of unimaginable proportions… and if you believe it can just be done by letting financial markets [do their work] or incentivising a few tech companies, I would almost say “dream on,” he added.

(Picture source: Shell)

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?