Shell is in need of a big deal or discovery as its oil and gas reserves are dwindling

Shell and analysts agree that the company needs to find a way to increase production to compensate for an expected shortage of between 350,000 and 800,000 barrels equivalent to oil per day in 2035, due to mature fields that are unable to meet its output targets.

Oil majors have resisted the urge to 'top up' their reserves for years. They were aware that a rapid transition from oil and gas to other energy sources could reduce demand.

As the transition is slow and the demand continues to rise, the spotlight has returned to those who have enough fuel in their tank.

GAP BETWEEN THE TARGETS FOR OUTPUT AND WHAT IT IS ABLE TO DELIVER

Shell's portfolio has been in the spotlight due to its so-called "reserve life" - or, how long proven reserves can support current production levels - being equivalent to less than eight years of production by 2025. This is down from nine a year ago, which was at its lowest level since 2021.

Wood Mackenzie data shows that this compares to over 12 years at each of Exxon and TotalEnergies by the end 2024.

A shorter reserve life increases the pressure to purchase assets or have a large exploration success in order to grow or maintain production.

Shell has committed to increasing hydrocarbon production by 1% per year for the next decade, while maintaining crude volume at its current level. Shell is focusing on the long-term growth of the liquefied gas market. It aims to increase its LNG sales at least by 5% per year.

Shell's total reserves dropped to 8.1 billion Boe, the lowest level since 2013.

Wael Sawan, the Chief Executive of Shell, warned investors last year that declining production across its portfolio would "leave 350,000 boed by 2035" between what it can produce and its goals.

EXIT FROM US Shale, GUYANA HURTS OUTPUT OPPORTUNITIES

The shrinking resource base is the result of years of retrenchment. Shell, for example, has withdrawn from U.S. Shale in 2021 as well as from Guyana in 2014. These are two regions which support Exxon's plans to grow.

Sawan told reporters on Thursday that he wished they hadn't left Guyana so soon.

Shell has already attempted to make up for some of the anticipated shortfalls in production.

Sawan predicted a gap of 100,000-200,000 boed by 2030 as mature fields are expected to produce less.

The company claims that investments in the U.S. Gulf region, Brazil, Nigeria and Angola as well as field improvements, have covered this shortfall.

Shell refused to comment further on the matter.

Shell's production levels will not be reached by incremental projects alone, say analysts.

Biraj Borkhataria, RBC's Biraj said: "We expect that these concerns about longevity will linger if there is no M&A near-term."

Irene Himona, equity analyst at Bernstein, said Shell's reserves life is very short and that a renewed focus on exploring is necessary.

Sawan was less than pleased that Shell has yet to make a "major discovery" but he did not want to increase assets for the sake just of volume.

Wood Mackenzie predicts that Shell's production will fall dramatically from 2028. It also expects its free cash flow to decline in the gas and upstream divisions from 2032.

Luke Parker, Wood Mackenzie Vice President of Corporate Research, said that Shell's production will likely drop by 800,000. It produces about 2.8 million Boed.

Parker said that Shell's greatest challenge is the fact that it does not have a portfolio of assets to support its plan to continue to invest in oil and natural gas.

UBS estimates that production will fall to 2.5 million boed around 2035 if no further action is taken. This leaves a gap of approximately 400,000 boed, which can be filled by asset purchases or extracting more from the existing fields.

(source: Reuters)