In the recent earnings report, Royal Dutch Shell (NYSE: RDS.A) announced a 30-40% reduction in refining capacity for the second quarter. While the oil product sales volumes are expected to range within 3,000 – 4,000 MBD, the company has not slashed its upstream production volumes significantly. Per EIA, the global oil demand is likely to shrink by 8% to 92.6 MMBD in 2020. With the first rounds of production cuts by OPEC+ leading to a surge in benchmark oil prices, Trefis expects Royal Dutch Shell’s total revenues to be negatively impacted by slow economic recovery during the latter half of the year and be roughly $232 billion in FY2020. This marks a steep 42% decline in the top line from the level of $397 billion in FY2018 – a reduction of $165 billion, as we detail in our interactive dashboard about Royal Dutch Shell’s Revenues.
A Quick Look At Royal Dutch Shell’s Revenues
Shell’s three segments generated $345 billion of operating revenues for the full-year 2019.
- Upstream: $10 billion in FY2019 (3% of Operating Revenue). This segment is responsible for the exploration and extraction of crude oil, natural gas, and natural gas liquids. Due to integrated operations, intersegment sales are subtracted from the total upstream revenues.
- Downstream: $294 billion in FY2019 (85% of Operating Revenue). This segment is responsible for refining crude oil and other feedstocks into various finished products such as gasoline, diesel, heating oil, aviation fuel, etc.
- Integrated Gas: $41 billion in FY2019 (12% of Operating Revenue). This segment is responsible for the exploration, extraction, and processing of natural gas to LNG and GTL fuels.
Royal Dutch Shell has a strong presence in Asia where production costs are much lower
- In 2019, Royal Dutch Shell’s total production from Europe, Asia, Oceania, Africa, and America segments was 425 MBOED, 1196 MBOED, 362 MBOED, 346 MBOED, and 1337 MBOED, respectively.
- The average production cost per barrel of oil equivalent in Europe, Asia, Oceania, Africa, and America was $14.14, $6.30, $9.17, $8.44, and $11.78, respectively.
- With Asia contributing nearly 32% of Shell’s total production volumes and benchmark oil prices (WTI) trading at $25 per barrel, we expect the production from the company’s Asian fields to increase as it gets lowered in Europe and America due to unfavorable unit economics.
- In Q1’20, Shell’s total production from Asia increased by 7% (y-o-y) while it decreased in other regions.
While this will cushion the bottom line, revenues will be hurt significantly as benchmark prices will remain subdued throughout the year
- As industrial and transportation sectors account for 95% of the total oil consumption in the U.S. (as we highlight in our dashboard U.S. Oil Consumption By Sector), the low demand environment is likely to hurt Royal Dutch Shell’s revenues for the full year.
- Per EIA’s latest report, the global oil demand is likely to pick up in Q4 as various countries ease lockdown restrictions.
- Considering relatively flat production volumes and an average realized price of $35 per barrel, Royal Dutch Shell’s Revenues are likely to be around $232 billion in 2020.
Shell’s largest U.S. rival, Exxon Mobil, is also looking at a sizable reduction in revenues this year, although the revenue loss isn’t so drastic.