Shell units shed $495m after huge refinery writedown

MATT CHAMBERS
The Australian
May 11, 2012

ROYAL Dutch Shell has reported a $495 million full-year loss on its Australian refining and marketing business after being hit by higher costs, a higher Australian dollar and a $638m writedown of its Geelong refinery.

But the oil major’s petroleum exploration and production division, centred on its stake in the Woodside-operated North West Shelf LNG project in Western Australia, offset the loss with a $US845m profit.

The writedown and earnings results were revealed in the 2011 reports of Shell’s two main Australian subsidiaries, which were filed with the Australian Securities and Investments Commission in recent weeks.

The loss and writedown on local refineries and marketing (known as downstream) reflects the growing headwinds Australian refiners are facing as crude oil prices and the dollar remain high and huge Asian refineries produce big volumes of refined petroleum products at lower cost.

In its February accounts, Australia’s only listed refiner, Caltex, wiped $1.5 billion from the value of its two refineries, leading it to report a $714m after-tax loss.

Yesterday Caltex hinted that a year-long review of refineries would result in the closure of its Kurnell refinery in Sydney. Last year Shell announced the closure of its Clyde refinery in Sydney and its conversion into an import terminal.

“Performance across the economic entity’s refinery assets was challenged, with refining margins weakening,” Shell’s downstream company, Shell Australia, said.

“Within product sales and marketing, performance was strong, with sales volumes growing 6.7 per cent year on year, driven mainly by growth in commercial industrial volumes.”

Shell Australia said it expected to be able to reduce costs in 2012.

The $495m loss widened from a loss of $121.6m in 2010, with the rising dollar costing the company $47.4m in pre-tax earnings.
Without the refinery writedown, the after-tax loss would have been $48.1m, Shell said.

Two weeks ago, when Shell’s parent company released its full year results in Europe, chief financial officer Simon Henry played down the chances of a closure of Geelong.

“It is clearly an economic challenge — it has a good month, it has not a good month, depending on Asian refining markets,” he said. “Overall we are considering refining capacity around the world as we see various developments in the supply/demand balance, but nothing specific on Geelong.”

Downstream revenue rose from $18.11bn in 2010 to $21.98bn in 2011 but the cost of sales rose from $12.7bn to $16.67bn.

Shell’s local exploration and production, or upstream, company, Shell Energy Holdings Australia, logged a drop in 2011 profit to $US845m, from $US2.69bn in 2010.

The 2010 profit was aided by the sale of a 10 per cent stake in Woodside Petroleum.

Net cash flow from operating activities rose 79 per cent to $US1.23bn.

Shell, which has a one-sixth stake in the North West Shelf, said the transfer of the giant LNG project to the governments’ offshore Petroleum Resource Rent Tax regime was not likely to increase its tax bill.

Shell had a $US263m net income tax benefit after booking a $US340m tax benefit from revaluing its stake in the North West Shelf ahead of its coming under the PRRT, similar to the way miners have been valuing their assets higher ahead of the Minerals Resources Rent Tax.