Today I am explaining why Royal Dutch Shell (LSE: RDSB) remains a high-risk investment.
Here are two numbers that I think help make the case.
80
A slew of bearish economic data from the eurozone, combined with enduring signs of decelerating activity from the Asian engine room of China, have prompted analysts to slash their oil price forecasts for the next 12 months and beyond.
Goldman Sachs was the latest institution to take the hatchet to its estimates, and said that it now expects the Brent benchmark to average $85 per barrel during the first quarter of next year, down from its previous projection of $100. And it cautioned that prices could fall as low as $80 per barrel by the summer of 2015.
Brent prices have toppled more than 25% from the summer’s high of $115 per barrel, and in recent days breached the $85 level to fresh multi-year troughs.
A slew of bearish data from across the eurozone, combined with enduring signs of slowdown from Asian engine room of China, have exacerbated fears of a rapidly-deteriorating supply/demand balance in the oil market as the global economic recovery grinds lower.
Combined with a significant step-up in US shale production in the coming years, and a seeming reluctance from the Organisation of Petroleum Exporting Countries (OPEC) to turn the taps down, rafts of excess capacity are expected to hit the market in the medium term.
6 billion
To say that Shell’s planned ventures into the oil-rich regions of the Arctic have disappointed would be something of an understatement.
The business has forked out more than $6bn since it acquired leases in the Chukchi and Beaufort seas in 2005 and 2008 respectively, but exploration work has been hampered by a host of regulatory hoops as well as environmental opposition. On top of this, Shell has also encountered huge operational difficulties in the region, embodied by its Kulluk drilling rig running aground in late 2012.
Shell is now in serious danger of its leases in these regions expiring, with the first ones in Beaufort due to terminate next year. The company has since applied to the US government to extend these rights before they run out, but should they fail then Shell will face the double-whammy of massive capex wastage as well as being left on the sidelines in the oil industry’s race to the Arctic.
