Shell’s withdrawal from North Sea oil field is “completely in line with its strategy”

Shell’s decision to withdraw investment from the Cambo oil field off the Shetland Islands may be seen as a victory for environmentalists, but it also aligns closely with its overall business strategy, according to Professor Michael Tamvakis, Professor of Commodity Economics and Finance at Bayes Business School (formerly Cass).

“Shell’s decision to abandon Cambo is completely in line with its strategy,” Professor Tamvakis said.

“In a presentation earlier this year, Shell outlined how it would reach its net zero target by 2050 and highlighted the importance of new energy and a further push for more gas than oil in its asset portfolio. At the same time, it forecast an annual decline of between one and two per cent in its oil output, with no entry to new frontier projects after 2025.

“With current oil prices high, I think investment in the Cambo field made good economic sense, but expectations about both the role of oil and its price in the future somewhat dampens the strength of this case.

“The North Sea is central to pricing oil through the Brent price benchmark (or, to be more precise, the Brent-Forties-Oseberg-Ekofisk-Troll benchmark), but as a producer it is relatively small. For instance, the UK section of the North Sea produced just over one million barrels per day (mbpd) in 2020, which was just half of the Norwegian production of two mbpd.

“The Cambo field is only expected to produce around 50 thousand barrels per day (kbpd) when it peaks towards the end of this decade, and the estimated addition of its reserves to Shell may not be worth the negative press it has received and would probably have continued to receive.”

No likely effect on oil prices

Despite Shell’s withdrawal from involvement at Cambo, Professor Tamvakis does not foresee any deep or lasting impact on oil prices.

“Oil prices are currently driven by supply decisions taken by OPEC+ members and developments in US shale oil, so Shell’s announcement is unlikely to alter things too drastically,” Professor Tamvakis continued.

“In the current operating environment, and making the rather large assumption that there are no more major disruptions caused by new Covid variants, demand for oil has bounced back and OPEC+ is doing a good job at keeping prices tight.

“This bounce back has created an environment for further investment in the oil sector, incentivised by high and stable oil prices.”

Importance of environmental considerations

Professor Tamvakis says although environmental factors are important, recent events have highlighted how reliant we are on oil, even as we progress towards becoming more eco-friendly.

“Environmental aspirations are a worthy consideration, and Shell’s decision will be seen as a victory for activists, but think for a moment how we all panicked a few weeks ago when there was not enough fuel at petrol stations,” Professor Tamvakis said.

“This was down to a lack of tank drivers, and not a shortfall in supply shortfall. Are we all quite ready to abandon our internal combustion engines (ICEs) for electric vehicles (EVs)?”

All quotes can be attributed to Professor Michael Tamvakis, Professor of Commodity Economics and Finance at Bayes Business School (formerly Cass).