Shell expects oil price recovery to take several years

By Ron Bousso, Karolin Schaps and Dmitry Zhdannikov

LONDON (Reuters) - Royal Dutch Shell (L:RDSa) expects oil prices to recover gradually over the next five years, with progress slowed by persistent global oversupply and receding Chinese demand growth.

The Anglo-Dutch energy giant is betting on crude rising to $90 a barrel by 2020, a key assumption in its move to buy rival BG Group (L:BG) for $70 billion to help transform it into a leading player in the costly deepwater oil production and liquefied natural gas (LNG) markets.

"We are not banking on an oil price recovery overnight. It will take several years but we do believe fundamentals will return," Andy Brown, Shell's upstream international director, who oversees the company's oil and gas production outside North America, told Reuters in an interview.

"Until such time, we, like other companies, will have to make sure we stay robust," he said, referring to deep spending cuts taken by oil companies in recent months in the face of a near-halving of oil prices since June last year.

A rise in global supplies, mainly due to a sharp increase in output from U.S. shale, has weighed on oil prices.

In the nearer term, Shell expects Brent crude oil to show only a modest recovery from today's $58 a barrel, with 2016 prices forecast to average $67 a barrel and $75 a barrel in 2017, based on the company's BG offer.

Oil companies rarely reveal the price forecasts that underpin their future strategies. The chief executive of Shell's rival BP (L:BP), Bob Dudley, said recently he expected oil prices to remain low for "a couple of years most certainly."

MIXED DEMAND

The drop in prices boosted demand across the globe. In the United States, gasoline consumption has soared to multi-year highs in recent months as motorists drove more and sales of large vehicles surged.

According to John Abbott, Shell's downstream director who oversees refining and trading, consumers have also leapt on the drop in oil prices to stock up tanks.

"In countries like Germany and the United States where people use heating oil, they use the low prices as an opportunity to fill up the storage tanks in their back garden. Some people watch pricing like a hawk. (In Germany) home consumer heating oil storage is at a five-year high today."

In China, where the economy's rapid growth since the early 2000s had been the engine for rallies in global commodity prices, the picture remains mixed.

"On the consumer side, the 8.5 percent year-on-year increase in vehicle sales is still there, and you need fuel and lubricants to run those vehicles," Abbott told Reuters.

Demand from Chinese heavy industries is nevertheless slowing as the country's rapid growth in recent years cools down.

"In China, industrial demand for oil products is plateauing. If you look at our sales of industrial lubricants, they are plateauing a little bit," Abbott said.

LNG

Shell is betting big on the LNG market with its planned acquisition of BG, one of the largest players in the up-and-coming frozen gas sector.

Brown said Shell sees LNG supply rising to 460 million tonnes a year by 2030, nearly double the volumes delivered in 2014 at around 240 million, painting a bullish picture for a market reliant on a switch to gas from coal in energy systems.

"We see the number of countries taking LNG doubling to 50 over that period of time (by 2030)," Brown said.

China, Southeast Asia, Europe, India, the Middle East and South America are growth regions Shell has identified, he said.

The oil major operates over 40 LNG ships and says it is linked to around one third of the world's LNG shipping operations, a figure that will increase dramatically when its BG acquisition comes to fruition.

LNG prices have dropped in recent months due to a growing supply glut as more production facilities, such as BG's Queensland Curtis LNG plant in Australia, become operational.

Brown sees the drop in spot prices as irrelevant to Shell's outlook for the business as most of its supply is sold through long-term deals at a stable price.

Around 90 percent of the oil major's LNG sales are committed to long-term deals spanning multiple years and 65 percent of them are pegged to the cost of oil, giving prices some stability.

"You've got that very long-term commitment of supply that underpins your investment decisions," Brown said.