Royal Dutch Shell warned its investors Friday that the oil giant made “significantly” less money than expected in the last quarter of 2013.
It’s the first time Shell has issued a profit warning in a decade and comes at a time when the company is being choosey about where to invest capital. Last month, Shell abandoned plans for a gas-to-liquids plant in Louisiana. A proposal for a multi-billion ethane cracker in Beaver County, Pennsylvania, which stands to receive the largest tax break in state history, is still on the table.
So, is today’s profit warning bad news for the future of the ethane cracker?
It’s no news, according to Cindy Giglio, an analyst with the firm IHS Herold.
“This is a long-term project,” Giglio said. “The decision is going to be a long-term, strategic decision and these results are not going to impact that long-term outlook for regional ethylene demand and supplies from the Marcellus.”
In other words, the Shell’s ultimate decision about whether to build the cracker will be based on how much the company can make on the project long-term, relative to other ways to spend its money.
“This is actually kind of an important deal because they are suffering some significant losses that traditionally generate a lot of cash flow for them,” argued Colorado-based economist Philip Verleger.
Shell and other major oil companies like Exxon-Mobile have been losing money on oil refining. Shell invested $24 billion investment in U.S. shale, but was met with disappointing results and tanking gas prices.
However, Verleger says low prices are a big reason Shell may decide to go ahead and build the ethane cracker in western Pennsylvania, albeit with caution.
“That makes it more likely that Shell will proceed, but again the company’s going to face a capital constraint so it will probably go slower in trying to decide what to do and it may have to scale the project back,” Verleger said.
The cracker would draw on vast amounts of ethane being produced in western Pennsylvania and convert or “crack” the ethane into ethylene, an essential ingredient for making plastic. Last month, Shell announced it would start demolition on the proposed site in Monaca, Beaver County on the company’s dime.