The energy crisis brewing in the Persian Gulf has prompted Shell to produce at more than 100%.
The British energy giant said it ran its refineries at 102% of capacity during the second quarter, eking out more jet fuel and diesel to take advantage of soaring prices. That's harder than simply turning a knob, like the amplifier in the mockumentary "This Is Spinal Tap" that goes past 10.
"In all assets there are opportunities to take away some of the bottlenecks and produce above 100%," Shell Chief Executive Wael Sawan said in an interview. "The challenge is to do it for 90 days in a row."
So far, that strategy is paying off. Shell on Thursday said second-quarter profit more than doubled, driven by higher prices and a strong performance from its trading arm.
Sawan said Shell has been working to boost output from various businesses during a time of deep disruption in energy markets, in large part because of the squeeze on the Street of Hormuz. That includes increasing oil production and shipments of liquefied natural gas -- or LNG -- from facilities outside the Middle East, such as its new terminal in western Canada.
Moves by Shell and others in the industry have helped the global energy system adapt to the shock stemming from the Iran war, helping prevent outright shortages from materializing. A few months ago, Shell directed its refineries to produce more jet fuel, raising production by nearly 20%, Sawan said. Now its refineries have shifted to producing more diesel and gasoline.
Still, the conflict in the Middle East has left the energy system in a more fragile state, Sawan said. Stocks and strategic reserves have been drawn down, and producers outside the region are producing at close to -- or above -- full capacity.
"The energy system has been much more resilient than many, including ourselves, would have feared," Sawan said. "At the same time...those shock absorbers are just weakening, which simply means that further supply shocks will have an amplified effect on the overall system."
Shell has also been a victim of the conflict. The company has lost roughly 10% of its total production because of damaged or shut-down assets in Qatar, where it owns the Pearl gas-to-liquids plant and has a 30% stake in a QatarEnergy LNG facility.
The company was preparing to restart production from Pearl and load LNG cargoes from Qatar, but new strikes between the U.S. and Iran put those plans on hold, Sawan said.
"We have gone back to just pausing for now, until we can assure ourselves that we can safely take product out of the strait," Sawan said.
Sawan's comments came as Shell reported a sharp rise in second-quarter adjusted earnings -- a closely watched metric that strips out certain commodity price adjustments and one-time charges -- to $9.84 billion.
The jump in earnings enabled the London-based energy major to maintain its quarterly share buyback at $3 billion -- matching its May tranche. It marks the 19th consecutive quarter of at least $3 billion in stock repurchases. Strong cash flow also enabled Shell to pay down debt.
The Middle East conflict has been a major boost for oil majors' earnings.
Trading desks have benefited from volatile market moves for commodities. Upstream units, which extract oil and gas, are raking in bumper profits on higher prices as customers scramble to replace supplies stuck in the Gulf. And companies able to refine crude oil into diesel, jet fuel and petrochemicals are benefiting from soaring margins.
Shell's refinery operating level of 102% was its highest ever, the company said. It owns Europe's largest refinery, at Pernis in the Netherlands, along with facilities in Germany, the U.S. and Canada.
The company said it was able to exceed 100% capacity because full capacity is based on a common industry benchmark that assumes refineries won't operate more than 335 days a year to account for routine maintenance. Shell said there was less planned maintenance and unplanned shutdowns at its refineries this quarter.
Finance chief Sinead Gorman said the Middle East conflict hasn't altered Shell's long-term view on the attractiveness of Qatar. "This is a short term event," she said.
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