February 1, 2008
Patrick Hosking: Business Commentary

Some people are never satisfied. Shell may have made greater annual profits last year than any other European company ever, but as one City sceptic remarked yesterday, one should expect nothing less from a company that has over the past decade enjoyed a ninefold increase in the selling price of its main product, crude oil.

However, big oil companies are facing nasty headwinds, not just from soaring exploration and production costs and thinner downstream margins, but also from the paucity of new finds. They are having to forage deeper into ever-costlier and politically suspect territories to rootle out ever-piddlier new pockets of the black stuff. The easy finds were all made long ago.

The unexciting share price trajectories of Shell and its peers demonstrate how investors take current profits as a given, and are much more concerned about where the money will be made in five or ten years.

For the first time, Shell omitted to publish reserve levels alongside its results, preferring to defer them by six weeks. There is nothing sinister in this, but it is a sore point for shareholders. They haven’t forgotten that the company misled them for years over its reserve levels. Unions and greens may focus on yesterday’s profit figures; investors will be more interested in the reserves numbers in March.

patrick.hosking@thetimes.co.uk

http://business.timesonline.co.uk/tol/business/columnists/article3285676.ece

February 1, 2008
Robin Pagnamenta, Energy and Environment Editor

Royal Dutch Shell reported annual profits of $27.6 billion (£13.9 billion) yesterday, smashing European company records and prompting calls for a windfall tax on “obscene” oil profits.

But the record results, which were boosted by surging global crude prices, masked uncomfortable truths about the company’s lacklustre operational performance.

The Anglo-Dutch oil giant suffered a 6 per cent slump in daily oil production last year to 3.3 million barrels, down from 3.5 million in 2006. It also faced a 10 per cent rise in costs and a steep drop in both refining margins and cashflow.

Questions also persist about the strength of Shell’s reserve base, although full details of this will not be disclosed until March 17.

Jeroen van der Veer, the chief executive, who described the results as “satisfactory”, blamed increased costs on the fact that Shell’s upstream oil and gas projects were becoming ever “bigger and more complex” and were often located in remote and challenging environments.

Mr van der Veer also acknowledged that the company was facing “very serious difficulties” in Nigeria, where violence has forced it to cut onshore production in the Niger Delta, sell some assets and refocus on offshore and liquefied natural gas operations.

Shell revealed yesterday that it took a $716 million charge last year related to its troubled Nigerian unit, which, under normal conditions, should yield 12 per cent of global production, second only to the US.

It also emerged yesterday that Shell Petroleum Development Company, a joint venture with the Nigerian Government, was chronically starved of investment, and that this, too, was affecting production. Nevertheless, Mr van der Veer insisted that Shell remained “committed to the country” and expressed confidence that its problems there could be resolved.

Elsewhere, Shell revealed that production had been hit by the reduction of its stake in the Sakhalin gas project in Russia, after pressure from Moscow, and by technical problems in Canada, where the group extracts crude oil from bitumen-rich sands.

The results also showed that Shell poured $33 billion into its upstream activities last year – more than its entire full-year profits – yet was still struggling to maintain production and replenish reserves. “They are struggling to stand still,” one senior investment banker said yesterday.

Although the full data on reserves will not be available for about six weeks, Mr van der Veer said that Shell had made “11 material oil and gas discoveries” in 2007 that, combined, added one billion barrels of resources to its portfolio. He gave warning that these could not be booked as reserves until they passed further scrutiny.

The struggle to rebuild reserves has led Shell to examine opportunities in Iraq. Mr van der Veer confirmed that the company was “very interested” in the country, which has the world’s third-largest oil reserves, and that it had submitted a number of proposals to the Iraqi Government.

Shell’s full-year earnings for 2007 were $27.6 billion, up 9 per cent from $25.4 billion for 2006. They came on the back of oil prices averaging more than $72 last year and prompted calls for a windfall tax from Tony Woodley, joint general secretary of Unite, Britain’s largest trade union, who branded the record profits “obscene”.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3285665.ece

Lionel Laurent, 01.31.08, 8:50 AM ET

LONDON - Oil prices may be booming, but the strain of higher costs is beginning to show for Royal Dutch Shell.

The Anglo-Dutch oil and gas stalwart posted a 60.4% increase in fourth-quarter profits Thursday, to $8.5 billion, from $5.3 billion, but most of the gain came from the jump in crude prices this year. Excluding price fluctuations and a $963 million gain from asset sales, net profit for the quarter came in at a more modest $5.7 billion.

Royal Dutch Shell’s (other-otc: RDS.A - news - people ) ‘B’ shares fell 26 pence (52 cents), or 1.5%, to £17.18 ($34.22), on Thursday afternoon in London, while its ‘A’ shares fell 32 pence (64 cents), or 1.8%, to £17.57 ($35.00). Analysts had been hoping for profits of $5.8 billion, with Citigroup analyst James Neale noting that earnings from Shell’s oil products division missed forecasts by 33%.

Excluding oil price fluctuations, profits from oil products fell 40.4% year-on-year, to $876 million. The United States accounted for most of the drop, with American earnings down 59.5%, to $87 million. Last September, Shell announced a $7 billion expansion of its Texas refinery in partnership with Saudi Arabia’s Aramco.

Shell said its fourth-quarter performance reflected industry-wide problems: higher costs, higher taxes and lower production volumes. Despite the fact that the benchmark West Texas Intermediate crude price is still above $90 per barrel, it is not always easy for companies like Shell to pass on increased costs to its customers.

“In earlier years, there were bonanza refining margins,” said Brendan Wilders, analyst with Oriel Securities. But higher crude oil prices have since outpaced gasoline prices, and the differential is currently squeezing integrated oil and gas companies like ExxonMobil (nyse: XOM - news - people ) and ConocoPhillips (nyse: COP - news - people ).

Wilders told Forbes.com that he rated Shell a “Hold,” recommending BP (nyse: BP - news - people ) as a better profitability play instead. He said that the British icon had a stronger position regarding oil and reserves. The firm has reportedly added 1 billion barrels’ worth of new reserves for 2007, which would be a drop from the 2006 figure of over 2 billion. But Shell did not provide details on its new reserves on Thursday.

Earlier this month, press reports suggested that Shell could axe as many as 3,000 jobs in an effort to offset higher costs. The company believes it can generate cost and operational synergies of around £500 million.

By Marianne Lavelle
Posted January 31, 2008

Royal Dutch Shell, the world’s second-largest publicly traded oil company, today reported net income up 60 percent last quarter to a record $8.47 billion, thanks to the same rising crude oil prices that most observers expect will lift the profits of Exxon Mobil and Chevron tomorrow to nearly historic levels.

Shell’s results were shy of the largest quarterly profit ever for a company in the United States—the record $10.7 billion that rival Exxon earned in the fourth quarter of 2005. But Shell’s full-year profit for 2007 of $31.3 billion set a record for a European company. Still, CEO Jeroen van der Veer’s muted comment was that the results were “satisfactory,” and the company’s stock reacted to the news with a downward slide. It wasn’t just that Shell’s results were in the lower range of expectations. Weighing on the company appeared to be the now apparent fact that Shell is producing less oil and that its performance cannot be sustained if a slowing economy lowers oil prices.

Shell’s increase in profits last quarter came despite a 5.7 percent drop in production. Shell’s chief financial officer, Peter Voser, also said that 2008 would see a decline in oil and gas production because of woes in Nigeria and the loss of company assets. Most notable: a decreased stake in the huge Sakhalin Island project that Russia forced on the company after it had invested in it heavily for years. This marked the first time that Shell did not announce its reserves figures along with its year-end financial results. Although that puts the company in step with its U.S. competitors, which announce their holdings later in the spring, most analysts viewed it as a sign that the company was losing assets faster than it could replace them.

Another downside to high oil prices for Shell and the other multinational oil companies: Their production-sharing deals with many of the countries in which they operate, most notably in the former Soviet states and Africa, are structured so the oil companies earn less of a share of each barrel’s profit—with more going to national governments—as oil prices rise. Voser also said this contributed to Shell’s lower production.

High profits also mean increased political risk for all the oil companies; British labor union leader Tony Woodley immediately called for a windfall tax after Shell’s announcement. In the United States, although similar efforts in Congress fizzled last year, the oil industry fears the idea will gain new steam once the full industry profit picture becomes apparent—especially with the federal government in deficit and about to hand out billions in an economic stimulus plan.

The portion of the oil industry that could be the bellwether for economic downturn is refining. With gasoline demand down, the profit margins in the business of making gasoline and other fuels have shrunk, leading some analysts to warn that that could weigh on profits. But last week, when the No. 3 U.S. oil company, ConocoPhillips, which has huge refining operations, reported profits up 37 percent in the fourth quarter, Wall Street again began looking for stellar results. “Unless oil prices collapse, companies will probably have another strong year, if not a record year,” says Fadel Gheit, oil analyst with Oppenheimer & Co.

http://www.usnews.com/articles/business/economy/2008/01/31/shell-rakes-in-85-billion-in-three-months.html?s_cid=rss:shell-rakes-in-85-billion-in-three-months.html

By Andrew Hill, Mure Dickie and Richard Milne
Published: January 31 2008 18:08 | Last updated: January 31 2008 18:08

“Obscene” profits and calls for “windfall taxes”: it’s oil company reporting season again. Royal Dutch Shell formally launched the 2007 full-year results festival in the UK on Thursday by recording the largest profit ever reported by a European company – $27.6bn after tax, adjusted for changes in the value of fuel stockpiles.

If the chorus of complaint from UK unions and environmental groups at the “£1.6m-per-hour” profit was predictable, so was the reaction of analysts: disappointment. Fourth-quarter net income was slightly below the market consensus. If the company reaped a bonus from the higher oil prices last year, it had to use it to offset lower production.

That is one reason why Jeroen van der Veer, Shell’s chief executive, deemed the numbers merely “satisfactory”. The reality is that as fast as Shell pulls in profit, it is having to reinvest it to prepare for the future. The group’s capital expenditure for 2007, excluding acquisitions and disposals, was $25.5bn – itself almost certainly a record or near record.

That figure will rise again in 2008 to $28bn-$29bn – £1.7m per hour.

As for “profitability”, rather than profit, analysts point out that cost inflation in the past two years of rising oil prices has curbed oil majors’ profitability – as measured by return on capital employed. Returns have been, at best, flat and are projected to fall in the years ahead.

Production of “easy oil” and “easy gas” – reserves that are close to markets and relatively simple to extract – should peak by 2015. That will push Shell out into the literal and metaphorical deep water in a search for what it calls “unconventionals”. Some of these reserves have to be squeezed out of the dirt – which is not cheap. The fall in the share price on Thursday put Shell on a forward multiple of about 9 times forecast earnings for 2008. Some analysts consider it a short-term bargain. But over a longer period, the destiny of Shell and its developed world peers is to run as hard as it can – not to catch a windfall, but to avoid a downfall.

world.view@ft.com

Copyright The Financial Times Limited 2008

 

Thu Jan 31, 2008 9:37am GMT
By Tom Bergin

LONDON (Reuters) - Royal Dutch Shell added “at least 1 billion barrels” of new oil and gas resources in 2007, Chief Executive Jeroen van der Veer said on Thursday, around half the level the oil giant flagged last year.

Van der Veer told reporters on a conference call that Shell made 11 material discoveries in 2007 and had an exploration success rate of 40 percent, yielding an extra 1 billion barrels of oil equivalent of resources.

A year ago Shell said it added “over 2 billion barrels oil equivalent of new conventional resources” in 2006.

Chief Financial Officer Peter Voser said both figures largely related to oil and gas added through exploration.

Voser noted that the latest figure excluded “business development” activities, which were included in the 2006 figure, so the actual performance in 2007 may not fall so short of the 2006 result.

“We are very satisfied,” he told reporters on the call.

Resources, also known as unproven reserves, refer to rough estimates of recoverable barrels. Analysts and investors generally focus on “proven” or “proved” reserves, which are independently verified estimates, that meet regulators’ rules, of recoverable barrels.

Shell shares fell earlier this week on fears it performed badly at adding new proven reserves in 2007.

(Reporting by Tom Bergin, Editing by Greg Mahlich)

© Reuters2008All rights reserved.

http://uk.reuters.com/article/companyResultsNews/idUKWLB656720080131

Reuters
Thursday January 31 2008
(Adds closing shares, share comparison)

By Tom Bergin

LONDON, Jan 31 (Reuters) - Royal Dutch Shell notched up the biggest ever profit of a European company of $27.6 billion in 2007, but lower production and indications of disappointing reserves suggest future earnings growth will rely on oil price rises.

The world’s second-largest non-government controlled oil company by market value said on Thursday its fourth-quarter current cost of supply (CCS) net income rose 11 percent to $6.7 billion. Excluding one-off items, the result was in the lower end of analysts’ range of forecasts.

CCS earnings strip out the impact from changes in the value of fuel inventories, and the figure is comparable to U.S. oil companies’ net income.

The rise in Shell’s profits was driven by its core upstream oil and gas production division.
Following a trend seen at Shell and peers such as BP Plc in recent years, the Anglo-Dutch company needed the big jump in oil prices to make up for a 6 percent drop in oil and gas production and a rise of over 10 percent in costs.

“(The results) will do little to assuage concerns that large integrateds are unable to capture record prices,” Peter Hutton at NCB brokers said in a note to clients.
Analysts at JP Morgan said earlier this month that the oil majors need prices above $85/barrel to sustain earnings growth.

U.S. crude prices averaged over $90 per barrel in the final quarter of 2007, before hitting a record above $100 in January.

Shell’s production was hit by the reduction of its stake in the Sakhalin gas project in Russia following government pressure, and technical problems at Shell’s unit in Canada which squeezes crude from bitumen-drenched sands.

Shell rowed back from targets to expand production in coming years, with Chief Financial Officer Peter Voser refusing to restate a plan for 1-2 percent growth to 2010 and saying output was likely to fall “slightly” in 2008.

Shell will have to pay more to achieve even this modest aim, with capital expenditure for 2008 now seen by the company growing around 7 percent to $28-29 billion after a 15 percent rise in 2007.

Although analysts had expected a capex rise, James Neale, oil analyst at Citgroup, said investors may wonder what they are getting in return for the higher spending.
Shell’s London-listed “A” shares closed up 0.11 percent at 1791 pence, lagging a 0.7 percent rise in the DJ Stoxx European oil and gas sector index.

RESERVES WORRIES

Shell did not, as in previous years, publish its reserves replacement ratio — the rate at which it matched production with new finds, instead delaying the release until later in the year.

However, the company indicated its end of 2007 reserves figures may disappoint, saying at least 1 billion barrels of resources were added in the year, compared with well over 2 billion in 2006.

The Hague-based company also took a $716 million charge related to its Nigerian operations, where violence has shut down fields. Analysts said this may lead to a cut in Nigerian reserves and the reduction of its stake in Sakhalin is also expected to weigh on reserves.

Shell has been struggling to rebuild investor confidence since admitting in 2004 that it had overstated its reserves by around a third.

A new management team was brought in and in the past two years the group has posted a strong financial performance, helped by record oil prices.

However, the oil price environment has made an operational turnaround tougher, shifting the balance of power away from international oil companies such as Shell and Exxon Mobil Corp to the governments of resource-holding nations.

Increasingly these governments prefer to have their state oil companies develop reserves, making it hard for the western majors to grow output and reserves.

Shell is finding it especially hard to grow production and reserves, and so its shares trade at a discount to peers.

Shell stock trades on a price-earnings ratio, using 2008 forecasts, of 8.71 times, according to Reuters data. BP trades at a p/e of 9.04 times, while Exxon trades at 11.2 times.

“We think that Royal Dutch Shell’s re-rating is a long-term story,” Alexandre Weinberg, analyst at Petercam, said.

REFINING WOES

A resurgence in the refining business also helped Shell and its peers in recent years but margins deteriorated sharply in the fourth quarter, as refiners found it hard to pass high crude prices onto motorists.

Analysts fear this business may be reverting to the low margins it endured for much of the 20 years to 2004 and may not in future be able to compensate for any upstream weakness.

Excluding a non-operating gain of $963 million largely from field sales, Shell’s CCS net income was $5.74 billion, compared with an average forecast of $6.1 billion in a Reuters poll of nine analysts.

(Additional reporting by Mark Potter; Editing by Quentin Bryar/Elaine Hardcastle)

http://www.guardian.co.uk/feedarticle?id=7270555

Terry Macalister
Thursday January 31 2008

Shell has started to “streamline” its operations in the Delta region of Nigeria in what appears to be a final realisation that it is fighting a losing battle against militants in the region.

The company announced today it had taken a $716m (£359m) charge in its fourth quarter accounts to pay for the cost of restructuring the business in the light of security and funding problems there.

Nigeria has always been a controversial part of Shell’s business with much criticism from campaigners worried about both human rights and environmental problems in the area.

Despite mounting attacks on its installations by militants in the Delta, Shell has previously played down the scale of the difficulties it was having there.

But today, at a financial results conference, Jeroen van der Veer, the Shell chief executive, made clear he was facing twin threats to the business and was reducing the scale of the operation.

“We have taken measures to streamline our operations taking into account the difficult circumstances we had to face,” he explained adding: “the Nigerian government is slow funding their share of the costs (of new developments).”

Van der Veer said he had held face-to-face talks with the Nigerian president last week to discuss both funding and security issues. He declined to comment on speculation that the authorities there are pressurising Shell to hand over a bigger equity stake in the business.

The Dutch oil group has already been forced to hand over a large stake in its Sakhalin scheme in Russia and Kashagan scheme in Kazakhstan.

http://www.guardian.co.uk/business/2008/jan/31/royaldutchshell.oil2

This Day (Lagos)
31 January 2008
Chuks Okocha
Abuja

The Bayelsa State Governor, Timipre Sylva has appealed to the Federal Government to intervene in the planned job cut by the Shell Petroleum Development Company (SPDC) as it would have a spiral negative effect on the Nigerian economy.

Speaking with newsmen in Abuja, Timi Sylva also called on the Federal Government to pay its equity contribution to the oil companies, as it is defaulting in the payment of the mandatory 60 percent of the Joint Venture Partnership.
 
SPDC had threatened to sack over one thousand staff of its over 3,500 staff strength. This is apart from the move to fire 5,000 staff engaged as contract staff.

The Governor stated: “The threat to sack or reduce its staff strength has nothing to do with the so-called activities of the Niger Delta militancy.No.

” The oil company is asking the Federal Government to pay up its sixty percent of the JointVenture Partners. They said that they have been spending and that thegovernment should pay its own 60 percent of equitycontribution. It has nothing to do with the situationin the Niger Delta.

” Honestly, the Federal Government should intervene,because the job cut by SPDC will have spiral effect on the economy and not the Niger Delta alone.”

.On why the 36 states agreed to reserve 20 percent of the excess crude allocation to development in a pool account to be managed by the Federal Government,the Bayelsa Governor said: “It is the rights of states to have andcollect their statutorily allocation, but collecting all the money will have and create inflationary trend in the economy, to the extent that the inflation would move to more than a single digit inflation in the economy.”

The governor who also reacted to the statement by the Chairman of the Revenue Mobilisation and FiscalAllocation (RMFAC), Engr. Maman Tukur that the 20 per cent investment is illegal said “what we did was political solution to a political problem and not who is right and who is wrong.”

He said it was done in the overall interest of the economy and national interest. Sylva also described the peaceful burial of the father of Vice President Goodluck Jonathan as a sign of peace in the troubled Niger Delta region.

“The progress so far made is most satisfactory. We used the burial to test the peace in Bayelsa state and it has shown that dialogue is greatly paying off.” he said.

http://allafrica.com/stories/200801310414.html

The Sierra Club (Washington, DC - www.sierraclub.org)

…is planning to bring a shareholders’ resolution to Royal Dutch Shell’s 20 May 2008 AGM. The resolution focuses on risks to shareholder value from Shell’s operating in Alaska’s Beaufort and Chukchi seas. Sierra’s concerns include the company’s failing to report on possible impact to value from operating in the Arctic oceans and failing to assess reputational risk from an oil spill in Alaskan waters, particularly one that impacts threatened marine mammals such as polar bear.

Sierra seek to highlight Shell’s ability to communicate to shareholders and potential investors the business case for its position on these issues and how such a position creates rather than destroys share value. They seek co-filers for the resolution, which must be delivered to Shell by 20 February.

To request a copy of the resolution wording and supporting statement, and for further information, please directly contact Athan Manuel

- athan.manuel@sierraclub.org, tel. +1 202-548-4580 / 202-716-0006,

or Keren O’Brien Murphy

- keren.murphy@sierraclub.org, tel. +1 202-675-6690 at Sierra.

Miles Litvinoff 
Co-ordinator, Ecumenical Council for Corporate Responsibility

PO Box 500, Oxford OX1 1ZL, UK 
tel. +44 (0)20 8965 9682

mobile +44 (0)7984 720103

miles.litvinoff@eccr.org.uk

www.eccr.org.uk

ECCR is a company limited by guarantee in England & Wales (No. 2764183) and a Body in Association with Churches Together in Britain and Ireland.