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Troubled Shell puts faith in high oil price for recovery

The Times: Troubled Shell puts faith in high oil price for recovery

“The focus on growth drew scorn from analysts, who said Shell should focus on generating cash. “It was a fairly inept performance,” one said.”

By Carl Mortished, International Business Editor

September 23, 2004

SHELL, the beleaguered oil giant, is pinning its hopes for recovery on long-term high oil prices. In its first strategy presentation since the reserves scandal, the Anglo-Dutch company set out an aggressive plan to rebuild its reserves with more investment and acquisitions.

Jeroen van der Veer, chairman of Royal Dutch/Shell, promised to spend $45 billion (£25 billion) over three years and said that Shell would plan the cashflow on an oil price assumption of $25 per barrel, up from last year’s benchmark of $20. “Higher energy prices are likely to be here for some time. That gives us opportunities,” he said. Oil prices have surged to more than $49 a barrel this year on supply concerns but Shell is the first big oil company to shift its long-term planning scenario to a higher price plane.

“Shell sees an environment where oil prices have shifted structurally higher,” Mr Van der Veer said. “The energy industry is really a growth industry.” Shell’s decision to increase spending from $14.5 billion to $15 billion failed to impress the City, which was hoping for news of share buybacks. Shares fell 14p to 418p.

By raising its benchmark oil price Shell hopes that more projects will stack up, allowing it to invest more and restore the 4.4 billion barrels of oil and gas reserves that were stripped out of the portfolio for failing to meet reporting standards of the US Securities and Exchange Commission.

“If we do it on a lower oil price, we may underinvest,” Mr Van der Veer said.

He said that individual projects would still be tested at $20 a barrel.

Malcolm Brinded, head of exploration, is increasing investment in exploration by several hundred million dollars to $1.5 billion, allowing him to drill 15 to 20 big wells each year. He expects Shell to add 13 billion barrels to proven reserves by 2009. But he admitted that oil output would barely rise over the next few years. Shell expects oil production to rise from 3.8 million barrels a day this year to between 3.8 million and 4 million in 2009.

The focus on growth drew scorn from analysts, who said Shell should focus on generating cash. “It was a fairly inept performance,” one said. “If you want a bet on high oil prices, you invest in a medium-sized oil company. What investors want from companies like Shell and BP are dividends.”

Disposals will generate between $10 billion and $12 billion in cash during the next three years and Shell yesterday revealed that it had received an offer for its liquefied petroleum gas distribution and marketing business.

Shell said that the unit, which sells the fuel better known as bottled gas, made $400 million last year.

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