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Shell to spend $45bn over three years

Financial Times: Shell to spend $45bn over three years

“Royal Dutch/Shell intends to spend $45bn over the next three years as it looks to repair the damage caused by its oil reserves scandal.”: “They needed to show whether they had the right people in charge to fix things. I think they have failed dismally here.”

By James Boxell in London

Posted 24 September 04

Royal Dutch/Shell intends to spend $45bn over the next three years as it looks to repair the damage caused by its oil reserves scandal.

The Anglo-Dutch oil group, which has been forced to cut levels of proved reserves by more than 20 per cent this year, said at its annual strategy meeting yesterday that most of the cash would be spent on oil exploration and production.

However, analysts were unhappy about the lack of detail in Shell’s plans to boost production over the next few years.

One said: “They needed to show whether they had the right people in charge to fix things. I think they have failed dismally here.”

There was also unhappiness that share buy-back plans appeared to have been curtailed by heavy spending plans at a time Shell’s peers are undergoing multi-billion dollar buy-back programmes.

Peter Nicol, analyst at ABN Amro, said: “A good presentation was spoiled by the lack of clarity over where the company is really going financially.”

The spending increase, which comes after years of under-investment and conservatism, puts Shell’s capital expenditure in line with that of ExxonMobil, which is a third bigger.

Shell said it had seen a fundamental shift in the long-term price of oil and would change the way it made investments to meet this. In line with its peers, Shell currently uses a planning price of $20 a barrel to determine whether a project will be economically viable.

But Malcolm Brinded, head of exploration and production, said yesterday that while Shell would continue to use $20 as a way to screen out undesirable projects, it would assume prices of more than $25 to decide which would be best pursued.

Oil companies are extremely cautious about their planning price assumptions even though they have been called into question recently after prices almost touched $50 a barrel.

Jeroen van der Veer, chairman, also said Shell needed oil to remain at $25 per barrel to ensure its cash income covered capital spending over the next three years.

Rivals such as BP only need to assume $20 to make sure they are covered.

Mr Brinded insisted Shell would replace all the oil it pulls from the ground over the next five years, but much of this will come from the reserves it was previously forced to rebook.

Richard Rose, analyst at Oriel Securities, said: “They are being very conservative on reserve replacement. They really need to do 100 per cent just to stand still. You would have expected a bolder statement.”

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