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Daily Telegraph: Shell gushes to $10bn in face of Sakhalin costs

Daily Telegraph: Shell gushes to $10bn in face of Sakhalin costs

Friday 29 July 2005

By Malcolm Moore (Filed: 29/07/2005)

Shell yesterday declared a 27pc increase in first-half profits to $10.17billion (£5.8billion) but admitted that its oil and gas production had fallen by 129,000 barrels a day over the period.

Shares in the newly-restructured Royal Dutch Shell fell 31p to £17.59. Analysts said that Shell’s upstream oil and gas unit had underperformed – even though it saw profits rise by around 50pc on the back of higher energy prices.

Shell’s main problem in the second quarter was a huge cost overrun on its landmark Sakhalin project, which aims to tap four billion barrels of hydrocarbons in the frozen sea off the east coast of Russia.

The company recently admitted that its costs had doubled to $20billion. Yesterday, Jeroen van der Veer, the chief executive, said: “It is clear we must improve our project management.”

However, he insisted that the problems would not endanger a swap deal Shell has announced with Gazprom. He said the Russian giant remained keen on the deal, since it will give it easy access to the Far-Eastern markets of China and Japan, and that details would be ironed out over the next couple of months.

Peter Voser, the finance director, said spending on exploration would increase by $300m a year to $1.8billion in 2005 and 2006, and said Shell’s previous capital expenditure guidance of $15billion for next year now had to be reassessed.

Contractors and oil services firms have pushed up their prices dramatically, according to Shell, as oil majors scramble to take advantage of the high oil price environment.

Shell is particularly aware of the need to search for oil, having admitted at the end of last year that it was unhappy at the rate it is replacing its reserves. Shell only found half as much oil as it pumped last year.

However, the company was able to announce two discoveries off the coast of Nigeria, as part of the Big Cat project. It did not say how big the finds were.

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