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Shell says considering ‘new realities’ of refining

Reuters: Shell says considering ‘new realities’ of refining

“Chief Executive Jeroen van der Veer told Reuters in an interview that new refineries needed to be built. De-bottlenecking and brownfields will not be enough,” he said…”: “If you start to tax away all the upside in the oil price, then we have less money to invest.”

Thursday Sept 29, 2005

By Tom Bergin

JOHANNESBURG (Reuters) – Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research) said on Thursday the world faced a shortage of refining capacity, which may affect the oil major’s future investment plans, although he did not say whether it would build a refinery itself.

Chief Executive Jeroen van der Veer told Reuters in an interview that new refineries needed to be built.

“De-bottlenecking and brownfields will not be enough,” he said, referring to traditional techniques of squeezing more capacity from and of expanding existing refineries.

Van der Veer, a former refinery manager, declined to say whether Shell (RDSb.L: Quote, Profile, Research) would consider building a new refinery itself or in conjunction with Kuwait, which is seeking a partner to build a new refinery in the U.S.

He said, however, “We are normal businessmen, and indeed the outlook for refining is looking better than, say, five years ago, so you have to take the new realities on your radar screen.

“That takes a bit of time, but we are practical and we do whatever is appropriate for Shell,” he said in an interview on the sidelines of the World Petroleum Congress in South Africa.

Van der Veer said he was optimistic that new government initiatives would reduce future strife in Africa’s top oil producer, Nigeria, where Shell and other operators have seen their oil production operations interrupted by unrest, which flared up again last week.

“What is different now compared to some years ago is that the Nigerian government is very serious about the unrest and there are now programmes in place that work better than in the past to get money back to the provinces where the oil is produced,” he said.

“We see developments which are positive. It is too early to see if that will lead to less unrest”.

NO NEWS ON SAKHALIN

In Russia, Shell’s flagship Sakhalin 2 liquefied natural gas and oil project off the country’s east coast is at the centre of negotiations with the government over who foots the bill for a $10 billion (5.7 billion pounds) budget overrun.

When asked if he was optimistic that the government would approve the new $20 billion budget, which Shell and its Sakhalin 2 partners submitted, van der Veer answered:

“I don’t know all the details of the budget procedures, how that exactly works, but of course working on a production-sharing agreement is all quite technical, and there will be a lot of contact with the authorities.”

“That is now for the joint venture management to work through.”

Traditionally, production-sharing agreements — the kind of contract entered into between the Sakhalin 2 partners and the host government — allow costs to be recouped from revenues before the host government starts to levy royalties.

However, analysts say Shell and its partners could be forced to bear part of the cost increase, something which would hit the economics of the project hard.

Van der Veer said that calls for windfall taxes on the bumper profits oil firms that are making on the back of record energy prices would not help consumers but instead worsen tight oil market conditions.

“If you start to tax away all the upside in the oil price, then we have less money to invest. Then the tension between supply and demand may even last longer,” Van der Veer said.

© Reuters 2005. All Rights Reserved.

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