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The Scotsman: Shell to post UK record £13bn profit

IAIN DEY
CITY EDITOR
OIL giant Royal Dutch Shell is poised to unveil the biggest profit ever recorded by a British company this week, clocking up earnings of close to £13bn.
Soaring crude prices, which have been close to $70 a barrel for much of the year, are expected to have propelled the company's profits almost 40% higher.
The £13bn profit figure would see Shell edge past banking giant HSBC, which recorded the highest ever profits from a UK company last year with earnings of £10bn.
Although both HSBC and Shell's rival, BP, have still to report their 2005 results, City estimates indicate that neither of the other two contenders for the title will steal it back.
The oil price boom will also see US giant ExxonMobil set a new American record this week, with analysts expecting its profits to break through $34bn (£19bn).
With petrol prices and domestic fuel bills rocketing on the back of the crude price rises, the oil companies are likely to come under further fire from consumer groups and politicians.
The profits come in spite of the additional 10% tax that Chancellor Gordon Brown levied on North Sea oil in his pre-Budget report – which prompted Shell to slash its North Sea exploration programme.
Despite the record profits, all the oil majors are likely to come under fire in the City over their exploration performance – all are believed to be producing more oil than they are now able to find.
Shell chief executive Jeroen van der Veer revealed at the Davos economic forum last week that he may be willing to spend up to $10bn (£5.6bn) on acquisitions to help plug the gap in its reserves base. The company has been repeatedly linked to a possible bid for Edinburgh-based Cairn Energy.
Merrill Lynch analysts said in a research note: “Watch for another sub-100% replacement from Royal Dutch Shell, despite a pick-up in exploration performance. The company is paying the price for chronic under-investment over the past five years.”
Shell's fourth-quarter profits are forecast to hit $5.4bn (£3bn), a rise of about 14%. Production problems in the Gulf of Mexico caused by last autumn's hurricanes will make the fourth quarter its weakest period of the year, with profits likely to be marginally down on those seen in the third quarter.
Analysts predict that Shell's output will fall 8% to around 3.5 million barrels of oil equivalent per day (boepd) in the fourth quarter, from 3.8 million boepd in the final quarter of 2004.
The group's downstream business, which incorporates refining and petrol retailing, is expected to have performed better than many of its peers, including BP.
Following the reserves reporting scandal which rocked Shell to its foundations in 2004, the company has been increasing its exploration activity.
Analysts will watch closely the extent to which Shell managed to match the oil it pumped with new finds.
Oil firms try at least to match each barrel they extract with a new discovery over time – otherwise their business will start to shrink.
In 2004, Shell replaced less than half of its production with new finds and is likely to miss the 100% reserve replacement rate in 2005 as well.

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