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Associated Press: Royal Dutch Shell 4Q profit drops 4 pct.

The company's main long-term problem is seen as the gap between the amount of oil and gas it is currently pumping and how much it will be able to produce in the future. AMSTERDAM, Netherlands
By TOBY STERLING
Associated Press Writer
FEB. 2 12:39 P.M. ET Royal Dutch Shell PLC reported a 4 percent drop in fourth-quarter net profit and a 2 percent decline in sales Thursday, as lower production and the impact from hurricanes Katrina and Rita outweighed the high price of oil.
Net profit at the world's third-largest oil producer came to US$4.37 billion (euro3.61 billion), down from US$4.57 billion, while sales fell to US$92.8 billion (euro76.6 billion) from US$95.1 billion.
By comparison, the largest global oil company, Exxon Mobil Corp. reported a 27 percent rise in fourth-quarter earnings earlier this week.
At the same time, Shell's full-year earnings rose 37 percent to US$25.3 billion (euro20.8 billion) while sales rose 12 percent to US$379.0 billion (euro312.9 billion). The earnings were the largest ever for a British or Dutch company, but are likely to be passed by BP next week.
Shell's new CEO Jeroen van der Veer tried to emphasize the positive in the results, citing “record cash and earnings” for the full year and “success in exploration and gaining access to new resources.”
In Amsterdam trading, Shell shares fell 2.6 percent to close at euro27.39 (US$33.17).
The company's main long-term problem is seen as the gap between the amount of oil and gas it is currently pumping and how much it will be able to produce in the future.
Shell is recovering from a major accounting scandal in which it was forced repeatedly to reduce the size of its estimated oil reserves in 2004 and 2005, ultimately forcing the departure of then-Chief Executive Philip Watts. It also led the company to merge its British and Dutch arms into a single company.
Van der Veer Shell said Shell planned to invest US$19 billion (euro15.7 billion) in 2006, most of that in “upstream” activities: exploration and production. He said the company expects to add around 750 million to 850 million barrels to proven reserves this year, and expects to return to a “100 percent reserves replacement” by 2008.
But Fortis Bank analyst Paul Andriessen said the 2005 rate of 60 to 70 percent replacement was about 10 percent less than he expected. Van der Veer's 2008 target may be seen as unrealistic, a main reason why investors were disappointed with Thursday's results, he said.
Still, he was positive about Shell's outlook. “The oil price in 2006 as a whole will probably be higher than it was in 2005 and you'll see that reflected in next year's earnings,” he said.
Despite President George W. Bush's call this week on U.S. consumers to break their “addiction” to oil, CEO Van der Veer said the global appetite for energy is likely to increase by half over the next 25 years, which means a continued dependency on fossil fuels for a long time.
“No one should underestimate the energy challenge facing us all,” he said, adding that Shell was also investing heavily in biofuels.
Jerry Taylor, a senior fellow at the Cato Institute, agreed that oil will continue to be the main source of global energy for years but said the company's current profits should be seen as exceptional.
Although crude oil futures were trading above US$65 per barrel Thursday, Taylor said recent industry deals show oil reserves can be purchased for less than US$15 per barrel and new fields are discovered for as little as US$9 per barrel, suggesting Shell may reach its replacement targets after all.
More importantly, Shell and others are constantly improving the yield from fields they do develop, he said.
He said the current high oil prices are part of a cyclical boom that will likely lead to over-investment in the industry and a possible price collapse at the end of the decade.
In any case “the lights are not about to go out on the industrial economy,” he said.
For the quarter, Shell's earnings from exploration increased 22 percent to US$3.56 billion (euro2.94 billion) because of the high prices, even as oil and natural gas production declined in terms of volume.
Hurricane Katrina drove crude oil prices to a high of US$70.85 a barrel after it battered the Gulf Coast, and Shell said its crude oil prices were around 29 percent higher in the fourth quarter than a year earlier.
Shell said it expected the hurricane damages to rigs and pipelines to total around US$275 million (euro227 million), of which US$130 million (euro107.3 million) has already been spent. It said it didn't know how much of that it will ultimately get back from insurance companies.
In Shell's oil refining division, profits fell by 51 percent to US$828 million (euro683.7 million) due to lost intake during the hurricanes, and lower refining earnings. The company had also had an US$405 million windfall in 2004 due to a revaluation of assets.

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