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Financial Times: Lex Column: Royal Dutch Shell

Royal Dutch ShellPublished: May 5 2006 03:00 | Last updated: May 5 2006 03:00

Royal Dutch Shell used to exaggerate its reserves. Now it admits it may not be able to replace them at the promised rate. This is progress of a sort, but disappointing nonetheless.

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Having cleared the decks after the 2004 scandal, Shell was at pains to point out that the hydrocarbons were still there and would be re-booked in the future.

The target of 100 per cent reserve replacement on average from 2004-08 was part of that promise. Investors are still waiting for a rebound in reserves.

To be fair, Shell's rationalisations are sound. It makes sense, for example, to delay deep-water projects when mobile rig prices are at a record high, but expected to fall as supply increases. Securities and Exchange Commission reserve definitions are arbitrary and Shell has unconventional oil reserves – such as oil sands – to fill the gap. Production targets, therefore, have been reiterated for 2009.

Unfortunately, having dropped the reserves replacement target, this implies greater reliance on expensive unconventional sources at what may prove peak oil prices. Even then, the Pearl gas-to-liquids project is unlikely to be onstream by 2009.

After a period of wearing a hair shirt following 2004's scandal, Shell has returned to uncommunicative ways. “Don't lose your shirt” is about the extent of the detail it will provide on its investment guidelines or its attitude to current low levels of gearing. Shell stresses organic growth, but has failed to dispel entirely fears of a pricey acquisition.

With oil above $70 a barrel, none of this may matter for the share price in the short term. But relative to its European peers, Shell's share price is lower than in the darkest days of the reserves scandal. On the strength of yesterday's strategy presentation, this is unlikely to change any time soon.

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