Financial Times: Shell fears over reserves target

By Thomas Catan in London
Published: May 5 2006 03:00 | Last updated: May 5 2006 03:00

Royal Dutch Shell has said it may miss its target of fully replacing oil and gas it pumps in coming years, adding to concerns over its future prospects.

Since downgrading its energy reserves by around a third two years ago, the Anglo-Dutch energy group has been struggling to replace its oil and gas stocks. Investors see the reserve replacement ratio as a key indicator of future value of oil companies.

Shell had promised to raise its reserve replacement ratio between 2004 and 2008 to 100 per cent, from an industry-lagging 72 per cent average over the past five years. But Jeroen van der Veer, chief executive, admitted yesterday the company may not achieve that, citing the tight market for materials and contractors to build new projects.

Mr Van der Veer said the company would drop the commitment and focus instead on the value that projects deliver to investors. “We do not want this target to drive the wrong business decisions, either in the timing of projects, or in the type of resources we prioritise,” he said.

Soaring costs have forced many companies to raise their spending on new projects. Yesterday Shell raised its capital spending to $21bn in 2007, from $19bn this year. That was already $4bn more than previously envisaged.

The admission signals a change of tack for Shell, which has sought to bolster investor confidence by redoubling efforts to bring new reserves on stream that meet strict guidelines set out by the US Securities and Exchange Commission. Some analysts fear that, in its drive to hit the target, Shell could lower the bar on investment decisions and plough billions into projects that could become unprofitable if the oil price drops.

It has already been investing heavily in expensive, “unconventional” oil sources such as Canada's oil sands and fuel from natural gas using “gas-to-liquids” technology.

Mr Van der Veer said those energy sources may not, however, qualify as proved oil and gas reserves under SEC guidelines. Shell also reduced its production guidance for this year to 3.5m-3.6m barrels of oil equivalent a day, from 3.5m-3.8m b/d previously. It is still suffering the after-effects of last year's hurricanes in the Gulf of Mexico and attacks by rebels in Nigeria, which have halved its production there. Despite the bad news, record energy prices ensured that Shell delivered a 9 per cent rise in first-quarter pre-tax profits, to $12.3bn. Earnings per share were $1.06 versus 99 cents.

Shell's “B” shares closed 3p up at £19.51 in London.