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The Guardian: Replacing reserves an aim not a forecast, says Shell

Financial: Replacing reserves an aim not a forecast, says Shell
The Guardian – United Kingdom; May 05, 2006

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Shell's attempt to rebuild its reputation following the fiasco two years ago when it mis-stated its reserves suffered a setback yesterday when the oil group admitted it could miss its target of finding enough new oil and gas to replace all of its resources each year.

Jeroen van der Veer, the chief executive, said Shell was no longer looking at a 100% replacement rate as a forecast but merely as a desired “outcome”. At the same time he reported profits of pounds 1.5m an hour over the first quarter of the year, due to soaring oil and petrol prices.

Shell insisted it was not to blame for forecourt prices of nearly pounds 1 a litre and said $100bn of “speculative money” was sending prices soaring at a time when there were no actual shortages.

Soaring rig and other equipment costs were also forcing Shell to postpone a range of new projects. It was the rise in costs as well as a move to less conventional developments – such as oil sands in Canada – that had forced it to reassess its reserves targets. Oil sands and gas-to-liquids projects may not qualify for the proved reserves replacement figures under guidelines from the securities and exchange commission (SEC), the US regulator.

Shell had promised to replace 100% of its reserves under the SEC's rules, following the debacle in 2004 when the regulator forced it to mark down its stated oil and gas reserves by 25%.

“We now see SEC reserves replacement across 2004-2008 as an outcome of our investment choices, rather than a forecast. Our goal is to invest in the right projects, at the right time, within our framework of capital discipline,” Mr van der Veer said. “We still have a fair prospect of achieving that [100%] target. However, we do not want this target to drive the wrong business decisions . . . The industry is seeing a very tight market for materials and contract rates.”

Despite a warning that some high-cost projects such as an extension of the Mars field in the Gulf of Mexico could be put on the back burner, Shell was planning to spend $19bn this year and $21bn next year on new exploration and production. The additional spending would help open up 20bn barrels of oil equivalent – including gas – by the end of the decade. Only the smallest percentage of this spending was likely to go on renewables projects.

The strategy update came alongside strong financial results. Profits were up 12% to $6.1bn, despite a 3% fall in production in the first three months of the year. Total oil and gas output fell by 3% to 3.7m barrels a day due to civil unrest in Nigeria and the hurricanes in the Gulf of Mexico.

Mr van der Veer could not say when Nigerian production would be back on stream. Shell was also not optimistic about the potential in Iraq. The company had completed “various studies” but said it needed a proper legal framework outlining the role of foreign firms.

Despite oil prices of $70 a barrel and petrol at nearly pounds 1 a litre, Shell said its UK retail profits were “disappointing”. Mr van der Veer refused to say what direction commodity prices might go in future, saying they were too hard to predict.



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