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THE NEW YORK TIMES: Strong Showing in 1Q for Oil Companies

Strong Showing in 1Q for Oil Companies

Published: May 5, 2006

Filed at 1:58 a.m. ET

AMSTERDAM, Netherlands (AP) — Royal Dutch Shell PLC and Total SA reported higher first-quarter profit Thursday on the back of high oil prices, rounding out a set of mostly solid results by the world's largest oil companies.

However, both European companies suffered from production woes that highlight the difficulties the industry faces in finding oil and bringing it to market — troubles that have driven prices to recent highs above $75 a barrel.

Shell's net profit rose 3.1 percent to $6.89 billion, while Total's earnings rose 15 percent to 3.68 billion euros ($4.65 billion).

But Shell said its volume production had fallen by 3 percent due in part to attacks on its facilities in Nigeria, and the company may not be able to restore its proven oil reserves as quickly as it had forecast after its 2004 accounting scandal.

Total's volume production fell 5 percent, and the company declined to say how much it stands to suffer from moves by governments in Bolivia and Venezuela to regain partial or full control of the hydrocarbon industry.

Taken as a group, Exxon Mobil Corp., BP PLC, Shell, Total, Chevron Corp. and ConocoPhillips Co. reported profit of $32.8 billion in the first quarter, a 6.5 percent rise.

''Crude oil prices are the linchpin of the whole profit picture,'' said Oppenheimer & Co. analyst Fadel Gheit. Given oil's recent rise, industrywide profit is likely to head even higher in the second quarter. ''The market has been very kind to them as of late.''

Gheit also noted that refining profit is likely to rise considerably in the second quarter due to soaring gasoline prices.

Some analysts questioned whether big oil is profiting enough, given the 30 percent rise in crude oil prices from a year ago. Brent crude sold for an average of $61.80 per barrel in the first quarter, up from $47.70 a year earlier.

''It's a widespread misunderstanding that oil company earnings will exactly reflect the rise in oil prices,'' said analyst Bert van Hoogenhuyze of De Vries Capital Management.

For most of the major oil companies, he said, the bulk of production in projects they participate in is sold in advance at long-term contracts at fixed rates. Earnings in the coming quarters are not likely to be affected dramatically by moves in the price of oil, he said, unless they are extremely wild — above $100 per barrel or below $20 per barrel.

The difficulties in developing new fields appear to be a more serious problem.

''In the past two to three years most of the companies have had problems replacing 100 percent of their proven reserves, and Shell is the most notorious example of that,'' Van Hoogenhuyze said.

Shell is still trying to recover from the scandal in which it was forced repeatedly to reduce the size of its reserves in 2004 and 2005. The company's chief executive resigned and Shell merged its British and Dutch arms into a single company to simplify its corporate structure.

New CEO Jeroen van der Veer said Shell might not be able to meet its target of a 100 percent replacement rate — a balance between the amount of oil a company pumps and the amount it adds to reserves — for the 2004-2008 period.

''We still have a fair prospect of achieving that target,'' Van der Veer said. ''However, we do not want this target to drive the wrong business decisions, either in the timing of projects, or in the type of resources that we prioritize.''

In 2005, the company's replacement rate was between 60 percent and 70 percent.

Shell is investing $19 billion this year, most of it in exploration and production, to help restore the balance. It said Thursday it would boost investment in 2007 to $21 billion.

However, ''we will probably hold back some of our longer-term projects until the supply and contracting environment cools down,'' Van der Veen said. ''That in turn makes achieving our SEC proved reserves replacement forecast less likely than it was.''

He said the company would still try to meet its goals by developing ''unconventional'' oil resources such as oil in sand, or using new technology to convert gas to oil, rather than by drilling traditional oil fields.

But these may not qualify as ''proved reserves'' under accounting rules set by the U.S. Securities and Exchange Commission.

Both Shell and Total lost production in Nigeria, where armed militias have attacked pipelines and pumping stations. The militias, who demand a bigger cut of proceeds from oil production in the Niger Delta, took hostages in February who were later released.

Total said new producing wells in Bonga, Nigeria, and Britain helped offset disruptions in production in Niger.

Shell, like BP, is still repairing damage to pipelines and platforms caused by hurricanes Katrina and Rita in the Gulf of Mexico.

Wilbur Berlot, a geopolitical analyst at The Clingendael Institute, said the problems in the Niger Delta and the Gulf of Mexico were less of a concern than moves by Venezuela, Bolivia and Russia to increase government control over their oil.

''The problems in the Niger Delta are an issue of security. In Venezuela and Bolivia, it's a question of philosophy.''

Van Hoogenhuyze said that with so many threats to oil and gas supplies outside the United States and Europe, most of the companies are turning to unconventional fields as a hedge against political uncertainties.

Shell closed 0.2 percent higher at 27.23 euros ($34.38) on heavy volume in Amsterdam. Total ended up 1.7 percent at 222.40 euros ($280.80) in Paris.


AP Business Writer Brad Foss in Washington contributed to this report.

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