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THE TIMES: Shell scraps reserves target as it pushes up spending

Shell scraps reserves target as it pushes up spending

By Carl Mortished, International Business Editor

ROYAL Dutch Shell yesterday abandoned its target of replacing every barrel pumped from its proven reserves, as it raised spending to record levels in an effort to boost its oil and gas output.

The oil major said that it would raise its spending from a budgeted $19 billion (£10 billion) this year to $21 billion next year, the highest among its peers, with a focus on oil sands and synthetic fuels. However, the Dutch company is being forced to shelve projects because of a scarcity of skilled labour and equipment.


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Jeroen van der Veer, Shell’s chief executive, said that the group still intended to meet its target of four million barrels per day by 2009 but its focus on unconventional hydrocarbons, such as its Canadian oil sands business and a gas-to-liquids project in Qatar, might prevent it from meeting a target of 100 per cent replacement of proven reserves as defined by the US Securities and Exchange Commission.

Shell is struggling to replace each barrel it pumps from the ground and replaced only between 60 and 70 per cent of the 3.5 million barrels per day produced last year. The company is hamstrung by regulation because some six billion barrels locked in Albertan oil sands are excluded from its proven reserves by SEC rules, which define these as mining operations, not oil exploration.

Yesterday the oil multinational finally abandoned the target. “For us, it is not relevant. We are not taking investment decisions on the basis of SEC reserves,” Peter Voser, Shell’s chief financial officer, said.

Mr van der Veer said that Shell still could achieve 100 per cent proven reserve replacement but it would not be an objective. “We do not want this target to drive the wrong business decisions. Our goal is to invest in the right projects, at the right time.”

The oil company beat City forecasts with its first-quarter profits rising by 12 per cent to just over $6 billion, beating the increases recorded by rivals BP and Exxon. Output in the first quarter fell 3 per cent to 3.7 million barrels per day, due to the effect of the hurricanes in the Gulf of Mexico.

Mr van der Veer echoed recent comments by BP on the speculative premium in the current oil price. “We know there is more than $100 billion of speculative money in the oil market and that is certainly playing a role. Physically, the market is in balance.”

Shell has 50 major projects on the go, intended to bring 20 billion barrels of oil into production over the next four years. However competition for resources has led to rampant cost inflation. An expansion of the Athabasca Oil Sands project has been put on hold and Mr Voser said that several deep water offshore projects would be delayed for lack of drill ships.

OIL SLIP

Oil prices tumbled after news of a rise in US petrol stocks eased fears over shortages in America’s summer driving season. Prices for US light crude for delivery in June slumped back below $70 a barrel, dropping by $2.63 to $69.95. In London the benchmark Brent crude for June fell $2.30 to $70.30 a barrel.

RELATED TIMES ARTICLE

Times Online May 04, 2006

Shell in 20bn barrel energy drive

By Miles Costello

Oil and gas group Royal Dutch Shell today laid out ambitious plans to increase its production to as much as 4 million barrels of oil a day over the next three years as it beat City forecasts with a 12 per cent gush in first-quarter profits to more than $6 billion – despite production slipping over the period.


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As chief executive Jeroen van der Veer described today's quarterly results as merely “satisfactory” – with political turmoil in Nigeria and a Gulf of Mexico hurricane both denting first quarter production levels – he said Shell planned to open up about 20 billion barrels of oil equivalent in resources by the end of the decade.

He also commited Shell to “unconventional” resources such as oil sands and gas-to-liquids energy processes, although he warned investors that these may not qualify as proven oil and gas reserves according to standards set by the American regulator the Securities and Exchange Commission.

In 2004, Shell overhauled its management and paid a record fine after admitting it had misstated the level of its proven reserves for years.

Mr van der Veer described Shell's new strategy as “more upstream, profitable downstream” – as part of its commitment to explore for new reserves and improve the production and transmission process.

“Upstream, we are committed to increase our production to 3.8 to 4.0 million barrels of oil equivalent in 2009, and we have record investments for our future in hand,” the Shell boss said. “Downstream, we are making selective growth investments, after a period dominated by disposals.

“These are exciting times for Shell. We are making investments and taking final investment decisions by the end of the decade, which together will open up some 20 billiion barrels of oil equivalent resources. These resources, which are around one third of our discovered resource base today, include substantial long-life fields, which will underpin our profitability for many years to come.”

As he embarked on the ambitious production and resources plan, Mr van der Veer nevertheless plaid down the chances of Shell meeting its target of an average 100 per cent SEC proved reserves replacement ratio over the years 2004 to 2008.

This Shell strategy update came as the oil and gas group increased first quarter profits to $6.088 billion, up from $5.455 billion over the same period last year, largely due to the surge in the price of oil and gas.

The oil price has been touching $72 a barrel over recent months, having more than doubled over the past 12 months. The high price of gas on the wholesale markets has been good news for Shell and other natural resources companies, but has hit domestic consumers hard with household gas bills rising by as much as 25 per cent in some cases.

However, production slipped by 3 per cent to 3.746 million barrels of oil a day as a result of attacks on pipelines by militants in Nigeria and a hurricane last year off the Gulf of Mexico.

Shares in Shell added 17p to 1,965p in early deals, valuing the group at nearly £53.8 billion.

For full details on Shell shares click here

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