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The Herald: Record profits at Royal Dutch Shell

EXTRACT: However, questioned about reports that BP executives had considered a merger approach to Shell, Van der Veer declined to comment. “You have to address that question to BP. We really have nothing to add,” he said, sticking to the formula when asked whether Shell had had any approach from BP, either directly or through bankers. The same applied to reports that Total might be interested in a tie-up, he said.

MARK WILLIAMSON July 28 2006

The chief executive of Royal Dutch Shell said the company was in great shape after the oil giant announced record profits but stonewalled questions on whether it would be interested in merging with its bitter rival BP.

While Shell cut production forecasts following a drop in output, Jeroen van der Veer said strong growth in second-quarter profits reflected a good operational performance at the firm, which is dealing with the legacy of a reserve-overbooking scandal.

The company has provided $500m (£269m) it would be prepared to pay to resolve a potential class action in the US on behalf of shareholders, following the over-statement of reserves by the company, without admitting liability.

The affair resulted in a boardroom cull in 2004 and prompted the unification of the group’s Dutch and UK businesses. This process was completed a year ago and has delivered big operational benefits, and helped Shell achieve forecast-beating results, according to Van der Veer.

Insisting the recent trading success was not just about higher oil prices, Van der Veer said Shell was effectively pursuing a simple strategy of developing a bigger upstream business combined with more profitable downstream operations.

Asked if he would apply for the top job at BP, which Lord Browne will vacate at the end of 2008, he said he could not think of any better place to work than Shell.

However, questioned about reports that BP executives had considered a merger approach to Shell, Van der Veer declined to comment. “You have to address that question to BP. We really have nothing to add,” he said, sticking to the formula when asked whether Shell had had any approach from BP, either directly or through bankers. The same applied to reports that Total might be interested in a tie-up, he said.

However, Van der Veer confirmed that Shell had not invested in Rosneft when the Russian giant completed an initial public offering on the London Stock Exchange this week. While BP took a stake, Van der Veer said Shell was not interested in the kind of small holding that was on offer, preferring to have more control over its destiny. “We do not want a small slice of an elephant.”

Van der Veer said 36% growth in second-quarter replacement cost profits to £3.4bn, compared to the same period last year, was evidence of great progress at Shell.

The result beat the £3.3bn replacement cost profit made by BP in the second quarter.

Excluding non-operating items such as the litigation provision, Shell made £3.5bn compared with an average forecast of £3.3bn among 12 analysts polled by Reuters news agency.

Defending its approach to safety issues in the North Sea, Shell said it would face a £161m additional tax charge following an increase in the rate of tax payable on profits made off the UK. However, the company signalled its commitment to the mature province last week by announcing plans for a new £25m campus in Aberdeen.

Shell may want to keep production in politically stable areas in view of difficulties in Nigeria, where disruption by rebels cost Shell 177,000 barrels oil equivalent daily production (boedp) in the second quarter.

Production averaged 3.253 million boedp, down from 3.52 million boedp in the same period last year.
Shell does not expect production shut by militant attacks to make a significant recovery this year and has cut its 2006 output target to around 3.4 million boedp, against 3.5 million to 3.6 million previously.

In view of cuts in production and rising production costs, Keith Bowman, analyst at Hargreaves Lansdown stockbrokers, said the fact that headline profit came in above forecast was “thanks largely to record oil prices”.

Liquid prices realised were 33% up on last year.

But Van der Veer denied Shell had been profiteering at the expense of consumers.

“People think they pay a very high price for fuel, but in retail you don’t make much money at all at the moment,” said Van der Veer, who expects oil prices to remain volatile.
Steep rises in wholesale gas prices have been driven by markets and supply and demand.

Shell said its capital expenditure budgets for this year and next were unchanged at £10.2bn and £11.3bn respectively.

It is investing heavily in unconventional energy sources such as oilsands in Canada and gas to liquids in Qatar.

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