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The Guardian: Shell beats forecasts

What the analysts say

Hans Kundnani, business reporter
Thursday October 26, 2006
Guardian Unlimited
Royal Dutch Shell today posted better-than-expected underlying profits.

The company yesterday learned it could face prosecution over environmental failures at its massive Sakhalin-2 project in Russia.

Today it announced profits on current cost replacement basis for the third quarter fell 4% from $7.2bn to $6.9bn.

However, this was because the third quarter of 2005’s earnings were boosted by divestment gains of $1.7bn.

With one-off items removed, profits were up from $5.8bn to $7bn, a 33% jump. The underlying profits were significantly more than the City’s expectations of $5.7bn.

The increase was due to stronger than expected third-quarter production, which reached 3.25m barrels of oil equivalent per day despite the ongoing impact of hurricane damage in the Gulf of Mexico and shut-downs in Nigeria.

Profits from refining profits were also up despite lower margins.

“Our earnings have proven to be resilient in the face of rising industry costs and weakening refining margins,” said chief executive Jeroen van der Veer.

Yesterday the Russian government announced that it was prolonging its inspection into environmental violations at the £11bn Sakhalin-2 oil and gas project, in which Shell is the leading partner. It also said a criminal prosecution could follow.

“The breaches at Sakhalin-2 fall … under criminal law and we think it is necessary to apply it,” Yuri Trutnev, the natural resources minister, said yesterday. The scheme on the Pacific island of Sakhalin, the world’s biggest liquefied natural gas project, is due to produce gas, mainly for Japan, in 2008.

Critics say the increasing pressure from the Russian authorities is part of a campaign by the Kremlin to take control over the project through the state-owned gas group, Gazprom.

Gazprom has been negotiating with Shell over a deal that would see the Russian company acquire 25% plus one share in Sakhalin-2.

Shell’s shares fell yesterday on the news and closed at 1789p. This morning they were up 51p, or 2.8%, at 1840p in early morning trading.

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