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Financial Times Shell reports record UK profit of £12.9bn

By Ed Crooks, Energy Editor
Published: February 1 2007 08:28 | Last updated: February 1 2007 12:26

Royal Dutch Shell, the second-biggest western oil company, on Thursday reported better than expected profits and a strong performance in replacing reserves, but warned of slow growth in production until the end of the decade.

Earnings rose an underlying 21 per cent to $25.4bn (£12.9bn) on a current cost of supply basis for 2006: the largest profit ever recorded by a UK-listed company.

Fourth-quarter earnings were ahead of most analysts’ expectations at $6.02bn, up 11 per cent on the equivalent quarter of 2005.

Higher oil prices, which averaged about $60 in 2006, up from about $50 in 2005, higher natural gas prices in Europe and a 14 per cent year-on-year rise in volumes of liquefied natural gas sales contributed to the rise in profits.

Reserve replacement was impressive thanks to bookings for Pearl project in Qatar to convert natural gas to road fuel, and for the Athabasca oil sands project in Canada.

Shell expects to report that it has added about 2bn barrels of oil equivalent (boe) to its booked reserves, including oil sands, and produced about 1.3bn in the year, giving a reserves replacement ratio of approximately 150 per cent.

The sale under duress of half its stake in the Sakhalin-2 gas and oil project off the far east coast of Russia at the end of last year, which took Shell’s share in the project to 27.5 per cent, is expected to cut about 400m boe from its reserves – less than some analysts had estimated.

However, Shell sounded a more cautious note than in the past about the outlook for production growth, saying it expected only 1-2 per cent annual increases until the end of the decade, although it said that would be followed by an acceleration to 2-3 per cent growth in the next decade.

Total production for 2006 averaged 3.473m barrels of oil equivalent a day, down 1 per cent from 2005 but slightly better than Shell had previously indicated.

Militant attacks in Nigeria have reduced Shell’s share of the country’s output by 180,000 barrels a day. The company said no firm date could be given for the re-start of production.

It added: “Restricted access in the area continues to impact the drilling programme for the future, and the progress of new projects.”

However, new sources of oil and gas have come on stream during the year, including the deep water off the coast of Nigeria.

Excluding the effect of Nigerian security problems, and some other adjustments relating to weather and what Shell described as “contractual issues”, production in the fourth quarter was 2 per cent higher than in the equivalent period of 2005.

Jeroen van der Veer, Shell’s chief executive, said: “Our exploration strategy is paying off.”

Shell’s ambitious capital spending plan continues: investment in 2006 was $23.1bn, offset by $1.7bn of divestments, mainly of downstream assets. In 2007, it expects to spend a net $22bn-$23bn.

It expects $9bn worth of disposals, including the sale of a US refinery and petrol stations announced this week, and about $7bn of acquisition spending to buy out the minority shaerholders in Shell Canada. However, directors played down the prospect of further large acquisitions.

The dividend was raised 9 per cent to €1 for the year. From this year, Shell intends to start paying its dividends in US dollars, and has promised that the first quarter dividend for 2007 will be 36 cents, up 14 per cent from the first-quarter dividend in 2006.

Shares in Shell were 2.8 per cent higher at £17.54 in lunchtime London trading.

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