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Financial Times: Royal Dutch Shell

Financial Times Royal Dutch Shell

Published: March 11 2007 19:05 | Last updated: March 11 2007 19:05

Jeroen Van der Veer, Royal Dutch Shell’s chief executive, likes to talk about how he is building a “new energy infrastructure”.

To take a cynical view, that is fancy talk for investing a huge amount in high-cost sources of oil, and trusting that the market will be strong enough for it to pay off. Shell invested $23bn last year; a larger sum than that spent by ExxonMobil, which produced more than 20 per cent more oil and gas. Much of that was not in traditional projects, drilling wells and letting the oil flow out of the ground, but in Canada’s oil sands, liquefied natural gas – where Shell is the leading international oil company – and converting natural gas to liquid road fuel.

Shell reported in February that its additions to reserves had replaced 150 per cent of production last year: a very important statement for a company that was hit by scandal over mis-reporting its reserves in 2004.

“Unconventional” sources such as oil sands played a large part in that success. The company rejects suggestions that these unconventional businesses can only be profitable at very high oil prices. But whereas BP, which has almost entirely excluded itself from these businesses, plans for a medium-term price of $40 a barrel and says it could cope if prices were lower, Shell would undoubtedly be happier if prices were higher.

Other companies have also invested heavily in unconventional oils, but some have experienced cold feet. Exxon, for example, recently dropped its proposed multi-billion dollar GTL investment in Qatar, opting to develop the gas for the local market instead.

The international oil companies are being driven towards unconventionals because of the ever more ferocious struggle for access to resources. That was illustrated at the end of last year, when the Russian government helped strong-arm Gazprom into a majority stake in Shell’s $22bn Sakhalin-2 LNG project.

Canada, where Shell has been seeking to expand its interest by buying out the minority shareholders in Shell Canada, may be expensive, but it does at least offer a stable legal framework.

Copyright The Financial Times Limited 2007

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