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The Associated Press: Shell Posts 16 Percent Gain in 3Q Profit

By TOBY STERLING – 2 hours ago

AMSTERDAM, Netherlands (AP) — Royal Dutch Shell PLC said Thursday that third-quarter net profit rose 16 percent despite a drop in production, but it warned that the underlying performance of its refining operations was weaker than it appeared.

Net profit at Europe’s largest oil company came to $6.92 billion, up from $5.94 billion, primarily due to a rise in the reported refining earnings. Sales rose to $90.7 billion in the quarter from $84.3 billion.

The company had net gains in the third quarter of $265 million from asset sales and a windfall from a tax change in Germany, versus charges of $77 million a year ago.

Refining earnings were $2.15 billion, up more than 70 percent from a year ago. However, Shell said that numbers this year looked better than the reality. The company said oil prices had risen between when the oil was pumped out and when it was refined, inflating refining earnings — and the opposite was true a year ago.

Adjusting for the price shift, refining earnings on a comparable basis fell 24 percent to $1.65 billion, Shell said. Using those numbers, which are not permitted under official accounting but are preferred by industry analysts, Shell’s earnings would have fallen around 6 percent.

Still, that was better than the performance of some of Shell’s major rivals. BP PLC reported a 29 percent drop in earnings to $4.4 billion on Tuesday, mostly due to problems at refineries. ConocoPhillips reported a 5 percent drop in profits to $3.67 billion on Wednesday.

“Given the weaker industry refining margins we have seen in the quarter, these are satisfactory results,” said Shell Chief Executive Jeroen van der Veer in a statement.

Shell’s shares fell 0.5 percent to 29.50 euros ($41.93) in Amsterdam.

The company’s production of oil and gas fell 3.4 percent from 3.25 million barrels of oil or equivalents per day to 3.14 million. That led to a 6 percent drop in production earnings to $3.51 billion.

Production earnings were still near record highs due to the price of crude oil. Shell’s selling prices were above $70 a barrel in the quarter, up from around $65. Brent crude was trading above $85 a barrel Thursday.

“We have positioned Shell very early over the last three years to take full advantage of the higher oil prices in the way we’re investing, so in those areas we’ve caught at least some of the upside,” Chief Financial Officer Peter Voser said on a conference call.

But he said the company wasn’t counting on the high prices to continue, and called predictions that oil may reach $100 a barrel “too speculative.”

“To be honest we find it hard to explain the oil prices,” he said. “At the end of the day you don’t see anybody queuing for gasoline or any shortages. Inventories are well supplied and refining margins have been lower, which is an indication of a well-supplied market.”

He added: “From that point of view, the price seems to be driven by some speculation and also has a political premium in it.”

The reference to a premium related to fighting on the Iraq-Turkey border and tension between Iran and the West over its nuclear program.

Shell said the major reason for its drop in production was declining output at existing fields, but that it expects a pickup in the coming years.

Shell was forced to restate its oil reserves downward in a major accounting scandal in 2004. But Voser said a massive campaign to find new reserves, partly in oil-rich sands in Canada, is paying off.

“We have added more than 2 billion barrels each year to our resource pool — in 2005, 2 billion plus, and in 2006, 2 billion. For your reference, we’re pumping around 1.3 billion barrels a year, so we’re actually adding more than what we’re producing,” he said.

“Our strategy of finding more oil is working. It’s in more complex areas, more remote areas, but it’s there,” Voser said.

Production earnings were also hurt by a dramatic change in terms of Shell’s participation in the Sakhalin island project in Russia. Shell was forced to cede control to state-controlled OAO Gazprom at the behest of the Russian government. In April, Shell completed the sale of a 27.5 percent stake, leaving it with 27.5 percent. Terms were not disclosed, but Shell said Thursday its relative investment costs had increased as a result of the deal.

Voser repeated that Shell is only evaluating the feasibility of a gas project in Iran and the company would weigh “political considerations” before deciding to invest — though Tehran has demanded a decision before June.

U.S. companies are barred from doing business with Iran, and Washington has warned foreign companies with significant U.S. operations like Shell to follow suit.

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