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The Times: Shell’s record $27bn profits invite calls for windfall tax

February 1, 2008
Robin Pagnamenta, Energy and Environment Editor

Royal Dutch Shell reported annual profits of $27.6 billion (£13.9 billion) yesterday, smashing European company records and prompting calls for a windfall tax on “obscene” oil profits.

But the record results, which were boosted by surging global crude prices, masked uncomfortable truths about the company’s lacklustre operational performance.

The Anglo-Dutch oil giant suffered a 6 per cent slump in daily oil production last year to 3.3 million barrels, down from 3.5 million in 2006. It also faced a 10 per cent rise in costs and a steep drop in both refining margins and cashflow.

Questions also persist about the strength of Shell’s reserve base, although full details of this will not be disclosed until March 17.

Jeroen van der Veer, the chief executive, who described the results as “satisfactory”, blamed increased costs on the fact that Shell’s upstream oil and gas projects were becoming ever “bigger and more complex” and were often located in remote and challenging environments.

Mr van der Veer also acknowledged that the company was facing “very serious difficulties” in Nigeria, where violence has forced it to cut onshore production in the Niger Delta, sell some assets and refocus on offshore and liquefied natural gas operations.

Shell revealed yesterday that it took a $716 million charge last year related to its troubled Nigerian unit, which, under normal conditions, should yield 12 per cent of global production, second only to the US.

It also emerged yesterday that Shell Petroleum Development Company, a joint venture with the Nigerian Government, was chronically starved of investment, and that this, too, was affecting production. Nevertheless, Mr van der Veer insisted that Shell remained “committed to the country” and expressed confidence that its problems there could be resolved.

Elsewhere, Shell revealed that production had been hit by the reduction of its stake in the Sakhalin gas project in Russia, after pressure from Moscow, and by technical problems in Canada, where the group extracts crude oil from bitumen-rich sands.

The results also showed that Shell poured $33 billion into its upstream activities last year – more than its entire full-year profits – yet was still struggling to maintain production and replenish reserves. “They are struggling to stand still,” one senior investment banker said yesterday.

Although the full data on reserves will not be available for about six weeks, Mr van der Veer said that Shell had made “11 material oil and gas discoveries” in 2007 that, combined, added one billion barrels of resources to its portfolio. He gave warning that these could not be booked as reserves until they passed further scrutiny.

The struggle to rebuild reserves has led Shell to examine opportunities in Iraq. Mr van der Veer confirmed that the company was “very interested” in the country, which has the world’s third-largest oil reserves, and that it had submitted a number of proposals to the Iraqi Government.

Shell’s full-year earnings for 2007 were $27.6 billion, up 9 per cent from $25.4 billion for 2006. They came on the back of oil prices averaging more than $72 last year and prompted calls for a windfall tax from Tony Woodley, joint general secretary of Unite, Britain’s largest trade union, who branded the record profits “obscene”.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3285665.ece

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