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Financial Times: Output alarm takes gloss off Shell earnings and unnerves shareholders

By Dino Mahtani in London
Published: February 1 2008 02:00 | Last updated: February 1 2008 02:00

Royal Dutch Shell warned yesterday that oil and gas production was likely to fall for a sixth consecutive year in 2008 as it struggles to make up shortfalls at key projects, writes Dino Mahtani in London.

High oil and gas prices helped the multinational oil company to report record full-year profits, with its current cost of supply earnings rising 8 per cent to $27.6bn in 2007. However, shares in Shell fell in early trade as investors focused instead on the company’s declining production trend.

The shares finally closed just 0.1 per cent higher at £17.91 in London.

Shell said that average production in 2007 declined 4.5 per cent to about 3.315m barrels a day of oil or its equivalent after it was in effect forced to cut its stake in the Sakhalin-2 project in Russia and following a fire at its Canadian oil sands development.

The company expects production to fall again this year in spite of holding on to a growth projection of between 2 per cent and 3 per cent in volumes from investment in new projects after 2010.

“This is a moderate disappointment,” said Jason Kenney, a senior analyst at ING. “It’s a difficult time for Royal Dutch Shell.”

The fall in production has unnerved shareholders, who are eager to see positive results from Shell’s long-term strategy of divesting non-core assets and building up investment in larger long-term projects.

These projects are expected to boost production in years to come, when access to easy conventional oil is expected to peak. However, many analysts fear that cost pressures on such projects could stymie their overall development, with cost inflation running at 10 per cent a year within Shell.

See World View Feeling the squeeze, Page 17 www.ft.com/ukdailyview www.ft.com/lombard

Copyright The Financial Times Limited 2008

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