THE WALL STREET JOURNAL: Shell Warns on Output After Profit Gusher

Access to Resources
Shrinks, Costs Rise;
High Prices Lift Net
By GUY CHAZAN
February 1, 2008

LONDON — Royal Dutch Shell PLC reported $31.3 billion in profit last year, one of the strongest results ever for a European company, as soaring oil prices offset lower production and weaker refining margins.

But it said output would likely be lower this year, partly because of continuing problems in Nigeria, where unrest has forced it to suspend 141,000 barrels a day of production. It also posted lower-than-expected fourth-quarter results and unveiled a modest increase to its capital-spending program, in a sign of the difficulties facing major oil companies.

Shell’s full-year earnings were up 23%, compared with $25.4 billion in 2006. Shell benefited from crude-oil prices, which surged at the end of the year and briefly hit $100 a barrel early last month.
 
For the fourth quarter, Shell posted $8.5 billion in profit, up 60% but below analysts’ expectations. Shell said it had been hit by higher taxes and royalty charges and higher costs, as well as lower production volumes.

Shell’s shares rose two pence to £17.91 ($35.66) in London trading yesterday.

Shell, based in The Hague, faces escalating industry costs, narrowing access to resources in the Middle East, Venezuela and Russia, and stagnant production.

It has dealt with these industrywide issues by investing heavily in so-called unconventionals — technically challenging and capital-intensive projects such as oil sands in Canada, gas-to-liquids in Qatar and liquefied-natural-gas projects in Nigeria and off Russia’s Sakhalin Island. It also is drilling for oil in the ultradeep waters of the Gulf of Mexico and offshore Brazil.

“All these big projects come onstream at the end of the decade and will drive the growth,” said Peter Voser, Shell’s chief financial officer. He said volumes will rise by 2% to 3% a year in the next decade. But until then, the picture isn’t so rosy: Last year, Shell produced 3.3 million barrels of oil equivalent a day, down 4.5% from 2006.

Shell officials said the company’s priority isn’t chasing barrels. “The art for Shell is not necessarily to maximize volumes in isolation,” said Chief Executive Jeroen van der Veer in a conference call. “It’s all about getting maximum return from our investments, and that is the first priority.”

But investors still want to see proof that the company is replenishing its reserves.

Yesterday, Shell said it had made 11 material discoveries last year that had given the company a billion barrels of additional resources, though it stressed these weren’t proven reserves.

Shell said its fourth-quarter earnings were buoyed by higher energy prices, which were up around 50% from a year earlier. But in a note, Citigroup said that after seven consecutive quarters of above-consensus earnings, the fourth-quarter results “must be viewed as a disappointment.”

Mr. Voser, the financial chief, said that while costs in the industry increased between 20% and 30% last year, Shell managed to trim its internal rate to 10% by streamlining its back offices and introducing “leaner and meaner” business practices and better contracting and procurement initiatives.

He said net capital spending would rise this year to between $24 billion and $25 billion, up from $23.8 billion in 2007.

Mr. van der Veer defended Shell’s investment levels. “If you take the end of the 1990s, you had below $10 billion” of capital expenditure, he said. “We have increased our activities enormously, and that’s all geared in the upstream.”

–Benoît Faucon contributed to this article.

Write to Guy Chazan at [email protected]

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