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Financial Times: Shell maintains reserves in spite of Sakhalin loss

By Ed Crooks in London
Published: March 18 2008 02:00 | Last updated: March 18 2008 02:00

Royal Dutch Shell, western Europe’s biggest oil company, kept its oil and gas reserves steady last year in spite of the loss of control at its Sakhalin 2 project in Russia, it said yesterday.

It also reaffirmed its commitment to output growth of 2-3 per cent a year in the next decade, and highlighted its shift away from traditional oil and gas production towards long-lived “legacy assets”.

Jeroen van der Veer, the chief executive, said Shell was investing in projects “that will underpin the group in the first half of this century”, a time when he believes conventional oil and gas production will be insufficient to meet demand.

Reserves have been a sensitive issue for Shell ever since the misreporting scandal of 2004, but yesterday’s figures, produced for filings to the US Securities and Exchange Commission and the company’s annual strategy presentation, were generally seen by analysts as reassuring.

Shell ended the year with a net 11.92bn barrels equivalent of oil and gas in its proved reserves on the SEC’s definition, down from 11.94bn at the end of 2006.

It booked enough reserves to replace 124 per cent of the oil and gas Shell produced during the year. Reserves were added from projects around the globe, including Shell’s big liquefied natural gas programme in Qatar. It also booked more reserves in the US, Australia and Norway, as well as from the troubled Kashagan project in Kazakhstan, where Eni of Italy is the operator and Shell is one of the biggest shareholders.

Shell has in the past relied heavily on Canadian oil sands for its reserves additions, but did not need to do so last year, except in its buyout of the minority shareholders in its Shell Canada subsidiary, which brought an extra 322m barrels of oil equivalent.

Those additions offset a loss of 402m boe resulting from the sale of half Shell’s stake in the $20bn Sakhalin 2 project to Gazprom, following pressure from the Russian government.

Shell had a good year for finding oil and gas – its best for seven years – although that success will not yet have appeared in officially recognised reserves. It was able to add about 2bn boe to its resources. Yet that conventional quest for oil and gas provided only about one third of the additions to Shell’s resource base, which rose by 6bn boe to 66bn.

The company has embarked on a fundamental shift in its business model. It is investing more than any other international oil company, and has focused on technologies such as gas-to-liquids, LNG and the oil sands.

Of planned capital spending of $28bn-$29n this year, more than half will be in those long-lived assets, which can run at plateau production for 15 years or more; unlike conventional oil fields, which tend to decline much more rapidly.

That means Shell’s return on capital is under pressure as it invests. It is prepared to accept an average rate of return of 10-15 per cent across its projects, when a typical conventional oil development might need a return of 15-30 per cent.

A steep fall in the oil price could put Shell’s investment programme under pressure. If costs keep soaring, returns could fall even lower. But once the projects are up and running, they should be highly lucrative.

Tom Ellacott, of Wood Mackenzie, the research group, said: “Shell has a very exciting long-term investment programme. If they can pull it off and deliver the projects like they say they can, the company will be in a very strong position for the next decade.”

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