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Shell profits mark end of oil price boom: recent golden age of the oil industry has ended

January 25, 2009

ROYAL DUTCH SHELL will leave no doubt that the recent golden age of the oil industry has ended when it reveals what could be the largest profit ever in Europe this week despite a drop of up to 50% in profits in the most recent quarter.

The sharp fall in the last three months of the year reflects the oil price, which has plummeted to $46 per barrel after reaching an all-time high of $147 last July. Exxon Mobil, Chevron Texaco and Conoco Phillips are expected to show precipitous declines this week when they reveal their end-of-year performance.

Despite the falls, several of the industry’s largest players will still post record annual performances thanks to the first half of last year when the oil price surged into record territory. Analysts expect Shell to reveal profits of $4.1 billion (£3 billion) for the three months to December.

Even though that represents less than half the $8.5 billion it earned in the same period last year, Shell is still expected to record annual profits of about $30.5 billion, which is an improvement on the record it set last year of $27.6 billion.

BP is expected to be broadly flat on the year before with around $2.9 billion in quarterly profit when it reveals its numbers next month.

Gordon Gray, analyst at Collins Stewart, warned, however, that at current prices Shell and BP were losing money once capital spending and dividends were taken into account.

“Our forecasts show a 2010 net cash outflow after dividends of $10.8 billion at BP and $12.7 billion at Shell,” he wrote in a recent note.

Gray said BP was the more vulnerable of the two because it had less room to cut its smaller capital-spending programme.

Companies across the industry have cancelled billions of dollars worth of projects as riskier endeavours like oil sands and deep-sea drilling become uneconomical.

The International Energy Agency, the adviser to industrialised nations, has warned that cutting exploration and production now will only mean supplies will be stressed even further when the economy recovers, pushing the oil price to new highs.

In BP’s case, investors will pay close attention to production figures in the wake of its dispute with its billionaire partners in Russian business TNK-BP, which accounts for a quarter of BP’s production.

A source close to AAR, which represents the Russians, warned that TNK-BP could be without a chief executive for up to nine months after talks with Denis Morozov, who had been tipped to succeed predecessor Bob Dudley, fell apart last week over compensation. Egon Zehnder, the headhunter, has reopened the search.

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