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Shell Lagged Behind BP in Replacing Reserves in 2008

By Fred Pals

March 17 (Bloomberg) — Royal Dutch Shell Plc, Europe’s biggest oil company by market value, failed to match all of last year’s oil and gas production with new discoveries, in contrast to smaller rival BP Plc.

Shell’s reserve replacement ratio, including oil sands, fell to 95 percent in 2008 from 124 percent the previous year, the Hague-based company said today in a strategy update. That excludes acquisitions, divestments and year-end price effects.

Earlier this month, BP said it replaced 121 percent of reserves. Shell’s Chief Financial Officer Peter Voser pledged to pay out around $10 billion in dividends this year, even as the company funds the biggest spending program among its peers to revive production growth against a backdrop of falling oil prices and the global recession.

“They came out with a commitment to invest in growth and with the capacity to support cash returns,” Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said in a telephone interview. “I would have liked to have seen an increase in reserves although that is on the horizon with Shell’s projects.” He has a “hold” rating on the stock.

Including year-end price effects, Shell’s reserve replacement ratio was 97 percent last year. The reserve ratio reported to the U.S. Securities and Exchange Commission standards was 98 percent.

‘Good Enough’

“It is not 100 percent, but it is good enough,” Aymeric de Villaret, a Paris-based analyst at Societe Generale SA, said in a telephone interview. He has a “buy” rating on Shell stock.

Shell dropped 21 pence, or 1.3 percent, to 1,619 pence in London. The shares have fallen 10 percent this year, compared with a 13 percent drop for BP.

The company added 1.2 billion barrels of oil equivalent to its non-proven resources last year at a cost of $2 to $3 a barrel. Total net reserves were unchanged at 11.9 billion barrels of oil equivalent at the end of last year.

The reserve replacement ratio of 126 percent from 2006 to 2008 was described as “satisfactory” by Chief Executive Officer Jeroen Van der Veer, who’s due to be replaced by Voser in July.

Shell will increase dividend payments in line with inflation, while the company’s “likely gearing level” is comfortable, according to Voser.

Dividend Growth

Its quarterly dividends are “normally” similar to the first-quarter payout, Voser said on a conference call with reporters. The company has already said it will raise its dividend for the first three months of 2009 by 5 percent to 42 cents.

Shell has “huge scope” to drive costs in exploration and production lower, according to Malcolm Brinded, executive director for the upstream business. Costs may be reduced by as much as 30 percent to 50 percent, he told analysts on a Web cast.

The Perdido prospect in the Gulf of Mexico and the BC-10 project in Brazil are on schedule to meet output forecasts. Perdido is now likely to start up in “early 2010,” Brinded said.

Nigeria remains an “extremely important” resource base for Shell’s long-term growth even though militant attacks have curbed output since 2006, Brinded added. The oil major plans to start up its Bonga NW and Forcados Yokri Ip projects in Nigeria from 2012 onwards.

Iraq Agreement

Shell hopes to sign a definitive agreement to develop natural gas projects in Iraq before long, according to Linda Cook, who heads up the gas and power division.

Shell will maintain project investment between $31 billion and $32 billion this year after cutting spending in 2008.

The company reiterated plans to invest in new fields with a capacity of about 1 million barrels of oil and gas equivalent a day. It forecasts annual production growth of 2 percent to 3 percent in the early years of the next decade to 2012.

Shell will invest about $3 billion on exploration this year, less than originally expected, van der Veer said.

Output fell for a sixth consecutive year in 2008 and Shell plans to “rejuvenate” production through so-called unconventional projects including a gas-to-liquids venture in Qatar and oil sands fields in Canada.

‘Small Part’

Renewable sources of energy will form a ‘small part” of the equation in respect of worldwide fuel supplies in coming years, the CEO said. Instead, the company will focus on biofuels.

Total oil and gas production may drop for a seventh year in 2009 before rebounding in 2010, Shell said.

In an annual report, Shell said it’s under investigation by the SEC and the Department of Justice for violations of the U.S. Foreign Corrupt Practices Act.

Last year, Shell said its U.S. subsidiary, Shell Oil, was contacted by the Justice Department with regard to using freight forwarding company Panalpina Inc. in a way that may have violated the act.

To contact the reporter on this story: Fred Pals in Amsterdam at[email protected]

Last Updated: March 17, 2009 13:30 EDT 

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