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Shell chief condemns tax hike as profits surge 30%

mark williamson

29 Apr 2011

THE chief financial officer of Royal Dutch Shell has warned , the surprise hike in tax on North Sea profits will hit investment in the area, after the company unveiled a 30% leap in profits on the back of surging oil prices.

Simon Henry said the hike, announced by George Osborne’s had already impacted on planning. and it may result in the company investing much less in future than it would have done.

His criticism comes in the wake of similar warnings from other big firms.

The oil giant achieved earnings of $6.3 billion (£3.8bn), net of one-offs and changes in the value of inventories, compared with $4.8bn (£2.8bn) in the same period last year.

This was powered by a 32% annual increase in the average price of the crude oil Shell sold. But Mr Henry claimed Shell’s 800 petrol stations in the UK make only 1p profit on every litre of fuel they sell.

The profit was stated after charging an additional $60 million (£36m) tax on Shell’s North Sea earnings following the 12 percentage point increase in the tax payable on North Sea earnings announced in the Budget. The company said it expects to charge an additional $150m (£90m) tax on its North Sea profits during the rest of this year and a further $900m (£541m) in 2012, including changes in the tax treatment of decommissioning costs.

Mr Henry said the North Sea remains an important area for Shell in terms of production but added: “The big oil fields are likely to go ahead but others look a lot more challenged,” said Mr Henry, who plays a key part in deciding where Shell deploys its vast capital investment budget around the world.

Mr Henry said Shell was likely to approve investment in the giant Clair and Schiehallion oil fields off Shetland later this year. These are operated by BP, which recorded a 4% fall in profits in the first quarter, to $5.4bn (£3.2bn) net of one-offs. The costs of the disastrous Gulf of Mexico oil spill increased by $400m (£240m) in the quarter, when BP also booked a $683m (£410m) charge in respect of the increase in North Sea taxes.

However, Mr Henry said Shell would stop early stage work on two projects. One involved extracting “tight gas” from dense rocks in the southern North Sea. Shell had also been discussing a project involving hard to produce heavy oil with Statoil.

Regarding these, Mr Henry said: “Work stops, basically”.

Mr Henry said investment in smaller fields and “difficult oil” developments would be most at risk of being cut. This might make it difficult to prolong the life of expensive infrastructure.

Mr Henry said the net effects of the reduction could be profound. “It’s pretty clear that the lifetime of operations will be reduced by around one to two years,” he said.

Mr Henry noted that Shell will be making final investment decisions on 10 giant projects across the world this year. These might underpin earnings well into the future.

In the first quarter Shell started shipping liquefied natural gas from the giant Qatargas 4 project in the Middle East and ramped up production from the Jackpine Mine at the Athabasca Oil Sands Project in Canada.

Production fell by 3% annually in the first quarter, to 3.5m barrels oil equivalent daily, following the sale of non-core assets. Yet output from new fields outweighed the decline in production from existing fields.

Upstream earnings increased by 8% annually, to $4.6bn (£2.7bn). Refining and marketing earnings increased by 112%, to $1.6bn (£961,990m).

In a note to clients, analysts at Evolution Securities wrote: “Royal Dutch Shell’s start-up of major upstream projects should see enhanced contributions from this area and enable RDS to continue to outperform its peers.”

Royal Dutch Shell declared a first-quarter dividend of $0.42 per ordinary share, unchanged from the US dollar dividend for the same period in 2010.

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