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Bloomberg: Shell Pays $150 Million to End Probe; Output May Fall

Bloomberg: Shell Pays $150 Million to End Probe; Output May Fall

“hopeful step in ending the reserves debacle that led to the ouster of three senior executives, the loss of a top-tier investment rating and more than a dozen shareholder lawsuits”

July 29, 2004

July 29 (Bloomberg) — Royal Dutch/Shell Group agreed to pay $150 million to settle U.S. and U.K. regulatory probes into the overstatement of its reserves and said the billions spent on drilling may not boost production in the next two years.

Oil and gas output at Shell, Europe’s second-largest oil company, may drop to 3.5 million barrels a day in 2006, down 2.2 percent from now. Second-quarter net income rose 16 percent to $3.77 billion from $3.26 billion a year ago, using accounting that excludes inventory-related gains.

Shell Chairman Jeroen van der Veer, 56, in a conference call from London said the settlement is a “hopeful” step in ending the reserves debacle that led to the ouster of three senior executives, the loss of a top-tier investment rating and more than a dozen shareholder lawsuits. Shell’s output may fall as BP Plc and Total SA tap fields from Russia to West Africa to expand.

“The settlement is one less thing to worry about, which is good,” said Ivor Pether, a fund manager at Royal London Asset Management, who helps oversee the equivalent of $8.5 billion, including Shell shares. “Production guidance is lower than I had expected. That’s disappointing.”

Shell, based in London and The Hague, will pay a $120 million penalty to the U.S. Securities and Exchange Commission. The accord with the SEC staff is subject to final approval, the company said.

Separately, Shell said it may sell its share of a chemicals venture, Basell, with BASF AG. The companies each have 50 percent of the venture, which analysts at Deutsche Bank AG said is worth $1.5 billion to $2 billion.

`Enormous Fine’

Shell will pay 17 million pounds ($30 million) to the U.K. Financial Services Authority. That’s the biggest financial penalty ever imposed by a U.K. regulator, after a 4 million-pound penalty to Credit Suisse First Boston in 2002.

“That’s an enormous fine and entirely unprecedented in the U.K.,” said Dorian Drew, an enforcement lawyer at London-based law firm Norton Rose. “No one wants these things hanging over their head. Companies want finality, the longer they continue the more costly they are.”

Shell shares were up 12.25 pence at 402.25 pence at 1:13 p.m. in London. Before today, the stock had fallen 7.5 percent this year, while BP rose 7.9 percent and Exxon Mobil Corp. shares rallied 11 percent. The gain at Shell today lagged that of other oil companies after U.S. oil prices yesterday reached a record.

The industry is reporting higher second-quarter profit after oil prices rose to records because of faster-than-expected growth in demand and concern violence in Iraq and Saudi Arabia will disrupt supplies. Profit margins from refining oil reached their highest in more than a decade.

Oil, Gas Earnings Fall

Exxon Mobil, the world’s largest publicly traded oil company, today said second-quarter net income rose 39 percent on surging oil prices. Profit climbed to $5.79 billion, or 88 cents a share, from $4.17 billion, or 62 cents, a year earlier, Irving, Texas- based Exxon said in a statement.

Shell’s revenue in the quarter rose 30 percent to $62.5 billion from $48.1 billion.

Shell’s oil and gas earnings declined 3 percent to $1.94 billion because of the drop in output and one-time costs. These included write-offs associated with the company’s purchase of Enterprise Oil Plc in 2002.

The charges offset rising prices in the period. Crude oil in the U.S. averaged $38.24 a barrel in the quarter, 32 percent more than a year ago. In the U.K., western Europe’s largest natural gas market, gas prices rose 16 percent.

Shell surprised investors and the industry by announcing in January that it had overstated its proven oil and gas reserves, a measure of an oil-company’s value, by 20 percent. Three more cuts followed, reducing Shell’s holdings in 2002 by 23 percent.

Shell Managing Director Malcolm Brinded at a press conference said he wasn’t sure whether the company will be able to add the reserves from a Qatari natural gas project in its accounts.

Stock Buybacks

Oil and gas output averaged 3.58 million barrels a day in the second quarter. Shell expects to produce between 3.7 million and 3.8 million barrels of oil equivalent a day this year, and between 3.5 million and 3.8 million a day in 2005 and 2006.

“The recovery in the upstream is taking longer than we thought,” said J.J. Traynor, an analyst at Deutsche Bank in Edinburgh, who kept his “buy” rating on Shell shares after the results. “We had expected better volumes for 2005.”

Oil and gas production at BP, Shell’s closest rival in Europe, in the second quarter rose by 18 percent because of an acquisition in Russia last year. Total of France is also increasing supplies.

Shell in April joined rivals such as BP in paying cash to investors by buying back shares, saying then it planned to spend $2 billion on repurchases in 2004. The company has also been funding cost overruns at some of its biggest projects, such as a $10 billion venture to tap gas off Russia’s Sakhalin Island.

OAO Yukos Sales

Yesterday, crude oil reached a record high in New York, topping $43 a barrel, after OAO Yukos Oil Co., Russia’s biggest oil exporter, said the government ordered a halt to sales, adding to traders’ concern about the security of supplies.

BP Tuesday reported second-quarter net income rose 35 percent to $3.43 billion, its second-highest ever, based on accounting that excludes inventory-related gains.

To contact the reporter on this story:

Alex Lawler in London  at [email protected]

To contact the editor of this story:

Tim Coulter at  [email protected]

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