The Herald: Reserves fear ruins Shell’s big day

KARL WEST, City Editor February 03 2006
Shell saw more than £3bn wiped off its stock market value yesterday over concerns about reserves replacement, despite it setting a new annual profits record of $22.94bn (£12.8bn) for a UK-listed company.
The oil major also revealed the amount it pays into chancellor Gordon Brown's Treasury coffers – through UK taxes – almost doubled last year to $1.2bn (£674m), up from $646m in 2004.
Brown is squeezing the North Sea oil industry to cough up another increase in taxes this year. The chancellor announced in his pre-budget statement in December that he was increasing the supplementary corporation tax on North Sea activities from 10% to 20%, to bring in around £6.5bn more revenue over three years.
The hike has caused consternation in the UK oil and gas industry. Shell immediately decided to cut its contract for exploration rigs in UK waters from three to two.
Jeroen van der Veer, chief executive of Shell, said: “We were in doubt whether to order two or three (new rigs). We decided to wait to order the third to see the market reaction to the (tax rise) announcement.
“It was a more commercial stance rather than a tit-for-tat.”
Lord Browne of Madingley, chief executive of BP, last month warned the government that investments in the North Sea could be abandoned if the controversial windfall tax does not drop when the oil price falls.
Van der Veer yesterday appeared to agree with Browne's sentiments, saying: “Even at the present (oil) price level it's quite attractive to go for smaller fields (in the North Sea). In the long term, we have to take into account price levels, including taxes, whether to go for them.”
Shell last night said plans may be drawn up for the eventual decommissioning of the Brent Field, once the biggest in the North Sea, which gave its name to the most famous trade crude oil in the world. But a spokeswoman emphasised Brent's remaining assets were “significant”.
The oil and gas giant notched up annual profits of £12.8bn for 2005, up 13% on the back of record high $70 per barrel oil prices and fat refining margins.
However, this profit record is likely to be trumped by rival BP when it reports year-end figures next week.
Fourth-quarter profits at Shell rose 3% to $5.39bn, in line with forecasts of about $5.38bn.
The exploration and production business was the main profits engine, with earnings leaping 22% in the fourth quarter compared with a year earlier.
It achieved this even though production fell to 3.5 million barrels of oil equivalent per day from 3.84 million in the corresponding quarter in 2004. Hurricanes hit production in the Gulf of Mexico in the past two quarters.
Van der Veer said: “These were good results. We realise we had a good tailwind with oil and gas prices last year.”
However, some analysts had hoped for better after larger rival ExxonMobil reported stronger- than-expected fourth-quarter results and a record $36bn annual profit earlier this week.
There was also some disappointment over Shell's weak performance upstream where it only managed to replace 60% to 70% of the oil it pumped with new additions to reserves.
This is well below the 100% rate needed to stop an oil firm's asset base from shrinking.
Peter Hitchens, oil analyst at Teather & Greenwood, said: “Shell has had another poor performance with the drill bit.”
And the analyst didn't fancy the group's chances of turning this situation round any time soon, adding: “(The target) would require the group becoming one of the best explorers among the integrated oil companies, rather than one of the worst.”
As a result, shares in the group fell 45p to close at 1866p, valuing the group at £127bn.
Unions and consumer groups criticised the group for profiteering from high petrol pump prices in the UK.
However, the company indicated it had not made much, if any, profit from UK garage forecourts, saying: “The UK market is, without any doubt, one of the toughest in Europe.
“Our profits come from 140 countries … it is not correct to think all the profits are coming out of the UK.”
Shell said that less than 10%, or less than £1.2bn, of total group profits come from the UK.
In addition, the group said it would buy back e5bn (£3.4bn) of its own shares in 2006, less than many investors had hoped for, prompting some to speculate that Shell could be planning acquisitions.
Van der Veer said he did not think that acquisitions above $10bn (£5.6bn) were likely to create value for shareholders, but suggested that smaller ones could. He added: “$10bn – that would still be considered in the oil industry as something small.”
The group declined to comment on whether it was eyeing anything in particular.