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THE WALL STREET JOURNAL: Shell Profit Falls On Lower Margins For Oil Refining

By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
February 3, 2006; Page A3

LONDON — Royal Dutch Shell PLC reported a 4.4% drop in fourth-quarter net income to $4.37 billion, as big year-earlier gains and softer refining-profit margins offset the high oil and natural-gas prices that have boosted profits throughout the industry.
The energy company, the world's largest by market value behind Exxon Mobil Corp. and BP PLC, benefited from last year's run-up in oil, gas and fuels prices spurred in part by hurricanes in the Gulf of Mexico. Profit at Shell's core exploration-and-production unit rose 22%, even as the storms contributed to a 9% drop in oil and gas production. For the year, Shell earned $25.31 billion, a record for the company and 37% higher than in 2004.
In addition to the year-earlier gains, Shell was held back by its oil-products division, which includes its refining and marketing operations. Shell saw a weakening in its refining margins, or the difference between the price of crude oil and the price of selling fuels such as gasoline, especially in the West Coast, Europe and Asia.
Shell indicated that it continues to face trouble replacing all the oil and gas reserves it depleted last year.
The results disappointed some analysts. Shell shares fell 2.4% to 18.66 ($33.10) in London yesterday, off 45 pence.
Shell said fourth-quarter net income amounted to 66 cents a share, compared with net income of $4.57 billion, or 68 cents a share, a year earlier. Revenue fell 1% to $75.5 billion. Its numbers conform to international financial reporting standards, which differ from U.S. generally accepted accounting principles.
The results reflected a net gain for nonoperational items of $34 million, compared with a $499 million net gain in the year-earlier quarter, which included proceeds from divestments and the reversal of a large impairment.
The results come as governments around the world ratchet up pressure on oil companies, who are throwing off a gusher of profit from today's high energy prices. Some U.S. lawmakers have threatened to impose new “windfall” taxes on oil companies. Meanwhile, countries from Britain to Bolivia have boosted the share of the revenue they take from oil and gas produced on state-controlled acreage by the international oil giants.
Despite the government moves and despite sharply escalating costs for everything from drilling rigs to engineers, high oil prices have more than made up the difference for Shell and its largest rivals.
Shell reported total oil and gas production of 3.5 million barrels of oil equivalent a day.
Its refining margins — the difference between the price of crude oil and the price of selling fuels such as gasoline and heating oil — softened during the fourth-quarter compared with the year-earlier period amid higher crude prices.
The company said it estimates its closely watched reserve-replacement ratio — the rate at which a company finds new reserves of oil and gas to replace the energy it pumps out of the ground each year — was between 60% and 70% for 2005. Companies typically try to achieve 100% reserve replacement to satisfy investors concerned about future production growth.
Write to Chip Cummins at [email protected]

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