THE WALL STREET JOURNAL: Shell's Earnings Rise on Oil Prices

LONDON — Royal Dutch Shell PLC said first-quarter earnings rose 3.3% thanks to higher oil prices, but it warned that soaring oil-field costs may force it to delay some oil and natural-gas developments.

Amid surging oil prices over the past three years, the world's largest publicly traded oil companies have struggled with cost inflation for equipment and contracting work. These higher costs have crimped still-healthy profits for several quarters. Now they are threatening entire projects, at least at Shell, as the Anglo-Dutch giant and others seek new sources to sate the world's increasing thirst for oil.

Shell — the world's No. 4 oil and gas company by market value after Exxon Mobil Corp. of the U.S., Russia's OAO Gazprom and Britain's BP PLC — said it would likely delay some projects because of super-heated markets for equipment and contracting jobs. (Related article on page 22.) Officials didn't list projects at risk, but Chief Executive Jeroen van der Veer said they would be “longer-term” ventures — those for which Shell hadn't yet approved investment plans. In an analysts' briefing yesterday, he singled out one of Shell's smaller, deep-water projects slated for the Gulf of Mexico as one that might be pushed back.

“The industry is seeing a very tight market for materials and contract rates,” Mr. van der Veer said. “Our requirement for competitive returns means that we will probably hold back some of our longer-term projects, until the supply and contracting environment cools down.”

Shell said net income was $6.89 billion, or $1.05 a share, compared with $6.68 billion, or 99 cents, a year earlier. Revenue rose 5.3% to $75.96 billion.

Earnings included a net gain of $113 million, compared with the year-earlier net gain of $220 million, mainly related to the resolution of a contract in its exploration-and-production businesses. Shell's numbers conform to international financial reporting standards, which differ from U.S. generally accepted accounting principles.

In London trading yesterday, Shell shares rose eight pence to £18.68 ($34.40).

France's Total SA, the No. 5 oil and gas company, reported a 15% jump in net profit as a 30% rise in oil prices offset disruptions to production in Nigeria. Net profit rose to €3.68 billion ($4.65 billion) in the first quarter, from €3.2 billion. New producing wells in Bonga, Nigeria and in the U.K. helped offset disruptions in Niger Delta production. Total also had setbacks in Bolivia and Venezuela, where governments are trying to regain partial or full control of the hydrocarbons industry.

Shell said it would raise capital spending next year to $21 billion from planned spending this year of $19 billion. Last year the company said costs at its oil-and-gas project on the Far East Russian island of Sakhalin would double to $20 billion.

A Qatari official told Dow Jones Newswires last month that the budget for a Shell-Qatari gas-to-liquids joint venture may now be as much as $10 billion, up from earlier forecasts of $6 billion. Mr. van der Veer said Shell would make a final investment decision on the project this year.

Shell isn't alone. Last month BP PLC said an oil pipeline it is close to finishing from the Caspian Sea to the Mediterranean was running 30% over budget.

Shell backed away from forecasts that it would achieve a 100% reserve-replacement ratio through 2008. Reserve replacement is a closely watched measure in the oil industry representing how successfully a company replaces oil and natural-gas reserves that are depleted each year through production.

Shell said it still had a “fair prospect” of achieving average 100% reserve replacement for 2004 through 2008, based on U.S. Securities and Exchange Commission criteria. Mr. van der Veer said Shell is concentrating investment in unconventional oil and gas projects, such as mining oil sands in Canada. Current SEC rules, however, may not allow Shell to book reserves from all of these projects. Any delays in other projects caused by rising costs may keep Shell from meeting its previous reserve-replacement forecast, he said.

“We do not want this target to drive the wrong business decisions, either in the timing of projects or in the type of resources that we prioritize,” Mr. van der Veer said.

Earnings in its exploration-and-production segment jumped 27% to $3.74 billion from $2.95 billion. Shell credited higher oil and gas prices, which the company said were partly offset by lower volume and rising costs.

Shell said output was 3.75 million barrels a day of oil equivalent, down 3% from 3.85 million barrels a day last year. Shell said it was still deferring some production as a result of damage to its facilities last hurricane season in the Gulf of Mexico.

Write to Chip Cummins at [email protected]