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Shell profits slump on shifting crude price

January 30, 2009

Carl Mortished, World Business Editor

Profits at Royal Dutch Shell slumped in the fourth quarter as the oil group paid the price for its high-cost business model in Canada and crumbling refining and chemical margins.

However, the company boosted confidence with the promise of a 5 per cent increase in the first-quarter dividend, a move aimed at bolstering the company’s image as a reliable cash generator to the investment community in a troubled stock market.

Shell’s average crude price in the fourth quarter was a third below the same period in 2007, sending the group result down 28 per cent to $4.78 billion. Oil sands fell into loss as the market price of crude oil fell below the cost of mining bitumen and converting it into synthetic oil.

The Anglo-Dutch company earned $371 million from digging up bitumen in the July to September quarter as the price of crude breached $140 per barrel, but the profit turned negative as demand for crude crumbled under the weight of the credit crunch. Shell’s oil sands business made a loss of $30 million in the final quarter, although the results of the bitumen mining business for the full year were still positive, earning $941 million.

Peter Voser, Shell’s finance director who steps into the chief executive role later this year, said that it was wrong to look at a snapshot of the oil sands business, which he said would do well over the longer term. The cost of producing a barrel of crude from oil sands is $38 per barrel, he said, of which $7 is for energy used in the process. That compares with yesterday’s US light crude price, which traded at $41.80 on the Nymex futures exchange.

Plummeting oil prices have forced the Anglo-Dutch company to shelve two Canadian projects as the costs outstripped the potential return at low prices. In October, Shell said it would delay an expansion of the Athabasca Oil Sands project. A month later it withdrew an application for regulatory approval at Carmon Creek, an oil sands-type project that would have produced 100,000 barrels per day from tar deposits in Northern Alberta.

Jeroen van der Veer, Shell’s chief executive, was sanguine yesterday about the weakness in the oil price. “We are an oil company, we see ourselves as price takers. In the long-term the world has a problem in supplying energy.”

The fall in value of stocks of crude held by the company caused Shell to make a net loss of $2.8 billion in the fourth quarter when accounted for on a first-in-first-out basis. However, most oil and gas companies use current cost accounting that strips out the effect of the daily fluctuations in the value of inventory.

Mr Voser said the outlook for Shell’s refining business would be difficult in the fourth quarter and he confirmed that the company had cut output at some units: “There is quite a lot of capacity coming on stream around the world, particularly in India.”

Profits in Shell’s refining business fell by a third in the fourth quarter to $582 million because of weakening refining margins in the United States, while refinery volumes fell slightly to 90 per cent capacity levels.

Shell’s profits were roughly in line with City expectations and Shell shares rose 1.4 per cent to £18.01 in London. The company is paying a fourth-quarter dividend of 40 US cents per share, up 11 per cent over the past year. At the same time Shell promised to pay a 42 US cents dividend for the first quarter of 2009.

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