Shell Capex to rise 27 per cent to US$19b, costs soar

LONDON - Royal Dutch Shell Plc will increase planned investment 27 per cent to around US$19 billion ($27 billion) next year as costs soar and the group tries to turn round its industry-lagging record for finding new oil.

The Anglo-Dutch group, the world's third-largest listed oil firm by market capitalisation, said today its capital investment budget for 2006 would be US$19 billion, up from earlier estimates of around US$15 billion.

Chief financial officer Peter Voser told reporters on a conference call that beyond 2006, the company was likely to invest at least US$19 billion annually.

Investors fear the higher spending plans will reduce the amount of cash available to distribute to them in dividends and share buybacks.

Analysts had expected Shell to raise its budget to between US$17 billion and US$20 billion per year but were disappointed that the increase was not counterbalanced by higher production or reserves growth targets for the future.

"Despite the increase there is nothing to suggest that the group will be able to increase its growth prospects, which should depress returns," Peter Hitchens, oil analyst at Teather & Greenwood, said.

Shell did not say to what extent the US$4 billion in extra spending in 2006 was due to higher costs and what part related to additional activity but Merrill Lynch estimated a 50:50 split between these two factors.

Shell is grappling with massive cost overruns on a number of large projects including the Sakhalin-2 project off Russia's east coast, where costs have doubled to US$20 billion.

This partly explains why it must spend much more than the US$15 billion larger rival BP Plc plans to invest in 2006, in return for weaker production growth than BP expects.

Analysts were disappointed that Shell does not appear to expect its increased activity levels to translate into higher output or reserves growth, at least before 2010.

Voser said the company was still "reasonably confident" of reaching its 100 per cent reserve replacement target -- the level at which it replaces every barrel it pumps with new finds -- over the 2004-2008 period.

Shell repeated it expects to produce 3.5 million to 3.8 million barrels of oil equivalent per day (boepd) in 2005 and 2006.

The Hague-based firm repeated plans to raise production to 3.8-4.0 million boepd by 2009 and said it had an "aspirational" target of 4.5-5.0 million boepd by 2014, compared with current production of around 3.5 million boepd, Voser said.

Some analysts are concerned that much of this growth will come from sources such as gas-to-liquids and tar sands projects, which have traditionally not offered as high returns as finding and pumping oil.

Shell will continue its share buyback programme into 2006, Voser said, although he would not give details of the level.

Buybacks have helped propel oil stocks in the past year but analysts said Shell's higher capital expenditure will reduce the cash available to it to spend on shares.

"On our forecasts of US$50 per barrel, we believe that the group will have circa US$2 billion of free cash that can be returned to shareholders. This is significantly lower than the amount that will be returned by BP," Hitchens added.

Shell said US$15 billion would be invested in upstream oil and gas exploration and project development in 2006. Exploration spending will rise to US$2 billion from the US$1.5 billion envisaged at the beginning of this year.

Spending on downstream activities such as refining, where margins have soared due to tightness in capacity, will be over US$4 billion compared with earlier plans of around US$3 billion.

Western politicians and oil producers have blamed a shortage of refining capacity for oil hitting record highs above US$70 a barrel earlier this year.

High oil prices have enabled Shell to overcome costs woes to post record earnings in recent quarters. However, the firm still faces problems replenishing its dwindling reserve base.

Last year it replaced only half the oil and gas it pumped with new finds, the worst record among the "Supermajors", as the premier league of listed oil firms are known.

- REUTERS