Shell spending to rise as costs soar
Market News and Investment Information | Reuters.co.uk
By Tom Bergin
LONDON (Reuters) - Royal Dutch Shell will increase planned investments 27 percent to around $19 billion (11 billion pounds) next year as costs soar and the group tries to turn round its industry-lagging record for finding new oil.
The Anglo-Dutch group (RDSa.L: Quote, Profile, Research)(RDSb.L: Quote, Profile, Research), the world's third-largest listed oil firm by market capitalisation, said on Tuesday its capital investment budget for 2006 would be $19 billion, up from earlier estimates of around $15 billion.
Chief Financial Officer Peter Voser told reporters on a conference call that beyond 2006, the firm was likely to invest "at least" $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 $17 billion and $20 billion per year but some hoped for the news to be counterbalanced by a more optimistic outlook.
"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.
It was unclear to what extent the rise in spending plans was due to higher-than-expected costs and what portion was due to the accelerated development of new and existing projects.
At 1:30 p.m. Shell's shares were up 0.84 percent at 1,805 pence, underperforming a 1.2 percent rise in the DJ Stoxx European oil and gas sector index.
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 $20 billion, and the Bonga oil field offshore Nigeria, where some analysts believe the initial $2.7 billion budget will also double.
The company has blamed the cost overruns on rises in the price of commodities such as steel, oil field services inflation, which some industry executives put at 10 percent per year, and overly ambitious targets set by previous management.
STICKS TO TARGETS
Voser said the company was still "reasonably confident" of reaching its 100 percent 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 3.5-3.8 million barrels of oil equivalent per day (boepd) in 2005 and 2006.
The Hague-based firm aims to raise production to 3.8-4.0 million boepd by 2009 and 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 such as Shell and rival BP (BP.L: Quote, Profile, Research) 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 $50 per barrel, we believe that the group will have circa $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 $15 billion would be invested in upstream oil and gas exploration and project development in 2006. Exploration spending will rise to $2 billion from the $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 $4 billion compared with earlier plans of around $3 billion.
Western politicians and oil producers have blamed a shortage of refining capacity for oil hitting record highs above $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.
By Tom Bergin
LONDON (Reuters) - Royal Dutch Shell will increase planned investments 27 percent to around $19 billion (11 billion pounds) next year as costs soar and the group tries to turn round its industry-lagging record for finding new oil.
The Anglo-Dutch group (RDSa.L: Quote, Profile, Research)(RDSb.L: Quote, Profile, Research), the world's third-largest listed oil firm by market capitalisation, said on Tuesday its capital investment budget for 2006 would be $19 billion, up from earlier estimates of around $15 billion.
Chief Financial Officer Peter Voser told reporters on a conference call that beyond 2006, the firm was likely to invest "at least" $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 $17 billion and $20 billion per year but some hoped for the news to be counterbalanced by a more optimistic outlook.
"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.
It was unclear to what extent the rise in spending plans was due to higher-than-expected costs and what portion was due to the accelerated development of new and existing projects.
At 1:30 p.m. Shell's shares were up 0.84 percent at 1,805 pence, underperforming a 1.2 percent rise in the DJ Stoxx European oil and gas sector index.
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 $20 billion, and the Bonga oil field offshore Nigeria, where some analysts believe the initial $2.7 billion budget will also double.
The company has blamed the cost overruns on rises in the price of commodities such as steel, oil field services inflation, which some industry executives put at 10 percent per year, and overly ambitious targets set by previous management.
STICKS TO TARGETS
Voser said the company was still "reasonably confident" of reaching its 100 percent 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 3.5-3.8 million barrels of oil equivalent per day (boepd) in 2005 and 2006.
The Hague-based firm aims to raise production to 3.8-4.0 million boepd by 2009 and 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 such as Shell and rival BP (BP.L: Quote, Profile, Research) 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 $50 per barrel, we believe that the group will have circa $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 $15 billion would be invested in upstream oil and gas exploration and project development in 2006. Exploration spending will rise to $2 billion from the $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 $4 billion compared with earlier plans of around $3 billion.
Western politicians and oil producers have blamed a shortage of refining capacity for oil hitting record highs above $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.
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