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Shell: Rising Costs May Delay Deepwater GOM Project

May 8, 2006
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Rising costs may force Royal Dutch Shell plc to delay some of its planned projects by one to three years, including one in the deepwater Gulf of Mexico, which in turn could hinder the oil major's efforts to boost its sagging oil and natural gas reserves, CEO Jeroen van der Veer said Thursday.

Speaking to financial analysts to discuss the earnings results for 1Q2006, Van der Veer said one project that could be delayed is a mini-hub planned in Shell's Mars South, a development near the deepwater Mars field.

"Cost inflation is very sizable," Van der Veer said. "So we will take that into account with those projects, which in general are very much at an early stage, not having passed the point of no return." Because of the rising costs, the CEO warned Shell was less likely to reach an average 100% proved reserves replacement ratio between 2004 and 2008 as defined under Securities and Exchange Commission (SEC) rules.

Van der Veer said Shell plans to give higher priority to making "good business decisions," which include an emphasis on unconventional hydrocarbons, instead of attaining previously announced oil and natural gas targets. Unconventional hydrocarbons may not be booked under SEC rules. Shell is still committed to increasing output to between 3.8-4.0 MMboe/d by 2009, he said.

In 1Q2006, total oil and natural gas production fell 3% to 3.746 MMboe/d from 3.847 MMboe/d in 1Q2005. The decrease reflected "the partial shut-in of production in Nigeria due to civil disturbances and production deferred in the Gulf of Mexico as a result of the 2005 hurricanes." Van der Veer said he didn't know when production would resume in Nigeria.

With increased costs, Shell raised its 2007 capital-spending target to $21 billion from the $19 billion planned this year. The spending hike follows an increase announced last December for 2006 spending going forward to average around $15 billion a year. (Competitor ExxonMobil Corp. said earlier this month it would raise its spending between 2007 through 2010 to $20 billion a year.)

The oil major on Thursday reported quarterly profit rose 3% on higher energy prices, which were offset by the impact of Nigerian operations and hurricane damage last year in the Gulf of Mexico. Net profit was $6.893 billion ($1.05/share), compared with $6.675 billion (99 cents) in 1Q2005. Revenue rose 5% to $75.964 billion from $72.156 billion. Shell's budget numbers conform to International Financial Reporting Standards, which are different from the U.S. Generally Accepted Accounting Principles.

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