THE WALL STREET JOURNAL: Shell Pegs Budget For Exploration To Higher:  “Mr. van der Veer declined to discuss details of an internal review of the company's corporate structure. Shell is studying whether to change its dual-board structure, which critics have blamed for obscuring accountability in Shell's reserves scandal. The company expects to unveil options in November.” (ShellNews.net)

By CHIP CUMMINS

Staff Reporter of THE WALL STREET JOURNAL

September 23, 2004; Page A3

LONDON -- Moving to persuade investors it can turn around its exploration-and-production unit, Royal Dutch/Shell Group said it is counting on higher oil prices to allow it to spend more on finding oil and natural gas. But Shell didn't sharply boost the budget, raising questions about its ability to quickly add petroleum reserves.

Shell executives, betting that oil prices will remain strong, said they plan about $45 billion, or roughly €37 billion, in capital expenditures over the next three years. The $15 billion in annual spending is up from $14.3 billion last year. About $11.5 billion a year of that is earmarked for Shell's exploration-and-production businesses, or so-called upstream activities, up from $10.7 billion last year.

In a strategy presentation yesterday, Shell said it was lifting its "cash neutral," or break-even, price for a barrel of crude to $25 from $20. The threshold is an estimate used by Shell financial planners to balance their investment spending against expected cash intake from things like oil revenue and proceeds from asset sales.

The threshold is substantially below market prices, which have remained near or above $40 a barrel recently for European benchmark crude. But the threshold is still higher than the forecasts used by some of Shell's rivals. Should prices plunge, Shell would risk having to either cut back again on exploration spending or to compensate in other ways, such as by accelerating its divestment of noncore businesses or paring its share buybacks.

Shell said that "oil prices have shifted structurally higher." By raising Shell's break-even oil price, executives essentially signaled they would rather risk being tripped up by suddenly falling prices than risk underinvesting in growth.

The increased spending could help shore up investor confidence, which was shaken by Shell's acknowledgment this year that it greatly overstated its energy reserves. Shell wiped about 4.47 billion barrels of oil equivalent, or almost a quarter, from its reserve tally. The restatement put it behind competitors such as Exxon Mobil Corp. and BP PLC in key investor parameters such as how quickly Shell has replaced reserves depleted by production.

But it isn't clear whether spending will be enough to solve Shell's biggest problem: turning around its underperforming exploration unit. Malcolm Brinded, Shell's upstream chief, said the company will spend about $1.5 billion on exploration next year, up modestly from plans to spend $1.4 billion this year and $1.2 billion last year.

Shell said the plan represents a solid increase. "We feel we have gone up a lot," said Jeroen van der Veer, Shell's top executive, in an interview.

Meanwhile, costs at some big Shell projects have grown, in part because of foreign-exchange fluctuations and higher commodity prices. Mr. Brinded declined to break out how much of the $11.5 billion in planned annual upstream spending will go to cover these higher costs and how much constitutes new outlays.

Peter Nichol, an analyst at ABN Amro in London, said the spending plans were disappointing. "It's steps in the right direction, but not aggressive enough," he said.

Shell -- the world's third-largest publicly traded oil company by market capitalization, after Exxon and BP -- is owned by parents Royal Dutch Petroleum Co. of The Hague and London-based Shell Transport & Trading Co. Royal Dutch shares fell 2.4% to €42.27 ($52.08), a drop of €1.04, yesterday in the Netherlands. Shell T&T shares declined 3.3% to 418 pence ($7.52 or €6.10), a fall of 14.25 pence, in London.

Shell also said it would continue its wide-ranging divestment campaign, promising to shed $10 billion to $12 billion in assets through 2006. As much as half of those sales will be in the upstream sector as Shell -- like many of its competitors -- sheds mature, low-growth fields to concentrate on more-promising prospects. Shell also said it would combine its two main "downstream" businesses -- oil products and chemicals -- into one unit.

Mr. Brinded said Shell's exploration budget will focus on 15 to 20 "big cat" wells a year, where prospects are estimated to be at least 100 million barrels of oil. That compares with 12 exploration wells last year, he said.

Mr. van der Veer declined to discuss details of an internal review of the company's corporate structure. Shell is studying whether to change its dual-board structure, which critics have blamed for obscuring accountability in Shell's reserves scandal. The company expects to unveil options in November.

Write to Chip Cummins at chip.cummins@wsj.com