BLOOMBERG: Shell Stock Headed for Worst Week Since January 2004: “The shares of Royal Dutch/Shell Group fell in London, heading for their worst week since the January 2004 disclosure that the company's oil and gas reserves had been overstated for years. The reason now: soaring costs and project delays from Russia to Nigeria. Shell, Europe's second-largest oil company, yesterday said an oil and gas development in Russia's Far East is behind schedule and may cost $20 billion, twice original estimates. (Update1): Posted Saturday 16 July 2005

(Bloomberg) -- The shares of Royal Dutch/Shell Group fell in London, heading for their worst week since the January 2004 disclosure that the company's oil and gas reserves had been overstated for years.

The reason now: soaring costs and project delays from Russia to Nigeria. Shell, Europe's second-largest oil company, yesterday said an oil and gas development in Russia's Far East is behind schedule and may cost $20 billion, twice original estimates. The Sakhalin-2 joint venture is central to Shell's strategy of boosting reserves through internal projects, not acquisitions.

Shell ``still needs to find a lot of oil,'' said Rene Bastiaenen, a partner of Eureffect BV in Amsterdam, a fund management company. ``One possibility is they may make an acquisition in 2006 if it doesn't look like they will make it.''

Shell shares in London lost as much as 11.5 pence, or 2.1 percent, and were down 7.5 pence at 541.5 pence as of 4:15 p.m. in London. Shell is down 4 percent this week. Royal Dutch/Shell next week plans to complete a merger of its two parent companies, Royal Dutch Petroleum Co. of The Hague and Shell Transport & Trading Co. of London, which for almost a century have controlled the group but remained separate.

The weekly decline at Shell compares with a drop of 0.9 percent at Eni SpA of Italy and 0.2 percent at Total SA of France. BP Plc, Shell's closest competitor, is off 3.4 percent.

Not Till 2008

The Sakhalin venture, in which Shell is the biggest shareholder, won't start liquefied natural gas deliveries until summer 2008, instead of November 2007, and may cost ``in the order of $20 billion,'' double its original estimate, the company said yesterday. Last week it swapped part of its share in the venture for part of an undeveloped Russian oil field, prompting analysts to lower forecasts for Shell's production this decade.

Chief Executive Jeroen van der Veer in a broadcast yesterday defended Shell, saying its managers are ``not bad project executors.'' Projects Shell has delivered include the Nigerian LNG operation, which started its first three production lines ``on time and on budget,'' said Shell spokesman Simon Buerk.

The Dutch parent, Royal Dutch Petroleum Co., which will be combined with Shell Transport into one company on July 20, also fell today, dropping 0.7 euro to 53.25 euros. Royal Dutch shares are down 3.8 percent so far this week, the worst weekly drop in four months.

Reserves Restated

Shell cut 29 percent of its original estimate of 2002 reserves in a series of restatements that started in January of last year, leading to the ouster of then Chairman Phil Watts, investor lawsuits, fines from U.S. and U.K. regulators and the loss of Shell's top-tier credit rating.

The goal of Van der Veer and exploration head Malcolm Brinded is to stem production declines and keep the overall level of its reserves steady through 2008.

``Royal Dutch is behind compared to its competitors, as far as reserves are concerned and in its investment programs,'' said Emmanuel Soupre, a fund manager at Banque de Neuflize Gestion in Paris, which has $15.6 billion in assets and doesn't own Royal Dutch or Shell Transport shares.

JPMorgan Chase & Co. today slashed its forecast for Shell's growth in oil and gas production from 2005 through 2009 to 1.1 percent a year, from 2.1 percent, as a result of an asset swap to allow OAO Gazprom to enter the Sakhalin project, analyst Gordon Gray said in a note to investors.

``Relative to the actual 2004 production, we see virtually no net growth to 2009,'' said Gray, who has an ``underweight'' recommendation on the share and a price target of 520 pence for Shell Transport.

Nigerian Delay

Shell also is behind schedule in Nigeria, with a $2.7 billion project to tap oil from the deepwater Bonga field.

Brinded told reporters Feb. 3 the field may start production this month. He added at the time Shell had got past ``major technical difficulties,'' but there's still a ``chance of slippage of a month or two'' beyond July.

Early last year, Brinded's predecessor, Walter van de Vijver, had said he expected Bonga to start at the end of 2004. In May 2001, Shell had targeted first oil by the end of 2003. Bonga's start-up is now slated for the end of this quarter, spokesman Buerk said today.

The West African country is also home to a third of Shell's 15 planned ``big cat'' exploration sites, a term Shell uses for prospects that may hold reserves of at least 100 million barrels.

Industry Norm

Shell's success in converting prospects to reserves is ``around the industry norm of between 30 and 50 percent,'' Martijn Minderhoud, Shell's head of African exploration, said in a telephone interview from the company's Rijswijk office in the Netherlands on June 10.

In Iran, Shell's development of the Soroush and Nowruz fields are about 15 months behind schedule and at least $100 million over the budget of $806 million, according to Mehdi Atrianfar, who oversees foreign oil projects in Iran for the government.

Shell's role in the Sakhalin venture, the biggest-ever foreign investment project in Russia, is shrinking as government- controlled Gazprom joins the enterprise.

Shell last week agreed to swap a 25 percent stake in the Sakhalin venture for a 50 percent stake in an undeveloped portion of the Zapolyarnoye oil field owned by Gazprom. The swap, likely to be completed next year, will reduce Shell's share in Sakhalin to 30 percent, meaning it won't be able to book as many reserves from Sakhalin project in coming years. Shell won't disclose how much it has already booked for Sakhalin.

`Extract The Maximum'

Executives including Linda Cook, the head of Shell's gas and power division, said last week the company expects to get more cash or assets from Gazprom as part of the swap. That was before Shell told Gazprom of the cost overruns. ``They could be taken to the cleaners by Gazprom,'' said Peter Hutton, an analyst at NCB Stockbrokers Ltd. in Dublin. ``You can bet your life that Gazprom will now extract the maximum from the negotiations.''

Shell spokesman Andy Corrigan in London said today that the ``process of valuation has yet to be done.'' Gazprom's deputy chief executive, Alexander Medvedev, said today in an e-mail the cost overruns and LNG delays ``will lead to a downward adjustment of Shell's assets in the Sakhalin-2 project.''

Van der Veer said last month he would set up a global program within Shell to promote skills such as negotiating with national oil companies and establish classes for its 1,300 project engineers to improve their performance.

For Sakhalin, ``everyone knew there were overruns, but probably more like $15 billion,'' so $20 billion is ``a bit of a shocker,'' said Hutton. ``Shell still has a reputation for gold- plating. The internal focus on costs is not as strong'' as at other companies, he said.  

To contact the reporters on this story:

Stephen Voss in London at sev@bloomberg.net

Dale Crofts in Amsterdam at dcrofts@bloomberg.net

http://www.bloomberg.com/apps/news?pid=10000102&sid=aD1hzsKjYLNs&refer=uk

Click Here to return to HOME PAGE