Financial Times: Shell lifts outlay to $19bn in hunt for reserves: “The revised budget reflects a number of cost overruns at Shell's largest projects. Its Bonga field in Nigeria cost about $1bn more than expected to develop, while the cost of the Sakhalin-2 project has doubled to $20bn.”: Wednesday 14 December 2005
By Thomas Catan
Published: December 14 2005
Royal Dutch Shell raised its annual spending forecast by 27 per cent to $19bn yesterday, citing rising costs and the need to find new oil and gas reserves.
Europe's second-largest oil company will invest at least $4bn more than previously envisaged next year and said it was likely to keep spending at that level for several years.
Shell's rise in expenditure comes as the industry looks to plough more of its record profits into finding and producing oil and gas.
In recent weeks ConocoPhillips and Chevron of the US have both announced plans substantially to lift their capital spending in 2006.
Amid soaring energy prices, oil companies have opted to hand a large portion of their revenues to investors through dividends and stock buybacks. But a lack of easy exploration opportunities is forcing them to look further afield and spend more to develop new reserves.
Jeroen van der Veer, Shell's chief executive, said: "Global energy needs depend on the industry's ability to sustain high levels of investment as the search for energy leads us to increasingly challenging and technically demanding environments."
More than half of Shell's increased investment will go towards developing projects and boosting exploration. A fifth of the new spending will be aimed at squeezing more out of Shell's existing fields.
A quarter of the cost increase next year - about $1bn - is due to the rising cost of drilling rigs, labour and materials in the industry.
Shell also pledged to continue returning cash to investors through stock buybacks.
The revised budget reflects a number of cost overruns at Shell's largest projects. Its Bonga field in Nigeria cost about $1bn more than expected to develop, while the price tag for the Sakhalin-2 project it leads in Russia has doubled to $20bn.
The cost of finding and producing oil and gas has risen sharply in recent years, with companies having to undertake expensive deep-water drilling projects and big integrated gas projects. According to Wood Mackenzie oil consultancy, development costs at the largest publicly traded oil companies rose from $27.6bn in 1999 to $49.3bn in 2004.
Spending seems set to rise further. A survey of 325 oil companies by Lehman Brothers investment bank found they were planning to increase spending on exploration and production by nearly 15 per cent next year.
"The industry has entered a boom phase where exploration and product spending growth in 2005 and 2006 will likely exceed 20 per cent and earnings growth for the oil service and drilling companies will be dramatic," Lehman said.
Click here to return to ShellNews.net HOME PAGE