ROYAL
DUTCH SHELL has been forced to
raise its spending by $4 billion
(£2.25 billion) next year to
cope with soaring oil industry
inflation, cost overruns on
difficult projects and a legacy
of ageing infrastructure.
The oil group yesterday
set out its investment plans for
2006, which envisage a capital
budget of $19 billion, up from
$15 billion in 2005, and higher
spending in almost every area of
its business.
Shell is raising the bar
after a difficult year in which
two landmark developments, the
Sakhalin liquefied natural gas
project in Russia, and the Bonga
deep-water offshore platform in
Nigeria suffered delays and
breached their budgets.
In June, Shell admitted
that Sakhalin’s total cost would
double to $20 billion and
yesterday Peter Voser, Shell’s
finance director, said that the
Russian gas project would absorb
$400 million more in 2006 than
will be spent this year.
The new spending plan is
heavily biased to Shell’s
upstream business, in which the
company is working hard to bring
more oil and gas into production
in order to raise its flat
production profile. The upstream
business will spend $15 billion,
including $2 billion on
exploration wells. Refining and
marketing will absorb the
remaining $4 billion of the $19
billion budget.
Jeroen van der Veer,
Shell’s chief executive, said
that two thirds of the upstream
spending would be devoted to
growth projects intended to turn
Shell’s dowry of 13 billion
barrels of hydrocarbons in the
ground into commercial reserves
of saleable oil and gas. “We
expect to bring 5 billion
barrels to final investment
decision by 2009,” he said.
By 2009, Shell expects to
lift daily oil and gas output to
between 3.8 million and 4
million barrels per day, from
current levels of between 3.2
million and 3.5 million bpd.
The remaining $4 billion
to $5 billion of upstream
spending will be targeted on
redevelopment of older fields,
such as the North Sea, and on
asset maintenance and the
integrity of offshore
facilities.
Shell and the other North
Sea operators, including
ExxonMobil, BP and Total, need
to renew infrastructure in the
North Sea, which, after three
decades of production, has
reached the end of its projected
life. Shell would not give
details of its spending in the
North Sea yesterday, but sources
close to the company indicate
that it has earmarked $1 billion
for asset renewal and integrity.
Analysts said that the
figures were at the high end of
expectations, but were not
surprising given the investment
signal from the strong oil
price. “It underlines the
intensity of spending in the oil
industry and highlights the
curious nature of the UK
taxation increase announced last
week,” said Jon Rigby, of UBS,
referring to Gordon Brown’s
decision to raise the tax on oil
companies from 40 per cent to 50
per cent. “It’s a tax based on a
retrospective view of spending,”
he added.
