THE WALL STREET JOURNAL: BREAKING VIEWS: Shell is sprinting to stand still.: Wednesday 14 December 2005

Shell is sprinting to stand still. The oil-and-gas company is boosting capital spending by $4 billion to $19 billion a year to find more oil. (See related article.) But despite the extra firepower, Shell hasn't changed its 2009 production targets. In other words, the company won't necessarily get more bang for its money.

How come? Less than half of the $4 billion is earmarked for new upstream projects. The benefits of these projects might not come through until after 2009. The rest is just higher costs and further investment on existing projects, plus about a $1 billion investment in the downstream business. Shell blames price inflation, exchange rates and a rise in drilling rates for some of the cost increases.

To be fair, creeping costs are dogging the rest of the industry. Just last week, Chevron increased its own capital-expenditure requirement by 35% to $15 billion, partly due to the increasing cost of drilling oil. The difference is that Shell has suffered its own embarrassing problems managing large technical projects. Its flagship Sakhalin-2 project in Russia is $10 billion over budget. The Bonga field in offshore Nigeria was two years behind schedule and $1 billion over budget.

More money on capital expenditures means less in the way of buybacks. Shell already looks pretty stingy compared with the likes of BP, which is funneling excess cash back to shareholders. But the increase in capital spending means Shell's ability to execute buybacks falls to the lowest of its peer group, according to Citigroup estimates.

Shell also looks more vulnerable than rivals to the vagaries of the oil price. Citigroup estimates Shell needs the oil price to stay at $40 just to cover the company's capital-expenditure and dividend needs. That compares with $22 for BP and $25 for Total. That is yet another reason why Shell's 5% to 10% discount to BP as a multiple of debt-adjusted cash flow shouldn't narrow any time soon.