'Elephant' hunting to cost Shell $19bn next year

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Royal Dutch Shell unveiled plans yesterday to raise capital expenditure next year by more than a quarter to $19bn (£11bn).

The increase on the $15bn Shell has spent this year is the result of higher costs and the company's attempt to improve its lacklustre performance in finding new reserves of oil and gas to replace existing production.

Shell said that of the $19bn total expenditure, some $15bn would be spent upstream - of which $2bn would be earmarked for exploration - while $4bn would be spent on downstream activities, such as refining and petrol retailing. Shell's benchmark oil price of $25 a barrel for judging whether a new project is justified on financial grounds remains unchanged.

The company is only now recovering from the reserves reporting scandal last year which devastated its reputation, forced the resignation of its three top executives and sparked regulatory investigations on both sides of the Atlantic.

It has also been hit recently by huge cost increases on high-profile projects such as the Sakhalin-2 gas field off Russia's east coast, where costs have doubled to $20bn; and the Bonga field off the coast of Nigeria, which could cost more than $5bn.

But Shell said that only $400m, or 10 per cent of the increase in expenditure next year, related to Sakhalin. It said a quarter of the increase in upstream investment was due to inflation, unfavourable exchange rates and higher costs for services such as the hiring of drilling rigs.

More than half - 55 per cent - is the result of ramping up new projects and increased exploration. The remainder relates to existing fields.

Last year, Shell only replaced 19 per cent of the oil it took from the ground, using the strict definition of reserves replacement required by the US Securities and Exchange Commission.

Shell's finance director Peter Voser said it still remained "reasonably confident" of achieving its target 100 per cent reserves replacement over the 2004-2008 period.

He also reiterated Shell's output forecasts of 3.5 to 3.8 million barrels a day this year and next, rising to between 3.8 million and 4 million barrels in 2009 and 4.5 million to 5 million in 2014.

Some investors are fearful that the increase in capital expenditure will leave Shell with less capital to hand back to shareholders but Mr Voser pledged to continue the company's share buy-back programme into next year. Shell shares rose yesterday by 11p or just under 1 per cent.

Of the $19bn to be spent next year, some $10bn-$11bn will be invested on upstream growth projects or "elephants" as Shell describes them, requiring investment of $1bn or more. The company aims to bring on stream fields containing about 13 billion barrels of oil by the end of 2009.