Shell to abandon output target as economy slows

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The Independent Online

Shell shocked the market yesterday by indicating it would have to abandon its production growth targets.

Phil Watts, delivering his first quarterly figures as chairman, said that the oil and gas giant's plan to grow output by 5 per cent between 2000 and 2005 now looked "very challenging" amid the slowing world economy.

Mr Watts said Shell would make this year's target but refused to put a new figure on the longer-term outlook.

The economic slowdown has hit industrial and consumer demand for oil and gas. Shell, which will update analysts on the issue in September, saw its stock close down 4 per cent at 575p.

Mr Watts said: "With the rather fragile global economy, we would be foolhardy not to take that into account. There is a lot of uncertainty. US consumer confidence is the key issue."

Bruce Evers, an analyst at Investec Henderson Crosthwaite, said: "The production going forward really shocked people. It became abundantly clear that growth is not sustainable and they will need a major rethink." Analysts said Shell could scale back its growth target for 2000-2005 to some 3 per cent, which would be a very significant reduction for a company the size of Shell.

Mark Redway, an analyst at Teather and Greenwood, said: "The real focus of attention is where do we go from here?

"The first-half [profit] is going to be about 60 to 65 per cent of the full year at the current outlook, so if anyone is saying 'this is as good as it gets for the oils', it might be that this is a possibility now."

Shell's figures for the second quarter of 2001 still had all the hallmarks of a booming economy and a high oil price. However, a slowdown compared with the first quarter was apparent.

The company made $3.6bn (£2.5bn) after tax in the second quarter or $1.6m an hour, an increase of 12 per cent on last year. This was well below the record $3.86bn of the first quarter.

During the second quarter, Brent crude oil prices averaged $27.40 a barrel but Shell said that later in the period prices fell as the growth in global demand for oil was lower than expected.

Exploration and production contributed earnings of $2.2bn, an increase of just 1 per cent on last year, as output was hit by operational problems in the North Sea.

Natural gas production grew 11 per cent from a year earlier, but oil output dropped by 4 per cent, leaving the total pumped in the quarter up just 1 per cent, below market expectations and against 3 per cent growth in the first quarter. The chemicals division was the poor performer, with second-quarter earnings down 54 per cent at $127m.

Shell was again forced to respond to UK public concerns over high forecourt petrol retail prices. The company, which has some 1,100 petrol stations in this country, said it had made a loss in UK petrol retailing every year for the last six years. This would be the seventh year of losses in this activity, it said.

Mr Watts said the high price of fuel in this country was due to fiscal policy. "Before tax, petrol in Britain is the cheapest in Europe."

Shell revealed that it had cash of $9.5bn in the bank, part of which it said would be returned to investors, through special dividends or share buybacks, if conditions permit. The company again said that it would look at acquisition opportunities but was determined not to overpay.

Shell's planning assumes long-term crude oil prices of around $15 a barrel.