Shell deserts production targets as profits tumble

The oil giant Royal Dutch/ Shell yesterday abandoned formal production growth targets and warned that output this year would be flat. It also cautioned investors not to expect any further share buy backs in the first half of the year in light of the uncertain economic climate.

Shares in the group, the world's third-biggest oil company, fell sharply amid fears that the fall-out from a fresh Gulf war would overshadow any rise in oil prices caused by a short-term interruption to supplies.

Announcing a 23 per cent drop in profits last year to $9.2bn (£5.9m), the Shell chairman Sir Philip Watts said the company's aim of increasing production by 3 per cent a year was no longer a target but a "capability". Shell shares fell 5 per cent to close at 360p.

"We will not follow a specific production target at the expense of creating value for shareholders," Sir Philip added. "We have a portfolio sufficient to underpin 3 per cent annual growth but it is not just about volume, it is about the margin you get on every barrel."

The company is now emphasising the profit it expects to make on its upstream activities and is targeting a 6 to 8 per cent increase in exploration and production earnings in each of the next two years, based on a reference price of $16 a barrel.

BP, the world's second-biggest oil company, is expected to follow Shell's lead and abandon production targets when it publishes annual results next week. BP has already been forced into a humiliating retreat on production targets, whittling back its original aim of 5.5 per cent growth three times since last summer.

The results from Shell met expectations with fourth-quarter profits bouncing back to show a 46 per cent increase in after tax earnings to $2.78bn. However, the company narrowly missed its target of achieving a 13 to 15 per cent return on capital, largely because of the $16bn it spent on acquisitions last year, including the purchase of Enterprise Oil.

Shell is aiming for a further $1bn in cost savings this year and next year in addition to the $5.5bn delivered since 1998. The new cost reductions include a further $80m of efficiency gains at Enterprise on top of the $300m already identified, although Shell would not discuss whether this would mean further job losses.

Sir Philip would not be drawn on the possible impact of military action against Iraq or how Shell might benefit in a post-Saddam Iraq from the 215 billion barrels of oil reserves held by the country. He said that Shell had not held any discussions with the UK Government or any other government. But he added: "You would be very surprised if we hadn't made our calculations."