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Reserves challenge clouds Shell’s growth ambitions

Peter Voser, CEO of Royal Dutch Shell, speaks at a press conference Thursday in London announcing the company’s full year results for 2012. ‘Shell’s efforts to expand its pipeline of potential energy projects are paying off,’ Mr. Voser said.

Kirsty Wigglesworth/AP

Anglo-Dutch oil company Royal Dutch Shell is struggling to replace its oil and gas reserves as it pushes ahead with plans to produce more, invest more, and pay a higher dividend.

Shell was posting quarterly profit that missed expectations on Thursday, rising 15 per cent to $5.58-billion (U.S.) on an adjusted current cost of supply basis thanks, in part, to stronger refining margins and compared with a forecast for $6.2-billion.

Disappointment over a weaker-than-expected performance in Asia-Pacific and U.S. production was partly offset by the promise of a 4.7-per-cent dividend rise in the current quarter.

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Analysts say Shell's strong cash flow outlook justifies a higher payout, but are concerned by a reserves replacement ratio that was only 44 per cent in 2012 and which Shell expects will average 84 per cent over the next three years.

"They are coming up short on that metric and that is a worry," Investec analyst Stuart Joyner said.

Andrew Whittock of Liberum Capital said the figures offered "little comfort that E&P (exploration and production) volume growth is sustainable."

The company pledged a net $33-billion capital spending for next year, some of which will go into controversial places such as Nigeria – where a Dutch court this week found Shell's local subsidiary partly responsible for pollution – and into the Arctic, where it suffered a series of accidents last year that have raised new questions about the safety of offshore drilling.

The world No. 2 among international oil heavyweights said it would keep investing despite headwinds and an uncertain economic outlook in some markets. World No. 1 Exxon Mobil will report results on Friday.

Shell has a strong flow of new projects coming on-stream in coming years to support the higher dividend. It expects to increase its total output to about 4 million barrels of oil and gas equivalent (boe) per day by 2017-18 from 3.3 million now.

"Shell's efforts to expand its pipeline of potential energy projects are paying off," chief executive officer Peter Voser said.

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"Our drive to increase our options for future projects means that we are more constrained by limits on capital than by limits on opportunities."

Looking further ahead though, as its reserve replacement figures show, Shell and peers are under pressure as the costs of finding and producing new resources rise.

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