THE WALL STREET JOURNAL: Shell to Raise Spending, Due Partly to Inflation: "The Bonga deepwater oil project off Nigeria, which started producing last month and is 55%-owned by Shell, has seen costs spiral in less than two years to nearly $4 billion from an initial $2.9 billion estimate.": Wednesday 14 December 2005

LONDON -- Royal Dutch Shell PLC said capital spending will rise nearly 27% to about $19 billion next year, citing increased spending on new and current projects and steep cost inflation.

Analysts had expected a significant spending jump at Royal Dutch Shell for 2006, but the rise -- up from 2005 spending estimates of $15 billion -- exceeded many forecasts.

Shell Chief Financial Officer Peter Voser said in a conference call that he expects Shell's spending to be at least $19 billion for several years after 2006.

Shell attributed an estimated 25% of the rise in exploration and production spending to "price inflation," including increases in service costs like contracting drilling rigs, as well as foreign-exchange fluctuations. The industry has been hurt by rapidly rising oil-field costs amid a scramble to secure workers and equipment to take advantage of high energy prices.

Shell had signaled it would raise spending as part of a broader turnaround effort stemming from a massive restructuring completed earlier this year. After disclosing the company had overstated its energy reserves in early 2004, it sharply revised its reserves tally, putting pressure on executives to rebuild its exploration and production portfolio. Reserves are an estimate of the amount of oil and gas holdings a company has in the ground and expects to commercially exploit.

"The increase in investment will grow and mature our resource base, increase production, build on our strong position in integrated gas and unconventionals and enhance our leading position in the downstream," said Chief Executive Jeroen van der Veer in a statement.

Shell said the spending estimate included $15 billion in exploration and production. It said 55% of the increased spending in this segment was aimed at new projects and increasing exploration.

Shell has said costs will rise for various projects. Earlier this year, Shell said costs for the giant oil-and-natural gas project it is leading on Russia's far-eastern island of Sakhalin will double to $20 billion. Shell has a 55% interest in the project.

Shell Canada, which is 78%-owned by Royal Dutch Shell, said earlier that its 2006 investment plan would total C$2.7 billion (US$2.34 billion), a 60% increase over the amount the company expected to spend in 2005, because of cost inflation and a more ambitious expansion program, particularly at the Athabasca Oil Sands Project.

The Bonga deepwater oil project off Nigeria, which started producing last month and is 55%-owned by Shell, has seen costs spiral in less than two years to nearly $4 billion from an initial $2.9 billion estimate. Downstream investment, which includes refining, chemicals and retail distribution, is planned at more than $4 billion. The figure includes a combined $1.7 billion for growth opportunities, clean fuels, alternative energy and other spending.

Write to Benoit Faucon at benoit.faucon@dowjones.com