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FINANCIAL TIMES: Lex live: Royal Dutch/Shell: “…that pesky reserves problem is not going away.”: “Shell will need to keep running just to stand still” ( 28 April 05


In the 1960s film "The Loneliness of the Long Distance Runner", the protagonist toils across difficult terrain as punishment for earlier transgressions. Shell must know how he felt.


Since last year's initial reserves downgrade, the Anglo-Dutch oil major has done the right thing by restructuring, restarting share buybacks, and redeploying capital towards the upstream business. First quarter results for 2005 beat expectations.


Shell's downstream business is now arguably second to none, but that pesky reserves problem is not going away. In order to meet Shell's target of replacing 100 per cent of production across 2004-08, it will need to average more than 125 per cent a year from 2006. Even if most of the new resources are due to come from longer term, big-ticket fields, that's an ambitious turnround.


Meanwhile, competitors are quickening their pace. Arch-rival BP could be pumping 5 million barrels a day by the end of the decade, opening up a significant gap. The temptation for Shell to buy its way out of trouble - as ChevronTexaco has done with Unocal - will increase, particularly with gearing of just 17 per cent. But that would not be cheap and investors are already wary of Shell's recent track record on upstream deals. Asset swaps, leveraging Shell's longer-term development potential, would make sense. But who will be willing to give up jam today with oil prices this high? With Shell now trading broadly in-line with BP on a 2006 enterprise value to debt-adjusted cashflow multiple of 9 times, much of the good work to date has already been rewarded. Shell will need to keep running just to stand still.


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