London (Platts)--31Jan2013/1040 am EST/1540 GMT

Shell said Thursday it remains on track to grow its oil and gas production by over 20% in the next five to six years, despite weak North American fuel prices continuing to dent the performance of its key upstream growth centre.

Europe's biggest oil company also reported lower-than-expected earnings in the fourth quarter of 2012 and said it would need to spend more on developing its existing reserves.

In a strategy update, Shell reiterated a target of increasing its oil and gas production to average around 4 million b/d of oil equivalent in 2017-2018, compared with 3.3 million boe/d in 2012.

A growing proportion of Shell's production will come from North America over the period but the company said it continues to suffer from dire US gas prices and weak Canadian bitumen values.

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During the fourth quarter of 2012, Shell said Canadian synthetic crude realizations were 19% lower than the year before with the shale boom-caused gas price collapse depressing gas realizations by 4% on the year.

As a result, the major posted its second straight upstream loss from the region for the fourth quarter and warned it expects its US business to remaining "under pressure" for the short term.

"We think the underperforming North American business is a key feature of RDS's current business," Citi's oil analysts said in a note, "That continued underperformance of America's upstream should start to raise questions around the company's medium-term growth ambitions, in our view."

Speaking to reporters in London, Shell CEO Peter Voser said while income its US shale gas and tight oil assets and Canada's oil sands have been hit by prices, the company's deepwater Gulf of Mexico oil projects are more profitable.

"The Americas' business is a growth engine for us and that has some implications in the financial results," Voser said. "You should expect the Americas' results to stay under pressure because it's a macro affect."

RESERVES

Shell CFO Simon Henry said the company took depreciation charges of $3 billion in 2012 on its US onshore gas and oil assets which, are being hit by the weak prices.

As a result of the US shale-driven gas price slump, the company said it expected to report a headline proved reserves replacement ratio (RRR) for 2012 on a US SEC basis of just 44%.

Excluding the effect of prices, however, organic RRR was expected to be around 85% for the year, Shell said, adding that its three-year average RRR should stand at 115%.

At the end of 2012, total proved reserves on an SEC basis were expected to be around 13.6 billion boe, after taking into account 2012 production.

Despite the low RRR last year, the company said it held 20 billion boe of resource potential under active development with 30 new projects likely to unlock 7 billion barrels of resources to drive its future production growth.

"Shell is on track for plans we set out in early 2012, despite headwinds last year," said Voser. "We are delivering a strategy that others can't easily repeat."

The company said it still aimed to deliver $175 billion-$200 billion of total cash flow from operations for 2012-2015, with a net capital spending program of $120 billion-$130 billion, implying a $35 billion-36 billion average annual organic spend over the period.

This year, Shell said it planned $33 billion of net capital investment, up from $30 billion in 2012. The company said it saw organic capital expenditure of $34 billion this year with some $3 billion of asset sales.

Shell said the high capex budget was justified by climbing costs, particular in its deepwater projects, as well as higher exploration spending over the period.

Shell said this year's spending included an increase of some $1 billion for non-cash capitalized leases, mostly in deep water growth projects.

"The increased spending from 2012-13 will be driven by higher investment in deep water and upstream engines, reflecting Shell's project flow, and an increase in core exploration spending from $6.4 to $7 billion," the company said.

Shell said it expects to drill over 40 high-potential wells in 18 conventional basins, and test 10 key resources plays for tight gas and liquids-rich shales.

The capital spending budget is based on an $80-$100/b Brent oil price but also assumes an "improved" US gas and downstream environment from 2012, Shell said, without providing further detail.

Q4 WEAKNESS

For the fourth quarter of 2012, Shell reported adjusted profits of $7.29 billion, up 13% from the $6.46 billion in the year-earlier period.

The major said its upstream earnings were hit by sharply lower US oil and gas prices but saw improving refining margins in the period support results from its downstream division.

Excluding one-time items, Shell's 'clean' earning of $5.58 billion came in well below market expectations of some $6.5 billion for the quarter and the company's shares fell by 2% in London trading.

Shell, which is close to seeing its gas production volumes overtake its oil output, said production averaged 3.41 million boe/d in the fourth quarter of 2012, up 3% from the year-earlier period.

Equity LNG sales volumes of 5.49 million mt were 13% higher than in the same quarter a year ago. Equity LNG sales volumes reflected the contribution from Pluto LNG and higher volumes from Qatargas 4 LNG, Shell said.

Helped by strong margins, fourth-quarter downstream earnings, excluding extraordinary items, were $1.16 billion, compared with a loss of $278 million in the fourth quarter of 2011, Shell said.

Refinery intake volumes were 5% higher at 2.8 million b/d in the fourth quarter. Excluding portfolio impacts, refinery intake volumes were 8% higher than in the same period a year ago. Refinery availability was 92%, in line with the fourth quarter of 2011.

The company said the crude distillation unit at its expanded Motiva refinery in Port Arthur, Texas, would be ramped up during "early 2013," after it was restarted earlier this month.

--Robert Perkins, robert_perkins@platts.com
--Edited by Jonathan Fox, jonathan_fox@platts.com

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