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Shell Says Reserves Stable, Shares Hold Firm

Royal Dutch Shell said its oil and gas reserves held stable in 2007 despite expectations of a drop, but added its growing focus on unconventional projects would limit growth until after 2010.

The world's second-largest non-government controlled oil company by market value on Monday put total net reserves at 11.9 billion barrels of oil equivalent (boe) at the end of 2007, in line with the level at the end of 2006, supporting its shares in a weak market.

"There's cause for more optimism ... the reserves seem like they're there," oil analyst Jason Kenney at financial group ING said.

Measured under U.S. Securities Exchange Commission rules, Shell's Reserves Replacement Rate (RRR), the rate at which production is matched with new finds, was only 17 percent, down from 158 percent in 2006.

This was due to the accounting treatment of the sale of part of its stake in the Sakhalin-2 project in Russia. The company said in January its RRR figure would be disappointing.

The focus on replacement rates reflects an industry-wide problem of adding new reserves as resource-holding nations increasingly hold back their best fields for their own national oil companies.

Among Shell's main rivals, BP has reported an RRR of over 100 percent for 2007, but U.S.-based Chevron has said its RRR was only 15 percent. Total of France replaced 78 percent of reserves excluding acquisitions and divestments; Exxon Mobil Corp has yet to report its RRR for 2007.

The reserve replacement issue is especially sensitive for Shell, which shocked investors in 2004 by saying it had exaggerated its reserves by around a third.

This led to the departure of top management and the company has been struggling to rebuild confidence ever since.

Exploration Success

Shell's London-listed "A" shares were up 1 penny at 17.16 pounds, outperforming a 2.7 percent drop in the DJ Stoxx European oil and gas sector.

Shell said it was helped by strong exploration success which added 1.4 billion boe of resources, helping push its total resource base to around 66 billion boe.

Increasingly, this portfolio is made up of "unconventional" oil and gas projects, reflecting Shell Chief Executive Jeroen van der Veer's regularly stated view that the era of easy oil is over.

In recent years, van der Veer has shifted Shell's focus away from pumping oil toward complex projects -- such as gas-to-liquids plants that turn natural gas into motor fuel, oil sands projects in Canada where it squeezes crude from bitumen-laden soil, and expensive liquefied natural gas plants.

The Anglo-Dutch oil major said its resource base held the potential of 2 to 3 percent output growth annually. However, a spokeswoman said the portfolio was "geared toward growth after 2010."

Chief Financial Officer Peter Voser said in January output was likely to drop slightly this year, while last year Shell said it was targeting 1 to 2 percent growth annually to 2010 and 2 to 3 percent thereafter.

"Much of the update is a restatement of the strategy that has been in place since 2004 and therefore the issue going forward is really about delivering this growth -- an area in the past where Shell (and BP) have disappointed," Richard Griffith at Evolution Securities said in a research note.

Some analysts have questioned whether the expensive projects in which Shell has invested will offer the same level of returns earlier projects have done.

However, many of its oil sands and alternative natural gas projects will have long production lives with low decline rates, so many analysts agree that if oil prices stay high, van der Veer's strategy will be justified.