* Profits rise 120 percent to $16 bln in 2017
* Q4 profits more than double, beating forecasts
* Cashflow strongest since 2014
* GRAPHIC: Output and cash flow http://tmsnrt.rs/2nGfmte (Adds analyst, company comment, details)
LONDON, Feb 1 (Reuters) - Royal Dutch Shell could usurp its largest rival Exxon Mobil as the energy sector's biggest cash generator after higher oil and gas prices combined with an improved performance lifted its 2017 revenue.
Chief Executive Ben van Beurden has made no secret of his desire to challenge the dominance of the world's largest listed oil company after its $54 billion purchase of BG Group in 2016 catapulted Shell into second place in terms of production.
The Anglo-Dutch company on Thursday reported a more than doubling of profit in 2017 to $16 billion, the highest since the start of the 2014 downturn as the effect of years of costs cuts and the integration of BG Group filtered through.
"We enter 2018 with continued discipline and confidence, committed to the delivery of strong returns and cash," van Beurden said in a statement.
Cash flow from operations in 2017 rose to $35.65 billion from $20.62 billion a year earlier, putting Shell on course to beat Exxon, which is forecast to have generated $32.6 billion in 2017, according to estimates by Jefferies analysts. Exxon reports earnings on Friday.
Shell's shares were however 1.5 percent lower at 1200 GMT, compared with a 0.16 decline in the FTSE 100 index, as its fourth quarter cash flow was lower than anticipated by analysts.
The cash growth was driven by a sharp recovery in oil prices in the second half of 2017, as the benchmark Brent price reached a three-year high of $70 a barrel.
But it was also due to a sector-wide drive to reduce costs to adapt to a world of "lower for longer" oil prices, as Shell and others cut thousands of jobs, lowered spending and brought in new technology to simplify field designs and operations.
As a result Shell can now generate more cash than it did with oil prices above $100 a barrel and in November it raised its cash flow outlook from $25 billion to $30 billion by 2020, assuming an oil price of $60 a barrel.
Free cash flow -- cash available to pay for dividends and share buybacks -- rose to $27.6 billion from a negative $10.3 billion in 2016.
"We expect them to keep driving up efficiencies and reducing break evens to make it resilient and fit for the future. The BG deal seems to be paying off and the rationale for it is being proved right," Rohan Murphy, energy analyst at Allianz Global Investors, said.
Shell in the fourth quarter scrapped its scrip dividend, in a sign that it is confident of being able to maintain around $15 billion in annual dividend payments without resorting to scrip or borrowing after a three-year oil price downturn.
Van Beurden said the company planned to start a three-year, $25 billion share buyback programme "as soon as possible" as the company focuses first on reducing debt.
Shell's oil and gas production in the fourth quarter rose from the previous quarter to 3.756 million barrels of oil equivalent per day (boed) from 3.657 million boed, but on a yearly basis, it fell 4 percent as a result of asset sales.
Production was expected to come down by 270,000 boed in 2018 as a result of divestments, including the sale of a North Sea portfolio to Chrysaor and its stake in Woodside Petroleum.
But Shell also plans to double its shale production in the United States, Canada and Argentina in the next 5-10 years from the current 275,000 barrels per day, Chief Financial Officer Jessica Uhl said.
Capital expenditure in 2017 was $24 billion, slightly lower than the $25-$30 billion range Shell set until 2020.
Shell's fourth-quarter profit, based on a current cost of supplies (CCS) and excluding identified items, rose by 140 percent to $4.3 billion, slightly ahead of forecasts.
Shell said its gearing dropped to 24.8 percent from a peak of 29.2 percent in the third quarter of 2016 as it cut its debt to $74.65 billion.
And while it took a $2 billion charge due to new U.S. tax rules, Shell expects a longer-term boost.
(Reporting by Ron Bousso; editing by Jason Neely, Alexander Smith and Jane Merriman)