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Last Updated: Thursday, 3 February, 2005, 16:52 GMT
Shell pumps out record UK profit
Shell petrol station
High oil prices boosted Shell's profits in 2004
Soaring oil prices last year have helped Shell report a record annual profit for a UK-listed company.

The Anglo-Dutch energy giant generated income after tax of $17.5bn (9.3bn) in 2004, up 38% on the year before.

However, Shell also said it was downgrading its proved energy reserves for 2003 by 1.4 billion barrels.

Shell reduced its reserves several times in 2004, leading to the departure of its three most senior executives including chairman Sir Philip Watts.

'Extreme year'

The record profits were fuelled by the surge in crude oil prices in 2004 which hit more than $55 a barrel last October.

We have taken the steps necessary to close out the reserves issue
Jeroen van der Veer, Shell chief executive

"2004 was a year of extremes with the reserves reorganisation on the one hand and record net income and cash generation on the other," said chief executive Jeroen van der Veer.

In light of the bumper profits, Shell intends to pay out $10bn in dividends to shareholders in 2005.

However, the market responded cautiously to Shell's figures and its shares finished down 1.7% at 471.75p.

Analysts said a likely fall in oil prices this year and the difficulty Shell could face in boosting its reserves would make 2005 a much harder year.

Room for improvement?

"The reserves debacle led to a loss of three senior executives and tarnished the reputation of the company," Tony Shepard, an analyst with Charles Stanley, told the Press Association.

"Although a line may finally be drawn under this sad episode, Shell still needs to improve its operating performance, especially its reserves replacement ratio."

Shell has completed its review of its energy reserves following last year's crisis which resulted in the resignation of the company's chairman, finance director and production director.

It is downgrading its 2003 reserves figure by 10%, having previously reduced its 2002 estimate by 23%.

It will publish figures for its 2004 reserves later this year.

Historically, oil companies have not invested enough to sustain reserves, and this will be a challenge for them this year
Angus McPhail, ING Financial

Shell said that after restating its reserves between 2000 and 2004, it expects its after-tax earnings to be reduced by $700m.

"We have taken the steps necessary to close out the reserves issue, made substantial improvements to our portfolio and are reshaping the organisation," Mr van der Veer added.

Windfall demand

The size of Shell's profits has prompted renewed calls for a 'windfall tax' on the earnings of multinational energy companies.

Martin O'Neill, Labour chair of the Commons trade and industry select committee, said a windfall tax should be considered as a way of helping the thousands of people who struggle to pay their fuel bills.

"It is not unreasonable to assume that the profits that come from these companies should be directed, at least in part - either voluntarily or fiscally - to the UK's disadvantaged energy consumers," he told the BBC.

Vince Cable, the Liberal Democrats Treasury spokesman and a former chief economist at Shell, rejected the idea.

He told the BBC that a tax would deter investment and threaten employment in the industry.

"We know from experience when governments try to move the goalposts, as they did two years ago when the petroleum tax was introduced, this has a very damaging effect on the industry," he said.

Shell is the latest global oil company to post spectacular profits.

US firm Exxon Mobil revealed on Monday that it had made a $25.3bn (13.4bn) profit in 2004.

BP, which made a 5.5bn post-tax profit in 2003, will report its 2004 figures later this month.

What are the future prospects for Shell

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