Shell Rakes in $8.5 Billion in Three Months

Royal Dutch Shell, the world's second-largest publicly traded oil company, today reported net income up 60 percent last quarter to a record $8.47 billion, thanks to the same rising crude oil prices that most observers expect will lift the profits of Exxon Mobil and Chevron tomorrow to nearly historic levels.

Shell's results were shy of the largest quarterly profit ever for a company in the United States—the record $10.7 billion that rival Exxon earned in the fourth quarter of 2005. But Shell's full-year profit for 2007 of $31.3 billion set a record for a European company. Still, CEO Jeroen van der Veer's muted comment was that the results were "satisfactory," and the company's stock reacted to the news with a downward slide. It wasn't just that Shell's results were in the lower range of expectations. Weighing on the company appeared to be the now apparent fact that Shell is producing less oil and that its performance cannot be sustained if a slowing economy lowers oil prices.

Shell's increase in profits last quarter came despite a 5.7 percent drop in production. Shell's chief financial officer, Peter Voser, also said that 2008 would see a decline in oil and gas production because of woes in Nigeria and the loss of company assets. Most notable: a decreased stake in the huge Sakhalin Island project that Russia forced on the company after it had invested in it heavily for years. This marked the first time that Shell did not announce its reserves figures along with its year-end financial results. Although that puts the company in step with its U.S. competitors, which announce their holdings later in the spring, most analysts viewed it as a sign that the company was losing assets faster than it could replace them.

Another downside to high oil prices for Shell and the other multinational oil companies: Their production-sharing deals with many of the countries in which they operate, most notably in the former Soviet states and Africa, are structured so the oil companies earn less of a share of each barrel's profit—with more going to national governments—as oil prices rise. Voser also said this contributed to Shell's lower production.

High profits also mean increased political risk for all the oil companies; British labor union leader Tony Woodley immediately called for a windfall tax after Shell's announcement. In the United States, although similar efforts in Congress fizzled last year, the oil industry fears the idea will gain new steam once the full industry profit picture becomes apparent—especially with the federal government in deficit and about to hand out billions in an economic stimulus plan.

The portion of the oil industry that could be the bellwether for economic downturn is refining. With gasoline demand down, the profit margins in the business of making gasoline and other fuels have shrunk, leading some analysts to warn that that could weigh on profits. But last week, when the No. 3 U.S. oil company, ConocoPhillips, which has huge refining operations, reported profits up 37 percent in the fourth quarter, Wall Street again began looking for stellar results. "Unless oil prices collapse, companies will probably have another strong year, if not a record year," says Fadel Gheit, oil analyst with Oppenheimer & Co.