LONDON Rising costs, oil theft in Nigeria and weak U.S. shale liquids production have hurt profits at Royal Dutch Shell (RDSa.L), adding both to upward pressure on spending and to uncertainty on output growth.
These pressures prompted outgoing chief executive Peter Voser to abandon the company's target to deliver 4 million barrels a day of production by 2017. They also resulted in a $2.2 billion charge against the group's U.S. shale business.
Voser's abandonment of output targets brings Shell into line with other oil companies, and shows how the industry is struggling to translate investment into oil.
Voser called the company's second quarter result, published on Thursday, "disappointing." But he said a financial target to achieve $175-200 billion of cash flow from operations for the period 2012 to 2015 was intact.
The company's stock fell 5.0 percent - a big drop by the standards of normal trading day in Europe's biggest oil company - as analysts geared up to cut annual profit forecasts. The shares ended the day at 21.33 pounds, down 4.7 percent.
Shell said it took a $700 million hit for Nigeria thefts and other issues in the country - which it said cost Nigeria itself $12 billion a year - and for the tax impact of a weakening Australian dollar. Shell has put more of its Niger Delta activities up for sale.
"Higher costs, exploration charges, adverse currency exchange rate effects and challenges in Nigeria have hit our bottom line," said Voser, who is due to retire and be replaced by downstream chief Ben van Beurden at the end of this year. "These results were undermined by a number of factors - but they were clearly disappointing for Shell."
Adjusted second quarter net earnings on a current cost of supply (CCS) basis came in at $4.6 billion, down from $5.7 billion a year ago and below analysts' expectations of around last year's figures.
"There are mitigating factors, but we would expect our forecasts to fall by about 5 percent," Investec analyst Neil Morton said in a research note.
REVIEW FOR U.S. SHALE LIQUIDS
Including adjustments, Shell's CCS result was lower still at $2.4 billion, mainly due to the $2.2 billion charge for liquids-rich shale properties in North America. Shell said this reflected exploration and appraisal drilling results and production information that was not as positive as previously hoped.
These assets are also under a review now which will lead to divestments and a refocusing of investment into fewer plays, with growth potential, Shell said in its statement.
Shell vies with U.S.-based Chevron (CVX.N) for the world No. 2 spot among listed oil companies behind Exxon Mobil (XOM.N). Exxon also reported lower profits on Thursday.
Shell's results came in the same week as disappointing results from rival BP (BP.L) and on the same day as smaller Italian group (ENI.MI) was forced to cut its output target - partly because of Nigerian troubles.
In Nigeria, Shell's share of onshore production has fallen to 158,000 barrels a day in the second quarter from 260,000 in 2012. Overall, Nigeria's production has dropped by 500,000 barrels a day over the past few years to around 2 million.
Shell has been selling Nigerian onshore assets where most of the problems lie and said in June it would sell more Niger Delta assets. On Thursday it said it would be getting rid of about 80,000 to 100,000 barrels of production in this way. Oil industry sources pointed this week to four blocks that are for sale.
Shell's net capital spending will be higher in 2013 at $40 billion up from the $34 billion flagged early in the year, finance director Simon Henry said, as a result of some final investment decisions that have been taken since.
This is also because the company's deal to acquire Liquefied Natural Gas (LNG) assets from Repsol (REP.MC) may close earlier than anticipated in the second half of this year. Shell's $120-130 billion net capital spending target for 2012 to 2015 is unchanged.
(Corrects paragraph seven. Van Beurden is head of downstream, not head of upstream)
(Additional reporting by Simon Falush and Tricia Wright; Editing by Louise Ireland and Jane Merriman)