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LONDON -- The Royal Dutch/Shell Group lowered its threshold for measuring the financial viability of new projects in order to deliver the higher growth rate in oil and gas production its investors want.
In its annual strategy review, the company said it would from now on measure its underlying performance against a long-term crude price assumption of $16 a barrel, up from $14 previously, according to Reuters.
The higher baseline price will allow the world's second-largest oil and gas company to commit to riskier projects and acquisitions, entailing higher production costs per barrel, without technically breaching the target it set in 1998 for a 13 to 15 percent return on average capital employed.
That target, like all its performance measures, is based on the baseline oil price. The news went hand in hand with plans to hike capital spending by five percent a year from 2004, the report said.
Capital spending over the next two years will continue steady at about $12 billion, Shell said, but thereafter it will rise by some five percent a year, with the highest growth for exploration and production and gas and power.
Shell said its new $16-a-barrel threshold was "still conservative" and that low-price periods had recently become shorter. It brings Shell's price assumption into line with that of rival BP, which raised its base price to $16 from $14 in July last year.
Despite the target change, Shell will keep on cutting costs. It said it was on track this year to reduce costs by more than the $5 billion targeted in 1998 and that over the next two years its established businesses would deliver $500 million a year in cost cuts, the report said.