Oil giant's £14bn profits fuel anger

Published on Thursday 31 January 2008 21:19

IT IS a multi-billion-pound haul described by the firm's chief executive as "satisfactory", yet denounced by union leaders as "obscene".

Shell yesterday posted the highest earnings ever made by a European company, a full-year profit of almost 14 billion.

The Anglo-Dutch giant's record announcement has led to further questions over "excessive" profits made by oil companies.

Union leaders called the 13.9 billion profit – the equivalent to 1.5 million an hour – "obscene", at a time when motorists, pensioners and businesses are struggling to pay higher energy costs, with some suggesting the government levy a windfall tax on the major oil concerns.

Tony Woodley, joint general-secretary of the Unite union, said: "Shell shareholders are doing very nicely while the rest of us, the stakeholders, are paying the price and struggling.

"This government took the brave step of putting a windfall tax on the greedy privatised utilities to fund the New Deal. With pensions injustices still to be addressed, fortune should favour the brave again and the greedy oil companies should be asked to contribute for the common good."

Jeroen van der Veer, Shell's chief executive, described the firm's performance as "satisfactory", adding: "If you get additional taxation, in the end it means you can invest less. The money has to come from somewhere and, over time, it will impact on our production.

"You should not only look at the profits size, but at the size of the companies and the huge investment tasks we have to do for the future of our companies."

Shell and other oil companies insist they already pay high levels of tax. In 2005, Gordon Brown, then Chancellor, increased a North Sea tax on energy companies from the 10 per cent he introduced in 2002 to 20 per cent.

Introducing a windfall tax against Shell would be a complex procedure, given the difficulty in claiming enough of its profits have been made in the UK. Though one of its listings is at the London Stock Exchange, it also has listings in the Netherlands and the US, with its headquarters in The Hague.

Meanwhile, concerns remain after it delayed publishing figures showing its oil reserves. The statistics, which reveal whether Shell has found enough oil in the ground to replace the amount it was taking out, will not be published until spring, a sign some analysts believe does not augur well for the company.

Commenting on the scale of the profits, Sheila Rainger, acting director of the RAC Foundation said: "Shell is a private company and its job is to make profit. The people that could do something about this are the government. Petrol in the UK is very cheap compared with the rest of Europe when you take away tax.

"The problem is the 70p in the pound that goes to the Treasury. We would like to see the Treasury being a bit more creative in how it's taxing petrol.

"We would like to see something like a fuel-duty stabiliser. At the moment, whenever the price of crude goes up, the cost goes straight to the motorist."

Neil Greig, director of the IAM Motoring Trust, said: "The average motorist finds it difficult to understand why prices at the pumps are so high and Shell profits are also so high. But it would be very difficult for Shell to pile this money back into discounts at the pumps. They should be putting money back into ensuring future supplies on the high street."

Mr Greig said securing the supply of diesel, which is being encouraged for its environmental credentials, but which has seen a shortage of refining capacity, was a "top priority".

Tony Juniper, director of Friends of the Earth, said: "Shell is making vast profits from its climate-changing activities. The Chancellor must introduce a windfall tax in his March Budget, and use the money to improve energy efficiency in people's homes.

"Such a scheme would benefit millions of householders who can't afford to heat their homes, save people money and help tackle climate change. It would also reduce the UK's reliance on imported oil. The government must show it means business."

He added: "A tiny fraction of Shell's investment is going into renewables. It must do more to tackle climate change by investing more in helping develop a low-carbon economy and cleaning up the impact of its activities at home and abroad."

Q & A: RECORD GAINS

How has Shell been able to post such extraordinary profits?

The company rode the wave of rising crude oil prices, although it claims most of its profit comes not from the forecourts, but exploration and production initiatives. The impact of higher oil and gas prices on revenues was partly offset by lower production volumes, higher taxes and rising costs.

How can companies like Shell make money from producing oil but not from selling it at the pumps?

Fierce competition on the forecourts drives prices down and oil companies argue that minimal profit is made at their garages. When crude oil is expensive, the seller will see a rise in profits while the buyer will see a rise in costs. The companies say they are making their money through crude oil exploration and production, the "upstream" part of the business, but not in refining and selling fuel, the "downstream" area of the business.

Why do petrol prices remain so high when the price of oil falls?

Refineries and petrol stations can make some money by letting prices fall slowly but rise quickly in response to crude oil price movements. Fuel duty and VAT accounts for about 75 per cent of the total price of petrol. Petrol stations have to buy the crude oil and pay refinery costs. Whatever is left over, minus any additional expenses, constitutes profit.

Does all the money go to Shell executives and shareholders?

Around 6.7 billion of the 2007 profits will be paid to shareholders in dividends, but Shell argues that its profits are almost matched by the amount of money it spends on securing new energy sources, with 13.2 billion reinvested.

Why can't the upstream operations subsidise the downstream ones?

Only some petrol retailers boast their own upstream operations, with the likes of supermarkets only selling petrol.

Were the likes of Shell allowed to subsidise their operations, there would be an uneven playing field in the eyes of competition regulators.