Royal Dutch Shell Has Shrinked Because of Weak Oil

By Jose de la Cruz | Feb 05, 2016 09:10 PM EST

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The biggest oil company in Europe, Royal Dutch Shell, has reported Thursday its lowest annual income, the first in 13 years. But the oil company vows to make the necessary efforts to weather its worst downturn in more than a decade.

Just last week, its shareholders approved the acquisition of BG Group, a rival oil company. Still, the Royal Dutch Shell reported that its income dropped 87 percent to $1.94 billion.

The loss of income is in line with analysts' predictions and it appeared that this figure is the lowest, at least since 2002, because of the weakening oil prices that hit the company's production of gas and oil.

This experience of Royal Dutch Shell seems to be not so unusual given the weak oil prices that the market has experienced lately. Many gas and oil companies have reported negative figures.

Many companies are pulling back on their explorations as they struggle to fill up their normal productions with their reserves using what is called reserve replacement ratio.

For instance, Statoil reported a ratio of 55 percent on Thursday, while BP said it used a ratio of 61 percent in 2015. Numbers under 100 percent means that oil companies are slowly adding to their reserves compared to the amount they are getting out of their wells.

However, Shell took it a bit higher. Last year, its ratio was -20 percent. That means the company did not just increased its reserve, it also dwindled beyond the zero level. The company's production was the equivalent of 1.1 billion barrels, but its reserves fell to 1.4 billion.

The effect of weak oil prices is clear. When the price is low, companies will opt to reduce pumping or not pump altogether. However, in Shell's case, the negative number arose from the very unusual decision made by the company last October, which is to stop its development of the Canadian Carmon Creek oil sands, two years after its approval.

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