LOWER TAX OFFSETS LOWER SHELL U.K. UPSTREAM PROFIT <Shell U.K. Ltd's> pre-tax profit on exploration and production operations fell to 869 mln stg in 1986 from 2.12 billion in 1985 due to the fall in oil prices last year, Shell U.K. Finance director Nigel Haslam said. But he told a press conference that due to the high marginal tax rate on North Sea operations, the main impact of the drop in profit was absorbed by a fall in taxation to 330 mln stg from 1.45 billion in 1985. The bulk of tax last year was Corporation Tax, with Petroleum Revenue Tax (PRT) representing only 16 mln stg, he said. As a result, post-tax profit from the exploration and production sector fell by only 126 mln stg to 539 mln. Earlier, Shell U.K., a subsidiary of Royal Dutch/Shell Group <RD.AS>, reported an overall net profit of 757 mln stg, up from 667 mln in 1985, on sales of 6.57 billion stg against 8.81 mln. Shell U.K. Chairman Bob Reid said the company's crude oil output from the North Sea was at a record 373,000 bpd in 1986, which would almost certainly prove to be a peak for the company. Shell expects a fall in output of around 10 pct in the current year to around 340,000 bpd, due mainly to the decline in output from the major Brent field, he said. Gas output of 5.9 billion cubic metres and natural gas liquids output of around one mln tonnes in 1986 are expected to be maintained in 1987, he said. A final decision on development of the Kittiwake and Osprey North Sea oil fields will be made in the next 12 to 18 months, Reid said. The Kittiwake field, originally part of the 2.5 billion stg Gannet project abandoned last year when the oil price fell, is now estimated to cost around 350 mln stg. Economies on development costs for the Tern and Eider North Sea fields, which were approved last year, have brought the cost down to 30 to 35 pct below the original budget. Day to day operating costs of the exploration and production sector had been cut 10 pct last year, and the target is to keep costs per barrel constant. The company drilled 17 wells offshore, with 10 leading to the discovery of hydrocarbons, although it is too early to gauge the commercial viability of these discoveries, Reid said. Restructuring of the downstream oil sector contributed to a profit rise to 187 mln stg in 1986 from 91 mln stg in 1985. Jaap Klootwijk, managing director of downstream unit <Shell U.K. Oil>, said refining margins in the first quarter of 1987 were a "bit better than the very bad fourth quarter 1986." In November and December in particular, refining operations had shown negative margins following the fall in crude and oil product prices, he said. He expected margins to continue generally positive over the summer, although they could dip to become negative from time to time, depending on price movements. A new catalytic cracker at Shell's Stanlow refinery will now come on stream by the end of first quarter 1988, about five months behind schedule, following a crane accident which severely damaged the plant last year, he said. Profits from the chemicals sector rose to 33 mln stg from 11 mln after the rationalisation of the Carrington chemical site. Haslam said the Budget announcement on PRT relief, by which companies will be allowed to offset up to 10 pct of qualifying development expenditure on certain future oil fields against PRT, was "helpful," but rather less than had been hoped for. Reid said his estimate of crude oil prices this year was in the range of 15 to 18 dlrs. If prices went much above that, he would expect some over-production above OPEC"s official 15.8 mln bpd output ceiling which would tend to bring prices back down. He said it looked as if the December OPEC pact to restrain output was holding, bringing supply and demand into balance, but the test will come in summer when demand for OPEC oil will fall.