Jan. 31 (Bloomberg) -- Royal Dutch Shell Plc, Europe's biggest oil company, posted fourth-quarter earnings that missed analysts' estimates for the first time in two years because of a decline in production and lower refining margins.

Excluding inventory changes and one-time items, profit was $5.72 billion, less than the $6.03 billion median forecast of eight analysts surveyed by Bloomberg. Net income climbed 60 percent to $8.47 billion, or $1.36 a share, from $5.28 billion, or 83 cents, in the year-earlier quarter, The Hague-based Shell said today in a statement.

Output fell for a fifth straight year after Shell ceded a stake in Russia's Sakhalin-2 venture and militant attacks in Nigeria kept fields offline. Chief Executive Officer Jeroen Van der Veer said state-run oil companies are demanding better terms when negotiating energy ventures and this trend will continue. Profit from refining fell 40 percent in the period and margins will stay weak in 2008, he said.

``I'm modestly disappointed,'' Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh with a ``hold'' rating on the stock, said in an interview. ``The risk is to the downside with Nigeria. You've got a lot of unknowns on the horizon and refining margins are going to be quite low this year.''

Shell's London-listed Class A shares rose 0.1 percent to 1,791 pence. The stock is down 15 percent this year, compared with a 14 percent decline for BP Plc, Europe's second-biggest oil company, which reports earnings on Feb. 5.

Analyst Recommendations

Of the 38 analysts tracked by Bloomberg who cover Shell, 21 have a ``buy'' rating and three advise selling the stock. Fourteen have `hold' recommendations. Shell's annual net income was $31.3 billion, a record for a European company.

ConocoPhillips, the third-largest U.S. oil company, said Jan. 23 that fourth-quarter net income jumped 37 percent to $4.37 billion on high oil prices. Exxon Mobil Corp., the world's biggest oil company, and Chevron Corp., No. 2 in the U.S., report earnings tomorrow.

Oil prices in New York were 50 percent higher in the fourth quarter compared with a year earlier, reaching a record $100.09 on Jan. 3. Prices will continue to fluctuate for some time to come, Van der Veer told a press conference. ``If you think about oil prices, you will have to expect ongoing volatility.''

Refining margins, or profits from turning crude into fuels such as gasoline and diesel, fell to $5.68 a barrel in the fourth quarter from $6.40 in the year-earlier period, according to data posted on BP's Web site.

Output Disruptions

A fire at Shell's 155,000 barrel-a-day Athabasca oil-sands mine in Alberta and repairs at the 458,000 barrel-a-day Pulau Bukom refinery in Singapore crimped output during the quarter.

``I expect an environment of weaker margins and we have to deal with a relatively weak dollar'' this year, Van der Veer said.

Shell said that net capital spending will rise to between $24 billion and $25 billion this year, reflecting higher industry costs.

Van der Veer said today that the company had 11 ``material discoveries'' last year, adding about 1 billion barrels of oil and gas resources. Some of these resources will have to be verified before they can be booked as reserves.

In a letter to employees dated Jan. 22, Shell's CEO said global demand for energy will outstrip supply within seven years because of ``population growth and economic development. After 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.''

`Very Hard'

``It's very hard for Shell to keep coming up with new reserves, new big oil fields that can actually make a difference,'' Andy Brough, who helps oversee $6.5 billion in assets as executive director at Schroder Investment Management Ltd. in London, said in a Bloomberg Television interview.

Full-year oil and gas production, including oil sands, fell to 3.32 million barrels of oil equivalent a day in 2007, compared with 3.47 million barrels a day the previous year. The company had previously expected full-year output of between 3.3 million and 3.5 million barrels a day.

``In the next decade, we would expect 2 to 3 percent growth from our organic capital programme,'' Chief Financial Officer Peter Voser told the press conference. ``We would see production in 2008 slightly below 2007.''

One-time items provided a net gain of $963 million to Shell's fourth-quarter profit, and that included exploration and production division divestment gains of $1.5 billion and a $716 million charge related to funding shortfalls and security in Nigeria.

Lower Stake

Shell has been losing Nigeria production since late 2005 after militants attacked oil installations in the Niger Delta. The raids have forced Shell's venture in the country, Africa's biggest producer, to halt output of about 500,000 barrels a day, almost a quarter of the nation's output.

In Russia, Shell suffered a setback at the hands of OAO Gazprom when the state-run company in 2007 completed its purchase of a majority stake in the Sakhalin-2 oil and gas project. That cut Shell's stake in half to 27.5 percent.

Shell slashed its proven oil and gas reserve estimates in January 2004, which led to fines, investor lawsuits and the removal of the company's top three executives, including Chairman Phil Watts.

The company will publish last year's reserve replacement ratio, which states the percentage of production replaced by new discoveries, in its annual report. The company is also due to give a strategy update on March 17.

To contact the reporters on this story: Fred Pals in Amsterdam at fpals@bloomberg.net; Eduard Gismatullin in London at egismatullin@bloomberg.net

Last Updated: January 31, 2008 12:04 EST