Royal Dutch Shell, the world's third largest oil group, has reported a 34 per cent rise in second-quarter profits to $5.2 billion in its first set of results as a unified company.

But in a gently rising market this morning, shares in Shell had slipped 18p - or more than 1 per cent - to 1,772p.

The stock slipped as Shell confirmed a hike in the amount of capital it had invested in the second quarter to $4.1 billion, from $3.4 billion in the same quarter last year.

The group said it had yet to set a level for its overall capital investment programme for next year and beyond, but said its spending would reflect its involvement in new projects such as its gas developments in Qatar, Nigeria and Libya as well as the expected high construction costs of its involvement in big projects.

It said its spending programme would also reflect its involvement in Sakhalin II, the Siberian gas project where the budget has now doubled to $20 billion.

As it said that its future spending programme would be "subject to review", the group noted that: "The latest estimate for Shell's 2005 total capital investment, across all its business activities, remains some $15 billion (excluding the investment by the 45 per cent minority partners of Sakhalin II).

Shell also reported this morning that it would increase expenditure on exploration for this year and next to $1.8 billion a year.

As it stuck to its production outlook of between 3.5 million and 3.8 million barrels of oil a day, Shell took a confident line on its second quarter numbers this morning.

The group is promising to use some of the $6.3 billion of cash it has generated this quarter to reward shareholders with a buyback programme that is expected to be worth between $3 billion and $5 billion this year.

Jeroen van der Veer, the chief executive, said: "Our good earnings and cash generation can be used for dividends, investments and share buybacks. The company continues with its strategy of 'more upstream and profitable downstream'. We focus on project management, operations, customers and technology."

Shell increased revenues from its exploration and production operations by nearly 48 per cent from $1.9 billion in the second quarter last year to $2.7 billion for the three months to the end of June.

This takes revenues from exploration and production over the past six months to $5.7 billion - a dramatic increase on the $4.6 billion for the first half of 2004.

Like its rival BP, Shell derives a large part of its revenues from this part of the business. It results this time included a net charge in the exploration and production business of $149 million, including a $270 million charge relating to the valuation of some of its UK gas derivatives contracts.

Also, thanks to the recent surge in the oil price Shell - also like BP - reported that its oil products unit had again performed well. Revenues in this division during the quarter came in at more than $2 billion, up on the $1.5 billion in the second quarter of 2004.

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