updated 5/3/2007 7:54:31 AM ET 2007-05-03T11:54:31

Royal Dutch Shell PLC, Europe’s biggest oil company, said Thursday its first-quarter earnings rose 5.7 percent, despite falling oil prices and declining profit at its production and refining arms.

Net income rose to $7.28 billion from $6.89 billion in the year-ago period, while sales fell 3.3 percent to $73.5 billion.

The main reason Shell’s results improved was due to the good performance of the stock market. The company’s corporate financing arm reported earnings of $801 million, up from $227 million last year, due mostly to the “realization of gains on the sale of the equity portfolio held by the group insurance companies.”

Production of oil and equivalents fell 6.4 percent to 3.5 million barrels per day, due mostly to lower natural gas production.

“That’s just part of the normal business,” Chief Financial Officer Peter Voser said in a conference call, adding that the company’s long-term production prospects are solid.

Shell has largely recovered from a 2004 accounting scandal in which it was forced to restate the size of its proven reserves, in part by investing heavily in non-conventional sources such as oil sands and liquefied natural gas.

KBC Peel Hunt analyst Tony Alves said the earnings looked like “a good set of results.”

“It seems to be a company on the turn,” he added.

Shell shares rose 1.9 percent to 26.40 euros ($36.01) in Amsterdam.

The company’s first-quarter results weren’t as strong as those of the world’s largest publicly traded oil company, Exxon Mobil Corp., whose profits rose 10 percent to $9.3 billion. But they compared favorably with those of top European competitor BP PLC, which reported a 17 percent drop to $4.66 billion. BP Chief Executive John Browne resigned this week.

Shell’s dropoff in production was also partly due to a loss of 80,000 barrels of oil a day at its Nigerian operations in March, which were already partially shut down due to violent protests by rebel groups seeking a larger share of oil profits.

“There have recently been some improvement in the security situation” in the western Niger Delta, Voser said.

But he said that the company’s facilities had “seen considerable damage” and it was impossible to predict how much, if any, of the 178,000 barrels per day Shell is missing throughout Nigeria per day would be restored before the end of the year.

That message was underscored by reports Thursday that gunmen kidnapped at least 18 people in less than 24 hours in three separate attacks in Nigeria, including a Dutch man taken from a bar in the southern town of Warri. The bar’s owner described the man was an unemployed oil worker but it was not immediately clear if he was associated with Shell.

Another Shell worker in Nigeria — a Filipino — was kidnapped and released earlier this year, the latest in a long line of problems Shell has had in Nigeria, including attacks on pipelines and offshore platforms.

Shell said selling prices in the quarter fell to $54.45 per barrel from $57.39 per barrel a year ago.

Profit from oil production fell to $3.51 billion from $3.74 billion in the year ago period.

At refining, earnings were $1.80 billion compared with $2.1 billion a year earlier. Despite better margins, especially at Shell’s U.S. West Coast operations, the company was hurt by higher costs and lower plant utilization rates.

Among other operations, Shell’s chemicals division performed well, with earnings of $527 million compared with $183 million a year ago.

Gas earnings were $39 million higher at $860 million, despite a fall in prices, because gains from divestments outweighed impairment charges.

Last year, Shell agreed to sell half of its 55 percent stake in the Sakhalin island project to Russia’s OAO Gazprom for $4.1 billion, under heavy pressure from the Russian government. Shell is now a minority partner in the project, with 27.5 percent. Exact terms of the negotiation have not been disclosed but are presumed to have been unfavorable for Shell.

“This transaction will be accounted for in the second quarter (of) 2007,” Shell said.

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