|PIC1|Royal Dutch Shell posted record European company earnings of $27.6 billion (13.9 billion pounds) in 2007, but fourth-quarter profit missed forecasts as a fall in production dampened the benefit of high oil prices.

The world's second-biggest non-government controlled oil company by market value said on Thursday its current cost of supply (CCS) net income, which strips out changes in the value of fuel inventories, rose 11 percent to $6.7 billion in the final quarter of 2007.

Excluding a net gain to non-operating items of $963 million, fourth-quarter CCS net income was $5.74 billion, compared with an average forecast of $6.1 billion in a Reuters poll of nine analysts.

A spokesman said its refining division had performed worse than analysts had expected.

"In the last seven quarters, Royal Dutch Shell has achieved performances that were better or in line with consensus, therefore, we believe that the current shortfall will probably be a disappointment to the market," Petercam analysts said in a research note.

At 8:50 a.m., Shell shares were down 0.3 percent at 1,784 pence, in line with the DJ Stoxx European oil and gas index.

Shell also reported higher-than-expected capital spending for 2007 and upped its budget for future years significantly, reflecting the increasing cost of getting oil and gas out of the ground.

Shell said 2007 capital expenditure (capex) was $26.6 billion, or $23.8 billion net of disposals. The Anglo-Dutch firm said in October that gross capex would be $24-25 billion, or $22-23 billion net of disposals.

Shell said in slides published on its Web site that capex for 2008 would rise to $28-29 billion, excluding acquisitions, and that after disposals the figure would be $24-25 billion. In October it predicted medium-term capex of around $22-23 billion, net of disposals, and analysts had expected an increase.

Shell said it expected production to fall in 2008 if oil prices remain high and violence keeps facilities shut in Nigeria, and it declined to reaffirm growth plans to 2010.

However, Chief Financial Officer Peter Voser said on a conference call with reporters that he still expects growth of 2-3 percent from 2010.

Chief Executive Jeroen van der Veer said on the same call that Shell added "at least one billion barrels" of new reserves in 2007, around half the level Shell indicated for 2006.

He did not say whether the 2007 resource additions included unconventional sources such as oil sands, which traditionally have lower margins than conventional oil and gas reserves.