AMSTERDAM - A marked deterioration in Royal Dutch Shell PLC's refining operations contributed to a modest fall in fourth quarter profits at Europe's biggest oil company.

Over the previous year, Shell said its net profit fell 4.3 per cent to $6.50 billion as an advance in the production side of its business was offset by a loss in its refining operations.

Though the company's production arm was helped by higher oil prices, Shell said its refining operations swung to a loss, and it paid more taxes.

A more detailed look at its statement shows that Shell's production profits rose 29 per cent to $6.57 billion despite a drop in production from 3.49 million barrels per day to 3.31 million barrels, in part due to asset sales.

Shell's "downstream" operations, which include its refining arm and chemicals sales, lost $244 million, compared to a profit of $411 million a year ago. The company also paid nearly a billion dollars more in taxes.

"Our fourth quarter results were impacted by a sharp downturn in industry refining margins and North American natural gas prices," said Chief Executive Peter Voser.

Voser added that the global economy and energy markets are likely to "see continued high volatility" in 2012.

Shell's shares fell 2.5 per cent at the start of trading in London, to 22.68 pounds.

Investec analyst Stuart Joyner said the results were below estimates, and Shell's costs were higher than forecast.

"We expect to see material downgrades to the consensus estimate numbers for 2012 and 2013," he said.

However Voser said he was "pleased" with the company's performance, and released new financial targets, including increasing production by 25 per cent, from 3.2 million barrels per day on average in 2011, to 4 million barrels on average by 2018.

In 2009, Shell had targeted an increase to 3.5 million barrels per day by 2011. Although it missed that goal, its operations have benefited from an emphasis on investing in new production, and from selling off refining operations: Shell said Thursday it generated $43.2 billion in cash flow in 2011, up from $33.3 billion in 2010, as several new projects have come on line.

As a result, Shell said it will increase its quarterly dividend a cent to $0.43 in 2012, its first increase in three years.

Shell plans $30 billion in capital expenditures in 2012, 80 per cent of it on production projects, the bulk in North America and Australia.