Royal Dutch Shell posted stronger than expected first-quarter profit thanks to higher oil prices and wider margins in its refining business, boosting hopes for a more generous dividend policy.

Europe's largest oil and gas company by market value said on Thursday current cost of supply (CCS) net income rose to $6.9 billion in the first three months of the year.

Shell said oil and gas production in the first quarter fell 3 percent compared with the 2010 period, due to divestments.

Analysts said the ramp-up of new projects in the second half of the year and strong oil prices could allow Shell to boost its dividend as some rivals struggle to keep theirs constant.

Gearing remains low and, with the expected growth in cash generation from H2 2011, supports dividend growth from Q1 2012, in our view, Citigroup analyst Alastair Syme said in a research note.

Shell shares were up 1.0 percent at 0930 GMT, compared with a 0.1 percent drop in the European oil and gas sector <.SXEP>.

In recent years, Hague-based Shell has invested heavily in big new projects such as Qatargas 4, which are now beginning to come on stream.

Brent crude was 38 percent higher in the first quarter compared to the 2010 period, while global refining benchmarks tripled.

Shell, the largest shipper of liquefied natural gas, also benefited from higher LNG prices following the Japanese earthquake, which was expected to lead to higher LNG demand in that country as nuclear power is scaled back.

The Anglo-Dutch company's result compared well with British rival BP , which posted a 2 percent fall in replacement cost net profit on Wednesday, on the back of an 11 percent fall in production after selling assets to pay for the Gulf of Mexico oil spill.

Investec analysts said they expected Shell to continue to outperform BP during 2011.

Italian rival Eni reported a 6 percent rise in replacement cost profit, although the result was muted by the weak dollar and a fall in output due to the conflict in Libya.

ConocoPhillips reported a 43 percent rise in net income.

Like BP on Wednesday, Shell said it would be taking hundreds of millions of dollars in charges related to hikes in British oil taxes, adding it could scale back North Sea investment.

Stripping out one-offs, CCS earnings were $6.29 billion, compared with a forecast for $5.87 billion in a Reuters poll.

Industry leader Exxon Mobil , also due to announce first-quarter earnings on Thursday, was expected to post a 59 percent jump in net income, according to I/B/E/S estimates.

Replacement cost and CCS net income strips out unrealized gains related to changes in the value of oil inventories and so is comparable to net income under U.S. GAAP.

(Additional reporting by Jon Hopkins; Editing by Dan Lalor)

Libya Japan