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Oil giant Royal Dutch Shell has reported a dip in third quarter earnings, with higher costs and lower production volumes having hit its performance.

In a statement today the company confirmed that its earnings, on a current cost of supply basis, dropped by eight per cent year-on-year over the period – falling from $6.9 billion (£3.4 billion) in 2006 to $6.4 billion (£3.1 billion).

News of Shell's lacklustre performance comes after rival BP reported a 45 per cent fall in its third quarter profits earlier this week, with a slowdown in production also partially to blame for the drop.

Nonetheless Shell appears to be in a better position than its competitor, with the company's reported income climbing by 16 per cent to $6.92 billion (£3.38 billion) as the impact of higher oil prices partially offset higher costs and lower production.

The company said that its production levels fell to 3.137 million barrels of oil equivalent per day (boepd) during the third quarter, down from the 3.251 million boepd reported at the same time last year.

Shell revealed that its earnings were also dented by higher exploration expenses and lower profits from the Sakhalin oil and gas project, with the company having sold its majority stake in the project to Russia's Gazprom earlier this year.

However Shell chief executive Jeroen van der Veer remains upbeat about the company's performance.

"Given the weaker industry refining margins we have seen in the quarter, these are satisfactory results, underpinned by Shell's operating performance," he said.

"We continue to rejuvenate our portfolio with sustained investment in new legacy assets, and through disposals," added Mr Van der Veer, who stressed that the execution of Shell's strategy remained on track.

Shell confirmed that it intends to declare its dividend to shareholders in dollars, rather than euros, in the future and said it had decided to pay a dividend of 36 cents a share for the third quarter - a 14 per cent increase on the previous year.