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* Shell to allocate 85 pct of new shale capex to oil -exec

* Energy firm expects shale business profits in 2019

* Shell to decide on Argentina shale development by year end

By Ron Bousso and Ernest Scheyder

HOUSTON, March 8 (Reuters) - Royal Dutch Shell Plcis focused on increasing its U.S. shale operation's oilproduction while slowing investment in lower-margin natural gas,an executive said on Thursday.

The Anglo-Dutch company aims to boost its overall shaleproduction by 200,000 barrels of oil equivalent per day (boe/d)to 500,000 boe/d between 2017 and 2020, mostly in the UnitedStates with some production in Argentina.

Although the shale business has yet to generate a profit, itis expected to do so next year, Greg Guidry, who heads Shell'sshale operations, told Reuters on the sidelines of the CERAWeekenergy conference in Houston.

Shell, like Exxon Mobil Corp and Chevron Corp, aims to make shale production a driver of growth in thenext decade. But today most of its output is natural gas, whereprofit margins are lower.

As a result, around 85 percent of Shell's shale budget forat least the next two years will go toward new oil resources,particularly in the Permian oilfield of West Texas and Canada'sDuvernay Basin, Guidry said.

"We're not spending very much at all on the dry gas assets,"Guidry added. "Liquids is growing very rapidly because that iswhere our capital is going."

After years of faltering performance and increased spendingin shale, Shell has in recent years transformed the business toadapt to the sharp drop in oil prices since 2014. Shale oilwells today can be profitable with oil prices above $40 a barreland gas above $2 per million British thermal units, Guidry said.

Shell has earmarked between $2 billion and $3 billion peryear, roughly 10 percent of its capital expenditure, for shaleuntil 2020.

Gas production will remain largely flat in the coming yearsand would be boosted in Canada's Montney basin once Shelldecides to go ahead with a major natural gas liquefaction plantin British Columbia known as LNG Canada, Guidry said.

In its eastern U.S. Appalachia gas fields, an increase inoutput would require construction of pipelines to deliver fuelto demand hubs, he added.

Shell also is advancing shale production in Argentina's VacaMuerta basin and will make a decision on developing a productionwell later this year, Guidry said.

Shell's 2016 acquisition of BG Group in 2016 boosted theshare of natural gas to 50 percent of its global fossil fuelsoutput and made it the world's largest natural gas trader.(Reporting by Ron Bousso and Ernest Scheyder in HoustonEditing by Gary McWilliams and David Gregorio)