殼牌 (SHEL) 2001 Q1 法說會逐字稿

Welcome to the Royal Dutch/Shell group's first quarter 2001 results conference call on the 3rd of May 2001. Throughout the day's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the presentation, please press the * followed by the 0 your telephone for operator assistance. I will now hand the conference over to Mr. Simon Henry. Please go ahead, Sir.

Good afternoon. Welcome to first quarter results teleconference for the Royal Dutch/Shell group. I would like to start by introducing myself to those I have not yet met. My name is Simon Henry, and I have recently taken over from [_______________] as head of Investor Relations for the Royal Dutch/Shell group. In line with previous practice, I will briefly highlight some of the features of the results and will then take your questions in the usual way. Before starting, I'd just like to remind you that if I make forward-looking statements, such as projections or latest estimates, these are subject to the risk factors associated with our business, and I refer you to the disclaimer carried on our website shell.com at the bottom of the investor relations home page. Highlights for the quarter: Our adjusted current cost of supplies earnings in the quarter at $3,855 million were a fifth consecutive quarterly record. This represents an increase of 8% over the previous quarterly record and 23% compared with a year ago. While still reflecting strong oil and gas prices, the results continue to benefit increasingly from the improvement programs of the last few years and particularly from the cost improvements and the underlying growth in volumes. ROACE on a CCS basis, for the rolling four quarters, was 20.7%. On an adjusted basis, the crude figure was 21.3%. On a non-adjusted basis, the contributions from the businesses were 48% from exploration and production, 11% from gas and power, 13.5% from oil products and 6% from chemicals. On a normalized basis, the group's return on average capital employed remained above remote road map target of 14%. These results reflect the inherent balance and the strength in the group's overall portfolio across businesses and across geographies. Overall, we continue to deliver on

our promises. In addition, this has been a busy quarter in the continuing process of portfolio management. The acquisition of Fletcher Challenge Energy in New Zealand was completed successfully, adding high quality assets and around 13,000 barrels of oil a day and 200 million standard cu feet a day to the upstream portfolio which will be recognized from the start of the second quarter. A tender bid to acquire Barrett Resources in the United States was launched in early March. This was followed quickly by the announcement of the proposed downstream joint venture in Germany with DEA [_______________] to a leading position in Europe's largest oil market. In China, we purchased 14% of the shares of the IPO of China National Offshore Oil Corporation. This transaction is related to a strategic alliance that is expected to lead to investment opportunities in both exploration and production in the gas and power businesses. The sale of the Kraton Polymers business concluded the major chemical divestment program which was begun back in 1998. Taken as a whole, these transactions are just one manifestation of the group's determination not to sit back on the current results. The emphasis remains very much on disciplined investment and long-term efforts that will continue to generate excellent shareholder returns well into the future. In February, the parent companies began their first share buyback program. In the quarter, shares were purchased under these programs for total consideration of $1.4 billion, and this represents just above the minimum required in this year by the Dutch regulations. Please remember that we also purchased a further $0.5 billion of shares to hedge our employee share option scheme. And we don't dilute our issued share capital base by split dividends or any other means. I'd just like to remind you that we don't ordinarily update you on our detailed business [_______________] during quarter one. We will

provide a full update on our progress in the second quarter results announcements. I also draw your attention to two reporting changes this quarter. We have amended reporting of the business segments to exclude the effects of financing, now included in the corporate segment, and minority interests which are now shown separately. We have also made a minor change, the destination of capital investment, to report transparently the loans to associate companies. In both cases, the intention was to improve the transparency and comparability of our reported information with our competitors, and you can find information from previous periods, restated on a comparable basis on website at shell.com. We have also amended the way in which we calculate the refinery reference margins to more accurately reflect the current product yields and specifications. The impact on the restated figures for prior periods here is minimal, and again details can be found on the website. Turning now to the businesses. The exploration and production business set a new quarterly record for earnings. Underlying oil production excluding the effects of divestments and PSC's rose by 1% compared to a year ago. Notable increases came from Nigeria at 25,000 barrels a day; Oman, 20,000 barrels a day; Abu Dhabi, 18,000 barrels a day; and Denmark of 12,000 barrels a day. In gross terms, these were offset by the divestments which were mainly in the UK and USA, representing 67,000 barrels a day. That includes [_______________] and Altura divestment, and also offset by natural field declines. Natural gas production available for sale at 9,916 million standard cu feet per day was just below the group's highest ever quarterly production. The underlying increase compared

with last year was 6%, again excluding divestments and PSC effects. We saw increases in Oman at 280 million cu feet a day and Egypt at around 115 million cu feet a day. And there were increases of around 100 million cu feet a day in each of Nigeria, UK, and the Netherlands. These more than offset the field declines in the USA and lower [_______________] in Germany. The average brent oil price at $25.80 a barrel was 4% lower than a year ago. The realized oil price for the group outside the USA was $24.98 a barrel and in the USA was $24.24 a barrel, giving a weighted average of $24.88, which is an overall decrease of 5% compared with the first quarter last year. Gas prices rose strongly relative to the comparative period. In the US, $7.67 per million standard cu feet and outside the US $2.72 per million standard cu feet. The global average gas realization was $3.66 which is an increase of 65% over the comparative quarter. When considering the realized gas prices, it is important to remember both the US and European markets have shown significant improvements. In the USA, the overall supply shortages and the West Coast demand has created short-term volatility with prices varying widely from the Henry Hub marker on a regional basis. In Europe, prices have been less volatile. However, the increase seen reflects both the linkage of price to refined products and the inherent time lag in the price [_______________]. Please note, you can find the history of the realized oil and gas prices on our website. The exploration expense of 163 million was lower than the 211 million in the comparative period. The relatively lower

expenditure is primarily the result of phasing projected spend for the year, remains in line with the cost improvement target of 800 million. Final investment decisions were taken on fourth LNG train on the North West Shelf and for the Halfdan field in Denmark. Moving on now to downstream gas and power, quarterly adjusted CCS earnings $355 million and new LNG equity sales volume of 2.2 million tonnes were both records. The LNG volume in Nigeria and Oman continued to build up with the Nigerian plant reaching full production, and Oman is around three-quarters of capacity. The two plants are targeted to deliver on 100% basis in excess of 180 cargos this year, and both are well positioned to take advantage of spot sales opportunities as these arrive. The LNG business overall also benefited from the high margins as a result of time lag price linkage to that of crude oil. Contribution from the business in the USA is benefited from improved trading result mainly in power. Also in this quarter, the consumer gas business mainly operating in the USA and Australia was transferred to the new Shell consumer business whose results are now reported under other industry segments. Turning now to the oil products, adjusted CCS earnings at 958 million represented a 62% increase on first quarter 2000. Within this total, the performance of the business outside the USA was outstanding with improving results across portfolio in refining, marketing, and trading. The industry refining margins were higher in the USA and Europe than a year ago, but sharply lower in the Asia-Pacific region. Total refinery throughput was 4% higher, with the high throughputs in Asia more than compensating for the European closures and divestments. The Asian throughput benefited from third party processing deals. The quarter saw

planned turnaround activity in the UK, France, and Thailand with a comparative quarter, including high overall level of both planned and unplanned shutdowns, in particular in Australia. The second quarter of this year will see similar turnaround activity in the Netherlands, Canada, and in Singapore. As supply price pressures ease during the quarter, the overall marketing margins continued to improve. Improvements in Latin America and South East Asia were partly offset by lower margins in UK and Australia. Contribution from the trading business remains substantive, and the positive effect of leveraging the inherent skills in this business across the other businesses can be seen in the results of both downstream gas and in chemicals. These results were achieved in a less volatile market than previous quarters demonstrating the relatively robust nature of this income stream. In the United States, Equilon and Motiva both continued their underlying performance improvements. Motiva benefited from a positive refining environment and was ahead of planned earning targets for the year. Equilon is also benefiting from the refining margin environment. However, results reflected by the aggressive competition in the West Coast retail markets which has impacted the results of all the main competitors too [_______________] the very high cost of utilities, including field gas. Deer Park was in a planned shutdown for much of the quarter to tie in the new Maya 2 crude processing and upgrading facilities. The unit is now up and running, making a healthy contribution to the second quarter. This further consolidates our important joint venture with Pemex, the Mexican State Oil Company. The chemicals adjusted earnings of $53 million were significantly impacted by the difficult global trading conditions. High feedstock costs including the cost of gas in the USA, the intense competition as a result of capacity significantly exceeding demand in many

markets, and a weaker euro all contributed to the reduced unit margins. These effects far outweigh the improvement in the [_______________] margin in both USA and Europe. In addition, unit fixed costs have shown an increase relative to last year as a result of turnaround activity. Basell, the joint venture with BASF has been making good progress on cost reductions. Special credit in the quarter in chemicals relates primarily to the realization of cumulative currency translation differences in the Asia-Pacific region following the repatriation of capital to the parent companies in the completing phase of divestment program. The corporate segment is the area most affected by the reporting change that I mentioned earlier. The first quarter includes a lower net interest cost as a result of the high cash balance. This was, however, more than offset by two one-off effects. Additional withholding tax incurred on high dividends remitted from the US holding company, and there was a corporate effect from the UK tax planning. Both effects are the corporate side of normal tax planning that benefits the main businesses, and in this quarter there was an offset in credit primarily to the E&P business. As a guide [_______________] following the change in segmented reporting, the normal level of negative contribution from the corporate segment in the quarter is expected to be in the range from $100 million to $150 million, but of course, this is a notoriously challenging figure to project. Capital investment for the quarter was $2.764 billion, almost double the level of the comparative quarter. The current quarter included the effect of the billion dollar acquisition of the Fletcher Challenge Energy, which was included in the projected total investment for 2001 of $12.2 billion as advised in the group strategy presentation in December 2000. This total

remains the expectation excluding any impact from further transactions. The group's effective tax rate increased slightly from 42% to 44%, mainly a result of tax credits recorded last year. The underlying rate excluding the effect of special one-off items showed a slight decline of around 1%. Before closing, I'd just like to quickly draw your attention to the earnings per share calculation at the end of the results announcement. For the first time in a while, several decades, the number of shares in issues changed during the quarter, and the EPS is being calculated according to the weighted average of number of shares in issue on a daily basis. Some events of interest to mention, the two parent company AGMs will be held on May 17, 2001, in the Hague and London. On June 14, 2001, and June 15, 2001, we will be holding business presentations in London and New York respectively covering the chemicals and renewables businesses. I'll be joined in a few minutes for the Q&A session by Steve Hodge, Director of Finance, in order to address any questions you may have on the portfolio transactions the group is currently involved in. If you would like to ask any questions on these issues, please could you leave them for after we have covered the quarter. With that, I would like to take your questions. Operator, could you help out with the instructions, please? Thank-you.

Thank-you, Sir. If any participant would like to ask a question, please press the * followed by the 1 on your telephone. If you wish to cancel this request, please press the * followed by the 2. Your questions will be polled in the order they are received. One moment for the first question. Thank-you. The first question comes from Mr. Alan McDonald. Please state your company name followed by your question.

Hi. It's Alan McDonald of UBS Warburg. Hi, Simon. I have a question about the capex. You say that your projection remains in place, but clearly this is, even taking seasonality into account, a very low number, ex-Fletcher, compared with the run rate that would be required to reach your projection. In particular, you looked very low in the downstream and chemicals areas, and I was wondering why that may be? And what were the projects that you are expecting that would pick the run rate up later in the year?

Yeah. Thanks Alan. I would reiterate we do still expect to meet the $12 billion target. The impact on chemicals and oil products for the first quarter is largely a phasing effect. We do expect in oil products to pick up later in the year. There are some investments in Canada from the Scotford refinery to come, and overall, the majority of the oil products portfolio this year is in the marketing area. Those projects by their nature have an element of phasing in them. On the chemical side, around 750 million is the target, and we are on track to meet the total by the year-end. EP is, in fact, the bulk of the spending. We are behind on the phasings in the UK and Nigeria. We do expect to catch up in both areas, and if you may recall, we do have some flexibility in the EP area. We do expect to find a good home for that money.

Okay. Thanks Simon.

Yeah, thanks.

Thank-you. The next question comes from Mr. Jeremy Elden. Please state your company name followed by your question.

Good afternoon. It's Jeremy Elden from Lehmann Brothers. I wanted to followup, if I may, on the capex question. Could you give us an indication of your current thinking on the next five years of capex? Are we likely to see this sort of 12 billion figure increase in line with the growth you are expecting in the business? And separately, could you give us a rough split of the profitability of gas and power between the LNG business and the power generation business?

Okay. Thank-you, Jeremy. The 5-year capex plan is likely to remain around $12 billion as we stated in the group's strategy presentation back in December 2000. We don't see any indication of a need to change that. We might turn the organic investment program. We have always stated that that $12 billion does not include acquisitions or other options that may present themselves. On the question about gas and power, the contribution from the LNG business accounts for almost all the gas and power performance at the moment. The power business remains at an early stage of development largely on the InterGen joint venture and many of the projects are not yet on stream. The LNG performances by the far the most significant factor and particularly in this quarter.

Thank-you, Simon.

Okay?

Yeah, fine. 00:1957 IMON HENRY: Thanks.

Thank-you. The next question comes from Mr. [_______________]. Please state your company name followed by your question.

Hi Simon. This is [_______________] from [_______________]. I think you earned yourself a speed record in reading out these things. I must admit I missed a little bit of the ROACE's. Maybe, you can repeat them for the sectors. I've also a related question regarding the capex. Your capex downstream gas and power went [_______________]. I wondered is that because of some [_______________] projects? Oh sorry, the depreciation in the downstream gas and power should go up because some of these Oman and Nigerian projects have been completed whereas your capex in your Deer Park refurbishing, is it still to come or has it been showed yet? And I also wondered about the exploration cost being particularly low. Has that something to do with what you just mentioned about Nigeria and the UK, or are there other reasons?

Okay. Burt, thank-you. Several questions, I'll try to take them as I can. Firstly, one of these was the Deer Park refurbishment. Deer Park is a 50:50 joint venture with Pemex and is an associate company. That's why we would not recognize the capex in our reported results anyway, only if we had to inject new equity. ROACE for the sectors, apologies if I did go a little too quickly, just to repeat, this is on an adjusted CCS basis, so this is after removing the impact of specials. Exploration and production was 48%, gas and power 11%, oil products 13.5%, and chemicals 6%. We don't report normalized return on capital ordinarily this quarter. And going back to the other questions. Capex in gas and power, again InterGen is accounted for on an associate basis, so you will not see additional depreciation in the gas and power business per se.

Thanks very much.

And I think the same applies to all [___________________] Nigeria LNG too. Okay? So does that cover everything?

Okay. Thank-you. The next question comes from Mr. Stanley [_______________]. Please state your company name followed by your question.

Hi. Stan [_______________] from [_______________]. I'd two questions. One is on the retail and oil products. The retail results seem, both in the US and outside the US, across industries still to be difficult, particularly, as you mentioned, in spots like California just due to the very large price hikes you've had over the last six quarters. That must be compounded by the dollar strength versus most of the other currencies in the world. And I just wonder if you could lend any color to that aspect of the business, and if you see potential going forward as things might normalize, and also make a comment on the lube business in the same format.

Okay. Thanks Stanley. The retail business in the US has indeed been under pressure particularly on the West Coast, but I think, it's fair to say that outside the US, the first quarter was an outstanding success for the retail business, particularly in Latin America, South East Asia. Europe, we've seen a recovery in one or two key markets such as Germany, and we have certainly seen good contributions again from Argentina, Malaysia, Philippines, and several other markets around the world. The dollar strength that you mentioned does indeed reduce our reported retail results at the dollar level, but then, that just goes to demonstrate what a strong business it has been. The average effect of the dollar has been about 7% outside the US on a currency basket basis, and that will pull down our reported results which were still a record. Lubricants, that scenario of the business, I don't have specific details on at this moment in time.

Okay. Could I ask one separate question? Just broadly speaking, there are two pressures, I think, on the head count. One is probably, in some cases, to continue making a lean and more productive organization, and on the other hand, there are areas probably which need some staffing up as growth starts to appear. Is the overall head count stable or is it still declining?

The overall head counts in the quarter were roughly stable.

And you would expect that to continue more or less.

It's not something that we necessarily target as a business. We look more at the overall cost base, but yes, you do have a point that in some of the businesses, the cost improvement targets will require rationalizations, and other parts of the business, particularly gas and power and some of the E&P projects coming on, we will be looking to move people into that area, but overall, we don't target the head count.

Thanks very much.

Okay.

Thank-you. The next question comes from Mr. Paul Ting. Please state your company name followed by your question.

This is Paul Ting of Salomon Smith Barney. Let me just, two questions please. First of all, you mentioned the fact that Nigeria and Abu Dhabi showed some year-over-year production increase. Given the quota decrease that we are looking at within OPEC, can you quantify, perhaps, some of the impact that on your maybe second or third quarter as a result of quota decrease, whether it's going to impact your production target? And second question relates to the refining downstream side. Several refineries have chosen to accept [_______________] licensing procedure for RFG gasoline. Can you give us an update on your later thinking, whether there is any plans on your part to perhaps pursue the same strategy?

Okay. On the OPEC quota decrease in Nigeria and Abu Dhabi, the increase that we've stated was versus Q1 last year. We don't expect too much of an impact between Q1 2001 and Q1 2002. The Nigerian increase also included new fields coming onstream, so it was not all.

Any sequential impact, Simon, Q2 versus Q1. Any short-term impact that you see?

No, not that I can see at the moment. Okay, and then the [_______________] question, I think it is probably inappropriate to comment at the moment.

All right. Thank-you very much.

Okay.

Thank-you. The next question comes from Mr. Peter Nichol. Please state your company name followed by your question.

Hi Simon. This is Peter Nichol from ABN Amro. A couple of questions. A couple on the E&P side first of all, maybe just clarify. First of all you sort of referred to discovery in Brazil, and I was just wondering which block in particular, you are referring too. And the other was, given that you're saying your average price realization has no declined year on year. Just wondering when you start to see the PSC contracts, volume impacts go back the other direction. And the other one [_______________] just given the amount of the noise around the US downstream results, I wonder if you could sort of give us any indications of the magnitudes of the various impacts, given that you're saying you're sort of on track to sort of deliver [_______________] improvement in Motiva and yet despite such a strong increase in the refining margins, we haven't sort of seen much improvement in the contribution?

Thank-you, Peter. First question, Brazilian blocks. BC-10 A, BC-2 [_______________] Blocks. Second question was the PSC contracts?

Yes.

When will we see an impact going forward? We don't expect to see that impact affected or shown in the results as the price moves. There is no lag effect. So we will be seeing some at the moment in the second quarter, but it's almost directly related to the prices you see. The noise in oil products. First quarter effects of the shutdown in Deer Park was around $30 million on the bottom line. That will not be repeated obviously. The impact of the current retail composition on the West Coast is difficult to project, as in fact is the impact of the US refining margin changes. There is still quite some volatility there. So, those items tend to be difficult to project going forward. There is around $10 to $20 million outside the alliances, but we would not expect to be repeated as reported going forward. Okay, does that cover everything?

Just go back on the PSC. What I don't understand is your saying that, I mean, I can see the gas price went up, so your PSC volumes could go the other direction, but your oil price realization, we saw, went down and yet, you are still seeing sort of a negative impact being corrected for on your actual production versus your underlying, or is it the other divestments swamping that impact.

Yes, the other divestments are swamping that impact [_______________] same effect already turned around on oil not gas.

Okay, great.

Okay?

Yeah. Perfect.

Thank-you. The next question comes from Mr. [_______________]. Please state your company name followed by your question.

Yeah, [_______________] from CSFB. Hello there, Simon. A quick question on LNG if I may. You talked about sales volumes in Q1 of this year at 2.2 million tones. Can you just tell us what sort of proportion of that was sold spot, and of the spot sales, how much that went into the US, please?

Okay, we sold out of Nigeria, I think it was three spot cargos and out of Oman, there were four spot cargos. I don't have any figures for Asia-Pacific. In fact, there were no other spot cargos for Asia-Pacific. Okay, the Nigerian cargos did go to the US, not the Omani cargos.

Sorry, what about Oman?

The Omani cargos did not go into the US.

Just three out of the total?

Yeah.

Thanks, Simon.

Okay.

Thank-you. The next question comes from Mr. Steve Turner. Please state your company name followed by your question.

Yeah, Steve Turner from Commerzbank. Just continuing on the LNG thing, I wondered if you could give us any guidance on the [_______________] year tonnage for your LNG equity sales. Secondly, you've highlighted a couple of times, the impact of higher trading profits. I guess that you are not going to tell us what those the total trading profits were, but could you give us any guidance on the magnitude of the improvement versus last year from your trading profits.

Okay, thank-you. The LNG sales are by their nature, seasonal. Particularly, in the middle of the year, we do see a reduction. In capacity terms, we do expect to see Oman increased towards full capacity towards the end of the year. We are looking at about 180 cargos on a 100% basis, and our equity sales share should be around or just above 8 million tonnes. Sorry, could you just repeat the second question?

I was wondering whether you could give us any guidance on the magnitude of the improvement in trading profits year on year.

You're right. We don't ordinarily disclose the absolute, but the improvement, are you looking at just the power trading or the overall trading business within in the group?

What comes first? First of those trading profits on the gas [_______________] and oil products. Is that fair?

Oil products have been the majority of the trading business, that is true. Actual improvement within oil products is fairly modest year on year, and the power trading would be, I think, around 20 million or so improvement year on year, but the power trading is more difficult to sustain.

That's great. Thank-you very much.

Okay, thank-you.

Thank-you. The next question comes from Mr. Richard Franklin. Please state your company name followed by your question.

Hi. It's Richard Franklin from Morgan Stanley. Just back on to the subject of refining, how much did the Wood River disposal, what sort of net operating volume would that account for last year, so we know what's [_______________] there, point one. And point two, I think Steve Hodge mentioned the last set of results, you are beginning to see some signs emerging of upward cost pressures within E&P particularly with regards to oil services companies. Have you seen that coming through, and what do you see the outlook looking like for the rest of the year?

Okay, thank-you. I will take the second question first, EP upwards cost pressures. The answer is yes, we do see that coming through the greats and also this company shortage of supply into the market. What we certainly do confirm is that we will meet the cost improvement targets for the year. On Wood River, we don't generally look back on a year ago's basis. It was a fairly modest contribution anyway.

Okay, thank-you.

Okay? Can I just add that I have now been joined by Steve Hodge who's with me, so if there are any questions on the various transactions, please feel free to join in. Okay, I will take the next question.

Thank-you. Once again, if you'd like to ask a question, please press the * followed by 1 on your telephone. To cancel this request, please press the * followed by the 2. The next question comes from Mr. Jonathan Wright. Please state your company name followed by your question.

Hi Simon. This is Jon Wright of Merrill Lynch. I was just looking at the E&P result outside the US. It seems particularly strong, and I wondered if there was any one-off items or one-off tax benefits that you can quantify in that area.

Okay. Not too many one-off items or one-off tax benefits that's mentioned in the corporate segment area, around $100 million one-off benefits. Other than that, the main factor is the gas price and the increased gas production.

Okay thanks.

Okay?

Thank-you. Your next question comes from Mr. Neil Perry. Please state your company name followed by your question.

Hello, it's Neil Perry from UBS Warburg. Two questions. Firstly, in other industry segments, your losses appear to be deepening. Can you explain why that is, and when you might expect it to improve? And secondly, you separated out your gas realizations by US and rest of the world. Would it be possible to let us know what your realizations were in Europe or what the improvement was in European gas price quarter on quarter.

Okay, thanks. Other industry segments deepening losses in the quarter. I mentioned we transferred or separated the Shell consumer business and then transferred over the consumer gas businesses from gas and power. At the same time, we also recognized some divisions for that in those businesses, so there are some one-off effects in that segment. Going forward, we would, for the rest of this year, expect to see a similar level of result. Couple of the businesses by their very in nature are startup, development-based businesses, where in the consumer businesses and the internet business. Investing in customer acquisition and some of the infrastructure cost you would see associated with those businesses. When do we expect to see it return? It is a combination of businesses, and we look at the businesses the same way we look at our other businesses. It is difficult to project forward when there will be a net return in what segment, but we expect all of them to apply the same standards of discipline that we apply to our main businesses. Second question, on the gas realization in Europe. The European gas price did, in fact, increase largely due to the time-lag effect. There is an approximate 6 month time-lag effect. Behind movements in gas oil and fuel oil prices [_______________] in Europe? I don't actually have a number for that available. Does that cover?

Yes, thank-you.

Okay. Thanks.

Thank-you. The next question comes from Mr. [_______________]. Please state your company name followed by your question.

It's Chesapeake Partners. I was wondering if you could give us an update at all on the negotiations for the unwinding of Motiva and the other joint ventures with Texaco.

Okay, I'll hand that one over to Steve.

We will continue, good afternoon ladies and gentlemen by the way. We are carrying on the negotiations, and we would like to get them to an early conclusion, but we are not going to complete a transaction except one which is able to help us meet our global targets. The turntable is actually driven by the larger turntable around Chevron-Texaco merger, and it's when they want to close or adopt some other course would in fact determine when we finally close this negotiation. We go a long way in agreeing the parameters around which we might restructure this [_______________], but the final pace of it is not entirely in our control. Let us say, it's a Chevron-Texaco matter.

Is it more a question of, you know, the timing in terms of completing it or the parameters such as price at this point?

Well, it's a bit of all that. We have to come to an agreement on price, but we haven't yet come to an agreement on price.

Okay. Thank-you.

Thank-you. The next question comes from Mr. JJ Traynor. Please state your company name followed by with your question.

Hi, it's JJ Traynor from Deutsche Banc. A question for Steve Hodge, please. Lots of acquisitions going on. Could you talk about what criteria you are using to set the prices for these acquisitions? Perhaps, you could talk a little bit about your group level return on capital employed targets, and whether you expect to still hit them this year.

[_______________] as yet, we do expect to hit them this year. Yes, we are running a lot of acquisitions. Yes, like any investment, some of them will not immediately return the returns that we expect over the long run upon which we have based our evaluations, but no, there is no difference in the way in which we would look at acquisitions from any other kind of investment. That's fundamentally why we don't do very many of them because the market tends to price these things wrongfully.

Can I just ask, could you just restate what your group return targets are and [_______________] debt to equity as well.

Debt to equity ratio, are you saying, JJ?

Well, the targets that you have for debt to equity ratio and the targets for return on capital employed.

What we said on return on capital employed is that the established nine businesses should earn 15% in a $14 world. Obviously in a $28 world, the E&P earns an awful lot more, but this should earn 15%. And quite frankly, if we have a business that looks as though it can't earn 15%, that's at the very least an amber light and sometimes a red light. We are a company that is not solely in established businesses. We have been growing the gas business for decades, and we as you saw, as was mentioned a minute or two ago, we've got these new businesses that we are creating, and we don't expect that overall, the return that the company will be able to deliver will be 15%. We will keep it between 12-15, and how far below 15 it goes depends on the balance of capital expenditure and investment that happens in any period. Obviously, it's well in absolute terms on the oil price. On the debt/equity ratio, the stated position that we have is that we would like to see it between 20 and 30% which is on a wide range as you could imagine. That's debt to capital employed, I'm sorry. Simon is just pointing out to me, debt to capital employed between 20 and 30%, where in that range we would want to afford at any one time is a function of how we see the future, the immediate future, and what opportunities we have got coming at us. What opportunities we've just taken up which, I think, says to you that we do feel that at the moment, it's rather too low, and we would like to see it pushing upwards. We have the tools with which to achieve that. Of course, we can change

our capital investment profile, but as was said earlier on, I believe, the 12-13 billion a year is about where we think we'll be. Acquisition opportunities do come [_______________] and if they are right for us, we take them, but if that doesn't absorb the debt, then we have our share buyback program which we will be able to move up and down as our view of the conditions in the future changes and as the cash generation in the business changes.

Okay. Thanks very much.

Thank-you. The next question comes from Mr. [_______________]. Please go ahead with your question.

Yes, good morning or good afternoon [_______________]. [_______________] bank. I have some questions about chemicals. First of all, could you give the impact on sales of the divestment because the effect seems to be much bigger than in the first quarter of last year? Secondly, what was the bottom line effect of the extra turnaround at [_______________] and chemicals? And finally, can you tell us something about what was the impact of the transfer of the consumer gas business from [_______________] downstream gas and power to the other segment? What was the effect on the downstream gas net profit?

Okay. Thank-you. I'll take the last question first. The impact of consumer gas in this particular quarter was around $20 million although that did include one or two of the one-off effects that I mentioned earlier, including some debt provisions. Effect on sales of the divestment program in chemicals? The sale transaction, I think, came in at the beginning of Q4, so the sales proceeds in the [_______________] would have been equity accounted would have been not in the results. I'm not sure, if you're actually looking against Q4 or last year in January.

Alright, I'm comparing the change in Q4 when chemical sales declined by, I had something like 13 or 15% and then in this quarter, it's declined by 23%.

There is a price effect in there. I'm not sure how much of this has been driven by the divestment program. It's not something we would concentrate on. The underlying sales volumes have been flat. It's one thing that I can say, and we are being effected by general demand in the market which has generally been softer. The actual sales would have been significantly impacted between Q4 and Q1 by that turnaround activity. The impact on the bottom line of the turnaround activity is not something that we would generally disclose. I'm sorry, [_______________] asking the question is not necessarily [_______________] business. Is that okay? Does it cover the question?

Okay.

Thank-you. We have a followup question from Mr. Stanley [_______________]. Please go ahead.

Hi, Steve.

Hi Stanley.

I thought, I don't know if it's your favorite subject anymore, thought I'd ask about Australian gas. I assume that the turning down of your deal was specific to the deal that you are still going to be an active player in Australia since you have bought a bit of property. There seems to be in the industry now a lot of moving parts as your company representative pointed out, so within six months Northern Australia proposal to move gas to the US. The PNG project versus some larger projects from Northern Australia down to center of Australia, the Gorgan project of which I guess Chevron-Texaco if they get their clearance from the FTC, will have at least more volume power, but not necessarily customers or economics. And finally, you know, distantly related to your hope that you'll be involved in China in some way in the gas business in a very significant way. So, I don't know, just kind of a post mortem without being morbid about it, but just what's from here, what do you see is the picture going forward for Shell.

[_______________], we are obviously extremely disappointed with that turndown from the Australian government, but the country remains what it has been for decades. A really important place for us to invest and to develop our gas business, and I understand you've listed, as well as I could have done all of the various plays that exist in there. Now quite and frankly, the proposal we have made to Woodside was designed to bring to fruition, in what we felt the most efficient way possible, a lot of those plays. They haven't gone away, and now we've got to think about how we are going to move that business forward, but for sure, we're not in a mood to feel that this is the end in any sense of the decades that we have put in to building a position in the North West Shelf and indeed building a position in Woodside, but it is going to take us especially [_______________]. There are so many moving parts here that it's really going to be hard to get the players to stand still long enough to take a photograph, and it's going to be, I think, weeks really before, maybe months, before it becomes clear what the way forward on this is and how best we will be able to achieve the objective that we have around the gas business in Australia which we have had for decades and continue to have.

And just one sort of industry question right in the middle of all this. One of the things that has happened in the last 6 months has been, I guess, a sufficient number of letters of intent from Japanese customers to break ground on train four which I think is a large train. Nonetheless, that took a very long time, and one hears or one senses that the role of [_______________] Australian coal in the Asia Pacific may be a little stronger as long as the oil price, and therefore, just sort of attached gas prices are high, and I just didn't know whether there has been some sort of implied pricing pressure on new LNG that has come out of the last couple of years at very high oil and gas prices.

Pressure seems to be more on getting the LOI's, getting the volume commitments than on the pricing as such, and I think it would be foolish to say that if we ran at high oil prices for a long time then power generation through coal, which has always been a big feature won't become more so, but we are not at the moment, but the whole industry is scrambling around looking for LOI's, and we are right there with the rest of them, but it's not to chain yourself in that rather than in price pressure at the moment.

Okay great [_______________].

Once again, if you would like to ask a question, please press the * followed by the 1 on your telephone. To cancel this request, please press the * followed by the 2. We have a followup question from Mr. Jeremy Elden. Please go ahead.

Steve, can I just follow up on what you said about the method of sort of screening acquisitions. You described it as being exactly the same as for organic capex. I would think that it's different in one very important respect. With the organic capex, you have made the big change from the mid 1990s to now, and it is not just instead of projects simply having to pass some sort of hurdle rate or set of economic tests, and if they pass, they are done. You now have under your capital discipline, a certain pot of money, and projects compete against each other for that money and continually improve. Whereas the acquisitions seem to be being done using the, shall we say, the mid 90s model, past the hurdle rates, and they go forward, and I think that what's worrying people is that we saw what happened in the mid 90s when you had lots of money, and you had this model of testing investments, and it all ended in tears, and now you've got lots of money, and you have a similar model of testing acquisitions, and people are nervous. Is there any other comfort you can give us about the change in the way you look at acquisitions. This is the way you were doing things in the mid 1990s or any sort of competing between acquisitions, something that might give us a bit more comfort on the process.

[_______________] Jeremy, is that the acquisitions come when they come, and you can see that quite clearly in Fletcher, with the merger with DEA, with the Texaco issue, and with Woodside. The timing is not driven, if you try to drive it in terms of an annual program, the way we can organic capex to an extent, then you would simply never be able to take the opportunities when they arise, and that's why it really is sheer chance that the industry is in turmoil. Assets are coming available that didn't come available in the past and so on and so forth, but it's from our point of view, sheer chance that we happen to have this run of size altogether. It's not also, but when we work we spend a lot of time looking at these kind of things, and I don't believe that we've got kind of more with thinking about now then we have in the past. It is just that the opportunity comes, and you have to take it. That's the nature of our business. It's a bit like these major chances that you have to get into places like Iran or Saudi Arabia. When it comes, you take it, and that's one of the reasons why you need to watch your leverage level in our business.

Okay. Thanks Steve.

Thank-you. The next question comes from Jim Hoffman, please state your company name followed by your question.

[_______________] asset management. Will you please elaborate why the US refining and marketing operations appear to be underperforming their peers? And secondly, are there any structural reasons why those operations cannot be as profitable as those peers over time.

Okay, thanks. There are several structural reasons why the peer group appears to perform better. The Texaco and Shell alliances have around 80% refinery cover for their marketing sales whereas most of our competitors have around 100% plus, and the last year, 18 months in the US, the results have been driven primarily by refining. That's one structural issue. Another has been increased exposure on the West Coast that we don't benefit quite so much from. Those are probably the two key structural issues. We also then have the issue that our operation in the US is three complex structured joint ventures. One with Texaco, one with Texaco and Saudi Aramco, and one with Pemex. We also carry some residual costs in the Shell company. That overall complex structure is one of our incentives to work for a solution in the Texaco joint ventures as Steve talked about earlier and to reduce the cost base there. Probably also one or two other marketing issues, but not worth raising as a structural issue I think, a question of whether they can be improved. There are quite a few things we can do, and what we have been doing since the inauguration of the joint ventures in 1998 and early 1999. One thing in particular that we have been working on, and we are seeing improvement, there is still some way to go, has been refinery reliability. Our overall reliability had lagged

behind the competitors, and we are now moving to catch up there. We have also been doing quite a bit of work on the retail marketing side. Take an example of the Los Angeles area, notoriously poor margins in the last 3 to 6 months. We are taking some quite close look at the network in that area and looking to apply some of the activities that alone depend the success of the business outside the United States. There are no quick fixes though. It's plainly a lot of small things done well that will make the big difference. There is no reason in the long term why we cannot perform at the same level as the US peers. We stated the target of 10% return on capital within the US this year and in the longer term, the expectation is that the main businesses will all generate the returns that Steve mentioned earlier.

Thank-you.

Did that cover? Thanks.

Thank-you. The last question comes from Mr. Peter Nichols. Please go ahead, Sir.

A question for Steve. Steve, we obviously saw the announcement yesterday about your successor, Judy Boynton, and [_______________] looking outside the group as a possibility. Just wondering if you could sort of add any more flavor as to what we should expect after you depart at the end of September or the particular attractions of recruiting her to the group.

We are consciously trying to open this group up and to make ourselves less inward looking than we have been in the past, and part of that has been when we see an opportunity to recruit from outside, we take it, and the CFO role was one such, and this was a general kind of reason to have to refresh our talent pool. It's not that the people we have got aren't top quality people, but we do believe that it helps any company and especially in the world that we are now in to be open to the outside. It was years and years ago, it was almost given that the Shell system would reject anybody who was recruited in from outside, and we have sold that now, and what we are getting is great benefit from the fresh perspective that you tend to get. We haven't done that much of it in finance frankly although we will probably do a little more. I am sure that in terms of continuity of policy, Judy will make her own mind up about how she wants to handle the finance area, I know, but I don't think you will see any major change in the way in which we've handled our financial management because that is something that an approach which we have established over decades,

and it's kind of almost hardwired into the genetics of the company. The main thing that's changed recently is the ability to buyback stock, but that's about it. I think you will like her too. She will probably give you a harder time then I give you, but a rather nice cuddly old bear. [_______________] Peter, I think [_______________] you spoke about.

Thanks.

Okay, thank-you. Operator are there anymore questions?

No, there are no more questions now, Sir.

Okay, thank-you very much.

Thank-you. This concludes the Royal Dutch/Shell group conference call. Thank-you for participating.