殼牌 (SHEL) 2002 Q1 法說會逐字稿

Please go ahead, sir.

Good afternoon to listeners in Europe and good morning to those in the U.S.

Welcome to the Royal Dutch Shell quarter one 2002 results conference call.

I'm Simon Henry, Head of Group Investor Relations and later on our CFO Judy

will join me to take some of the Q&A.

I'll begin with a brief statement on the quarter's results and events.

As you have seen from both macro indicators and competitor results, this has been an extremely challenging three months for the sector.

However, behind every cloud there is a silver lining.

We have spoken to you for some time about robust profitability and this quarter's poor conditions enabled us to demonstrate exactly what this phrase means, a portfolio of businesses with complementary strength that delivered industry-leading returns in a wide variety of market conditions.

Although we don't ordinarily calculate return on capital employed on a three-month basis, I can confirm that on such a basis the group is comfortably within its target range for returns and that in the worst market environment for some considerable time the oil products business was able to deliver above cost of capital return.

This is what delivering robust profitability really means.

We made almost $2 billion this quarter, which is an extremely considerable performance considering that weak industry environment outside of the upstream.

This was a 4 percent improvement compared with Q4 of last year, bucking industry trends.

On a normal rolling 12 month basis this represented 16 percent return on average capital employed for the whole group, broken down 33 percent for the upstream, 16 percent for gas and power, 11 percent for oil products and 1 percent for chemicals.

The results were underpinned by upstream volume growth, record LNG sales and once more an industry leading contribution from oil products.

These earnings reflect the progress made over recent years in cost cutting and portfolio management.

In particular I'd highlight our strong competitive positions in each of our businesses, where the benefits of global integration and our geographic reach were particularly apparent this quarter.

It was also notable for our portfolio activity in support of the strategic direction that Phil laid out last December.

In addition to the offers to purchase Pennzoil-Quaker State in the U.S. and Enterprise Oil here in the UK, we made progress in several other key areas such as the investment decision taken on the new LNG trains in Nigeria.

We included this quarter for the first time contributions from the oil products transactions last year in the U.S. and in Germany.

So in summary there, solid delivery against targets and a business that is now better positioned to benefit from any improvement in those industry conditions.

I'll now run briefly through the key indices in the business before opening the call for Q&A.

First, expiration in production: Earnings just under $1.5 billion were 49 percent below the record earnings of last year.

Clearly the major impact was hydrocarbon prices.

I won't read out the realizations now.

As you'll know, we now publish them in the table in our results announcement on page 12.

Overall production was just over 4 million barrels of oil equivalent a day and was 1 percent higher than a year ago, and within that total gas volumes were up some 5 percent.

This increase was driven by new production and the strong performance of existing assets.

And for example in the Gulf of Mexico the

platform had a record quarter and has also started the second quarter very well.

We had strong production in Denmark and higher gas volumes associated with the upstream supply to the Oman LNG platform.

We benefited from a new field, including

in the Philippines,

in Iran,

in the Gulf of Mexico.

We also, of course, had the benefits of the reflected energy volumes primarily in New Zealand this quarter.

Depreciation was higher in EP, reflecting the amortization of asset write-offs from the Fletcher acquisitions and higher depreciation in the U.S.

This production increase was achieved despite OPEC restrictions, which amounted to some 60,000 barrels per day, the effects of warmer weather, mainly in the Netherlands, which reduced gas production by over 40,000 barrels a day or 240 million

a day relative to last year, and a number of problems with our Brutus and Auger platforms in the Gulf of Mexico and at the Sheer Water platform in the UK North Sea.

The impact of the shutdowns and the reduced production of Brutus and Auger was some 90,000 barrels a day compared to our plans, while Sheer Water was producing at around 30 percent of our full year plan.

Please remember though that neither Brutus nor Sheer Water were producing last year, so the 20,000 barrels a day from Brutus and the 8,000 barrels a day from Sheer Water that we produced in quarter one were new volume.

Auger, which suffered from cracked drivers following a very rare shear current, sea current in the Gulf, returned to normal operations at the start of May.

Brutus is expected back on stream next month.

On a positive note we took advantage of the shutdown to increase capacity of the Brutus platform from around 120 to 130,000 barrels of oil equivalent a day.

Sheer Water is planned to shut down in the summer and to bring back into operation the remaining wells.

All six wells are expected to be back in production in the fourth quarter.

Total effects in quarter one of all these elements was to limit production by around 200,000 barrels a day.

Without just the Gulf of Mexico and the OPEC effects the quarterly production growth would have been around 5 percent.

In December we gave our volume target for 2002 of 3.8 million barrels of oil equivalent.

This was expressed at $16 a barrel.

I can confirm we expect to meet this target.

And this is in spite of the expected loss on an annualized basis of around 60,000 barrels a day from Brutus and Auger and if we assume the current OPEC quota restrictions continue at around 60,000 barrels a day also.

I'd like to mention here the likely impact of the change to the UK tax regime.

At oil prices as we saw them in the first quarter this will lead to an ongoing additional charge to income of around $120 million per year and that's equivalent to less than 30 cents a barrel change in the oil price across our whole portfolio.

There's no immediate cash impact because of the effect of the change in the budget on capital allowances.

There will also be a once off charge to income as we increase our provision for deferred tax.

Under U.S.

GAAP this once off charge must be recognized after enactment of the relevant legislation.

It's not yet clear if this will be in the second quarter or the third quarter.

The amount of that one off charge will be around $200 million and we would not classify this as a special item.

Turning to gas and power: In the quarter we earned over $200 million, 39 percent below the record earnings of last year.

The main driver was LNG prices, which were 21 percent down on a year ago and indeed were down 11 percent compared to Q4 of last year.

However, volumes were up 3 percent, reaching a record 2.44 million tonnes in the quarter.

You see we've now included a table in the operational data page of our results showing these LNG volumes, which just for clarity include both the long-term contract and spot sales.

Progress was made on a variety of LNG related projects in the quarter and proceed with our growth target there of 6 percent per annum growth in contracted sales.

These include the go-ahead for the new LNG trains in Nigeria, announcement of a potential receiving terminal in Baja, California and Mexico and in

volumes from several sources for marketing purposes.

Taken together, these reflect that determination to maintain our existing lead in this fast growing business and to deliver that 6 percent growth target.

The next major contributions to this growth will come from a third train in Nigeria, the Malaysia

plant, both of which are due on stream early next year, and the Northwest Shell train, due on stream in 2004.

In the power business

brought further two plants into operation in Egypt and Mexico and on a 100 percent basis total generating capacity now stands at 3.8 gigawatts, on track to meet the year-end target of 5.6 gigawatts.

This will represent a nearly fivefold increase in two years from the end of 2000.

Looking towards the second quarter for the gas and power business, LNG prices can be expected to continue downward reflecting the fall in oil price towards the end of last year and the lag in pricing.

We can also expect a normal seasonal decline in LNG volumes in the second quarter.

We do expect to receive the benefit of the dividend from

Gas in the second quarter.

You may recall we had the benefit of an enhanced dividend here in the last few years and this year it's more likely to be at this underlying level, which is typically for us around $45 million.

Moving on to oil products: I want to remind you that from the start of the first quarter the results of Equilon were included on a 100 percent basis.

Indeed, Equilon as such no longer exists.

It's been merged into Shell oil products in the U.S.

We also include Motiva as an associated company but with 50 percent share of its income compared to the 30 percent we included last year.

Also from the start of the quarter the JV with

in Germany has been operational.

This is fully consolidated so it has a minority interest component and the effect there is to increase the capital employed, which will be brought on a gross basis by about $1.4 billion, although net assets are unchanged as the 1.4 billion is essentially reversed out in the minority interest.

Equilon and Motiva were acquired for around $2 billion and the Equilon debt of around $2 billion was consolidated, given the total capital employed impact for the oil products business of around $4 billion.

We've used this opportunity of the expansion of the oil products business to improve our volume reporting.

I hope you've all received details of the changes that we've made and these are described on our Web site.

If you do need any more information I suggest you contact

,

or

.

The downstream environment was particularly difficult this quarter.

Overall it was the worst defining environment we've seen for at least a decade, with, for example, the European industry refining margins averaging virtually zero.

Marketing margins in all regions were squeezed by the rise in crude prices in the quarter, by high stocks and by soft demand.

Outside the U.S. gross unit margins before deducted costs were over 10 percent down compared with last year.

In the U.S. the fall was almost 50 percent.

We also continue to feel the effects of the economic turmoil in Argentina.

Consumer sales there were down 20 percent year on year, for example, giving results for us that were some $55 million after tax below those a year ago.

The challenging environment was reflected in our overall volumes and the various ownership changes I mentioned do disguise the underlying movements.

The

effects of the German JV.

In the world outside the U.S. refinery processing intake was 3 percent down on a year ago, while oil sales overall were 1 percent down.

In the U.S. on a like to like basis the RPI increased by 12 percent, largely due to the expansion of the

refinery last year, while oil sales on a like to like basis increased by around 2 percent.

In this tough environment our results of $441 million are a testament to the underlying strength of the portfolio.

In particular, this resilience reflects the strength of the global businesses, which reported earnings that were either similar to or in excess of those achieved a year ago.

The earnings also benefit from a continuing delivery of cost reductions.

Throughout all aspects of the business you will recall we had delivered $2 billion over the previous three years in the oil products business and we see these results building on the achievements of those years.

It's also worth noting here that in a period that's been especially difficult for the U.S. downstream industry we did at least keep our head above water there.

I'd also highlight here the good early progress being made in delivering performance improvements in both the U.S. and Germany.

We intend to report more fully on this in August, but we're increasingly well positioned to benefit from margin improvements in both these major economies.

In particular, the position as leading U.S. gasoline retailer, together with the potential completion of the Pennzoil deal, offers a significant earnings growth opportunity for the remainder of the year in the U.S.

Quarter one was a relatively light quarter for turnarounds, especially compared to Q1 last year.

Refinery utilization though was little changed as they were also run-cut, responding to the economic conditions.

These were mainly in Asia.

Looking forward to the program for Q2, the turnaround activity is expected to be somewhat heavier.

In particular, it includes a significant program in Canada, including a 40-day shutdown of

refinery to accommodate tie-ins for the

Project.

On Tuesday of this week we announced run-cuts of around 10 percent in the European refining, driven by the current low margin level that's around 180,000 barrels of oil per day.

Looking forward, while refining margins improved towards the quarter end on the U.S.

Gulf Coast the immediate outlook remains uncertain.

As this week's refinery run-cuts indicate, recovery in April has been rather patchy and we expect further volatility.

Marketing margins remain tight as the competition remains fierce.

However, we do expect that Q1 will prove to be the bottom of this particular cycle.

In the chemicals' business trading conditions continue to be very challenging and industry profitability has not improved since last quarter with very low operating rates continuing to be seen on both sides of the Atlantic.

In these circumstances the chemicals first quarter adjusted earnings of $75 million represents a significant achievement both on last quarter and on a year ago.

This improvement has been achieved mainly through growing volumes and reducing costs.

The result is particularly commendable, given the pressure on

margins in the U.S.

prices fell there while naphtha prices were rising, making Shell

, which are mainly used for heavier liquid feed stocks, less competitive.

However, by the end of the quarter there were some signs the advantage had been moved towards cracking the heavier feed stocks, particularly as the gas prices rose.

In Europe

margins dropped sharply as naphtha prices rose while the value of the

products fell.

However, there was some benefit from lower

values passed on into higher

and derivative businesses, while other businesses also showed some signs of margin improvement.

Overall the quarter finished stronger than it had started.

We remain cautious on signs of immediate recovery in chemical industry conditions.

There are signs of demand growth in some product areas but overall capacity utilization in the industry will remain low.

Other industry segments had a loss of $41 million.

This is somewhat better than the average quarterly number for last year and better than the first quarter last year when the results contained a number of unusual charges.

Going forward to the rest of this year a similar quarterly charge can be expected.

This in part reflects the refocusing of some of these businesses that we announced earlier in the first quarter.

In the corporate segment adjusted earnings were little changed.

Net interest expense was higher as net debt increased, despite the lower interest rates.

This is partly offset by lower tax rates.

A year ago they included some unusual tax charges.

It's always somewhat difficult giving guidance on this sector.

It depends very much on cash levels, changes in interest rates and timing of dividend payments from our operating units.

We do currently expect to continue at a similar level for quarter one, though there is a charge of around 175 million each quarter.

The increased charge is associated with the higher net status we pay for enterprise in Pennzoil, which should be offset by lower withholding taxes in the rest of this year.

Overall group capital investment for the quarter was $4.6 billion, including the impact of the U.S. downstream acquisition that we included in Q1.

Excluding this, the 2.7 billion or so of investment was inline with the plan of $12 billion and was focused on the major upstream growth projects.

This is consistent with the intent to increase the share of the upstream capital employed in the portfolio.

To conclude, in the last few months we've made excellent progress developing our business portfolio within our clearly stated strategic and financial framework.

We continue to deliver robust profitability, leading the competition in a tough environment.

And I'm happy to say we're well on track to meet all our stated targets.

I'd now like to move to questions and answers.

Thank you, sir.

If any participant would like to ask a question please press the star followed by the one on your telephone.

If you wish to cancel this request please press the star followed by the two.

Your questions will be called in the order they are received.

There will be a short pause while participants register for questions.

The first question comes from Mr. Andrew Archer.

Please state your company name followed by your question.

Good afternoon.

It's Andrew Archer at Banc of America.

A couple of questions: I wondered could you give us the figure for like for like volume growth in the upstream for the first quarter, just to make those adjustments?

And the second one on Brutus, brought on stream ahead of schedule and obviously below budget but you've indicated today that you expect Brutus to have been shut in for 16 weeks.

Do you think Brutus is paying the price for perhaps an over-aggressive development schedule?

Thanks, Andrew.

On volumes I would emphasize that absent the OPEC, Brutus and Auger restrictions the headline volume growth would have been 5 percent.

The underlying volume growth would have been 4 percent.

We expect those OPEC restrictions to continue for the rest of the year.

OK, thanks.

On Brutus, yes we did bring the platform on ahead of schedule and on budget and we had some problems on the top side this quarter and it has gone down.

The platform will be back in June and we will have taken the opportunity to increase the throughput there.

This was not a result of any acceleration of the schedule in terms of development.

It was a problem on the platform.

That has now been fixed and it was not similar to the problems we've seen in Sheer Water, for example.

I suspect with the first question, just going back to that, you may have been looking for the impact of Fletcher Energy, which was around 75,000 barrels of oil equivalent per day and it's primarily gas, as you're probably aware.

OK, thanks very much.

The next question comes from Mr. Steve Turner.

Please state your company name, followed by your question.

Hi there.

It's Steve Turner of Commerce Bank.

And the first question relates to your oil realizations, which came in at quite a low level relative to our expectations certainly and that was particularly the case outside the U.S. and I wonder if you could just help us understand those numbers a little bit.

And the second question is you've obviously been very active with your acquisition program in recent months.

We were just wondering whether that's going to prevent you from buying back shares in Q2.

The first question is the oil price realizations outside the U.S.

There are several reasons.

The UK contract terms, you'd be aware, primarily work with a 30-day lag against the quoted front price and therefore our realizations in the first quarter didn't really benefit from the up tick in March.

We see that coming through in April realizations.

And secondly we had higher NGL volumes in the UK itself increase to just under 30 percent of our total UK liquids volumes.

NGL prices themselves declined relative to brand.

They were down 33 percent on the quarter compared to about 18 percent decline.

And the last reason driving this is in Canada we had a heavier oil mix from our production in Canada, which contributed to the greater realization gap compared to brand.

In the U.S. we actually know the gap year on year and that was more an unusual quarter a year ago where we had a particularly heavy mix in the Mars platform, back more towards more normal levels this quarter.

Secondly, a question about whether our activity on the portfolio would preclude any buyback activity in the second quarter: You are probably aware that the Dutch fiscal regulations actually require us, once we've started a program, to reach a minimum level, otherwise we may face fiscal penalties.

So I think it's fairly likely that we will be back in the market.

Our minimum target for the year is just under $1.5 billion and we expect to complete that program during the year, at least that program during the year I would say.

Does that handle the question for you?

Yeah, unless you can just help with the second quarter aspect of it all, if you're prepared to comment on that at all?

The second quarter for the buyback?

Yeah, yeah, given that you have got acquisitions outstanding at the moment.

Well, I'll tell you the one thing we don't give advance notice about the timing of our buyback program, for the obvious reason the way it impacts on the market, but I can certainly say we don't have liquidity issues.

This wouldn't stop us.

But the fact that you have got outstanding offers on the table, is that an obstacle or not?

No, it's not price sensitive information.

Thank you.

That's great.

The next question comes from Mr. Neil Perry.

Please state your company name followed by your question.

Hello.

Sir Neil Perry from Warburg.

A couple of questions on the downstream, please: Can you clarify for us what the earnings contribution was from

?

You talked about the volume but can you talk about the earnings?

And secondly, you mentioned the contribution from the global businesses in the downstream.

Are you prepared to let us know what percentage of the downstream earnings come from global businesses as separate from straight refining and marketing activities?

Neil, thanks for that question.

The

contribution to earnings this quarter was an overall negative, partly driven by the special item for restructuring that you will have probably picked up.

This was driven by two factors, in essence the refining margins in Germany were particularly bad.

In Europe overall they only averaged zero and German marketing was extremely competitive in the quarter.

Year on year contribution from Germany is not far short of $100 million less than it was a year ago.

Presumably that helps explain the positive minority.

It goes some way to explaining the positive minority interest, yes.

Global businesses, you asked what percentage we would expect of the total products earnings?

Yes.

And I would say this quarter it was quite a significant percentage, upwards of 20 percent.

However, please bear in mind that the rest of the business, refining and marketing performed considerably lower than we would ordinarily expect in normal conditions and therefore the proportion contribution from global businesses would be somewhat less.

Thank you.

The next question comes from Mr. Doug

.

Please state your company name followed by your question.

Morgan Stanley.

You mentioned in your comments that Shell felt that refining and marketing margins in the first quarter of 2002 would probably market the bottom for the current cycle.

And while it's pretty clear that they will probably not be getting much worse, I'm interested in some of the view that go into those conclusions on refining and marketing.

Doug, are you interested globally or U.S. in particular?

I'm actually interested in both.

OK.

Well, what we have seen in the first quarter was a combination of factors.

Supply costs rose, demand was soft and there were excess stocks in the market.

All three of those came together and I think the effects of that are reflected in the reported results of almost all the players.

What we see happening around the world at the moment is not necessarily consistent.

In the U.S. we've seen some recovery in refining margins and in the marketing margins, because in part the stocks were coming down and demand is beginning to pick up ahead of the gasoline season.

In Europe we've seen a pretty mixed bag.

It's not a homogenous market and some countries are showing stronger demand, some are still very difficult markets.

What we can say about refining is that the refining continues to be depressed to the extent that we have shut in 10 percent of capacity as of this week.

If we look slightly out beyond the second quarter we do see demand pickup as the year progresses, initially most likely in the U.S. and we are linked to a certain extent to global economic recovery thereafter.

I would also point out that we did have quite some warm weather in Q1 that not only affected European gas volumes, it affected European gas/oil volumes in the downstream and heating oil also in the northeast of the U.S.

So those factors may not recur again later in the year but I wouldn't like to speculate on that.

OK, so it sounds like your comments are more demand side related as opposed to any particular view on capacity.

Is that a fair characterization?

Correct.

Demand will be the big driver at the extent of the pickup later on this year.

Certainly for Q2 things will remain volatile.

OK.

I also have a strategic question today, and if Judy is there maybe she can help on this one, but you guys have obviously been in growth acquisition mode recently and with meaningful progress possibly on the horizon in Russia related to tax regulations and maybe even PSAs.

I wanted to see if we could get an update as it relates to your strategic thinking and criteria toward that area, specifically in that the FSU has been somewhat of an area of unrepresentation for Shell in relation to some of the major peers.

It seems like Russia may be a logical area for investment, which is the first point that I'd like to get an update on.

And secondly, if it is an area that you have appetite for and that you feel would fit well in the portfolio, are meaningful fiscal changes, such as those that are expected to be discussed at the end of this month required before you guys move forward or are you comfortable with the situation as it exists today?

So it's really two questions, so if you could comment on those I'd appreciate it.

Could I just clarify the second question?

That was fiscal changes in Russia?

Sure.

If you see meaningful fiscal changes before moving forward or are you comfortable with the situation as it exists today?

Well, Judy hasn't joined me yet so I'll take this question and maybe somebody will bump her later.

OK.

Russia is clearly a province of significant interest both to Shell and the industry overall.

We have been represented there for some time through

, which is currently one of the very few PSAs actually operating.

And yes we are comfortable with the structure around

.

We have had a relationship with Gasprom since '97, which is currently undergoing something of a reinvigoration and you have probably seen in the press discussion we have recently had with them about one or two projects.

These include the

field and that is a good example where we would like to work with the Russian partners and the respective authorities to develop a production contract that does indeed meet both our needs and their needs in economic terms.

We wouldn't necessarily expect to see a sea change on all projects and all opportunities in Russia at the same time.

We will take it one project at a time, work with our partners and look to develop a series of projects building on what we already have with

,

and we also picked up an interesting prospect in the enterprise portfolio of course.

In terms of fiscal changes we'd like to see later in the year I wouldn't like to speculate, although I'm not sure that any overall change would make a difference to all projects.

OK.

That answers my questions.

Thanks a lot.

The next question comes from Mr. Paul Stedding.

Please state your company name followed by your question.

Dresdner Kleinwort Wasserstein.

Two questions, if possible: Firstly, could you let us know whether the 3.8 million barrel a day target was set on the assumption that Enterprise would be done or wouldn't be done?

And the second question is just about your relatively low exposure to U.S. gas compared to your peer group.

Do you believe that bringing LNG inside of the west coast or the east coast is an acceptable substitute for that direct exposure?

Thanks, Paul.

The first question, 3.8 million barrels of oil equivalent per day; we first talked about it effectively in September, which I think was before we were expecting to look at Enterprise.

We did not set that target with Enterprise in mind.

That was based on our existing portfolio.

Enterprise, if and when it comes in, would add around 240,000 barrels a day from the date of consolidation.

Low exposure to U.S. gas: Slightly lower.

I would highlight actually we do have a bit of additional exposure as that gas price goes up.

It makes our U.S. chemicals business that much more profitable.

Will LNG be an acceptable substitute for exposure?

We've talked several times about what is an economic landed price for LNG in the U.S.

We've said at $4 everybody would make money.

At $3 only the best projects will make money.

We have currently capacity at Coal Point, capacity at

Island, a potential receiving terminal on the west coast, Baja, California and also a further potential of a receiving terminal at

on the east coast of Mexico.

The combined capacity there is quite significant and yes it would give us potential additional exposure to the U.S. gas market.

Did you happen to give the capacity on that to the lines --

No, I didn't give the total capacity there.

OK.

The next question comes from Mr. Jonathan Wright.

Please state your company name followed by your question.

Simon HSVC.

I just wanted to ask about the European downstream and in particular exposure to gas/oil, which was a drag in the fourth quarter.

I think you indicated it took about 30 cents a barrel off of indicative margins.

Was there a similar impact in the first quarter?

I don't have a direct number on that one at the moment.

Certainly the gas/oil demand, low demand because of warm weather, particularly in Germany was a key factor both in the

, and as I mentioned, the

earlier, and also for the overall stock.

I would say in this quarter we saw weakness in gasoline as well as gas/oil and that ultimately drove those refining margins down.

OK, thanks.

The next question comes from Mr. JJ

.

Please state your company name followed by your question.

Hello.

JJ Tyner from Deutsche Bank.

Simon, could I just ask you a very simple bottom line question?

I wonder if you could just give us the earnings impact at the bottom line of Fletcher, DEA and Equilon-Motiva for the first quarter?

A simple question, JJ, not that easy to answer.

It's probably not that high, to be honest.

You can see Equilon-Motiva.

Equilon did make quite a significant profit in the quarter but it was offset by losses in Motiva, so you can see the net impact in the U.S. was virtually zero.

made a loss.

Fletcher will have made a small profit.

Do you think you have a stab at normalizing it to your reference environment?

With those three companies?

Yeah, the things you've bought.

What are they giving you in your reference environment?

One at a time.

In the U.S. we're making good progress towards our 12 percent target in 2004.

In Germany it's basically too early to tell.

There are a few water factors in there, such as the specials and a very

in terms of the demand in gas/oil, gasoline.

For Fletcher I'm not sure, I just don't have the data to be honest.

I wonder, I mean, is it going to be at any stage perhaps later in the year where you're actually going to give a disclosure of what the acquisitions are actually earning at the bottom line?

It would be awfully useful for us to measure what sort of returns you're getting.

I wouldn't want to commit myself but I would say quite possibly no, that the point of this as a management tool is not to make decisions about individual investments.

It's a guidance or a guideline for the overall portfolio, what you want in your portfolio rather than what any individual constituent of it does, and therefore we will give guidance on normalized returns in each of the businesses.

That is our guideline.

On individual projects

is considered only inasmuch as it impacts the overall portfolio.

We use normal cash flow base measures to assess the attractiveness of a given investment.

Right.

OK, thanks very much.

The next question comes from Mr. Mark Gilman.

Please state your company name followed by your question.

First Albany.

Hi, Simon.

Hi, Mark.

A couple of things: There is reference in the release to higher DD&A charges.

Is that total dollar or units?

Both.

And in gas and power outside the U.S. were there any unusual dividend flows in the first quarter, Malaysia, Woodside or equity earnings contribution?

And what does that look like insofar as the second quarter?

The answer in the first quarter is no.

It's essentially dividends as normal.

I did mention in the script that the second quarter we expect

Gas dividend to come in but at a slightly lower level than it has been in previous years, so it should be around 45 million.

I did mention the first quarter no special dividends, that Malaysia is a dividend that's time in the first quarter, so Malaysia is in there.

OK.

Again, this

issue, was

a loss on an adjusted basis, exclusive of restructuring charges?

Yeah, it was a small loss.

OK, I was just a little bit curious in that regard why the minority interest item in the adjusted statements actually represented a smaller increase rather than a larger increase on the reported statements, if that's true.

A combination of several factors:

is not the only impact in that minority interest line.

We also have lower earnings in the quarter on quarter for Shell Canada and Shell Japan, which are ordinarily the main profit contributors on that line.

We have in that line also losses in

,

and

.

Could I just ask you to repeat what the Sheer Water number was in the first quarter and whether that was a gross number?

We actually produced 8,000 barrels a day and that is Shell share 28 cents.

And the Fletcher challenge number that you quoted, the 75, what was that?

Is that first quarter this year or first quarter last or a delta?

There was nothing in last year first quarter so it's both the delta and the second quarter of this year.

OK, Simon, thanks very much.

OK, thanks.

Say, Judy has now joined me, so if there any questions you'd like to book through to Judy, please feel free to do so.

Good morning.

Good afternoon to everyone.

The next question comes from Mr. Rob

.

Please state your company name followed by your question.

Yes, hi, Simon and Judy.

Simon, you talked a little bit about this earlier on but just in terms of natural gas production available for sale in the other eastern hemisphere, can you just describe the delta between Q1 of this year and Q4 of last year just in terms of explaining where the additional gas production available for sale, which country that comes from?

The major factor is Fletcher Energy.

Relative to Q4?

Oh, sorry, relative to Q4.

In fact, Fletcher Energy is down a bit there.

Malaysia is probably the main single contributor there, relative to Q4, where in addition to production it's PSC effect.

And do you have the number by any chance?

Q4 on Q1, no I don't right here.

I'll have to follow that one up.

OK, thanks.

The next question comes from Mr. Michael Mayer.

Please state your company name followed by your question.

Prudential.

I have three broad questions.

In gas and power in the United States in the press release you cite the natural gas trading losses.

Can you quantify those for us first?

Second, could you update us on your worldwide production forecasts?

What component do you have in that for U.S. natural gas production?

And third, I would appreciate a more detailed variance analysis of the earnings swing for minority interests.

The swing in that segment exceeded the swing in chemicals, gas and power, corporate and other and was pretty material for the quarter.

OK, thanks, Mike.

Part of your answer to your last question is in the first question actually.

I forgot to mention that overall our U.S. gas and power trading unit also made a net loss in the quarter and therefore contributed their net positive to the minority interest.

We don't specify a particular loss on that trading activity within gas and power, although you will see the overall result in the U.S. was indeed a loss.

Gas and power trading is an activity we've been involved in for some time and by nature it is somewhat volatile.

We did in the quarter see gas prices rising in opposition to expectations.

Given the high stocks and the likelihood of demand coming off in December, that is what led to those losses.

I can't confirm that in all cases they were operating under their normal trading mandate and that it's not a level of losses we would expect to continue.

Those positions are now closed out.

U.S. gas production going forward we expect around 4 to 5 percent a year decline in U.S. gas.

From the base you see in Q1 one would have to remember that Brutus and Auger would bring back quite some gas production against that.

So overall for the year I don't actually have a figure in front of me but I would guess slightly higher than you see in Q1 as Brutus and Auger come back in.

The last question on the minority interest: What I can give is I will repeat the list from earlier.

I'm not too sure how much it helps.

I mentioned losses in

, primarily oil products, in

where we have no production in the quarter; it's a six month a year producing asset, that's obviously all upstream EP, in

as a result of the trading loss, which is gas and power, and in

refinery, which is oil products.

We also relative to normal had lower earnings in Shell Canada, which is a combination of two-thirds upstream, a third downstream maybe and Shell Japan, which is all oil products.

There's a combination of those factors.

I'm not sure, Mike.

Does that answer the question?

Well, I guess I'm looking for a sense of sort of exclusives of things like trading losses and transitional effects.

What should we look for in minority interests in the next couple of quarters?

You shouldn't expect a profit.

It should be a deduction.

And I would refer back to previous reports for guidance.

The only new items that you might see are

and

.

I wouldn't expect

to be contributing in that way.

OK, and we would expect to see

turning around pretty substantially as time goes by?

That's correct, yes.

OK, thank you.

The next question comes from Mr. Jeremy

.

Please state your company name followed by your question.

Hi, good afternoon.

From Lehman Brothers.

Could you give us a bit more guidance, at the risk of being creepy, how you did so well in production?

You seemed to have swallowed a hit of 200,000 barrels a day from production from the various difficulties, OPEC, et cetera and yet still be on track.

Now, that presumably means that the other things have done correspondingly better than your plan.

Now, is that uncertainty of 200,000 barrels a day what you would expect the normal uncertainty in estimating future production or has something else happened?

Has Walter gone around with a very big stick and frightened everybody?

And are the improvements you had recurring or is this sort of will this fade out by the end of the year?

Thank you, Jeremy.

I'll say a few words first and then let Judy comment on Walter's contribution.

Firstly, we're very pleased to have increased the production year on year and to have delivered above the target.

I'm also pleased to be able to confirm that we will meet this year's target.

We're also somewhat pleasantly surprised to note that our volume growth was the highest in the sector year on year for the quarter.

You ask about 200,000 barrels a day, is this the normal level of variance.

Well, I wouldn't say it was a normal level of variance but I would make one serious point.

Management of production is not an exact science plugging in numbers to a spreadsheet.

We have many thousands of wells, 35 countries, 4 million barrels a day.

We have many good people around the world who, yes, are being encouraged to ensure that we meet the production targets, irrespective of OPEC cuts, irrespective of any unforeseen production problems or delays in bringing projects on.

Now, we did have some good performance in Denmark, in other platforms in the Gulf of Mexico and around the world everybody has made their own little contribution to meeting that target, because we take it very seriously.

Judy?

Yeah, Jeremy, I guess in terms of BP's conviction on this, they are making a very concerted effort to apply their technology across the board.

That's gotten heightened awareness through Walter's leadership.

This is something obviously we're taking very seriously and the more we can apply our technology to push the limits on some of the production that we have on stream, that benefits us, and to get our fields in development, you know, up faster, better, quicker that type of thing.

So is Walter pushing us?

Absolutely, very, very strongly and in terms of the organization, as Simon said, it's a contribution from a lot of different places.

So, Mike, in terms of as we look forward, whatever our view might be on the persistence of the OPEC cutbacks and the other issues, we might think in terms of adding the recurring 200,000 barrels a day, adding the 200,000 barrels a day to our estimates on a recurring basis?

I would just say 40,000 of that was warm weather.

We can't do much about the weather, Jeremy.

Yeah, but you've made an improvement of around 200,000 barrels a day in all the things other than weather, OPEC and production hiccoughs?

And from what I hear you saying is that that 200,000 is an enduring improvement, not something that's going to be transitory.

Well, Jeremy, I think, as Simon mentioned, you know, we have all kinds of confidence in making our goals this year and we'll see what we can do beyond that.

Thanks.

The next question comes from Mr. Peter

.

Please state your company name followed by your question.

Hi, it's Peter

at ABN AMRO.

A couple of more general questions for me, all sort of press comments towards the end of this quarter.

One was that Paul Skinner was quoted talking about looking to dispose of surplus refining capacity and even some further rationalization in Asia, and I just wondered if you could us some more details in that and sort of timing.

And the other was sort of what's happening in the Netherlands with

that sort of spokespeople have been talking about splitting up the company and ownership of

et cetera, and I was just wondering again if you can give us any details there?

Maybe I can take those.

I don't know the specifics of Paul's comments but I can speak a little bit about the situation in Asia.

We, in fact, shut down some capacity in the Philippines, as I think -- Simon, did you mention that earlier?

I'm not sure that I mentioned that.

The

refinery in the Philippines, which is primarily based oil and bitumen was closed down in the quarter and we did take a special charge for that.

And in addition I think you know that that region has been in an overcapacity mode for quite a while with the most recent downturn in margins.

I suspect that you're doing to see more activity along those lines and we always continue to look at our own configurations to see what we might be able to do either on our own or with partners.

But I suspect that's what Paul was talking about.

In terms of the

situation in the Netherlands we are pleased that the economic minister has accepted our initial proposal, the proposal coming from ourselves and our partner, but there is a lot to do yet there in terms of discussing exactly how that will unfold.

I think the key phrase would be fiscal neutrality in terms of how we're going to restructure there, but all the details haven't been worked out.

They are progressing very constructively and we're pleased with that situation.

Thanks.

The next question comes from Mr.

.

Please state your company name followed by your question.

Hi, good afternoon.

This is

from

.

One question about the autonomous sales growth in OP.

You mentioned 8 percent overall.

Can you sort of break down what's the acquisitions and what's the autonomous growth?

And the other regards again the minorities.

I heard you say something about a figure of 1.4 billion in connection with

, a figure, which I couldn't quite place.

Can you sort of explain is there any cap ex involved in the first quarter in

or is it 1.8 billion sort of major difference?

Is that just the Equilon-Motiva thing?

Can you give us a few more details there?

OK, first the oil products growth.

Outside the U.S., if we exclude the impact of

, there was a small decrease, a 1 percent decrease in total oil sales volume.

Inside the U.S. if we exclude the impact of the Equilon-Motiva transactions there was a small increase; that's plus 2 percent.

Thank you.

And the

thing?

.

I did mention $1.4 billion.

That's the impact on gross capital employed of the joint venture with

, which just to remind everybody is a 50/50 joint venture where the two parties contribute their existing assets to a new venture.

That 1.4 billion is the gross capital employed increase for the Shell group.

When we talk about our total capital employed we always talk on a gross basis before we deduct minorities.

When we do our return on average capital employed calculation we deduct the minority interest from top and bottom, numerator and denominator.

Therefore the minority interest, which is roughly the same number as that increase, comes out.

The impact on net assets and the denominator in the calculation is roughly nil.

I see.

So the minority interest is the difference between the 5.1 billion and the 3.477 billion?

That's the 1.4 billion.

You're looking at the balance sheet, Bert?

Yeah, right, yes.

Just one moment.

Because you consolidate the thing.

Yeah, the minority interest on the balance sheet, yes it is basically.

The majority of that difference is that, correct.

But to make the thing clear from your side there was no cash involved in the joint venture deal?

With

?

Yeah.

No.

There was no payment between Shell and

or

and Shell.

Thank you.

The next question comes from Mr. Richard Franklin.

Please state your company name followed by your question.

Hi, Simon.

Hi, Judy.

Richard Franklin from Morgan Stanley.

I just wanted to pick up on something that was held in the strategy presentation in December regarding the 10 cents to the asset base that was earmarked for priority attention.

I wondered if you could give us a bit of an update on how much progress you've made and what the key benchmarks are and your confidence in achieving that target during the course of this year?

Maybe I can take that one.

We continue our efforts on portfolio management and something that is very important to us is making sure that we look at the part of the portfolio that really needs fixing.

And I would emphasize that the point here is that we want to fix those assets, make them more profitable before we look to do anything differently.

In terms of progress on that particular part of the portfolio we did sell the Texas pipes towards the end of last year and closed that I think in the first quarter in terms of getting the cash in the door and that was certainly part of it where those assets had a better natural owner than Shell.

Another entity that has made good progress is

.

They've rationalized some of their capacity in ethylene, polyethylene in the U.S. and in Europe and they're really, really focused on costs.

So I mean that's another area that we're working on.

And I would say chemicals in general has been a very nice job on their cost focus.

Let's see:

, the Texas pipe -- oh, we have our forestry assets that we mentioned in December.

We are looking to dispose of those assets and that's progressing well.

And in terms of the other bits in that portfolio we're working on them to fix them, I guess I would tell you.

We had outlined a timeframe of about 18 months and we're moving to that target in terms of getting that part of the portfolio upgraded.

I think it also fair to say what we found from experience over the years is every time we put businesses in this position there's --

Added incentive.

-- a marked uplift in their underlying performance.

Maybe some of that is showing through in the first quarter results.

Understandable.

OK, thanks much indeed.

We have a follow-up question from Mr. Mark Gilman.

Please go ahead, sir.

Simon or Judy, I wonder if you could clarify the comment, Simon, you made regarding the guidance for the corporate sector in terms of lower withholding taxes offsetting the incremental interest associated with Pennzoil and Enterprise?

The incremental interest associated with Pennzoil and Enterprise is going to be a pretty big number.

What in particular are you talking about in terms of lower withholding taxes?

Is that a one-off?

Is it permanent?

Thank you, Mark.

My pleasure, Simon.

It's like taking exams sometimes when you come up with the unexpected question.

The withholding taxes last year were more the one-off.

There was a specific payment in from on the U.S. to the holding companies.

So year on year we expect a lower level.

We do hold withholding taxes within that corporate sector.

What we are seeing is very low interest rates at the moment on the debt, much lower than we had a year ago, seen steady progression over the year and that has had quite an impact on the corporate sector.

Whether interest rates will stay so low for us remains to be seen.

Clearly we do expect the debt to increase as we conclude the two transactions and the balance of the debt, the interest rates we estimate around $175 million, but clearly there will be timing effects and we would be exposed to changes in those interest rates.

I can't give any more direct guidance on that, Mark.

Withholding taxes are driven in part by some timing issues last year.

Simon, is the net interest included in that particular segment a pre-tax or an after-tax number?

It's a pre-tax number.

And the tax effect of that interest is located where?

In taxation, in that segment.

Simon, I thought that the proceeds on the sale of

were in the neighborhood of 700 million, yet asset sales proceeds in the first quarter are a small fraction of that.

Was I just misinformed in terms of that or was there an after-tax burden of some kind?

The assets are actually held by

.

sold the assets and

is accounted for on an equity basis so the proceeds don't show in the consolidated results, Mark.

I see.

OK, thank you.

I think we have time for a couple more questions.

The next question comes from Mr. Neil

.

Please state your company name followed by your question.

Hi.

Neil

from

.

Just back to the U.S. gas production numbers, Q1 was done over Q4.

I'm just wondering how much of that was due to U.S. onshore decline rates versus the Gulf of Mexico, decline rates from your fields going down?

And secondly could you just clarify the timing of your new deal coming on in '02 and '03 from the Deep Water Gulf, especially the Princess field?

Princess Field.

We currently are looking at one well specifically for Princess that we bring in through the

platform I believe and that would be potentially drilled ahead of the main Princess field development.

That may or may not come in this year, because we are still looking at the timing of that development.

In terms of the decline quarter on quarter it would be -- I don't have a figure onshore or offshore but my guess would be it's primarily offshore but we also, of course, lost Brutus and Auger production offshore so I think overall numbers would suggest it was an offshore issue.

OK.

I'm just wondering if you're seeing extraordinarily high declines onshore versus the offshore?

Not that I'm aware of, no.

OK, thank you.

OK, one last question.

We have a follow-up question from Mr. Andrew Archer.

Please go ahead, sir.

Oh, yes thanks.

It's actually going back to the volume issue.

You said production year on year was up 44,000 barrels a day.

Fletcher contributed 75.

Now, you mentioned OPEC, the technical problems and the weather.

I was just wondering how much of a positive effect you had from production sharing contracts, given the oil and gas prices were significantly lower year on year during Q1?

Just one moment.

Total effect for us was around 16,000 barrels a day, split roughly between oil and gas.

All right.

Thanks very much.

OK, I think with that we have no time left now.

I'd like to thank you all very much for your contributions and look forward to talking to you again in August.

Thank you.

This concludes the Shell first quarter results presentation.

Thank you for participating.

You may now disconnect.