殼牌 (SHEL) 2002 Q2 法說會逐字稿

Welcome to the half year results.

As usual I would draw your attention to the disclaimer, those of you that have not been here before, not many, I think.

Here is our agenda.

I'll set the theme.

Judy will go through the numbers and then I will come back up and review our progress as far as the strategic direction is concerned.

That's what we set out in December and what actions we're taking to achieve our target.

Let's start off with the highlights for the half year.

We delivered $4.2 billion in adjusted CPS earnings.

By any standards I hope you'll agree that's robust profitability in an uncertain world.

However, despite the 10 percent increase on the first quarter, second quarter earnings of $2.2 billion below our aspirations.

I think we're capable of doing better and I'm determined that we'll do so.

There are things we need to fix [inaudible].

We know what things are and we'll explain what we're doing about it.

We exceeded our production targets.

That's an 8 percent quarter on quarter rise and 4 percent for the half year.

This concludes of course the contribution from enterprise starting in the second quarter. [includes] we invested nearly $13 billion, $5.6 billion of it in underlying capital expenditure in line with our plans.

Acquisitions were some $9 billion including certainly enterprise which brings reserves, production, synergies many enhanced opportunities.

And secondly in the U.S. downstream, the [inaudible] provide the opportunity not just to be the largest retailer in the world's largest markets but also the most effective and that's our target.

Thirdly the [inaudible] acquisition in Germany which will extend our European down^stream strength.

Delighted it was announced yesterday we've accelerated that second stage of the [inaudible] acquisition, taking full control of the company right now, but paying next year as originally envisaged.

We announced [inaudible] over $2 billion selling assets that don't support strategic direction including those [inaudible] pipe lines and [inaudible].

Impacts are weaker environment earnings pushed our returns down 12 percent.

Mobilized to our referenced position that's just within the range 13 to 15 that we talked about in December.

Business has continued to generate the strong cash flow, supporting increased investments, higher dividends and continued share buy backs.

Finally, we're taking decisive action on underperformance.

So we're going to keep [inaudible] of the presentation first, that we can deliver robust profitability in uncertain times with resilience and when, of course, resilience and flexibility are premium.

Second, that we have clear strategic directions for growth.

Third, that we've already taken significant portfolio action, and fourth, that we're really do emphasize performance delivery, understanding that portfolio action is only the first stage, what matters is taking decisive action clear to the bottom line, accelerating integration, realizing the synergists, executing the projects, delivering operational excellence.

And finally you'll see in my concluding remarks thar we're committed to meet our targets.

I'd like to hand it over to Judy who as I said will take us through the numbers.

Thanks very much.

Thanks, Phil.

Good afternoon to you all.

Good to see many of you again.

Turning to the results for the second quarter and the half year, the business environment was mixed with particularly bad refining conditions. [Inaudible] 9 percent lower than a year ago and the gas price 23 percent lower, although both were up on the first quarter of the year.

Refining margins were very much lower than a year ago everywhere.

It risen slightly since the first quarter in rotter dam and the United States gulf coast, but this amounts only to a few cents a barrel.

Elsewhere they've fallen further.

Overall they remain very poor and well below our reference conditions.

Oil product marketing margins in the U.S. were significantly lower than a year ago, although there was a recovery from the first quarter.

Given these external conditions, we posted adjusted CTS earnings of 2.2 billion, 38 percent down on the record second quarter last year.

The major decreases were in gas and power and in oil products, both of which were also down versus the first quarter.

Chemicals on the other hand improved.

As Phil mentioned earlier the major impact on our returns was the external environment.

We also saw a sharp increase in the capital employed at the end of the second quarter.

Together these two reduced our returns to 12 percent from 21 percent a year ago and 16 percent for the 12 months ended at the end of March.

I would note that the 12 percent is after amortization related to acquisitions.

[inaudible] mainly due to lower prices which more than offset the 8 percent increase in hydrocarbon volumes.

Enterprise contributed 56 million to earnings while exploration expense was up in other parts of the business.

Just a few facts about enterprise.

The acquisition increased our capital employed by around 7 and a half billion dollars including both the equity value and assumed debt.

Cash flow from operations exceeded 200 million. [inaudible] charges of 68 million were taken in Q2 relating to severance and office enclosures.

Additional depreciation was 240 million, and this included some 150 million related to the amortization of asset write-offs following the acquisition.

The after tax affected business was around 70 million which was broadly in line with the $300 million annualized figure we gave at the time of the acquisition.

In the third quarter [inaudible] recognize the U.K. offshore tax charge in accordance with the relevant accounting rules.

The ongoing quarterly impact of these will be in the range of 35 million to 45 million, depending on the exchange rate and oil prices [inaudible].

The quarter freeze there will be an incremental charge at around 320 million, reflecting a catch up for quarter 2 and the impact of the deferred tax balance.

All of these figures include enterprise and neither will be treated as a special item.

The impact of the tax change on group returns in 2002 will be a reduction of about a half a percentage point.

We have already made clear our concern about the [inaudible].

We just don't think it's appropriate for a mature area, especially because it requires investments to prolong production.

[inaudible] 8 percent production growth includes an 11 percent increase in oil and 3 percent in gas.

An additional 2 41,000 barrels of oily equivalent per day from enterprise was the primary contributor.

However underlying volumes rose by 1 percent as production from new fields outweighed field declines and owe peck quarter constraints.

The new production was primarily in the gulf of Mexico and Denmark as well as from the additional 10 percent of the droughting field in Norway that we purchased.

British platform returned to production in May and is producing 100,000 barrels of oily equivalent per day. [inaudible] on track to deliver our 3.8 million barrels of oily equivalent today as referenced conditions.

The gas and power earnings also reflect a weaker business environment in comparison with our unusually strong quarter last year.

L and G prices were down 16 percent reflecting the lag effect of lower oil prices. [inaudible] L and G earnings, the GP results were expected by smaller dividends from [inaudible] gas and the rephase dividends from Malaysia.

In a difficult year as gas and power environment, our trading operation made a small profit.

This contrasts with a very strong performance of a year ago and the decline was not related to [inaudible].

The other item includes a contribution from the power business.

Intergen's [phonetic] installed generation capacity has almost tripled in the last month and management is focusing on operation excellence.

The company is not immune from deterioration in the business environment for power, and Intergen management is developing a plan in response to be reviewed with the shareholders in the coming months.

This is a slight on oil products which we've used before [Slide] it demonstrates the competitive strength of this business as a whole, and also the challenge and opportunity of the U.S. business.

This quarter's results were dominated by the dramatic fall in refining margins compared with 2001.

In addition, there were concentration of refining shut downs in the quarter.

Weakness in some large markets, notably Argentina, limited trading opportunities and a poor shipping environment.

However, taking the first half as a whole, the business [inaudible] good and competitive performance.

Now it's heartening to see the improvement in chemicals after a lot of hard work and painful choices.

Industry conditions are starting to improve from the very low point, but unlike ten years ago, our earnings remain positive in the [inaudible].

We're riding ahead of the wave on the recovery.

Figures a year ago benefited from one off income from contract terminations.

Underlying earnings have more than doubled in an environment that was really no better overall, and this reflects 9 percent higher sales, higher margins for some products and lower fixed costs.

The contribution from the sell is also improving and Phil will talk more about that later.

As we're taking out 5 billion in costs for the last three years we knew our 3 percent unit cost reduction target would be a challenge.

It's a different type of challenge than before.

Rather than taking a blunt instrument to spending, we need to focus on our business prophecy, redesigning how we do things.

So far our progress has been met.

The refining figures were of concern.

They reflect the impact of constraint through put in reaction to weakest margins and the shut downs during the quarter.

Now, our shut down program for the second half is relatively light and we should be better placed if margins recover.

The good news is that the acquisition synergies are on track and [inaudible] has made excellent progress.

This mix [inaudible] on costs played an important part on our not meeting our aspirations.

We are committed to making our improvement targets and Phil will have more to say about the specific actions there.

Our investment program is on track for the first half of the year.

We spent 5.6 billion of our planned 12 billion capital expenditure on organic growth, 80 percent on upstream gas, upstream and gas projects which is in line with our strategy.

In addition, again in line with our strategy, we undertook some key acquisitions as opportunities arose opportunities arose.

The Pennzoil expenditure is still to come, and the second half of the [inaudible] acquisition will be counted as capital investment this year, even though the cash payment is in 2003.

Our investment could be 22 to $24 billion depending on how we optimize taking account of the new opportunities.

I mentioned the decrease in actual return on capital employed earlier.

This is largely because capital employed has increased.

Normalized to our new reference conditions, our returns at the lower end of our 15 to 16 percent target range as we said they would be when we announced the acquisition.

The competitive returns assure strong cash generation.

We averaged over 14 billion a year over the past decade.

Cash flow in the first half of 2002 was 6.4 billion depressed by cash flows into working capital. 1.7 billion impacts the working capital movement reflects taxes paid and the impact of higher oil prices.

As well as funding our investment plans this strong cash generation throughout the cycle supports the continued long term rise in dividends ahead of inflation.

The yield in both shares is now around 4 percent in triple A companies - in a triple A company.

And we were very disappointed by the recent unilateral and unexpected decisions to delete royal Dutch shares from the Standard and Poors 500 index in order to restrict that index to U.S. stock.

It has clearly affected our shares, but we can cannot predict the future impact of this unprecedented event at a time when the markets are particularly volatile.

In December 2000 we declared we had the capacity to deliver 50 percent more cash to shareholders over those next five years and we have more than done that for the past 18 months.

While this resulted in a more efficient balance sheet with gross debt to capital employed of 21 percent. [inaudible] would have been 19 percent without short term borrowing in advance of our repurchase of the enterprise debt.

Competitive returns throughout the cycle and a strong balance sheet provides us with continuing financial flexibility to weather uncertain conditions or to pure profitable growth.

And with that I'll turn back to Phil to talk about our strategic delivery.

Thank you, Judith.

Thank you.

As I said at the beginning, we have a clear strategic direction for growth based on [inaudible] robust profitability and competitive edge.

We believe that that robust profitability depends on being disciplined in our use of our capital, seizing opportunities to strengthen the portfolio, really delivering on operational excellence and [inaudible] leadership, and ultimately [inaudible] throughout the organization accepting personal accountability for every decision.

Our competitive edge, we believe, includes wide ranging technology technological capabilities, the strength of the shell brand, global reach and the attention we give to our reputation.

Now, in December we told you how we aimed to grow the business in the median term. the investments of $12 million a year in organic growth exceeding depreciation which runs about $7 billion a year and judicious acquisitions to meet our strategic goals.

The [inaudible] check the balance of the portfolio towards the upstream in gas, geographically towards the United States, Asia, especially China and offshore Africa.

Oils and chemicals will grow steadily and profitably and we pursue new income extremes.

In the last six months we've secured some important pieces of the jigsaw.

We know that portfolio action is only the first step.

We have to deliver the benefits and we're very focused on doing so.

The predictions over $7 billion to BP's capital employed, and over $5 billion [inaudible]. [inaudible] $20 billion increase also reflects the weakening of the dollar.

Higher crude prices and cash held for repurchase of enterprise debt.

These account for some $7 billion.

We still have the check the balance of the portfolio.

We have to seize those opportunities as and when they present themselves, not just acquisitions, but also divestments.

How these changes affected business returns?

You'll see it on the chart here.

It shows the actual [inaudible] and then normalized our new reference conditions.

These returns are just within the 13 to 15 percent [inaudible].

We expect the BP business to deliver around 18 percent this year in a steady state, which it would have done without enterprise.

The acquisition has pushed it lower, still above the 15 percent level, but we want our established businesses to be capable of delivering.

BP is at 14 percent.

Further structure improvements are required, particularly in the United States to achieve 15 percent.

Dealing with it will be a key challenge for the rest of this year and beyond.

Chemicals is improving.

We know still has some way to go.

Achieving the desired returns are the key target.

And how are the businesses pursuing delivery? [Inaudible] we're building for upstream growth, dynamic picture with a drilling pipeline of projects in different stages of development.

From new prospects to production coming on stream.

I can only mention some examples from the last few months.

Our exploration efforts continue to deliver results with significant discoveries this year in Malaysia, the gulf of Mexico and Nigeria.

The enterprise acquisition opens up new possibilities, particularly in Brazil and the gulf of Mexico.

We've also made new acquisitions firstly in the Pinedale region of the Rockies, last year's McMurry [phonetic] purchase, and we also purchased an additional 10 percent in the ground and sale operated by shell in Norway.

The work is to bring several important projects to the investment stage.

For example, the giant [inaudible] in Kazakhstan, with as much as 9 million barrels of producible reserve.

We're please with the progress made on partner operated projects.

The air field in Nigeria and blockade team in Angola.

Some important projects which have come on stream in the next six months [inaudible] development in Canada, and the offshore [inaudible] in Nigeria.

I want to focus briefly on gas opportunities in China.

We will have already noticed, I hope, that this is not China on the screen, but let me start by illustrating the expansion of gas in Europe over the past three decades.

The infrastructure developments reflects a full [inaudible] increase in demand.

Shell played a significant role in developing Europe's gas supplies, and we see major opportunities in applying our capabilities in China where gas demand could grow nine fold by 2020 and may approach half the present European level.

We're helping just a few gas resources in [inaudible].

Offshore we recently signed production sharing contract to explore in the [inaudible] and we're studying offshore gas sales in the sea of trough, [inaudible].

We are also considering an oil field development in the bow high bay.

During which framework agreements for the [inaudible] pipeline to bring gas from the [inaudible] to Shanghai has been signed, although there is still much to be agreed before the investment is confirmed.

Let me turn now to how we're realizing the benefits of the [inaudible] acquisition.

Targets we announced at the outset are unchanged, and the integration is progressing rapidly.

For example, the enterprise has office in London has already been closed less than two months to the deal.

We're on track to deliver the expected $300 million in synergies, $75 million this year.

Staff reductions are on target.

Recent operational highlights include the staff production in the [inaudible] sale and the Tahiti discovery in the gulf of Mexico.

The key points is that as well as having our production, the acquisition is already accreted to cash flow and earnings in the current environment.

Turning to gas and power, this [inaudible] showing already contracted the L and G sales for 2005 demonstrate the extent of our leadership in this business.

The right hand map illustrates some of the things we're doing to extend that leadership.

Let's start with the expanding Atlantic markets.

The decision to invest in trends 4 and 5 for the nigh year I can't L and G plant were fundamental.

Over half of the gas, upstream gas taken from our production venture.

Slide 3, targeted completed near the end of this year. [inaudible] we will also buy 3 million tons a year of L and G for 20 years from the plant.

One of the range of such actions supporting our strategy for capturing key markets.

Framework agreements for the L and G project in Venezuela is also important. [inaudible] gaining future import capacity [inaudible] terminal in Georgia and the continuing to work with El Paso for L and G [inaudible] on the East Coast of Mexico.

Thanks for the opening.

Those points, the terminal there in Maryland progress.

The purchasing 7 million tons of L and G a year from [inaudible] for the next five years to support Spanish customers and we've agreed the framework for purchasing L and G from Algeria.

That's the first stage of wider upstream and down^stream corporation [inaudible]. [inaudible] almost inevitable disappointments.

These drilling reports from Libya were not encouraging, although we have significant gas discoveries offshore Nigeria to compensate for that disappointment.

We are also very active in Asia Pacific, Malaysia [inaudible] and the northwest shelf [inaudible] are under construction at the Sahasara [phonetic] terminal in western India.

There are also plans for another port terminal on the Mexican West Coast and we're studying the feasibility of one in California.

From the L and G deals I've been involved in a few, takes longer in time in economic uncertainty and we're working hard to realize the value of tackling L and G's in rifle competitive positions as well as opportunities.

For oil products, the key issue is delivering the results from integrating acquisitions in the United States and Germany.

In the United States we are ahead of target in realizing the planned $300 million [inaudible] and $100,000,000 in extra revenues.

Business structures are being [inaudible] and network rationalization is progressing well.

We expect to reduce staff by at least 8 percent and are already a third of the way there.

And to close ourselves, 13 percent of the network. [inaudible] or it's not too much of a problem.

You can hear okay?

My goodness, I can't hear myself.

Regrounding is underway and there has been significant growth in shell branded lubricant sales.

On an annualized basis, savings so far amounts to $150 million progress is certainly being made, but the results show that we have to drive confirmation even harder.

Operational excellence is the key to delivering.

In Germany, integration is also progressing well, although this is not fully reflected in the results in the really dreadful and refining environment at the moment.

The current benefits of $40 million have already been achieved and are expected to reach $60 million by the end of the year.

In addition, one benefit of the $100 million in working capital and capital expenditure have already been realized.

Management has been unified and the refinery network integrated.

The work force is being reduced by about 10 percent.

Accelerating the acquisition means all these benefits will now flow to shell.

[inaudible] chemicals is to realize the business potential of [inaudible], our joint venture with [inaudible].

The leading position in the [inaudible] market and technology in addition to its competitive strength, decisive action is needed to ensure adequate profitability in today's markets. [Inaudible] doing that in a number of ways. [Inaudible] 10 percent of capacity by selling, closing and [inaudible] plants enabling them to achieve higher operating rates than its competitors.

Secondly, reducing staff by 20 percent with 18 percent already achieved.

Thirdly, rationalizing 35 percent for product trends. [Inaudible] deliver 50 million you're owes emerging synergist since 2001 by the end of 2003.

It is on track to deliver the target of 220 million you're owes by the end of this year 2002.

These savings are split between fixed and variable costs with fixed costs being reduced by 9 percent.

We are also reshaping our new businesses where we've been testing a range of possibilities and we now focusing on those with identified real potential.

Renewables with the [inaudible] wind and solar while disposing our forestry assets in New Zealand.

We recently added to our wind, U.S. wind interest in acquisition in California which will bring our U.S. capacity to around 230 megawatts.

Shell [inaudible] is now the world's fourth largest [inaudible] business.

We restructured other new businesses and we sold our coal synergy retailing energy venture in Australia.

And if I'm right the cash fit the bank accounts yesterday.

The constant new ways of strengthening our portfolio.

This includes disposing of assets that no longer support our strategic direction such as [inaudible] and Poland.

Taking action on them, the performers, such as Intergen, including the Texas pipe lines, the [inaudible] refinery in the Philippines, and the new businesses that I just talked about.

And also, of course, optimizing the oil products portfolio to focus on growing markets.

If we come to the last item which is about commitment to targets, looking forward we are fully aware you don't want vague assurances.

You want to be told what we intend to do, preferably by when.

These are things we're going to do in the rest of this year.

First, to deliver the group [inaudible] within our stated range.

This would depend on delivering on costs realizing the $75 million in enterprise, the $260 million in our products, and the 220 million you're owes in Brazil, amongst others.

And achieving the 3 percent unit cost reductions in the oil products and exploration and production businesses.

In terms of portfolio actions, it's the complete the key deals that are indicated there.

The [inaudible] actions with our partner Intergen and implement them.

These projects such as Cashagan [phonetic] tackling and opportunities in China to the investment decision stage.

With a complete especially those big projects which are underway such as mad gas car Nigeria ALG and [inaudible] they need to be done on time.

And meanwhile for all this, optimizing our capital investments.

We are well aware of the importance of delivering these things to meet your expectations and our own explorations.

We are committed to meeting our targets within a strong financial framework.

Let me just remind you what these are.

The central target is delivering a group return between 30 and 50 percent is our reference conditions.

That means that established businesses should be capable of delivering 15 percent of reference conditions and there is work to be done here.

We seek further unit cost improvements of 3 percent per year totaling $500 million.

Our performance has been mixed.

We know what we have to do about it.

And we're looking for gearing between 20 and 30 percent.

And we're just into that range now.

We are integral percent production [inaudible] over the five years from 2000.

We're on track to achieve it and we've reaffirmed our target to 3 percent growth on a higher base.

We have the capacity to continue our share buy back program and we're taking action on the $7 billion of under performing assets. [inaudible] acknowledge, I am pleased with the results, it's not as good as we would have wanted.

We've made some important strategic steps which we believe will deliver long term value to our shareholders building on the great strength of our existing business.

We're working hard to realize those benefits, but we need to do so more urgently.

We also have taken significant action to fix under performance and I think we need to be even more vigorous about that.

And I'm determined that we will do those things.

Finally, in this current environment, I must mention the prices of confidence around business overall.

Rebuilding trust is urgent.

Our conduct in shell was driven by [inaudible] principles, honesty and integrity are central, most particularly in matters of accounting and reporting.

You have my personal commitment as far as those aspects are concerned.

Thank you very much.

We will now move to questions and answers.

And I'd like to welcome those that are not in the room, we have some people on the wire I believe, Simon, already.

But shall we take the first couple of questions from the room?

Thank you.

Could you please identify yourselves, even if I recognize you, and say your affiliation, especially for our colleagues that are not in the room?

Thank you. 00:40:37

Thank you.

Neil [inaudible] from UBS Warburg.

Can I ask a couple of questions on the upstream.

About a year ago [inaudible] one of reasons you downgraded the production group from 5 percent to 3 percent.

Can you give us a bit of an update on what's been happening in the [inaudible] portfolio [inaudible] as well?

Secondly, [inaudible] you had some discoveries already this year.

Can you give us any indication of your aspirations to reserve a placement for the year?

And then finally, are you yet in a position to talk about a rate of volume great you might expect for next year?

Okay. [inaudible] remind me of [inaudible] 5 to 3.

When we announced the enterprise acquisition, we stated very clearly that we retained our objective from 2000 to 2050 of an average of 3 percent and it's now on a higher base including enterprise, and that's the position which I reiterated today.

And we're confident of that.

As far as [inaudible] ratio is concerned, you know that our stated objective is to replace our production on a running average.

This year, of course, will include the enterprise effect of some one and a half million barrels that were brought to our reserves and we haven't changed our objective, our [inaudible] 100 percent recovery. [inaudible] growth in 2003, frankly too early.

As you know people are [inaudible] away on the details for next year, and no doubt there will be some mention of that later in the year or early next.

Thank you

Thank you.

Front row.

Thank you.

I'm going to be very democratic about this.

From Lehman Brothers.

You mentioned [inaudible] for slightly higher time.

Could you tell us how much the capital employee in Intergen itself is and how much your [inaudible] invest many in the coming years?

Yes.

Let me make a couple of general remarks on Intergen, and then probably [inaudible] gas and power business.

Maybe you'd want to add some remarks.

Intergen is going through a concession of being a project developer.

They're now becoming a real project Operator.

And as I said in my remarks, between the middle of last year and the middle of this, I think we've trebled the megawatts that we have out there that they're running.

Now, we all know that the environment is not brilliant at the moment and Intergen management is at the moment discussing amongst themselves how they make this concession from the new projects which were their very strong focus and much more operating the assets that they have. [inaudible] would you answer that, please?

Just to add a bit to what Phil said, of course, tremendous deterioration in the power business around the world and Intergen is not immune to that.

Management don't have their heads in their sand and we wouldn't let them do that.

I think you're glad to hear us say that.

They're not pretending nothing is happening around them.

So they have two I think different dimensions to what they're doing right now in the power business.

They have a tremendous focus on operational excellence and getting these new plans into operation. [inaudible] the current operation over the last 12 months will triple as Phil has mentioned they're operating capacity, and those plants actually are six different countries around the world.

So if we're worried about one market being under the weather right now in the power business their portfolio is actually quite diverse and that's been one thing that's always differentiated Intergen to other companies in their sector that they've been a very global company and I think that's good news for us [inaudible] in the power business is very cyclic.

So they're focusing on operational performance and also reassessing over the near term how much development activity they'll be undertaking given the downturn in the industry and reassessing them, the levels of expenditure on new development in the coming two or three years and that work is underway.

I'm sorry.

On the capital - [inaudible], we have not yet broken out externally the capital employees for the various sectors in the gas and power business.

But I note your question.

It may be helpful for us to do so.

Let's come to this conference over here.

And then we're ready to go to these two questions, we'll go abroad.

[inaudible].

Trading was a problem for you in Q2, it certainly seems to have contributed to the disappointing results in gas and power and contributed to the O P downturn as well.

And if trading was a problem, is that a reflection of the fact that last year was very good or this year was very difficult?

And secondly, you mentioned -

You just answered the question.

A couple of times, your heavy oil activities in Canada have had a bad price recently in terms of cost overruns, labor problems, delays.

Could you update us on how things are going there?

Do you want to take that one?

Yes.

I think that you're right, that we had a very, very strong trading quarter in the second quarter last year.

The opportunities with all the uncertainties around all markets and market crews were certainly not [inaudible] there to the same degree this year and the compression of refining margins and lower refining runs by definition dried out the international product flow and reduced the level of inter regional arbitrage opportunities which we've been used to.

So under those circumstances, not being speculative traders, but being traders to optimize the value of our oil flow, if we were to an extent standing back from the market so it was a period of barren opportunity and I think in gas and power you're comparing a rather poor quarter with an exceptional quarter related to the California events a year ago.

That dealt with all gas and power.

Chairman of shell Canada to talk about mad gas car, a couple remarks.

There is some good news and bad news around this.

The good news is this large complex project is now 90 percent complete and notwithstanding the cost increases that we have seen driven primarily by poor productivity and an overheated Alberta labor market.

This is a project which about [inaudible] values, it's still going to deliver strong economics.

The schedule as it stands currently is a project in two phases.

There is a mine and a conversion unit [inaudible] and several couple 100 [inaudible] attached to our refinery.

Both of these will mechanically complete during October, that's our current schedule.

We then go through a work up phase, the pipeline fill, tank fill, and we hope to see synthetic crews coming out of the system in the early days of January next year.

So it has been a tough ride, but all the partners, Chevron and Western Mining, remain very committed to the project, and we still believe it will be long term profitable and generate cash for many, many years.

I remember being there some years ago and standing there at the pilot plant watching the first tests and of course now we're on the real thing, 1 55,000 [inaudible].

And of course, when this is up and running, we of course have significant [inaudible] and potential for the future.

Let me take the gentleman there and then we'll go abroad.

[inaudible].

You highlighted [inaudible].

I wonder if you could give us [inaudible] refinery additions in terms of volume and secondly whether you're going to see anything else happen in the restructuring cost that was [inaudible] some of your acquisition [inaudible]?

Paul?

If I may, the prime reason for that 3 percent increase in unit rate was lower intake volumes.

As Phil said in his remarks, we had a heavy shut down program in the second quarter.

It's interesting that elective nonutilization capacity for economic reasons related to [inaudible] margins outside the U.S. rather something in excess of 15 percent in the quarter.

So the prime driver on those rates was that on a combination of the cost incurred essentially due to [inaudible] shut down, the big news actually was in Canada where we took a whole [inaudible] unit down for months to tie in the [inaudible] unit, the operator unit.

So this was a rather exceptional quarter in most terms.

If you normalize it, I suggest we would start on the right side of neutral on the unit cost basis.

So, more work to do.

Thank you.

Shall we invite somebody from elsewhere?

Let's let the technology work.

Can you please identify yourself if you're on the line?

Mr. somebody please state your company name followed by your question.

Thank you.

I'm with Goldman Sachs in New York.

You mentioned significant discoveries in Malaysia.

I believe this is in the emerging deporter play over there.

Can you confirm that and then can you make any comments on whether you found oil versus gas and is there any quantification of the resource base potential over there?

I think the only thing I can confirm on those questions is the fact that it's the big water we're talking about.

We've already mentioned that as far as gas is concerned this [inaudible] gas for any second generation gas to liquid scheme.

Can you make any comments on how you see the fiscal reregime for that deporter province for other regions of the world like gulf of Mexico Africa, Brazil?

We've.

We've been in Malaysia now for let's say 90 years and we find it's a good place to work.

And we also find the authorities very sensible in the way they help new projects to proceed.

They have a track record of being very pragmatic and are very well informed house government.

Thank you very much.

The next question from outside?

Mr. Fred leaser, please state your company name followed by your question.

Fred refer, Bear Stearns.

Can you give us an estimate of what the refinery turn^around and tie inches cost in the quarter with what the impact on earnings was?

N ins] secondly I think Phil you mentioned operating costs were down about $75 million on a like by like basis, but in the down^stream.

Kind of hard to see that given the results.

I'm not sure all of that's hit the bottom line, but can you give us some feel for what the operating cost on the bottom line has done in U.S. oil products year over year?

Thanks.

I think falls on top of your first question so we'll deal with that first, but then we don't quite understand the second.

We'll come back to that.

Yeah, let me if I may with the first question, if we compare second quarter to second quarter or we incur the approximately $60 million of incremental costs related to refinery shut downs, I think that's the answer to the first question.

Could you just repeat the second question on U.S. [inaudible]?

Sure.

On operating costs was noted in the release was brought down and I think Phil said in his prepared remarks there was about a $75 million improvement in cost.

But kind of hard to see that, you know, given total R and M number of only 25 million in the second quarter and R and M results at probably break even industrywide maybe even a little bit better.

I'm just wondering if maybe not all of the synergies have actually been realized that have been identified.

We think that we - I can confirm that that has certainly been a reduction in cost in U.S.

R and M operations quarter to quarter, and that we are around about $150 million in to the delivery of $400 million of additional benefits of this integration, from which there is one inescapable conclusion for business [inaudible] 25 years.

But obviously the margins [inaudible].

The second quarter were very much bad years.

So we're trying to isolate the two effects, but I'm confident that we are reducing costs.

We are delivering benefits, but not at the rate that can offset the kind of environment that we saw in the U.S. in the second quarter.

If I can just take advantage of the question to just take just one important point which is now having seen only briefly the Exxon/Mobil numbers, downstream numbers globally actually had six month earnings which was higher than any of our competitors.

How much was the quarter on quarter -

[inaudible].

Mr. [inaudible], please state your company name followed by your question.

AB and M Asset Management.

I have two questions.

First question about the as [inaudible] in Canada.

How do you view the marketing side of all these products and groups and synthetic crews that come into Canada as opposed to the U.S. because you're not the only one, as many project there.

So marketing competition in the future there.

And the second question is about the income statement.

If I look at the income statement, it's hard to tell.

I know it's always problematic to go on the quarter figures quarterly figures, but if I compare sales to cost, I don't see productivity or efficiency improvement from this statement.

Let me turn to Paul in the first instance because, coincidentally, he's practicing this question.

It was asked at the board yesterday.

Wasn't it, Paul?

As Phil said, [inaudible] about $150,000 a day, 60 percent, so round about 100.

The greater part of that is [inaudible] a lesser proportion to that [inaudible] refinery in can did.

We will be exporting a relatively [Canada] small proportion of our total entitlement from the facility.

We are well involved [inaudible].

And I think our marketing [inaudible] is very well set.

The main answer to the question is [inaudible].

Thank you.

The second question on the income statement, productivity, Judy?

Yes.

In terms of the costs that we are [inaudible], we have moved from initially from an absolute cost level to a unit cost level.

We've also moved to a definition of costs that is very close to operations.

So there are some run^off costs, start up costs, feasibility studies, etc., which we classify [inaudible] costs in the sense they're supporting projects or new growth opportunities.

They are not counted in this run rate calculation.

We are looking for productivity on an ongoing basis, and because of that you won't be able to specifically tie these numbers to the income statement.

We will, however, provide transparent [inaudible] reporting.

We're going to come inside the room and you're very patient, sir.

And then I'm coming.

[inaudible].

On the cost, I think last December you talked about an equivalent of the unit cost target around $500 million a year.

Can you give us an update on how much of that [inaudible]?

And secondly, looking back I guess since 1998 there have been should quite dramatic changes in the portfolio in the different business he is I think also in respect to the debt level.

In that change, do you think the productivity of your net income has gone up or gone down?

And is there overall plan there to move that in any direction?

Judith, the costs how much are the 500?

On the costs we've achieved thus far about 140 or so of the 500.

Now, the way to think about this is our cost structure is heavily weighted towards O P. So as that turn^around schedule and the shut down schedule gets wider in the back half of the year, we should see some improvement in that as well, but that's about where we are, J P, on that one.

Judy I think there are two aspects to this.

Volatility that you talk about.

In terms of aspired portfolio, what I'm talking about is raising the level on which the volatility occurs.

And for that reason we want to address that 7 billion.

We also want to make those focused acquisitions that for instance in Germany and the U.S. [inaudible] leading strategic positions.

We're talking about, sir, an upgrading of the portfolio across the board.

And of course the efforts on cost pushes us up somewhat, too.

That would be my initial reaction to that question.

Do you want to add, Paul?

It's a very interesting question.

I'm not sure of the available [inaudible] to answer it.

If you just reflect on the last three years, 2000, 2001, we had very strong earnings in both our main businesses.

So [inaudible] very strong this year in the downstream we've got an actual replay of 1999, but slightly worse.

The upstream continues to perform strongly.

I think the kind of natural hedge there is not entirely obvious from that last set of observations.

So we'll take notice of the question and see if we can give you a better answer and look back at the data.

Judith?

One final remark on that.

We noticed just to emphasize, one of the reasons we target the 13 to 15 percent rate of return reference conditions which is [inaudible] conservative set of assumptions so that we can weather the storm with the volatility and take advantage of opportunities as they come.

Too.

Thank you.

Second row here.

[inaudible].

Sir, you talked in your presentation about the importance of building trust and [inaudible] might have been avoided [inaudible].

Is it not possible for you to include your guidance so that analysts can spend more of their time looking at the fundamentals and the direction of the company rather than trying to second guess the [inaudible] volume? [inaudible]

Transparency is one thing, but it depends what you mean by guidance.

And there are some kinds of guidance that we are not into as you will well aware, and we don't play that game, but I'm sure you're not referring to that, not at all.

We have to make a judicious review of what is appropriate to make available, and I think you'll have seen from the presentation today a real effort to get a better understanding about business in different areas.

And we are open to dialogue as to what is reasonable to rebuild.

Judy?

I think also I'll take your point.

Second of all, I think there is quite a bit of information available in the marketplace around what's happening in regional areas, and we are quite transparent in terms of our operations and helping you to understand where we operate in the world so that you can see that distribution against the economic environment in which we operate.

Company specific guidance still says we're very particular about that.

According to the security laws.

Thank you.

We're going to go to the middle of the back there.

We'll take two together.

And then we're going to go outside again after these two questions.

Thank you, sir.

[inaudible] from Lehman Brothers. [inaudible].

Could you say what is your target [inaudible]? [inaudible].

How do you see that one playing out?

You'll forgive me if I don't say what is our target IRR for any of our particular projects around the world.

But what I will tell you is that those timing arrangements were subjected to the same rigor that we have for all of our major investment proposals.

Anything that lasts for 20 years that depends crucially on the assumptions you make means very detailed analysis and rigor.

And in the case of these, we actually not only use our own people here in addition to our own people in the states in this case, but also some third parties to take a different look.

So the target IRR was the sort of return that we expect from our other businesses in shell has been complete for capital.

That's a limited [inaudible].

Nigeria of course it's very important for us and let me not second guess what Nigeria will say about Nigeria's position in owe peck. [inaudible] Nigeria in the early '90s and we've looked through these periods, and frankly I'm not going [inaudible] concerned about owe peck restraints as far as our business situation in Nigeria is concerned.

Thank you.

One here and then we'll go outside.

From A B and emerald.

A couple of questions. [inaudible].

Comment on what's happening in Europe [inaudible].

The second one is feedback from the U.S. industry, [inaudible] productivity improvement. [inaudible].

What is happening here or is the West Coast [inaudible]?

There have been reports in [inaudible].

My view of that is the operators, you know, in many countries.

And if I think of my career in shell for the last 15 years, [inaudible], we had many countries where you get steady growth and you get [inaudible].

I have no doubt people are getting on top of those problems and questions have arisen and that we will see a pretty good future.

That's a very short bottom line assessment of that.

Downstream?

It will take a lot of figures here, but I think the one thing I'd just like to focus on is the compression of margins that has taken place in refineries with heavy conversion units, particularly [inaudible] to which we are exposed both on the gulf coast and the West Coast.

And what has happened is owe peck has taken supply back and the barrels that are gone are the low unit revenue barrels which are the heavy barrels which of course squeezed up the light heavy dramatically.

I think the thing we struggle with, marginal issues related to reliability in some refineries has been what has happened to those light heavy differentials.

That's been our biggest single [inaudible].

You need to use for the sake of people outside.

[inaudible]?

Well, of course, [inaudible] careful with some of the margins which are markers as well.

But the main thing is what I said, to take the discussion off line might be better.

Thank you.

Shall we move outside now?

Mr. [inaudible], please state your company name followed by your question.

Mr. McFaelby [phonetic], please go ahead with your question.

Yes, hi.

It's Angus McFael from ING financial markets.

Last December you highlighted $7 billion versus under performing assets.

You're still talking about this in your last slide.

Why is it taking so long for you to address this issue?

And are you not beginning to become a little bit skeptical that shell's plan to turnaround these assets is lagging expectations in and finally, as a business makes these outsets requiring attention changed since last December?

I missed your last sentence.

My last sentence was has the business mix over $7 billion versus under performing assets has not changed?

No, it hasn't changed particularly significantly since last December. and if you have - when we talk about the $7 billion worth of assets it may be priority attention.

And then what is happening is that you get some things that's reasonable liquidity, start to move in the positive direction.

Others [inaudible] Texas pipes they're never going to want to make the sort of returns we have [inaudible] and you have Linda cook just now talking about the really focused effort on Intergen, which is a significant part of that 7 billion.

You had me, for example, talking about Gazelle and the determined efforts that are taking place to really improve the returns on what is potentially an excellent business.

So some of these assets get into that position and it takes a while for them to get there.

Some it takes a while to get them around, but it just needs very determined action over sustained period, and I think we're doing that.

Another outside?

Mr. Mark gold man, please state your company name followed by your question.

First Albany.

I have one strategic question and then I have a financial question for Judy.

On the strategic front, I'm wondering to what extent given the obvious difficulties in the business, you have given consideration to a broad base withdrawal from gas and power activities across the board, or if you haven't considered that, under what circumstances might you?

On the financial side, the interest expense number in the quarter, Judy, in my view, is extremely low.

I wonder if you can comment on that as well as the impact in the quarter and going forward of the refinancing in the enterprise debt.

Well, on the strategic question, Mark, I don't contemplate leaving my wife and I don't contemplate leaving the gas and power business either.

What about the financial question, Judy?

That was quick.

Yeah, Mark, on the interest expense, let me just give you an understanding of where we are on the enterprise refinancing which will probably answer your first question about the rate.

During the quarter, we obviously borrowed for the acquisition and we actually preborrowed, recognizing that enterprise would come into the portfolio and in and around bend of the quarter we would be paying their short term debt and tendering for their bonds that were outstanding.

The financing plan was executed as we expected.

We borrowed commercial paper through a medium term note program to fund that so that answers the question why the rate is attractive.

At the end of the quarter we had actually taken advantage of the market to preborrow enough cash to repay enterprise short term debt which was 350 million, but that was repaid right at the end of the quarter.

And we started tendering for the bond and that process is nearly complete so that ties back to my comments about the [inaudible] ratio the 21 percent at the end of the quarter, but we actually had what I call some surplus cash on the balance sheet to use to payoff the debt.

And if you correct for that, the gearing ratio at the end of the quarter was more like 19 percent.

Coming back to the first question, Mark, I'd like to ask Linda Cook to respond perhaps with some more detail to your quick strategic question.

I'm not Phil's wife.

Just to say that two things.

First the gas and power business is a very difficult verse set of activities and assets it is very difficult to generalize at all about the business, so that would be dangerous, I think.

But the group has a policy and a strategy that's heavily involved portfolio management and I think that we've demonstrated in the gas and power business that we're not immune to that and that we are [inaudible] aggressively take action when we need to.

The evidence of that has been the divestment of the Texas pipe earlier this year, the announcement of our agreement to sell our position in [inaudible] gas. [inaudible] aligned our interest in the smaller gas line company in Germany, and we continued that active review of the portfolio and if and when we see things that aren't strategic or that won't meet the kind of returns the group responds to, we're happy to take action on that.

Linda.

Another one from outside, please.

Mr. Goldstein, please state your company name followed by your question.

Salomon Smith Barney.

I have two downstream related questions.

First on U.S. and the second one on far east.

In the U.S. downstream, Phil, I believe in Europe prepared remarks you mentioned the fact there are some structural changes required in order to get to your target Riachi [phonetic].

Can you talk about the scope and the timing of those changes second airy on the far east, there are mixed signals from companies that have reported so far on far east product market.

Some suggest some possible turn^around in the demand.

Your product sales show some slight increase, but yet you're refining run rate shows in decrease.

Can you clarify as far as what you see any changes going on in the far east products market?

Thank you, Paul.

I'll ask Paul to answer the question.

You're the other Paul.

First of all, on the U.S. clearly, still below our requirements but still on track towards a 12 percent targeted Riachi further down the track, an encouraging sign of things which are happening in both network rationalization, the foremost improvement in refining, cost reduction, rebanding.

It's a very big story, and I hope later in the year we're going to have the opportunity to talk to you more in detail about that, maybe in the U.S.

[inaudible] is interesting.

We have seen over the last six months quite resilient performance from our marketing businesses in a number of the key countries in Asia Pacific, and we've seen volume growth and relatively strong margins.

I would say looking around the world, it's been the most encouraging feature of our marketing portfolio.

The same is not true of refining.

We are there still remains a significant capacity overhang in Asia Pacific refining which is taking a lot of time to work itself out and margins continue to be under pressure.

So while you see volume growth and sales, but in our case for example our biggest single unit in the Far East is in Singapore where we have nearly 500 barrels of capacity which anywhere between a third and a half has been down electively in the last year.

So that's why you see the apparent contradiction between sales strength or volume growth and refinery intake [inaudible], and it's another complex issue [inaudible].

Thank you, Paul.

We have a question in the room in the far corner, sir.

[inaudible] SG Stewart.

First question for Judy.

My understanding, Judy, rather simple question here.

My understanding was that the [inaudible] 10 percent tax charge in the U.K. perhaps you could say why you're not taking the impact on to Q3 rather than in Q2.

Sure.

I can answer that.

We're following U.S. gap treatment which says that you take it in the period it is effective. [inaudible] sent a couple days into this quarter.

As I did mention, the charge that I quantified for you for Q3 did pick up those deferred tax effect and the catch up of the Q2 amount.

That's the reason we're doing it that way.

Thank you.

And my second question, again this is about the reserve.

Could you compare what level of reserves you will book for enterprise in and given that the enterprise [inaudible] P 50 level or [inaudible] and U.S. [inaudible] reserves of P 90 or 1 K, re self reserve [inaudible]?

And could you also tell us how you calculated it?

Are you going to use the multi [inaudible] method or the [inaudible] method?

I more general question on the reserve as well.

Perhaps you could just put it and tell us what percentage of your reserves you do calculate using Monte Carlo, and what percentage you calculated using deterministic?

And my further question - [inaudible]?

We're just going through the enterprise stuff in great detail [inaudible] and we won't comment on what we're going to do there, in addition to what we already said at the time of the announcement of the purchase.

And that will come out at the normal time at which we go through our reserves.

With regard to how reserves are calculated or whatever, rather detailed question that somebody here from exploration and production are very well welcome to take that.

I think [inaudible] we're going to have an E and P discussion probably in the U.S. where we'll have time to take that up.

Thank you.

One more question.

There are lots of other people with questions.

If it's one.

[inaudible].

You said you want to bring cash again to investment at the decision stage.

That report shows Tushgen [phonetic] actually has about 20 to 30 percent [inaudible] PSI and the [inaudible].

Could you just say how confident you feel in your field and how far in advance you would see the pay back time for this?

We'll come to the details of cash again when the time comes, but it's no surprise that this got a lot of H 2 S. That was known from that province long before which I think is oil field.

And preparing the development plan is taking all of that into account.

And in our view we've not been with not insurmountable difficulties.

Thank you.

We'll go outside again, if we may.

Please state your company name followed by your question.

Good afternoon, ladies and gentlemen, Bert Analkaiz [phonetic].

One question about the exploration costs I suppose at the jump from 175 to 304 was not entirely caused by the [inaudible] higher level we're looking forward to for the next number of quarters.

Is this due to price rises? [inaudible].

Second question, the rest you included to consolidate now and pay for it next year which is something I would like to learn if you are to do that.

Can you explain how the deal works in terms of consolidation and borrowing charges, etc.?

And the third question about power -

The second question, thank you.

On the first one exploration costs Judy?

Exploration costs should include the enterprise exploration, but as well we had a number of dry wells in the quarter.

Phil mentioned he had disappointing results at queue due.

We had dry wells in Namibia and also smaller wells in the gulf.

And the second question?

So that's not a figure to look forward to [inaudible]?

In July?

Basically the timing of the deal will require the second [inaudible] of these German assets has been brought forward to an economic date of first July or what we do not pay for that second charge until the 1st of July 2003 which is as it was originally envisaged.

We will treat the 1.35 billion we're saying is capex this year, but subject to my financial advisors help, we will carry a payable in our accounts at the end of this year also, which offsets it.

Thank you.

Let's take one question from outside and then the last question from inside if that's okay.

[inaudible] please state your company name followed by your question.

Hello.

This is Father Gate [phonetic] with Comstock.

I have a question on the natural gas offshore [inaudible].

Is this gas economic and when can you see shell involved in these projects?

We are happy to be participating in gas discovery offshore Egypt. for example, Rosetta which is already economic and we are busy with partners and ourselves exploring for gas and oil, and you can rest assured that we wouldn't be doing that if we didn't feel that there was the chance of economic developments.

Oil is relatively straightforward, of course.

As far as gas is concerned, as well as the domestic market, there are also plans for pipeline construction to neighboring countries as well as [inaudible] envisaged correct thought to southern Europe and elsewhere.

Thank you.

In the room?

This is our last one.

In that case the last one goes outside.

Mr. Paul Anderson, please state your company name followed by your question.

This is SN Securities.

I have two questions.

Do you think 3 percent unit cost reduction target for the full year is still achievable?

And the second question on your returns actions for the second half and oil products, the 260 million, is that the 3 percent unit cost reduction only or are there acquisition synergies as well?

I'll take the first part and Paul the second.

I have by no means given up on wanting that 3 percent for all businesses overall this year.

Paul?

Essentially, you're saying the same thing there.

Fully our products has work to do [inaudible] to deliver the 3 percent which we remain committed.

And the business improvement that we see, we saw in one of the charts is essentially bringing that back to track.

I thank you all, both outside the room and inside the room here, for coming.

We've appreciated the questions and the 01:27:07 conversation.

Thank you very much indeed.