殼牌 (SHEL) 2002 Q4 法說會逐字稿

Thanks for coming.

You'll recognize the first chart at least.

I'll give you time to read it.

It actually hasn't changed that much.

If you go to the next one, you see here the global leadership team, which is sitting on my left.

Together we're going to discuss how we're building on the achievements of last year.

I'll start with our strategic progress.

Judy is going to focus on what's been delivered in 2002.

Walter, Malcolm, Jeroen, and Paul will outline their priorities in the businesses.

I'll end with a wrap-up talking about the way forward.

And then we look forward to answering your questions.

We'll also have people on the wire from around the world, taking their questions, too.

First, the progress we're making in taking forward our strategy.

In this presentation we want to show you how after the pivotal year of 2002 we're going to maintain momentum in uncertain times.

The first out, our strategy and financial framework are unchanged.

Our priorities are to return our ROACE to the 13 to 15% range at referenced conditions, deliver key projects and create new long-term legacy positions.

I think ours is a balanced portfolio well-positioned for the upturn.

Why was 2002 a pivotal year for the group?

On the one hand we enhanced our strategic position by creating new legacy assets, such as the Athabasca Oil Sands project to support continuing value growth, and seizing opportunities to make four major focused strategic acquisitions.

But on the other hand, we did that while delivering earnings of over $9 billion, 14% returns, over $16 billion in cash and $600 million in cost improvements.

And of course, all of this built on the road map achievements and cultural change that we've been going through in the last four or five years.

Our strategic direction and the financial framework which underpins it are clear and consistent.

What was communicated in December 2001 remains firmly in place and will continue to drive our actions.

We grow value for our shareholders in responsible ways and measure our success by competitive shareholder returns.

Talking of that, and delivery of these competitive returns to our shareholders, comparing the super-majors to the MCSI index, covering all business sectors, we were first over five years, second over three years and first in 2002.

That provides a healthy premium over the average for the index by nearly 16% last year.

Our portfolio direction is also unchanged.

More upstream and gas to reap the higher rewards from major upstream and gas projects and to anticipating increasing the demands for gas-driven by environmental and also security concerns.

Profitable downstream growth is a balanced risk and for cash generation.

New income streams to support long-term growth.

We also have a set of geographical priorities to continue broadening and diversifying our positions.

Overall we aim to balance risk, the bedrock of robustness and grow from a position of competitive strength.

And we want that to achieve higher average returns across the cycle.

How do we grow our portfolio?

Robust cash generation by our existing businesses, disciplined organic growth, 12 billion a year in our present plans, and continuous upgrading by seizing value adding acquisition and divestment opportunities.

That way we can create value with stronger strategic positions.

We made significant progress in developing our portfolio last year, including, for example, the four strategic acquisitions.

Walter and Paul will have something to say about those shortly.

Significant restructuring in divestments, largely in Europe and the U.S., major strides in building our leading global LNG business, which Malcolm will focus upon, and in establishing a significant integrated business in China, which Jeroen will talk about, all in line with the strategic direction that we described in December 2001.

We do have an outstanding track record of delivering value, nearly doubling returns between 1998 and 2001, supported dividend growth and share buybacks.

And we're delivering value now and in the future.

And I'd like just to mention the three-time frames, if I may.

In the short-term, returning our ROACE to range by realizing synergies and through portfolio upgrading.

In the medium term, delivering key projects, such as Nakika and Nan Hi.

In the longer term, continuing to create new legacy assets, such as Sakhalin, which Malcolm will discuss.

And of course, that's necessary to underpin our long-term dividend growth.

I mention those strategic acquisitions.

They're already adding value.

But because we understand that most acquisitions destroy value, we're going to transparently track the delivery of this value.

We've announced a target of $1 billion pretax synergies pretax 2004 of which nearly 370 million was delivered in 2002.

All of these acquisitions are ahead of plan.

We've identified further synergies from Enterprise.

And just a note on the right-hand side of that chart, we also gained an extra $1 billion in cash flow from these acquisitions for the parts of the year that we held them in 2002.

Now, for portfolio upgrading, we're continuously looking for ways to upgrade the portfolio, divesting nonstrategic assets, restructuring businesses, fixing the tail of poorer performing assets.

We've averaged something over $2 billion a year in divestments in the past, and we expect significant levels in the future.

But there will be no fire sales and no value destruction.

Bazel, Integen, and the new businesses are being restructured with several announcements made in 2002, which you must have noticed.

This is in both closing capacity, cutting back on new developments, stopping some activities and focusing on attractive revenue-generating activities.

The performance of the $7 billion slate of assets identified in 2001 has improved significantly, a 6 percentage point increase in returns is expected in the two years 2002 and 2003.

This includes the contributions from Bazel and Integen.

Our emphasis is on upgrading value and it's become a pretty relentless focus in all of the businesses and in the group.

We believe that in Shell we have the best potential for underlying performance improvement in the industry, and we think we do have a track record of delivering it.

After delivering $5 billion in cost improvements in three years, we knew our new approach for the 3% unit cost reduction target would be challenging.

We met this target in difficult conditions last year and we've extended it now through to 2004.

And we're pursuing the $1 billion announced synergies from our strategic acquisitions.

Of course, some of these overlap and contribute to that 3% reduction target.

So, to avoid any double counting, it's clear that this will lead to an underlying pretax earnings improvement of $1.5 billion for 2003-2004.

And in a very uncertain environment it's good to know that doing that is largely under our control.

Our financial framework that we talk so much about is based on a clear understanding of the cash cycle that's driving our business.

Our gearing is now in our target range, and the AAA credit rate being remains important.

We plan our portfolio around the need to generate adequate returns and cash to reward our owners, manage our debt and invest in organic growth.

We need to do this even if the conservative expectations of the business environment that we use.

There are considerable uncertainty in the external environment, so we've set annual organic investment at a disciplined $12 billion for year.

Share buybacks are always under review.

But in these uncertain times I have to tell you it's you unlikely there will be any in the first half of this year.

The way we allocate capital around the group drives us towards our designed portfolio.

Business reinvestment ratios differ.

EP and GP reinvest more than three quarters of their debt adjusted cash flow in organic growth while OP and chemicals reinvest less than half.

Investing up to 40% more than depreciation in the upstream businesses will drive significant growth in the capital base.

The downstream businesses are also growing despite only investing one out of every three dollars of cash that they generate.

We expect this disciplined trend to continue.

Our strategy and financial framework are designed to drive growth in both earnings and underlying cash generation.

Cash generation has been growing steadily, driven over the period by increasing returns on capital employed, augmented in 2002 by contributions from those acquisitions, the billion dollars that I mentioned.

We expect this growth to continue from an enlarged capital base, helped by underlying performance improvements.

And we expect to see improving cash returns on this base.

Reference conditions, the downstream businesses will be the key drivers of increasing cash generation in the short-term.

And remember the environment was poorer than we'd been used to, and so, there's considerable room for improvement there.

Of course, at current oil and gas prices, upstream remains a major contributor.

The concluding chart for this session, we remain committed to our targets within the established financial framework.

What are the elements?

Desired gearing, now in the middle of the range.

Returns from established businesses.

A challenging aspiration, not least in chemicals, which Jeroen is going to discuss.

Unit cost improvement.

Delivered in 2002 and extended into 2004.

Capital investment. $12 billion I mentioned.

Discipline maintained.

Portfolio upgrading.

Frankly, a continuing way of life.

And dividends, the bottom line for our individual shareholders and pension fund investors more than delivering year after year.

And at the heart, our objectives.

Delivering 13 to 15% returns at reference conditions, growing our businesses, established and new to generate value for our shareholders and measured by our total shareholder return.

And just to restate, if I may, our priorities, returning ROACE to the target range, delivering key projects, such as Afabaska, creating longer term legacy positions, such as Sacolin.

Let me hand over to you, Judy, so that she can discuss what we've been delivering in 2002.

Thank you very much.

Thanks, Phil.

And good afternoon to you all.

Turning to our actual results, we are delivering against both our strategic direction and our financial framework.

Q4 was the strongest quarter of the year.

Adjusted earnings of 2.8 billion were up 46% from 2001.

The upstream businesses benefited from higher crude and gas prices, but also achieved a 6% increase in volume.

And GP results reflected record LNG volumes.

Downstream trading conditions remained very difficult overall, and oil products earnings were affected by downtime in our U.S. refineries.

Chemicals benefited from higher volume, a strong cost focus and a one-off benefit from restructuring in Europe.

For the full year we delivered both robust earnings and cash flow in a very volatile industry environment.

Group adjusted CCS earnings topped 9 billion, a 23% reduction versus the prior year.

Strong results in EP were the main contributor, as the other businesses experienced difficult conditions.

And this was reflected in our group ROACE of 14%.

Last year the overall business environment was only slightly above our reference conditions, and there were wide variations.

Crude oil, NGL -- I'm sorry -- LNG and gas prices were better.

Downstream conditions were significantly worse, with some of the most difficult conditions on record in refining and chemicals in the first six months.

And there's also great volatility.

Compared with 2001, the overall environment was significantly down, which is reflected in our earnings.

External factors drove over $2 billion, or three quarters of the reduction year-over-year.

In oil products the difference was primarily lower refining margins.

Some chemical products also remained depressed.

Taking the other factors in turn, the $550 million EP reduction includes cost for bringing major projects to the investment stage and about 400 million for the U.K. tax change before partially offsetting credit.

The 150 million OP improvement includes earnings from the three major acquisitions as well as underlying cost improvements.

Chemicals improvement comes from lower cost and a better performance by Bazel.

And other includes lower earnings in gas and powers midstream and marketing and trading businesses.

Our net income was also affected by special items reflecting significant portfolio activity and some accounting items.

Restructuring charges were taken related to divestments and portfolio rationalization.

But divestments overall made a profit of 330 million.

We impaired our carrying value in Intergen by 150 million and previously capitalized oil and gas costs in our equity associate Woodside were no longer considered recoverable and resulted a charge of 135 millimeter.

While depressing earnings, most special items relate to implementing strategy and activities that leave the business in a stronger position going forward.

We've always focused our financial framework on returns and have an excellent track record of improving them, absolutely and relative to the competition.

Before making a conscious choice to seize acquisitions, we were delivering industry-leading returns, 19% actual ROACE and 15% normalized in 2001.

Two key factors drove the reduction in normalized returns.

The acquisitions had an impact of around 1.2 percentage points and the U.K. tax change another .6 percentage points before the offsetting credits.

Other effects include the negative impact of the light-heavy crude differential in U.S. oil products and lower earnings from gas and power, neither of which are normalized.

Looking forward, there will be further dilution from acquisitions in 2003 as the capital employed is recognized for the full year.

But our short-term priority is to return to the 13 to 15% range by reducing unit costs, improving downstream capacity utilization, and upgrading the portfolio.

Our financial framework is based on our ability to generate cash from the operational asset base.

We've always tracked ROACE against competitors and it performed well in that regard.

Here we estimate the cash return on capital employed against competitors, and we do well here, too.

Our cash return has declined less than ROACE because the acquisitions are strongly cash accretive.

We expect our position on this measure to improve over the next few years as the full benefit of the acquisitions are reflected in our results.

We're more than meeting our cost targets building on the $5 billion road map improvement.

Our goal for 2002 reflects a changed emphasis from cost cutting to productivity, targeting an annual 3% reduction in underlying costs from each of our three main businesses.

Refining conditions last year remained difficult, but lower costs in marketing and other businesses more than compensated.

Contributions from Bezell and Equilon Motivo were puts well above target giving a total delivery of 596 million, nearly 100 million above the target.

We achieved this by managing aggressively in all businesses, but especially chemicals.

The ability to react in a changing environment gives us confidence to extends this 3 percent unit cost reduction target to 2004.

Another key element of our financial framework is using capital effectively to grow value.

We plan to spend 12 billion on organic growth and 2 billion more on inherited commitments from the major acquisitions, the Drogan and Pinedale acquisitions and an overrun at the Athabasca oil sands project.

We also used our balance sheet for four major strategic acquisitions.

The cash payment relating to the DEA acquisition will be in 2003, although the investment is included in the 2002 figures.

All of the deals are now closed, integrated and delivering synergy.

The portfolio changes in 2002 increased our capital employed by about 18 billion or 28%.

This larger capital base gives us a greater potential to add value over time.

The plan shift towards EP-GP is occurring as a result of both organic investment and portfolio activity.

The upstream portion increased by 3 percentage points in 2002, notwithstanding the three major acquisitions in oil products

The right chart is another way of viewing the increase.

Acquisitions and organic spending were the main drivers, but there was also a material impact from currency translation effects on the balance sheet as a result of the weaker dollar.

The cash balance also declined by some 5 billion during the year.

These changes were partially debt funded, so our balance sheet is more efficient.

Acquisitions and share buybacks reduced cash to 1.6 billion in 2002, slightly below a representative operating level of some 2 billion.

Year-end gearing was 23.6%, within our desired band.

And our AAA rating remains very important.

Like ROACE, it's a boundary condition for shaping the portfolio.

Our dividends policy is one of the longest established elements of the financial framework.

We've consistently delivered long-term dividend growth, exceeding inflation and local currencies over time.

The full year 2002 dividends for Royal Dutch was increased by 3.6%, and for Shell Transport by 3%.

Now, the U.S. dividends will obviously be influenced by the exchange rate on the date of the dividend.

But if you use the currency rates today, the increase would be about 15%.

At the end of 2002, the dividend yield on both stocks was considerably above a U.S. two-year treasury investment.

We explicitly addressed the dividends range in our financial goals and decision making.

We've said that our portfolio has the capacity to increase cash to shareholders on average by 2.5 billion a year from 2001 to 2005, or 50% more than in 2000.

Up to the end of last year cash to shareholders, dividends plus share buybacks, exceeded this aspiration. 45% of the target in 40% of the time.

As Phil mentioned, future share buybacks remain dependent on cash flow and investment opportunity.

So, what should you expect in 2003?

Well, the business environment is highly uncertain and likely to be volatile, making balance sheet strengths and robust earnings and cash flow a decided advantage.

The U.S. gas price is likely to remain firm, but oil price fundamentals are very uncertain.

Crude prices will be driven by economic growth, winter weather, and geopolitical developments, and we expect higher than normal price volatility.

Refining margins will depends on U.S. demand recovery.

The petrochemicals recovery is weak and variable amongst products.

We'll also be affected by changing markets, accounting standards and security regulations.

Our pension funds have performed well over time with assets valued around 33 billion at the end of 2002.

But we're not immune to the market downtown and FAS 87 credits will decline by over 300 million after tax in 2003.

There will be be cash funding requirements this year, but they'll be modest compared to the relative financial strength of the group.

We plan to adopt a new abandonment accounting standard in Q1, with a favorable special item of about 300 million expected.

Results in Q4 2002 were reduced by the introduction of the latest U.S. guideline on energy trading contracts.

This will have an ongoing quarterly effect, although over time the income effect will be neutral.

We're still addressing with our auditors the impact of the new accounting standards on special purpose variable interest entities.

Sarbanes-Oxley and other governance issues will be addressed by building on our already strong corporate government.

To sum up, 2002 results confirm our ability to deliver robust earnings and cash flow, all within our established financial framework.

And they give us confidence in our ability to deliver on three key activities.

Achieving our 3% unit cost reduction target through 2004 together with the acquisition synergy.

Second, continued portfolio upgrading and divestments.

And third, disciplined organic investments, all in support of the group's short-term priority of returning ROACE into the target range and underpinning our capacity to grow dividends over time.

And with that I'll hand over to Walter to tell you about E&P.

Thanks, Judy.

Let's go to the upstream.

Also, the upstream is all about delivering robust profitability today while investing in tomorrow's project with our competitive edge.

At the same time, it's also about technical and operational excellence and about future value creation.

So, what did we do in 2002?

We think we've achieved a great deal in 2002.

Let me highlight a few key points.

First of all, we delivered 14% normalized returns.

We did that by digesting an 11 billion increase in our capital employed.

At the same time we absorbed unexpected impact of the increases in the U.K. tax.

We delivered a very strong cash flow of a total of $13 billion.

Even in this high-priced environment, we were able to cut our underlying unit operating cost by 3%.

Enterprise fully integrated and already delivered 47 million worth of synergies in 2002.

At the same time, we delivered a record production in our recent history, a record in oil and a record in gas.

And ahead of targets - 3% ahead of targets even without Enterprise -- without Enterprise was 1%.

Very important performance indicators.

I'll come back to that later.

At the same time, we replaced 17% of our reserves and we continued our track record on exploration.

Let's have a look at our cost structure.

Continued cost improvements.

And we now rebased our forward targets by including Enterprise.

So what you see here, the 3% underlying cost reduction, we extended now also to 2004.

This will all be possible by delivering price synergies, by continuing our leading role in industry on global procurement and activities such as on-line bidding, and by also continuing our strong technology capabilities to further improve our cost structure while at the same time we're going to a journey with an even further streamlined global operating model which allows us to further standardize our processes and deliver higher productivity over all.

So, 3% extended to 2004.

Let's look at Enterprise.

We moved very quickly on Enterprise.

Enterprise delivered for pus 850 million worth of cash in 2002.

At the same time, through a detailed look at the portfolio and having fully integrated the assets, we now see 80 million worth of synergies extra.

So, we increased synergies target from 300 to 380.

At the same time, at the run rate of our synergy delivery we were already at the end of last year 50% higher run rate than we had originally expected.

At the same time the portfolio future looks more attractive by two recent discoveries, Tahiti and Duersch in Ireland.

Enterprise still offers great opportunities for leveraging our positions and skills.

Bottom line, Enterprise, the deal is looking better all the time.

Future value is clearly there.

Let's go to the subject of production.

Production has been in the news recently and for the last couple of years.

Let's look at what we actually delivered looking back over a five-year period from '98 to 2002.

Summation's earlier 2002 oil and gas production ahead of target.

And that record was achieved notwithstanding some setbacks out of our control.

We had the strikes in Venezuela which closed down our production for the last three weeks in December.

We had the OPEC restrictions which totalled and equivalent 49,000 barrels a day equivalent for the full year, and we had the impact of hurricanes in the Gulf of Mexico.

At the same time this was in the news, we were experiencing some higher declines in our operations in Oman.

Notwithstanding that, we have delivered an excellent result.

Also important is to note our track record of steady production growth over the last five years, both looking at it organically and looking at it on a total reported level.

Overall we have proven with our track record organically that we can achieve the 3% production growth.

Great year 2002.

Let's look forward.

This chart hopefully is familiar to quite a few of you.

Same break down looking at our production, building from existing business projects and discoveries.

What we're basically saying is that we continue our capability to deliver 3% average annual production growth.

The 3% average annual production growth does now include Enterprise.

And Enterprise roughly represents 1% over that period.

We specifically don't talk about targets, but we talk about capability.

Capability is the potential of the current portfolio to deliver that may be affected by future investment decisions and portfolio actions.

At the same time we try to highlight in this graph 2002 we delivered above our target.

And therefore, in 2003 our production target will be 4.1 million barrels a day at $16.

So, production essentially being flat.

And the reason for production essentially being flat is linked to, as I mentioned, some of the issues, the operational issues we have in placing like Oman, knowing about the slight delay on our Na Kika projects and some delay on the project in Malaysia.

Production growth remains very important, but it is only one parameter for managing the business.

Ultimately we are not moving away from our capital discipline and we do want to grow earnings.

Therefore, we prefer to talk about capability rather than target production.

Let's look at our invest discipline.

Underlying the production capability outlook are our investment levels, all about pursuing value while maintaining capital discipline.

Plan on average going forward about 7.5 to 8 billion a year. 2003 it will be about some 8 billion.

That's about a billion less than we advised about a year ago.

Shell and Enterprise are now fully integrated, as I mentioned to you further.

So, this is all part of upgrading our investment opportunities.

At the same time let me give some clarity on where the investment is going.

About one-third of these investments will go into our producing areas, which will allow us to limit the annual decline rate to some 6%.

But 15 to 20% of that investment will go into these projects that will be the legacy positions we talked about earlier that will start later in the planning period.

This is where the cash accounts and the Sakhalin is [INAUDIBLE] The spending efficiency overall will continue to be enhanced by our technology leadership, as we have demonstrated in the deep water.

So, what does this all do for our bottom line?

Going forward, linking our production capability with our earnings, this is what you get when you look at our average annual growth and unit earnings.

Steady improvement is a key driver which will help us also on our return. 6 to 8% annual growth unit earnings you will get by extending our underlying unit operating cost reduction, by improving our effective tax rate, implying that new production is in lower tax rate countries, at the same time by some other feasibility costs that we have in Sakhalin [having capitalized].

This earnings road is a key contributor to the ROACE improvement in growth overall.

Let's look at some of these world class projects that are being delivered.

First on the left you see EA, the sea eagle, offshore Nigeria.

Significant production is shallow, Nigerian offshore.

Currently ramping up in production after having started up on the 14th of December last year.

Other major project in Athabasca oil sands in Canada, currently in the commissioning phase with a target of having first crude production by the end of the first quarter.

These are really world scale projects in very challenging conditions, providing the platform for future growth.

Let's look at some other projects.

The projects that are going to deliver going forward, Na Kika, plans to come onstream the end of 2003.

This is probably the most complicated deep water development being executed today, setting all sorts of records in technology and complexity in the project.

Six fields.

A lot of innovative technology.

On the right hand side, you see the projects, Bijupira-Salema, onstream middle of this year.

That is the project that we got through the acquisition of Enterprise, where we are leveraging our expertise to overall enhance the value of this project.

Very important.

Look at the longer term legacy assets.

These are real about the long-term future.

Sakhalin project in Russia.

We are extending the first oil phase to develop the major LNG [scale].

We're working that project very hard at this point in time trying to get all the stars aligned on this huge project.

Malcolm will tell you further about the progress in marketing.

We're right inside the Kashagan fields in Kazakhstan.

Development of that giant field is now in the detailed planning stage.

Final investment decision is expected later this year.

Also noteworthy therein the Caspian is the Kalamkas discovery that was made which overall in this area is having significant upside potential and also being aided by the recent acquisition that you saw yesterday announced by Kerr-McGee to further insure that we have the right focus in our activities in this area.

Let's move to our reserve base.

We have a continued growth in our overall reserve base.

In 2002 our overall reserve replacement was 117%.

If you just look at oil, we actually had an organic replacement on the oil side of over a hundred percent, 108%.

You note in the graph that gas additions were not material last year.

The reason for that is that gas additions come in very infrequent lumps tied into major take or pay or sales contracts on the gas side.

And you will know from some of the projects I mentioned we expect substantial future additions.

At the same time our gas reserves remain the highest in the industry, when you look at the reigning reserve life of about 15 and a half years.

When you look at reserve replacement, what really matters is long-term performance, in line with the typical expiration development cycle.

Our five-year effort to improve reserve replacement ratio is 109%.

For oil it's over 120%.

Our five-year proved and probable reserve replacement is 144%.

And it's that combination of proved and probable that we use for planning and working our business.

Let's have a quick look at expiration.

We continue our track record of expiration success. 55% of our expiration appraisals were successful last year, adding 1.1 billion barrels of reserve resources at a very competitive cost of $1.20 on an entitlement basis.

Total resources additions from expiration over the last three years were 4 billion barrels equivalent at a cost of around $1 per barrel.

We also should recognize that over the last 10 years 4 billion barrels equivalent of commercial reserves were added to our expiration effort with 2 billion of those having moved into the approved category and half a billion of those actually already being produced.

So, in summary we are building on our success in 2002.

In 2003 we will further reduce our underlying unit operating cost by 3%.

We extend our production capability of 3%.

We will continue to exercise our capital discipline and will execute world class projects while maintaining our exploration success.

All will translate in the growth and earnings per barrel.

All of this is about delivering continued value growth from our competitive strengths.

As a last comment, I just want to give you a reminder that we will have far more in depth regular presentations for upstream and gas and power in the end of March.

And we'll really look at our strengths and how we apply that to our portfolio and financial metrics.

Thank you very much.

Thank you, Walter.

Ladies and gentlemen, 2002 has been another successful year for gas and power.

Results were definitely helped by global demand for LNG keeping on growing, even in depressed economic conditions.

But conversely, they were hit by very tough trading and power markets.

Now, LNG accounts for nearly half the capital employed, and I will be focusing on that business.

But first, in our seconds largest segment, the midstream, we expect especially to bring Shell reserves to market.

We've been actively managing this portfolio, and in 2002 we divested around $600 million in assets.

And we also agreed to a raw gas deal which now looks to be successfully completed.

Gas to liquid is a small part of the diagram, but I think it offers exciting long-term growth potential and we've been making good progress with two major Middle East opportunities there.

I will start with our power joint venture Intergen where industry conditions have been particularly tough.

Their operating capacity increased 70% in 2002 and it will double from our present 5.2 gigawatts by end 2004.

Tough action has been taken in this business to sell assets, to restructure and to scale back on new developments.

We've cut overhead business development and staff costs by 40%.

After a careful look at forward prospects, we've taken a write down of $150 million in the fourth quarter, reflecting the poor markets conditions.

Integen is now focused on operational excellence, executing projects, maintaining up times and driving for cost leadership.

In fact, in the last quarter, up times were 25% higher than the average shift two years previously.

So, while Integen faces a difficult market, it's success in the restructuring program will mean that it comes through the down cycle as a leading operational and financial performer in its sector.

I turn now to LNG where Shell is the undisputed global leader.

We delivered record volumes in 2002.

As you see, 60% up on just three years previously.

And we achieved more than 20% ROACE at reference conditions.

Nigeria train 3 delivered its first cargo three months early in December and further expansions in Nigerian, Malaysia and the Northwest Shelf are on schedule and within budget.

Sales agreements were completed for Oman, Malaysia, Northwest Shelf and Nigeria.

And the award of the Quangdon supply contract made us the largest shareholder in supplies to the rapidly growing Chinese gas market.

We were also awarded the lead I.O.C. roll in the Venezuelan project and two LNG ships started service and they're immediately busy, giving us flexibility to meet the changing gas demands of our customers.

We're also expanding regasification capacity, for example, with the start up of Cove Point in the U.S. terminal there in mid 2003.

All of this grows value and gives us flexibility and diversity in our portfolio.

Nigeria LNG is a world class project, as Walter would say.

A stunning success in profitability and also in sustainable development.

By 2006 this will be the world's third largest LNG plant.

Shell's technical and our project management capabilities have helped capture the value inherent particularly in the plant expansions and the unit capital expenditures the graph shows for trains 4 and 5 will be just half that for the first two trains.

So, the total capacity of the first three trains has all been sold on long-term contracts and more than half the capacity for trains 4 and 5 which are currently being built is already contracted.

And in fact there's already interest in a 6th train.

I think in just 10 years this project has come a remarkably long way.

We turn east.

Sacolin feels a bit like the Nigerian project 10 years ago.

It's just a bit colder there.

The second phase of our planned Sacolin II LNG project offers many strategic advantages.

We've got a well-established partnership offering key insights into the Japanese market.

The high liquids content will add substantial extra value.

And as you can see, they're much closer to growing Asian markets than any competing source, providing lower shipping costs, and greater flexibility to meet customers seasonal demands.

So it offers a secure and stable new energy source with strong government support.

Sacolin II draws on Shell's proven low cost LNG technology and our proven management experience of the sort I showed in Nigeria.

We're making good [progress] in the market.

And subject to the necessary regulatory, legal and marketing progress, shareholders expect to take a final decision on the investment in the coming months.

Today Shell projects supply over 35% of the world's LNG in a key sector where demand growth is set to outstrip that for pipeline gas and where security of supply is at a premium.

We remain on track to deliver our target of 6% annual average growth in contracted sales from 2000 to 2005, maintaining our very significant lead over any competitor.

We also have the widest global presence, offering greater diversity.

And by using our own shipping and regas import capacity, greater opportunity to maximize the value of each and every cargo.

Projects such as Nigeria, Australia and Sacolin will insure we remain the leaders in global LNG.

We have a clear strategy in gas and power.

Growing contracted LNG volumes by 6% a year, sustaining profit ability with a 15% return target to the established LNG business, investing a billion dollars or so a year for the next five years, over half in LNG, continuing to upgrade our midstream portfolio and deliver the Intergen restructuring benefits.

Your booklet shows the major projects that will start up in the next three years.

And we're pursuing more new projects to fuel future growth.

In summary, we have a very strong position.

We've got excellent assets, excellent people, excellent technology.

We've got a truly global presence and a strong set of customer relationships.

This is an unrivaled position, and we intend use it well, to grow value for shareholders and to pull through upstream volume growth.

Thank you.

Over the past years we completely transformed this business.

What we did was we divested 40% of the portfolio.

On the 60% that we kept, we globalized the organization, we formed Bazell in Germany, and in the meantime, we restructured our business.

So, is that all fine?

No, it isn't.

When we looked at our results of 2001 in 2002, we were not satisfied with the returns.

So, we felt we have to revisit our strategy.

So, we have began an in-depth look at our strategy and we concluded that more or less the present strategy that we have, with some modifications, and I'll come to that, was the right strategy for chemicals.

We call that the cracker first round strategy.

What does that mean?

It means you use the feed stocks of your refineries or [INAUDIBLE] crackers and then we do [INAUDIBLE].

For instance, polyolefins.

You can see it on the first slide.

Of course, synergies with the refineries not only those hydrocarbons, but think about energy synergies, think about people, the use of combined specialists, and of course, everything on the one side, you can manage it a lot better.

And last but not least, chemicals and all the reserves adds to the technology basis of the Shell group.

So, we think, we know that the results are very modest, but we feel we are very well placed for the future.

As an example how we introduce this global strategy, this is the slide which we in fact used for quite some years.

It basically tells you we are in petrochemical chemicals.

We realize it is a bulk industry.

We supply to large customers from a lot fewer sites than we did some years ago.

And around that circle at the outside I gave you some achievements of 2002.

You see there on the west the huge cost takeout which is going on there.

And in fact the other examples is how we continue to streamline our business.

Here you see this strategy don't work.

How do you know?

This is about a 14-year graph.

And where you see in the blue-shaded area are the returns to the ROACE of our major competitors.

You see, as well, a cyclical industry where this red line, where we were let's say ten years ago, basically behind the major competitors.

And over the past year we got within that blue.

The second point I'd like to make here is that 10 years ago you see that line, that was us, we were under water.

And in the present downtown turn at least 10 years ago we see we are still in the black numbers.

We look at Bazell.

What has happened there is quite incredible over the past years.

Of course, they live in an industry environment which I characterize as lot of [INAUDIBLE].

But they realized their synergies ahead of target.

See what they did do with their head count.

The portfolio had a most [INAUDIBLE] certain plants, which is quite remarkable in an industry which is basically a growth industry.

That, of course, resulted in a turn around of the results.

We do know that.

But so far it has met our expectation, especially in the business environment.

Nanhai, Phil mentioned in his introduction, this is one of the various initiatives in China.

And what is it?

This is a $4.3 billion greenfield site.

Together with Sea Nook, we made a decision on the first of November last year, and we hope to start up the plant three years from now.

Why in China?

This is the fastest growing petrochemical market.

And you see we are located close to Hong Kong.

I think a very good spot.

If I look now to the future of chemicals, then we realize that the industry environment for chemicals will be for quite some years to come pretty weak.

So, it is really a weakened industry environment, especially in the States and Europe.

So, we think from the short to the medium term that the expected ROACE that we can achieve of this business is 12% to 15% between the short and the medium term.

As a consequence, we have said in our strategy that we will invest less capital into chemicals than we expected a year ago.

If you look over a five-year horizon, a kind of five-year investment plan, we have had a takeout of $1.2 billion of capital.

So, I emphasize we still continue to investment in chemical, but less, $1.2 billion less than five years.

Or to say it another way, the average speed of investment that we expect now is $650 million per year, including our part of Nanhai.

Of course, we continue the cost reductions.

We make sure that we get on the interface of chemicals to the oil side from the supply and to the downstream side, to Bazel, that we get the maximum amount of those interfaces, continue to restructure Bazel, and we will increase coal generation.

So, to sum up chemicals, they are part of the Shell family, an intrinsic part of the total Shell.

We will invest less capital.

We see a 12% ROACE environment, and we are well placed for the future in this industry.

Then I come to a few words about renewables.

This is only one slide.

Renewables are still very small today.

But that's not the point.

The point is that renewables may be important, say, 30 or 40 years from now.

So, what is it that we have to do at Shell to position our company for that long-term future?

It is our desire to have four pots on the fire.

Solar, we took over Siemen's.

Winds, and biofuels and hydrogen, if you see that as a renewable, biofuels and hydrogen, we put developed those businesses via joint ventures.

What do I mean by the remark "a commercial proposition"?

It is our aim to make normal commercial businesses in the long-term.

If we are successful with that, of course it has benefits.

So, it is not a sure [INAUDIBLE] green wash, and if we get some brownie points, or greenie points, I should say, to do that now.

It is really about normal business.

But of course, as a responsible company, we like to have the benefits of that.

I turn now over to Paul.

Thank you, Jeroen.

Good afternoon, ladies and gentlemen.

The oil products presentation has four main messages.

First, the business delivered a strong competitive performance in 2002 in a very tough business environment.

Second, major acquisitions in the U.S. and Germany provide platforms for substantive growth in earnings and cash flow.

Third, our strategies and targets are unchanged, including global leadership in unit earnings, operational excellence in continuing cost reduction and the delivery of cumulative synergies. $525 million in 2003, $725 million in 2004.

And continuing portfolio upgrading.

Fourth, the business is on track to deliver a global 15% ROACE at reference conditions in 2004.

In 2002 we delivered a resilient and competitive performance in a tough industry environment.

Refining margins were at historic lows over the first nine months.

Rising crude prices squeezed marketing margins, demand growth was weak, as was the U.S. dollar.

We achieved a global 13% at our new and tougher reference conditions.

Outside the U.S. it was 16%.

Reducing marketing cost by 3% enabled us to deliver a 2% overall reduction in the business, but even so we fell short in refining as a result of unplanned maintenance and throughput productions for economic reasons.

We talked to you in October about that.

Earnings growth continued in key customer-focused initiatives, differentiated fuels, convenience retail, global marine products and global solutions.

I'll give you some figures in a minute.

Major acquisitions were completed in the world's largest and Europe's largest oil markets, strengthening our competitive position and offering the potential for major future earnings growth.

We're delivering the benefits quicker than expected.

Our strong competitive performance last year delivered adjusted global earnings of $1.8 billion, 39% ahead of Exxon Mobile, leaving Chevron Texaco a long way behind.

We'll see what BP has to say next week.

The decline from 2001 reflected weaker refining and marketing margins and lower trading and shipping income.

Our ability to deliver leading global unit earnings comes from a number of directions.

The quality of our portfolio, particularly in marketing, supported by our industry-leading brand strength, a resilient contribution from our global businesses, continued improvements in costs and operational excellence, the success of target initiatives to grow earnings and the significant upside potential which still remains in the U.S.

Our first priority, and absolute determination, is to increase this earnings lead.

Customer focused initiatives are delivering increased earnings in many parts of our business.

Differentiated fuels are now improving volumes and margins in 46 markets.

Volumes increased by over 20% and income by 10% in 2002.

But for Argentina, that latter figure would have been quite a bit higher.

A refocused last capital intensive business model for convenience retailing is delivering steady growth in revenues, growth margin and income, the latter up by 70%.

A major restructuring of global marine products, that's the bunker and marine lubricants business, driven by new products, supply chain optimization and cost reduction raised earnings by 40%.

Global solutions is expanding its third party customer base.

Increased total revenue by 30% in 2002 and earnings by 25%.

Another of our global businesses, aviation recovered very well after the difficult events of 2001 in the aviation industry.

Our target framework is unchanged from December 2001.

We are aiming for 15% ROACE at reference conditions on a global basis and at least 12% in the U.S. by 2004.

Global returns in 2002 were depressed by the U.S. where a disappointing refining performance offset some very good progress in marketing, cost reduction, and asset integration.

We're determined to achieve 3% annual reduction in both marketing and manufacturing unit costs.

Manufacturing intends to get costs back on their long-term downward trend this year by improving reliability, raising intakes and delivering operational excellence.

But you should recall that we achieved a 35% reduction in refining and a 20% reduction in unit marketing costs over the period 1995 to 2001.

We're committed to delivering some $700 million in synergies from our three strategic investments by 2004.

And I'll show you in a minute we're well on track to do so.

We aim to keep capital investments within the competitor range of around about a dollar per barrel of sales and planned spending in 2003 is $2.5 billion.

We will continue to upgrade the portfolio, divesting in non-core or underperforming markets and seeking opportunities in major growth areas.

We're challenging around 10% of our asset base over the period 2003 to '04.

Delivering the benefits from these acquisitions is vitality for achieving our ROACE target.

I'll start with an overview.

Against a backdrop of depressed refining margins and lower retail margins good progress was achieved in the USA in reducing cost structures and nearly 60% of total planned synergies were delivered.

But our refining performance disappointed.

Notwithstanding performance in hydrocarbon management, as unplanned shutdowns again impacted earnings, and light/heavy crude differences were lower.

In addition, trading, transportation and aviation results were also lower, although not for structural reasons, as we had a number of one off costs related to the overall transition process.

Under reference conditions, with historical light/heavy differentials and adjusting for those transition costs, we estimated U.S. earnings would have progressed to around $500 million in 2002.

The Pennzoil Quaker-State deal which we completed in October was already delivering a 35 million per annum run rate in synergies by the end of the year and more than half the planned synergies should be realized in 2003.

DEA, in Germany is on track to deliver targeted 150 million synergies next year and we are now raising the bar a further 35 million to 185 for 2004.

Overall, as I mentioned earlier, we aim to deliver 525 million of synergies in '03 and 725 million in '04.

A few words on each of the acquisitions in turn.

We're already gaining significant benefits from the Texaco asset integration, streamlining the business structures, integrating the assets into the Shell business, capturing synergies and moving to a single Shell retail brand.

Synergy capture of $235 million in the first year was ahead of expectations with a focus on support costs and sales and marketing expenditure.

Over 40% of the planned reduction of 1750 in the work force has already taken place.

Retail conversion is ahead of plan, and we're confident that targeted Texaco wholesale volumes will be committed to Shell supply contracts.

Some 12% of targeted Texaco sites have already been rebranded.

A typical site rebranding is taking about five days.

And early direct market site conversions are delivering volume outputs of 5% on average as they switch to Shell.

Together with the upgrading of Shell sites from an old Shell imaging to our global imaging has delivered a .3% overall increase in market share, taking us very close to 15% in the United States.

We still envisage a site rationalization program of about 30% of the network, but do not intend to lose volume on the way.

And we expect to see a major improvement in site efficiency.

We do need to improve refining reliability in the U.S., minimizing the unplanned downtime which hurt our 2002 earnings by over $100 million.

And about three quarters of that fell in the fourth quarter.

There was some progress in 2002, but we will work much harder to bring our refineries to [INAUDIBLE] in the first quartile.

And we are pursuing a major program to transform work processes by the end of 2004.

We're also targeting network integration, supply optimization, hydrocarbon management, together with improved utilization.

This will yield an overall gross margin improvement of 30 cents a barrel on an annual intake of 400 million barrels.

That is in addition to our targeted cost reductions.

We're also now beginning to look at the structure of our U.S. refining portfolio.

We've already announced rationalization of our base oil capacity.

And our aim is to insure that all our assets can deliver competitive supply into their respective envelopes.

It's essential that we have a competitive refinery system in the first quartile.

We've made good progress on Pennzoil since October, a very smooth customer transition.

And the Q4 results were in line with the plan which Pennzoil had in place at the time of the acquisition.

The synergy capture targets are very well defined and being tracked, as they are in all our acquisitions.

The work force will be reduced by around 1200, and we've already announced the closure of seven out of 16 Shell and Pennzoil blending plants by the ends of 2003.

The required divestment from the XL base oil plant, the joint venture with Phillips Conoco, is progressing well, and we have a lot of buyer interest in that asset.

Base oil capacity at Via Clark and Martinez is being closed and supply focused on Port Arthur and third party contracts.

Major international activities in Canada and Mexico are being integrated.

In Germany, capturing the synergies from the DEA acquisition has also progressed well and started to move into a higher gear once we took full control in July.

Early synergies of 80 million dollars per annum were obtained by network reduction, refinery network integration,supply chain optimization, and hydrocarbon management.

We saw good income generation in the second half of the year, as European refining margins improved, as did German retail margins.

We're about halfway through the initial planned work force reduction of 750.

And there are major benefits from full operational alignment with Shell Europe and from implementing a single retail business model.

We envisage a progressive migration of the network to the Shell brand.

Two major heating oil businesses have been fully integrated.

And all the non-retail remedies requested by the German cartel office have been implemented.

The retail compliance action is well advanced and will certainly be completed this year.

In summary, we now have a strong platform to grow earnings by delivering the identified acquisition synergies over the next two years.

We look for continued improvements in processes and efficiency.

And I believe we still have a lot to gain from further standardizing business processes on a global basis.

We will vigorously pursue our programs to deliver operational excellence in refining and retail, particularly in the U.S.

And there's further scope to increase income from convenience retailing where performance in 2002 was very strong.

Our global businesses have the potential to continue growing and to add to our competitive strength.

We will have by the end of this year a global lubricants business in place based on the leadership platform offered by the Pennzoil acquisition.

And we will continue to upgrade our portfolio, rationalizing underperforming markets and non-core activities and continuing to pursue opportunities for profitable growth.

We're on track to meet our returns targets and to achieve sustained global earnings leadership in the downstream.

Thank you.

Thank you, Paul.

Before going into the last few charts, we extended the presentation today a little by having a special module on Enterprise and the three acquisitions in the downstream.

I'm very conscious that most acquisitions destroy value.

Also, most of them you never get to hear the full story as to whether the value was delivered or not.

We're absolutely determined that that is not the case for the acquisitions we made in 2002.

And you saw charts there that were used for our quarterly meeting and with our boards where we tracked that.

I think you chaps track it every month, if not more often, some of it.

But to make sure that we do deliver.

And part of the reason that I feel so strongly about this is that it took us outside our 13 to 15% range.

We consciously did that.

But when we did it, we talked about how we were going to get back into the range.

And we're going to get back in doing all those other things, but especially delivering those synergies and delivering the value from those acquisitions.

I'm delighted to be standing here today saying that they're ahead of schedule for the moment, which is good news.

But anyway, turning to the last session, if I may, the way forward, the differentiating strength of Shell is the unrivaled reach and depth of our portfolio, geographically, politically.

As far as fiscal diversity, it gives us tremendous resilience as well as a wealth of new opportunities and supported by our technological leadership in some key areas.

We think it's a unique portfolio.

And frankly, we wouldn't swap it for any other.

We worked have hard to enhance our capabilities and to develop and harness the skills of our people.

Our worldwide survey results of what Shell people think, and it's amongst the largest survey ever done around the world, help us to measure our progress.

The results of the latest one that we looked at a couple of weeks ago, completed by 78% of our staff around the world -- note that 78%.

This is a remarkably high return rate for such a disparate and distributed population.

They really show significant improvements.

And we exceed the high performance bench mark standard in terms of staff morale and the like for almost all of the key measures.

Our diverse portfolio provides great resilience in such uncertain times as these.

We're now even better placed to grow upstream earnings at high oil prices.

For example, through Enterprise and Athabasca.

Our production sharing and LNG contracts are robust against low prices.

We're very well-placed in the downstream to benefit from any upturn in demand, particularly with our enhanced market positions from the acquisitions, as Paul said, in the United States and Germany.

I believe that the unique strengths of our portfolio offers less volatility for investors in a very uncertain world.

Being trusted to behave properly and to contribute to society has never been so important for business.

And I must say in Shell we take it very seriously.

We believe that we earn trust by working to understand people's expectations, the expectations of society, acting always and everywhere on clear principles, assured by strong corporate governance, contributing to society by supporting and doing our business in line with sustainable development, and not least, being transparent about it all with first rate communications about what we stand for and what we do.

We've no doubt that doing this is good for our business and that we'll gain competitive advantage by responding early to the changing business environment.

I already said it, but I'll say it again.

In conclusion, key priority is to return our normalized ROACE to above 13%.

And we know how to do it, by continuing to improve performance, delivering those synergies and unit cost improvements, by continuing to grow volumes, executing good projects, and by continuing to upgrade our portfolio in line with our strategic direction.

We're very clear about the way forward.

It depends on robust performance, improving returns diluted by our strategic acquisitions, delivering the range of exciting projects that we have in hand, realizing the potential of our unique portfolio to establish new legacy positions.

And thus, insuring that we retain the capacity to grow dividends for our shareholders.

We'll build on the pivotal year of 2002 for the Royal Dutch Shell group, maintaining our momentum in difficult and uncertain times.

Thank you for the opportunities to discuss with you.

We'll move to questions, and I hope satisfactory answers.

Thank you.

I'll try to be properly democratic around the whole audience here, but there are apparently many more on the telephone outside, so occasionally I'll switch to Simon here for connection with the outside world.

There's a question there, and then secondly on the front here.

You, sir?

Could I ask you please to - you're about to - identify yourselves and your affiliation.

That will help us to respond.

Sure, Paul Spedding from Dresdner.

You managed to beat an underlying upstream growth target in 2002 despite the impact of OPEC, hurricanes,etcetera, which suggests very good performance, or perhaps the target was conservative when it was set.

I was going to ask Walter whether he felt it was more likely that Shell would beat its 3% growth targets up to 2005 or would undershoot it?

Walter?

This is an unexpected question.

Yeah, Paul, a very good question.

Obviously, as I've tried to mention in the beginning, operational excellence is at the core of our delivery in 2002.

And we have achieved in many places over the world record times and real strong performance that helped us get what we delivered in 2002.

At the same time we showed the track record, and the track record gives you some confidence going forward.

So, let's leave it at that for the moment.

I'm sure there will be supplementaries on production.

A question in the second row there.

Careful, careful.

Okay.

Thank you, it's Neil Perry from UBS Warburg.

Last year, this meeting you signaled $20 billion or so of capital capacity to spend, which signaled the start of a phase of acquisition.

This year you're talking about the importance of returns and the importance of the the AAA rating, does that signal an end to the period of major portfolio change and can you also emphasize your commitment to the AAA rating, and under what circumstances you'd be prepared to sacrifice it.

Also a fair question.

You would expect me to say right at the outset that in response to questions like this we never say never.

But as far as buybacks are concerned, I think it's fair enough in these uncertain times with a lot of volatility, it's not unreasonable that we wait a while for the fog to clear.

And that's why we've been pretty clear that it's unlikely we would be having buybacks in the first half of this year.

And I think everybody, frankly, would understand that.

Now, as far as getting back to our returns target range, what I said just now I hope is absolutely crystal clear.

That's a real priority for me.

Very, very important.

As far as acquisitions are concerned and divestments, we have the plans for divestments that I talked about.

We actually announced a modest acquisition yesterday and today in Kazakhstan.

Actually, this one was reasonably modest.

As far as future acquisitions are concerned, within that financial framework it's a matter of affordability.

And I'll turn to Judy to talk about how important we think the AAA rating is to us.

Judy?

Well, just going back to your flexibility question, Neil, you're quite right.

We had 20 billion last year and we spent about 16 billion on acquisitions, another two extra on capital expenditures and 1.3 billion on share buybacks.

So, our gearings and range were at much better balance sheet positions.

We have a lot of strength going forward with our cash generation.

We talked about cash returns and the fact that they're going to improve over time.

And that will give us our flexibility going forward.

AAA remains very important to us.

But as Phil says, that doesn't necessarily negate acquisitions in the sense of the trade-off between acquisitions and organic growth.

So, looking forward, we'll be using that kind of flexibility to continue to build our portfolio.

One our thing about buybacks.

Phil talked about the uncertain times on buybacks.

Just a reminder: under Dutch law, when we start a buyback program, there's a certain minimum that we have to buy back during the year.

Otherwise there are some adverse tax consequences associated with it.

And this year the minimum is about a billion and a half, given the exchange rate fluctuation.

So, we think it's prudent given that as we go into this year, I'm not sure anybody can predict what's going to half, and that's really why we're waiting till the second half of the year.

And in terms of cash generation, it was quite interesting, the purchase of Enterprise, Walter.

You already made it out of your cash flow this year.

Yeah. 14 investments versus 13 billion cash flow.

So, we're getting close.

Thank you.

I'm going to go to the front row here, if I may.

And then we'll --

J.J.

Traynor from Deutsche Banc.

Organic reserves replacement, below 100% for the second year in a row.

In terms of auditable, or I should say audited, financial trackers for the upstream, that base eliminates several measures for 2002.

Could you talk a little bit about the definitions of unit earnings in your plans to grow unit earnings in the upstream.

We don't, I think have any track record of what's been going on there, what are the recent trends in your returnings.

And what the return on capital employed target for the upstream?

It's interesting you mention unit earnings because this creation of value, there's more to it than just volume.

We need to know the unit earnings, as well.

That's why Walter has come forward with some ideas for the future.

Walter?

Yeah, I mean, trying to flag now unit earnings is so important because it's -- it really tells you what ultimately you're trying to deliver with your production growth.

I mean, the -- this is what I projected there.

Obviously we have in recent past been higher on unit earnings.

And that's part of the depreciation we take with Enterprise.

And the whole part of moving the unit earnings up is all part of the EP and the group target of got being back into the range.

And EP is part of the overall framework.

It's key to go back to the 15%.

So, it is all part of that same aligned process.

Yes, please.

Just to be clear, are you actually disclosing what unit earnings are doing in future presentations in that environment, and is there actually a divisional return on capital employed now for the upstream that you'd like to share with us?

The target for upstream is to return to the 15% over the coming years.

I mean, that's -- nothing has changed from a normalized basis.

That's where we're going.

No change.

That's right, Walter.

Yeah.

And having come forward with unit earnings, costs or whatever, we will track those and discuss them with you and be transparent about it.

I think that answers your question pretty clearly.

I'm going to go three rows behind.

Sir?

Richard Franklin, Morgan Stanley.

On the chemical side, just to really get more light on the downgrading of the mid cycle returns to 12% and how you sort of matched that with the ongoing view that [INAUDIBLE] should be able to return 15% under your road map conditions, how you're going to get from 12 to 15 over time?

Thanks for your question.

And of course, [INAUDIBLE] First of all, we say for the short to medium term 12%.

That is, say, at the coming cycle.

Nobody knows exactly how long the current cycle is.

I'll explain why.

Because we think in the short-term, chemicals will have a particularly weak business environments.

Then, of course, if I understand from your question, how does that fit with the 13 to 15% of the total Shell group, I any that the reality is now that we are about -- we are still a bit [INAUDIBLE] but in the future about 10% of the chemicals will be about 10% of the capital employed by the group.

And then you see that you make 12% or 15%.

If it's 10%, you can all calculate very fast, it's .3.

So, that's how we view that.

But I think we looked at the chemicals business.

And at a certain point you have to be realistic about the current environment.

And it's no good living in cloud cuckoo land.

That's why we came down to the 12.

But in the fullness of time, our mature businesses are expected to aspire to 15%.

I want to go to this side of the room and be fair.

On the third row there, sir.

Thank you, Richard.

Thank you.

Fred Lucas, Cazenove Two quick questions.

You show a production at $16 with flat production in '03.

I wonder what happens to that figure if we go to $25?

And the second question, simply what is your U.S. cap employed and what happens to it offer over the next couple of years?

Walter, and then Paul.

I'm afraid I can't answer that question directly, what the number is at 25.

But I'm sure Sam Henry can help you out to translate because it's quite a complex calculation given all our PSE effects and those numbers.

Simon is sitting on the front, if you want to contact him.

U.S. capital employed is just around $10 billion.

$10 billion in the U.S.

We'll stay on this side for a moment.

Yes?

All the questions are from the front of the hall.

I need to move back.

Jeremy Elden from Lehman Brothers.

The deterioration that a lot of companies have experienced in downstream results recently, it seems to us looking from the outside that the falloff in earnings is rather bigger than can be explained just by the movement in the indicated margins that we can see, the sort of headlined ones.

Are you seeing a lot of other things, the less visible margins deteriorate, or is it other losses of efficiency around the business?

And also, could you tell me if you're still keeping Fix a Flat, or have you transferred it to Walter?

Fix a Flat is a great brand, actually.

And I'll make sure you get a Christmas hamper at the end of this year. [ laughter ] But it has been a very, very difficult year for the downstream across the world.

Some of the margins we've seen in refining and marketing, particularly in the early part of the year, were even worse than we saw in 1999.

We actually take some satisfaction from the extent to which we were able to offset that by productivity and other performance improvements, particularly in some of our specialized businesses.

But it's been hard going for the whole industry.

And the results we're seeing, I think support that.

One thing I think which has hurt refining structurally is the deep conversion processes in which a lot of people invested.

And of course, as OPEC has cut back its heavy oil production, that part of the value chain has been very squeezed.

And of course, if you have a sustained -- going to the other ends of the value chain in marketing, if you have a sustained period of very high prices, it becomes very, very difficult to maintain and strengthen returns in that part of the business.

And all of us have seen to varying degrees some very difficult economies, in Latin America particularly where we are certainly significantly exposed, as are Exxon.

And there are some offsets for this.

But I think perhaps they're some of the factors which have made this an even more difficult year than was 1999.

But I think you have to keep a perspective.

It's interesting.

After that '99 tough year, our business then had its two best ever earnings years in 2000 and 2001.

That's not a forecast for this year.

It's certainly a hope that we will return to that improving earnings trend.

The silver lining to that dark cloud that has just been described is that if you're wanting to make the case for change in your organization around the wormed and especially in the States it certainly helps.

I'm going to go out of the room for the first question.

The next question comes from Mr. Bruce Lanni.

Please state your company name followed by your question.

Good afternoon, gentlemen.

This is Bruce Lanni from AG Edwards.

Could you expand a little bit on the reserve replacement number that you had?

I know there were some comments on it.

But could you break down the organic replacement as far as geographically where you had your most success?

And if you could in addition to that, please, just follow up the Cap Ex on the E&P side and give us a little bit of flavor going forward what the percent breakout is going to be on development projects, especially in some of your new frontier areas?

Did you get that, Walter, reserves replacement and --

Thank you, Bruce.

I guess you don't have access to the booklet, because we are all looking at, which actually breaks out the organic versus the total reserve replacement and also splits it out between oil and gas.

So, the total reserve replace is almost 17%.

If you look at it over a five-year period, it is almost 9%.

As I mentioned, on the reserve replacement on the oil side we more than replace our reserve.

That came predominantly from improved recovery and from discoveries coming through.

So, that is clearly something we would like to see, that these things come through the bottom line.

If you look at some of the area acquisitions, one of our key areas in the group United States has been doing extremely well in reserve replacement last year.

They more than exceeded their production replacement, as well.

I think they were around almost 20%.

Almost 34.

So, that's one of the key areas that we see in the group.

Overall we talk about our remaining reserve life, both on the oil side where we're looking at about 12 and a half years, and the gas side at 15 and a half years, those are very competitive and very strong positions.

And I think that is very important to remember, as well as the facts that we look at our probable reserves and inclusion, as well, that we use for a planning base, we continue to see growth in the total reserve figure, as well.

So, that is's very encouraging.

On the investment side, what we said over the next couple of years, maintaining that investment level of about 7.5 to 8 billion dollars per year, we say that about 15 to 20% goes to these real sort of frontier type of projects.

We mentioned examples of the Kashagans and the Sakhalins.

Does that give the answer, Bruce?

Okay, Bruce?

I think we've lost him.

I'm going to go to the back on this side and then come on to the middle of this side where the hand is up at the moment.

Mark Iannotti from Merrill Lynch.

You talked in previous presentations about the difficulties in juggling profitability and growth.

Today's presentation seems quite clearly focused on profitability.

Is that something we can expect to be sustained through the medium and the longer term, or is it just a function of the fact that you've got synergy benefits to be had this year from last year's acquisitions?

My other colleagues may want to answer, but we try to find that good balance between profitability and growth.

But we want to get back into the 13 to 15% range for the group.

But if you look at all of the businesses, you see growing volumes, cost reductions, growing margins the way of businesses are being run.

So, this is not a business that is not -- that's not growing.

Look at our capital employed.

It went up from $65 billion at the beginning of last year to $83 billion this.

What we're talking about is instead of having 12.5%, which is what it turned out on a much lower average capital employed last year, we're looking at 13 to 15% on the new number of 83.

I mean, if this is not a growing business, I wonder what is.

Added to that, if we invest $12 billion with capital discipline, I think our depreciation at the moment is running at like $9 billion.

So, the emphasis is on returns, but there's a lot of growth coming at the same time.

Thank you, Mark.

There was a gentleman with his hand up in the middle there.

Thank you, Daniel Samama, Exane.

I've got a question on the U.S. oil product results in the fourth quarter.

Could you mention what has been the contribution from Pennzoil acquisition, and could you also mention what was the one off items relating to the retail business and what was the amount, and also what was the amount of cost of shutdowns in the refining in terms of opportunity costs for the quarter?

I can give you the answers to some of those questions, but not all of them.

Pennzoil I would just say, mention first, is on track in line with the plan which Pennzoil previously had.

It now forms part of a much wider lubricants business, and it would not be our intention to isolate that result.

As far as the fourth quarter is concerned, the U.S. downstream reported a negative 85 million.

Almost all of that, in fact, pretty much to a million dollars was the impact of unplanned shutdown events, hurricane-related and otherwise, at a time when there was some margin strengths, maybe to which we inadvertently contributed a little bit.

So, that was a significant factor.

We also incurred some transition costs, 30 to 40 million.

And there was an impact in the U.S. of the new accounting standard which impacts the reporting of trading energy contracts of about $15 million.

So, had the business run normally, we would have seen a quarter probably much more in line with the third.

Thank you, Paul.

I'm going to go outside again, if we may, in deference to folks there.

How are you, Simon?

The next question comes from Mr. Fred Leuffer.

Please state your company name followed by your question.

Fred Leuffer from Bear Stearns.

On reserve replacement, first can you reconcile for us the two numbers you gave, 85% organic liquids replacement, and then -- that was shown in the table.

And then in your comment you said 108% organic replacement for oil.

That's the first part of the question.

And the second is can you detail for us what was booked in the United States to -- I think your number was 136% replacement?

And then there's the third part, which just --

Which fields?

Which fields, yeah.

And then thirdly, can you just talk about what major development projects are in the queue that weren't approved in time to be booked as proved reserves?

I know you've got Kashagan and Sakhalin, but what other ones are in the queue waiting to be booked maybe this year?

Thank you, Fred.

Walter?

The first question on the 85%, what it is there, it's oil and NGLs.

The number, I'd say about oil -- at 109% it's oil only.

That is splitting out oil and the NGL.

NGLs you will appreciate, come with gas.

The second question around the U.S., when it comes to reserve replacements, the key areas where we had the positive revisions were in California in our operations that we have jointly with Exxon-Mobil where continued good performance allowed us to increase reserves.

That's one of our top operating areas in the world.

And then there has been continued effort in reserves in deep water fields.

These mature deep water fields who keep on growing and growing and delivering and delivering.

So, those are two key assets we have when it comes to reserve revisions in the U.S.

When you look at sort of the improved recovery type of revisions we did last year, they go to a whole variety of areas in the world.

They can be all the range in terms of our mature fields in Malaysia and Brunei, to places in Denmark.

It's part of global operations.

It happens in many, many, many places.

Thanks you, Walter.

There's one there.

Sorry.

I see that microphone.

And the next one is next to the microphone there.

This one first.

Gordon Gray from JP Morgan.

Another question on upstream volumes, I'm afraid.

On page 36 it shows a fairly gentle growth for the next few years and then an acceleration in '06-'07.

I'm just interested to compare, when you look at the number for 2005, the volume is on the order of 4.2, 4.3 million barrels a day.

Tracking back to the presentation a year ago, the volume target for 2005 looks like it was very similar, sort of 4.2, 4.3, as well.

Now, given that in the interim you've acquired Enterprise oil, the implication is that there are some negative moving parts that have happened over the period.

I wonder if you could explain what they are.

I think our three factors relate to it.

I mentioned the overall high grading of our portfolio in terms of investment opportunities, which ultimately relates to the desire to grow our unit margins.

There is an area which I mentioned briefly in my presentation, some areas of the world we had steeper declines than we expected.

Oman is a key example where our Oman operation is going through a transition from infill drilling in a lot of fields to water floods.

And that takes time to sort of pick up in terms of response time.

And then we had also some slippages on projects execution.

And that's where I mentioned Na Kika will be a little bit later and the same with some of the -- the timing that was earlier on some of those new deep water projects, like in block 18 in offshore Angola.

They've come in a bit later in the process.

And that's why you see that the production potential buildup is back end loaded if you look at the graph and seeing the big steps in 2006, 2007.

They're not going away, but some are coming later by choice and some are coming a bit later through slippage I think is the bottom line.

The gentleman there.

Jason Kinney from ING.

That last question was part of my question as well.

But maybe you could shed some more light on your assumptions for the effects on Shell's portfolio from OPEC restrictions going forward.

And slightly differently, what progress has been made on the sales contracts for Sakhalin LNG, given that a final investment decision is to be made early this year?

Walter, the impact of OPEC in 2002?

I mentioned earlier the impact of OPEC in 2002 was 49,000 barrels a day equivalence.

You will appreciate currently we don't have that much debt constraints apart from the fact that we can't quite do what we want to do in Venezuela.

That's one of the things that we can't predict.

If you look overall at our portfolio, and OPEC exposure, you look at sort of a percentage of about 13% of our volume being exposed to OPEC countries.

So, that is, I would suggest, reasonably modest.

And it's a simple observation that when we're constrained there, we enjoy significantly higher prices on the rest of the portfolio.

But Malcolm, Sakhalin?

Yes.

Let me just say that the Sakhalin project we're really looking forward to.

I told you earlier about creating legacy assets, as this is one such opportunity that we'll look at for decades to come, I think.

We talk about making final investment decision in the coming months where a number of lights have to go green before we go.

These on the engineering side.

On the regulatory side.

And we come to your question on the marketing side.

I think the marketing is going well.

We've got a strong value proposition for customers because of the reserve base and particularly the proximity, the security, the government support and so forth, it's an asset that people are very keen to have a chance to get supplies from.

Negotiations advanced with quite a lot of customers.

Strong marketing progress in Japan.

I am not going to talk specifically today about specific customers and specific status.

What I will say is it's progressing well.

And the circumstances to sell LNG into the Far East markets, into Japan, Korea, Taiwan and eventually China are looking favorable, particularly this winter has been tight for LNG and people are very interested in diverse and secure sources of future supply.

Thank you.

Thank you, Malcolm.

The second row there, sir.

Rob McLean with CSFB.

Can I just ask a question about your cash flow cycle that you sort of chart off.

As you said yourself, capital employed has grown very quickly in 2002.

We'd expect it to grow a bit more going forward.

So my question is, to satisfy your cash flow cycle, you actually need to get into your target range or doesn't 13% make the numbers work?

And if you do achieve 14 or 15%, what do you do with the excess cash?

Does that come back to shareholders?

Or do you spend it?

My quick answer before turning to Judy is when we're over 13, we might talk about the 15.

But at the moment it's 13 to 15.

You know, part of the discipline that we have in Shell about setting a target range and being inside it.

Judy?

But if we do get back into range, you're right, Rod, the numbers do work.

I think if you have 13% on an approximately 85 billion capital base and about 9 billion of depreciation, you get there pretty quickly, especially since debt adjusted cash flow in that number.

So, it's before exploration expense and before interest, as well.

But I think in terms of where we put the cash going forward, that's a trade-off between the opportunities that we have internally.

And if we have very strong projects, I'm sure the shareholders would want us to do that, given that that's our business.

But there's always a trade-off in terms of where that excess cash will go.

Thank you, Judy.

The gentleman on the right-hand side with the red tie.

Well, there's somebody else with a red tie.

He just got the microphone.

I'vwe hijacked it.

Peter Nichol from ABM Amro.

A couple of questions again on the upstream.

Do you highlight the better performance and reserve replacement on the probable basis, when do you see that coming through to your proved reserve booking?

And what also is the reserve replacements on an organic bases on the program probable?

And if I could ask something in a totally different light, do you see any implications for the group structure arriving from the proposals in the Hicks report?

Walter?

Yeah.

As I mentioned, we -- as a part of our normal day-to-day planning process, we look very hard at the combination of approved and probable reserves.

And those are continuously moving into the approved category.

What we see happening is that on the oil side it's a bit different than on the gas side giving that the big projects we're involved in and how we sort of [INAUDIBLE] the contracts move into the proved category.

We say that the replacement of five-year efforts on the culmination is only 44%, which is something I feel very good about and that we monitor very, very closely.

Thank you, Walter.

On the Hicks and the different structure.

We have a different structure.

We've had, if I may say, a super track records of governance within Shell, best practice, because frankly, we're here in U.K. and we have to go to best practice.

We're in the Netherlands and we have to go to best practice.

We're in the S.E.C. in the U.S., so you need best practice there.

Our main problem here is reconciling all these best practices, that they fit together.

That may sounds a little flippant, but that's just something we've lived with for years.

We found that when Sarbanes-Oxley came in, we had to do some tweaks, some specific things and whatever.

But I don't think we're going to have any difficulty with signing the 20F in a couple of weeks time in accordance with the new rules of Sarbanes-Oxley and from the S.E.C.

In fact, we will a discussion at the ST&T board yesterday about Higgs, and I don't think that will be a major issue at all.

The gentleman in the red tie?

And I'm going to insist that he has the microphone this time.

And then we're going to go outside, Simon.

Is there somebody there?

It's Tim Whittaker from Lehman Brothers.

One thing we didn't hear from you -

Where is the microphone?

It's right here.

I'm failing completely to get this gentleman at the back there.

Carry on.

But the next question -- put your hand up, sir.

Yes, there it is.

Okay.

Thanks.

I'm coming back to Mr. Nickels.

Charles [Orr] with Newton Investment Management.

I thought my tie was bright enough.

It's a question on portfolio upgrading.

You do not have an overall target for portfolio rationalization that gives us confidence that you'll address the tail of the portfolio with some vigor, particularly whilst the oil price is supportive of divestments.

Can you comment on this and whether near term divestment will change your very conservative outlook for share buybacks?

Our track record over the last five years, and there might even be a box on the charts in the paper that you've got, shows that we've averaged something over $2 billion a year for the last five years, excluding the 40% of chemicals that was sold.

And these sales were over the whole range of businesses.

We expect to keep that up over the next years, similar levels around $2 billion.

As far as upgrading the portfolio overall, we talked about 7 billion last year.

And I think you'll find in one of the charts it talked about some 10% of the portfolio.

And I can reassure you that regularly we are looking at the things that fall into the bottom 10% in terms of performance.

But it doesn't mean that we just sell them willy-nilly.

It's amazing how with some focus and concentration things get fixed and people take some pride and there's some celebration when they get out of the bottom 10% and we lower the red flag, as we call it, over them.

But you do ultimately come to a position where some things, we can't get them back to the sort of profitability we want.

And sometimes they're worth more to somebody else, and then we sell.

But when we sell, no hasty value destruction and no fire sales.

We have the financial strength not to fall into that trap.

I don't know whether any of my colleagues would like to add to that.

Well, maybe I could just make the comment, also because I have a bit of a personal relationship with what we did in the U.S., for instance, on portfolio upgrading.

We went through that in '98 and '99 and that's the reason now if we competitively look at ourselves on the U.S. in the upstream side, in unit earnings we are the leader.

So, that gives you the whole confidence for building for the future.

Same if you look at Europe, at the scale that we have.

And also, the globalization process we go through where around our North Sea activities there' still a lot of synergy we can bring out of our total cost structure that can help us with unit earnings going forward, while at the same time we continuously look at our portfolio.

And that's part of what Phil mentioned, over 2 billion for the group overall.

And if you look in that chart, you see some big numbers in the '98-'99 -- well, '99-2000 period when, Walter, you were actually in Houston selling some stuff at really good price that is we're not busy selling now.

I'm going to go to Tim Whittaker.

Thank you very much, Charles.

One of the things you talked about in previous years are your roadmap and your trackers and they appear to be absent this year.

Is that a deliberate move on your part to move on from the past to give less, if you like, measures that we might be able to also check your progress on.

Is there something you are deliberately trying to achieve?

And one other thing, you had talked about and didn't mention this year is the Saudi core ventures.

Could you say where you stand on that?

I'll ask Jeroen to talk about the Saudis.

But on trackers, I think in that period of the road map we had certain things that we wanted to concentrate on that we've shared with you.

And I hope you'll agree that some tremendous progress was made during that period.

Take the example of costs.

This was a pretty aggregate number, a bit rough and ready, slightly tough or even brutal.

But there was a point when we had to move from that approach to something that was much more structural, much more systemic.

So, we said, all right.

We've delivered the 5 billion.

Now it's 500 million per year, 3% unit cost reduction, and it actually applies across all of our businesses.

I hope you'll agree in that case that we're being rather transparent about what we're doing.

And we define in the book here what underlying unit costs are and how we measure them.

If you take the example of ROACE, we talked about getting to 14% by 2001 at reference conditions.

I don't think we could have been any more explicit it about where we stand on ROACE and the target range in reference conditions.

And I suspect if you go down all those trackers, you'll find them back in a pretty transparent presentation today.

Saudi core ventures.

There's a lot of speculation in the press, I think quite logical, because these are multi, multibillion contracts.

They are huge.

They are large.

They are in the countries where we have the largest reserves.

And in fact, all major companies in the world are involved -- most major companies are involved in those projects.

With such large projects, you can't define that or agree what it's all about just in three rounds of negotiations.

I know you've got all the time speculation they are there or they go too slow or they nearly are there.

What I first can say, our project, which we are the leader CV3, but that's what I am going to say applies more or less for CV1, the first venture as well.

They are not that.

And just to demonstrate that, over the past six weeks I spent two weekend there, two trips to Saudi Arabia, to discuss that.

And I think it simply takes time to get those projects fully defined.

And I don't know that this is the appropriate term for an Islam country, but you have to wait until you see the white smoke. [ laughter ]

And I think there's a special factor.

You have to realize this is on the ministerial level in Saudi Arabia.

They take very high ownership for those projects.

And of course, those same ministers, they are busy with the total Middle East situation.

That's on their plate, as well.

So, just have some patience.

We don't give up and we continue to press our case as what we think is the best for those countries, of course, in a win-win situation for ourselves.

We're going to take the last two questions.

We'll take one outside, and then we'll come back.

And somebody's been very quick and put his hand up there.

The next audio question comes from Mr. Paul Ting.

Please state your company nay followed by your question.

Good morning, or good afternoon, rather.

A question on the downstream area.

I think in Paul's presentation he indicated a fact that the reference condition in the U.S. downstream ROACE is quite a bit lower than your global downstream ROACE, and there was some discussion about asset upgrading.

Could you flush out what is the timing and amount, what kind of asset upgrading should we expect?

Got that, Paul?

Thank you.

Thank you, Paul.

Hello?

We are carrying a difference in our target ROACE levels for the business, which is 15.

In the U.S. we're driving towards 12 in 2004.

So, that is certainly maintained.

We are, as part of the broader initiative that Phil described, looking to act on the tail of our portfolio in the next two years.

And I visit with an oil products is carrying total capital employed of about 30 billion.

We'll be looking to move about 10% of the portfolio, much in line with the group number.

So, that's potentially on average a billion and a half a year.

But life is never quite like that.

We did a lot of this in Europe in the late nineties, and just into 2000's acting on refineries, swapping out parts of our retail network.

That process is ongoing.

I expect that we will see some of that in the United States, as well.

We've now done a coast to coast examination of the retail network there, and it's clear that not all parts of it will be stayers.

So, I think you can expect to see some retail U.S. disposals.

We announced already an intention to sell three packages of nonstrategic onshore crude pipelines.

We have the disposal to meet the FTC requirement on the half share in the XL base oil plant.

There are parts of our European business which still concern us, and also one or two parts of our Asian business.

So, what I think you're going to see is a very determined effort to work down capital employed in oil products by about the amount I've said.

But in areas right across the business, both in the value chain and geographically.

Last question, sir.

The gentleman here.

Thanks a lot.

Brendan Weilers of Oriel Securities.

I just want to ask a general question about reference conditions.

Clearly your financial framework ultimately rests on these assumptions.

I was wondering how often do you test them and what sort of test do you do and how robust do you think they are at the moment?

We started these reference conditions, I think, in 1998.

We've revised them once significantly I think last year.

You'll remember the talk about changing from 14 to $16 a barrel.

Since then I think the average price has been about $26 a barrel, which puts it into perspective.

But when we changed the reference conditions last time, we changed from 14 to 16.

That had a positive impact for us.

But actually, I think in the downstream we changed the margins all over.

It was just about a wash.

I think it's important for you as well as us that we don't change them too often because the purpose of them is to see what's happening with our underlying business.

Are we making progress on the internal things, and that they're not just swamped by what's happening externally.

If you'd have asked me throughout last year the reference conditions in the upstream, I might have thought they were a little conservative.

It didn't feel like that in the downstream, did it, Paul?

But we don't want to change them too often.

Otherwise I think we lose track.

We all lose track of how we're really performing underneath.

Paul?

I mean, I agree with what Phil says.

And if it helps you just get a fix on it, versus reference conditions in refining on a global weighted average basis in 2002 the margin was about 57% of our reference condition.

In marketing, outside the states it was 96 and inside the States 89.

It looked very different in the preceding year.

I think what we'd intend to do is to track this very, very closely, try and understand the drivers and the logics which have underpinned it, and if we see a good reason to change, we would do so.

But not every year.

And you saw one of the charts that was there with the four box charts with reference conditions, you get wide variations.

But I think it really helps us to manage the business.

I hope it helps you to -- with the transparency to see how we're doing.

That is the last question.

But there is something very important to mention.

As our customers, we'd like to know what you think.

And there's a questionnaire that we'd really appreciate you filling in.

There is a prize.

Not for everybody.

The winners will be drawn out of a hat.

And there's a reasonably significant chance that you'll win the basket of alcohol of some sort.

I thought that might persuade you.

But thanks very much for coming.

We have to leave pretty quickly because we're going off to New York very shortly.

But we'll see you for a few minutes.

Good to see you.