殼牌 (SHEL) 2003 Q1 法說會逐字稿

Thank you for holding, ladies and gentlemen.

Your presentation will begin shortly.

Once again, thank you for holding.

Good afternoon.

Good afternoon to listeners in Europe and good morning to those of you in the United States.

Welcome to the Royal Dutch Shell Q1 2003 results conference call.

I am Simon Henry, Head of Group Investor Relations.

Before proceeding I'd like to refer you to our disclaimer about forward-looking statements, which you can find on page eight of the quarterly results announcement.

I'll now begin with a brief statement on the quarter's results and the events before moving into Q&A's.

First, you'll notice a few changes on the face of our quarterly results announcement and the accompanying notes.

These are the results of various developments in reporting requirements, including specifically the introduction of regulations G as part of the Sarbanes Oxley Act in the United States.

It's long been common practice in the oil and gas industry to report on the current cost of supplies basis in order to adjust for the impact of movement in commodity prices and also to provide comparability between FIFO and LIFO accounting regimes.

We've typically based our performance reporting and explanation around adjusted CCS earnings, that is, after adjusting net income for the current cost of sales and special items.

To ensure that we continue to help investors to understand the performance drivers, I'll make my comments today on this basis unless otherwise specified.

You'll note we're giving equal prominence to net income on a U.S.

GAAP basis in formal reporting.

In our annual 20-F, we'll provide reconciliation between any non-GAAP measures used or quoted and the nearest GAAP equivalent.

Willing to ensure that our quarter reporting is in line with our expectation of the ultimate 20-F requirements.

We've also brought our approach to the definition of special items in line with Regulation G. Special items are those significant credits or charges resulting from some vections (ph) or events which, in the view of management, are not representative of normal business activities of the period, and which affect the comparability of earnings.

Regulation G excludes from this category any items of a nature that have either occurred in the past two years or are likely to occur again in the next two years.

You'll see that the number of items reported as special this quarter has reduced.

For your information, from '99 to date that's the last four and a bit years, the net cumulative contribution from special items was just above break even.

If we go back a further five years, let's look at the last 10, the net cumulative number was about equal to the run off unique impairment charge taken at the end of 1998.

That was just under four billion dollars, but if you put that aside we'll again break even as the whole period.

One other of the significant items included in the earnings were mentioned as we explained changes quarter to quarter.

Moving on to the results.

In comparing results with last year, we should recall that downstream conditions then were the worst in recent memory, certainly the last decade.

As you'll see from macro indicators and competitor results, the last few months we've seen a much more favorable pricing environment than last year.

With oil and gas prices at recent highs and reefing margins around the world also much improved on a year ago.

This has been counted by some extent by lower marketing margins in some parts of the world and the petrol chemical environment has also remained very challenging.

This has helped our businesses to deliver record net income of over five billion dollars and after adjusting for the special gain on the sale of our interest in rural gas, the adjusted CCS earnings were also of course a record of just under four billion.

Competitive performance of our main businesses demonstrates their strong strategic positioning in this type of environment despite the overall strategic direction being faced on robust profitability at the much more conservative reference conditions.

The results were underpinned by a record upstream, production volumes, and excellent financial performance in gas and pair and the continuing industry leading contribution from all the products.

Coarse then showed strong generation from operations after tax and interest of six point seven billion dollars, more than double the level a year ago.

Both EP and OP businesses benefited from contributions from the acquisitions made last year.

Building on the one billion dollars of cash generated by the four deals in the calendar year.

The figure to date for cash generation is now well over one point five billion dollars.

Reported CCS role Archie (ph) on a rolling 12-month basis, was 18 percent.

A very creditable performance bearing in mind that both OP and chemicals conditions were, on average, below reference conditions over that 12-month period.

We don't report normalized return on capital employed every quarter, but I can confirm that the net adjustment for the price and margin environment over the 12 months was around six percentage points.

The full capital employee defect of the acquisitions last year is not yet in these calculations.

Another factor in the year-on-year comparison is the U.S. dollar exchange rate, with the dollar around 20 percent weaker against the euro on average over the quarter in 2003 compared with last year.

Compared with Q1 of 2002 and ignoring effects in the corporate segment, such as decrease net income in the quarter, such as increased capital employed and reduced ROACE (ph) a the 12-month rolling basis.

Steady progress continues to be made in delivering synergies from each of the four acquisitions and in delivering the projected three-percent reduction in underlying unit costs.

We'll report more fully on progress here in the middle of this year.

I'd like to highlight here the significant portfolio upgrading activity in the last few months - all the lines with a strategic direction that we out back in December 2001.

We've already achieved the year's expected divestment proceeds of $2 billion and, in addition, we announced the intention to further divest more than another billion dollars.

We've seen policy actions in each of the four main businesses and we're particularly pleased with the progress in this activity.

I'll now run briefly through KSU (ph) s in each of the businesses and then open the call.

First, expiration and production.

EP adjusted earnings of $2.8 billion were 92 percent higher than a year ago.

High oil and gas price realizations were the main contributor.

Production volumes were up six percent to a record of 4.2 million BOE (ph) per day.

Divestments, relative to last year, had a negative impact of around 40,000 barrels of oil equivalent per day.

And the production sharing contract price effect between the two quarters was around 80,000 barrels of oil equivalent per day negative.

Now, there's - this year was lower than last year.

Expressed (ph) at $16 a barrel, production was up by eight percent.

The targets for 2003 of 4.1 million barrels of oil equivalent per day at reference conditions remains unchanged.

Higher OPEC production allocations, strong performance and new production from the shallow offshore field EA enabled Nigeria to produce around 70,000 barrels more than a year ago.

This included the estimated reduction of just over 10,000 barrels from the effects of community disturbances similar to a year ago.

Currently, around two-thirds of the production shut in, in Nigeria in the middle of March, has now been restored.

Permanent changes to entitlements and the production sharing arrangement impacted production negatively by around 60,000 barrels of oil equivalent per day.

At the end of March, first production of synthetic crude oil from bitumen feedstock was achieved at the Athabasca Oil Sands Project in Canada.

Bitumen production at the Muskeg River Mine resumed on April 4 and shipment diluted bitumen into the Corridor Pipeline commenced.

No revenue barrels were booked in Athabasca in Q1, and the operating costs of some $80 million for the quarter was incurred.

Going forward, productional rampup to the full share, Shell share of around $90,000 of oil equivalent a day over the next three quarters, and depreciation on [Inaudible] will be around $35 million a quarter.

EP's total depreciation was up by around $550 million as a result of unfavorable exchange rate movement and the amortization of the Enterprise purchase price premium of some $150 million before tax.

The cash contribution from Enterprise has been very strong this quarter at about $500 million, taking the first year total to around $1.4 billion.

From Q2 reporting onward, Enterprise asset results will be in both reporting quarters for comparisons, and we will no longer separately highlight the contribution from them.

We'll continue to report synergy delivery.

Expiration expenses amounted to some $250 million, in line with our earlier indications.

EP capital investment was $1.7 billion and in line with plan.

We expect this year, to spend at the upper end of the $7 to $8 billion range for EP. [Inaudible] reported earnings included a credit of $255 million, resulting from the change in accounting for asset retirement obligations, for which I also refer you to note one in the quarterly results announcement.

We earlier indicated an estimated $300 million for this, and the final figure reflects the periodic review and calculation of such costs completed at the end of the quarter.

Turning to gas and power, I've mentioned in the quarter results announcement a special credit of over $1 billion was recognized this quarter, reflecting the profit on sale of our interest in raw gas.

Gas and power, a gain of $114 million, arising from utilization of tax credit that were related to this sale was included in the quarter as part of our normal tax management process.

Included in the 114 million-tax credit, adjusted earnings for $470 million, compared to $216 million a year ago.

This reflected higher energy prices and improved contributions from gas trading and power activities.

While overall energy volumes were five percent lower, reflecting the loss of volumes after the exit from Malaysia Satu (ph) plant, [Inaudible] of the remaining energy supply plants was around five percent higher than a year ago.

The third processing plant in Nigeria is building up volumes as planned, gradually, to the end of 2003, but with a modest contribution in the first quarter.

The first processing plant from Malaysia Tiga came onstream at the end of the quarter and again, many more contributions this quarter.

Power activities made a modest profit this quarter.

The improvement, compared with a year ago, reflected the start of operations of the three plants in Turkey out of Melmerin (ph) in Australia, and also lower costs as a result of the actions taken in mid-2002.

Total Integen (ph) power generation capacity stands at 6.4 gigawatts now.

That's 100 percent basis figure.

However, the outlook for the power market, particularly in the United States remains uncertain.

Marketing and trading results in gas and power improved due to better results from coal in the United States.

These were primarily a result of increased gas price volatility in the quarter.

Looking ahead in gas and power, Q2 is traditionally a lower volume quarter for LNG, due to seasonal demand factors in Asia.

But year on year, we would expect Q2 volumes to be up.

We do see the recent strong demand for incremental cargos continuing through the quarter and I would remind you that historically we've seen the Royal gas dividends coming into earnings in the second quarter.

Of course, they won't be there again this year.

In oil product, adjusted CCS earnings more than doubled to over $1 billion, reflecting strong global refining margins and the strong trading performance.

These more than compensated for higher results as a result of a weak dollar and the impact of pension costs and for weaker marketing margins in some regions.

Both why (ph) and the U.S. showed substantial increases in earnings.

Refining utilization was down two percent outside the United States and down by three percent inside the United States.

In the U.S.A, we had a heavy plant shutdown program compared with a year ago with three significant refinery shutdowns.

This continued structural changes to improve operational integrity and to meet environmental requirements.

The impact of the plant shutdowns in the U.S. was slightly lower than in Q4 last year and higher than a year ago.

Incidence in Q1 where an aggregation of small-scale events, unit slow down and severe weather impact.

No planned and unplanned shutdowns in the quarter cost over $80 million more than Q1 in 2002 inside the United States.

The outside the U.S. the equivalent demand was some $50 million.

Slightly lower than Q1, but still heavy, plant shutdown activity in the U.S. can be expected in Q2 as double (ph) our refinery is shutdown.

Outside the U.S. significant turnaround activity is planned in Europe at several refineries including Perness (ph) .

This will be the higher level than the first quarter but well below Q2 last year, which had an exceptionally high level of plant shutdown activity.

Coming back to Q1, improved marketing margins in Europe, including the effect of the stronger Euro were offset elsewhere.

In particular, in regulated markets in Asia and in Brazil and Argentina.

Overall, weather (ph) marketing margins were just above reference conditions.

This has ran 10 percent higher than one year ago.

In the U.S. gasoline marketing margins were also just above our reference conditions.

A significant improvement over a year ago.

Progress on upgrading the retail network continues as planned in the U.S.

We ran 1,400 Texaco stations there rebounded, approximately 20 percent of the total activity.

In the global businesses, LPG and aviation were both negatively impacted by the high supply costs.

Moving on to chemicals, who recorded a loss of 15 one $5 million for the quarter.

Increased adjusted earnings in weather (ph) were more than offset by the decrease in the United States.

The U.S. results reflect restructuring charges and impairment charges of $92 million and generally high supply cost in a weak final product market.

Manufacturing capacity utilization percentage remains in the low 80's.

And although slightly improved on SGA it is still below the desired level.

Utilization inside the United States reflected strong Asia Pacific demand for some products.

This parameter utilization remains a key driver of earnings going forward.

Excluding the restructuring and impairment costs, earnings were comparable to a year ago when fixed costs were relatively low compared to the 2002 quarterly average.

This year's fixed costs are in line with plans but some $70 million higher than one year ago.

Global, total products unit margins were similar to a year ago.

The improvements in Shell crack margins in Europe and the U.S. was offset by lower margins in aromatics, solvents, and higher oil find derivatives.

The economics of cracking liquid feedstocks in the U.S. were favorable compared to the more common EFANE (ph) feedstock.

Global earnings benefited from higher volumes and contributions from Bafal (ph) and Benfinium (ph) .

Looking forward, product demand in chemicals remains uncertain and patchy across geographies and across product groups, with few signs to give us a clear indication of the developments of industry demand or utilization for the rest of the year.

Other industry segments have a loss of $40 million, similar to a year ago.

Shell consumers result was negatively impacted by high gas supply costs in the United States.

Shell solely results suffered from continued difficult market conditions.

Looking forward in this segment, a quarterly charge of some $30 million can be expected for the rest of this year.

In the corporate segment, costs of $268 million were higher than Q1 last year, mainly as a result of high debt levels and also higher than Q4 of 2002 as currency exchange effects were positive in Q4.

In the absence of major changes in overall debt, interest, or exchange rates, some 200 to $250 million of costs is indicative of the level here going forward.

Group capital investment for the quarter was two point seven billion dollars, broadly in line with the annual plan.

Investment continues to focus on major upstream growth projects consistent with the intent to increase the share of upstream capital employed in the portfolio.

Residual cash payment for the Daya acquisition of one point three billion dollars is scheduled for mid 2003, but this was included in the capital investment number last year.

Depreciation in the quarter totaled two point five billion including, compared to a year ago, an additional $300 million, resulting from last year's acquisitions.

Given that Q1 production volumes aren't typical, production volumes are typically above average, the annual depreciation expectation remains around nine billion dollars, although our final number will depend on exchange rates over the year as a whole.

At the end of the quarter the growth debt ratio was 19 percent and cash holdings amounted to some four billion dollars.

Nets reflected strong cash generation from operations.

As we discussed in February, our financial framework is based around that strong cash generation from businesses, with fund dividends, debt service, and planned capital investment.

Additional cash could be used to reduce debt, take advantage of incremental capital opportunities, or to buy back stock.

The choice is driven by a desire to maintain a proven balance sheet and by relative economic attractiveness.

All this consistent with triple A behavior.

To conclude, in the last few months, we've continued last year's excellent progress, developing our business portfolio within our strategic and financial framework.

Last year, the emphasis was on acquisitions.

The last three months, we've seen excellent progress on the other end of the tail.

And we've continued to deliver robust profitability and strong cash flow.

I'd now like to move to questions and answers, so I'll hand over to the operator, who will remind you of the instructions to poll for questions.

Thank you, sir.

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

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

Your questions will be polled in the order they are received and there will be a short pause while participants register for a question.

Thank you.

The first question comes from Mr. Jason Kenny.

Please state your company name followed by your question.

Hi, Simon.

It's Jason Kenney from ING Financial Markets.

Firstly, congratulations on the results, particularly downstream.

I have two short questions.

Could you provide an update on the progress been made for LNG supply contracts for the saculon (ph) volumes into Japan with Taiwan?

And secondly, progress in India and your plans to set up a retail network there on the back of the LNG product import via Hasera (ph) .

Thank you, Jason.

The end of March we talked about progress on the LNG contracts with Japanese customers.

We talked of around four million tons that is under negotiation, currently being discussed with customers.

We don't have specific further information on that, but we are fairly pleased with the progress of those discussions to date.

On OPE (ph) retail aspirations in India, we've said for some time that we interested in the Indian retail market - the downstream market per se, but particularly the retail market.

And we have applied for a license to do that and that license is also still under discussion.

It would potentially link in investment terms and we need to meet certain investment criteria.

And that - the Hasera turn (ph) , you're correct, is potentially one way of meeting those investment criteria.

I can't really add any more than of that - the progress from those discussions though, Jason (ph) .

Does that meet your ...

Yes.

That's fine.

I was - you had me to - you may get some contracts signed by late April, so ...

For the Japanese LNG?

[Inaudible] .

Yes.

I can't confirm, but we are pleased with the progress that we've been making.

But we're not in a position to confirm or otherwise, specific contract.

OK.

Thanks.

OK.

The next question?

Thank you.

The next question comes from Mr. Jonathon Wright (ph) .

Please state your company name followed by your question.

Hello, Simon.

It's Jonathan Wright from Citigroup.

A couple of questions, please.

First of all, Sharewater (ph) - how long to expect that production to be down?

And secondly, could you update up on the status of the Coreb (ph) project and what's happening with the onshore facility?

Thanks, Jonathan.

For those who may not be aware, Sharewater (ph) went down, was taken down, in fact, at the end of the quarter after some pressure variations were noted at the top of one of the wells.

It was taken, the whole platform was taken down as a precautionary measure and all three partners are currently looking at the implications of what was seen at that time.

There is no damage to the well at this point, but they are, that is still under technical review.

Because it is under technical review and there is no completion yet, we do not have a date that we could give for when we may be back onstream.

On Coreb (ph) , and again, for those who may not have picked it on the news, we have an application for a permit to develop onshore [Inaudible] facilities, an island for a gas effort that we picked up in the acquisition of Enterprise.

Two days ago the request for the permits to develop was turned down.

We are currently evaluating that decision.

The inspector's report is long and detailed.

It would appear that environmental reasons were one of the main drivers, but there is quite some work to be done before we can come to a decision on where we go next.

It's just a little too early to take that question now.

wright OK.

Thanks.

There's one other thing as well.

Is it possible to give us the contribution from trading in gas and power, to strip that out?

If you want to know the straight answer, no, but what I can say is it was small and positive, and last year it was larger and negative, and therefore, the year-on-year comparison is a significant factor.

But the current quarter was more indicative of where we would hope to be.

Thanks.

Thank you.

The next question comes from Mr. Rod MacLean.

Please state your company name followed by your question.

CSFB (ph) .

Simon, hi there.

And U.S. downstream where you have a 12 percent plus [Inaudible] target for 2004, can you just sort of give us a little bit more color in terms of progress towards that?

And then, I think you did quantify the impact of the unplanned and the planned shutdowns in the U.S. in the quarter, but you did it on a year-on-year basis.

Could you also give us an idea of just what the absolute number was in the quarter, just to give us a feel for what the returns might have been if everything had been up and running?

Actually, I believe we are seeing some true bottom-line progress in the United States now, particularly when you look at the competitive position in the quarter.

The gap is beginning to close.

We do, indeed, have a target of 12 percent ORG for next year.

If you look at the headline ORG, all the normal lines or [Inaudible] over the past 12 months, you will come up with a figure in the low single digits no matter how you look at this.

Good question, where can we expect to see improvement?

If we look at the planned shutdowns in Q1, there was significant shutdown activity on the west coast and at Norco (ph) .

The total costs of shutdowns in the U.S., relative to no shutdowns at all, was over $100 million, and that is an after tax figure.

Those shutdowns do happen all the time, so it's not necessarily that they are only incremental improvement.

I would highlight the $50 million or so that were included in the earnings in the U.S. this year, this quarter, that previously may have been qualified as special.

I'd also highlight the heavy to light differential, heavy coking (ph) in the Gulf, our crackers benefit from Myer to West Texas sour crude diffentials.

These differentials over the past year have been significantly below historical levels of the sour base of heavy crude off the market and Venezuela is in a situations, also, which use the supply of heavy crude.

That on its own right over the past year is probably also cost more than a $100 million.

The look going forward, where do we expect to see some of the benefits coming through?

The refinery liability, I mentioned that the unplanned shutdown percentage was better than Q4 but it was still just under seven percent in the United States.

And that's we have a target there of four percent, so we have some improvement there with reliability.

Retain rebranding, we one-fifth of the way through the overall process and on operating we're seeing a five percent volume uplift where we get - where we've done that rebranding.

We still have some cost improvement to come, quite some cost improvement to come, in fact.

And the full synergy benefits from Pennzoil.

When the refineries are working reliably, when the network is positioned how we wish to see it, we have an additional opportunity to benefit from trading integration, supply trading around that network.

Reliable refineries give you reliable supply streams of products around which you can work.

And we talked previously 20, 30 cents a barrel opportunity.

And lastly, we're now beginning to see opportunities the global businesses.

For example, starting the presence up again in the aviation market in the United States.

So a lot of these things are at the early stages of the two, three-year program.

But we was pleasantly surprised by the competitive position in the first quarter.

Thanks Simon.

Thanks.

Thank you.

The next question comes from Mr. Sal Belgy (ph) .

Please state your company name followed by your question.

Good morning.

Foreign Stock.

A question on the cost saving in the U.S. downstream.

Where are you now from your $400 million target and is this additional cost savings can you find?

Thanks.

The $400 million target was by next year.

We reported in February that we were more than halfway to that target.

We're making steady progress but we're not normally in the habit of reporting this number every quarter.

We'll give a follow up date in the middle of the year.

But we are making positive progress and also particularly in the quarter we're beginning to see the progress in Pennzoil also, which was another $140 million.

We're not looking to increase that target.

And just to - well, not at this stage anyway.

Just to go back on previous answer, on the U.S.

The improvement in total earnings comes partially from synergies but the much larger improvement come from refinery reliability and making that retail network as we believe it can.

Thank you.

Thank you.

The next question comes from Mr. Tyler Dann.

Please state your company name followed by your question.

Bank of America Securities, good morning, Simon.

Good morning, Tyler.

I should say afternoon I guess.

Question on your effective tax rate looks to have been slightly lower sequentially in year over year.

I haven't heard anything on this call suggesting that that should be factored in going forward.

Could you comment on that briefly?

And then secondarily, the - I noticed some public commentary that you made this morning about the maintaining the view on incremental share repurchases beyond anti dilutive measures.

Would you mind expanding on that view and possibly giving just sort of give us a time table for when you might reinitiate a more meaningful buyback program?

Thanks.

You're absolutely correct, the effective tax rate this quarter is down.

Two isn't really be - and both related to the rural gas transaction one, the rural gas transaction occurred a lower tax rate and therefore the mix effect on the Group drives down the average rate.

But also, we were able to realize some tax credits related with the deal.

And that is the prime driver.

There is no other major change in the period and therefore the reduction this quarter is not indicative of an effective tax rate going forward.

We're not looking at the change at that - at this point in time.

And you asked about share buybacks.

We did repurchase shares for hedging our employee share option scheme in the quarter.

And we have a similar amount still to go on that particular activity.

So during Q2 we will be repurchasing, which is the ground to dilution I think you referred to.

On repurchase of shares to cancellation, the scheme seems we've been operating over last couple of years.

We stated in February that share buybacks in that sense were unlikely the first half of the year and that there remains the case.

We'll make no change to that statement.

OK.

OK.

Thanks very much.

Thank you.

The next question comes from Mr. Jeremy Elden.

Please state your company name followed by your question.

Good afternoon.

It's Jeremy Elden from Lehman Brothers.

Could I ask a couple of small bits of detail?

You had an increase I think in sales in the U.S. in oil products volumes.

Some of your competitors have quite significant decreases.

Is that a genuine like for like comparison in your data, this year's I think 2215 thousand barrels a day compared with last year's?

And secondly on the tanks associated with rural gas.

We would be right actually in thinking that the rural gas sale is tax-free?

Or is there some tax to pay outside of Germany on that?

Thanks, Jeremy.

Increase in sales in the U.S. is like for like in terms of activities it can incorporate.

However, the figure does include what we term supply fails which refineries and associated operations, buying and selling through the pipeline, the distribution network.

So some of those sales are not necessarily related to end consumer demand.

If we're to take the supply sales out, there is a small decrease overall, although not particularly a material one.

Thanks.

On comment to make on competitors, well there's like for like with them.

Yes.

And rural gas is it tax-free?

I can only speak for our position.

Yes, capital gains tax in Germany was suspended, but within our overall tax position for the group, we consolidate backup for the UK and the Netherlands and we've recorded this on what the effective tax basis would have been.

And we have been, as I said, able to offset it against credits that were available elsewhere in the system.

And they show through in gas and power and in the expiration and production business.

Does that mean, though, that - just so I understand, you would - you would have - you will end up having to pay tax apart from these credits in the UK and Netherlands on that disposal?

I can't really go into that tax fares (ph) in that kind of detail, Jeremy, but I can say the proceeds were $1.7 billion.

The total gain on sale was 1.3, of which we've taken 1.04 as the special with its effective tax rate and we've had - the tax credits you can see in GP.

And that's ...

... 140 in the gas and power and a similar figures in EP.

Right.

OK.

No, that's great.

Thanks very much, Simon.

OK.

Thank you.

The next question comes from Mr. Neil Perry.

Please state your company name followed by your question.

Hi, Simon.

It's Neil Perry from Warburg.

I've got two questions.

One's on the returns and the other one is back to the buyback.

On the return on capital employed, you said that you're not going to give underlying numbers on a quarterly basis, but then you referred to the number dropping six percent on the basis of prices and margins.

Can you just - visit (ph) on that?

I mean, are you trying to tell us that on the 12-month, you - the underlying returns on capital are 12 percent or are there other adjustments that we should be making to that?

And secondly, on the buybacks, I mean, I know you've spoken on this, but the reason given in February for not buying back shares in the first half was last year uncertainty.

Well, the war's out of the way and you've had $31 oil for a quarter.

Surely, there's enough certainly out there now, even [Inaudible] with the triple A rating.

Could you just be a more specific with it?

Are you still, given what you've had in the first quarter, not prepared to buy back share?

[Inaudible] returns, yes.

I did mention that the normalized adjustment, were we making it for the past 12 months, would have been a downward adjustment of six percent.

Again, that figure is primarily is an indication of where the 12-month environment had been, relative to our reference conditions.

And realize that's the primary numerator impact on the normalized right (ph) to calculation.

I can't reiterate that, in fact, DP (ph) would have been a slightly higher contribution because OP (ph) and chemicals were below reference conditions on average over the 12 months.

I'm not indicating a specific figure and, yes, there are other adjustments that go into the normalized factor - figure.

On - I will say, of course, that the actual environment in Q1 itself was well above reference conditions in everything except West Coast refining and in chemical.

Actually, in Q1 '03, that was a significant benefit overall.

On buybacks - yes.

There was uncertainty back in February.

And what - the uncertainty we were talking about was the oil price, refining margins, global, macroeconomic recovery, in particular, oil products demand recovery in the United States.

Where are we now?

Well, the oil prices dropped $10, refining margins in the U.S. and Europe have dropped back into range.

In Asia Pacific, they've dropped back into range as well, which means not very attractive.

And when we look at the oil products demand in the U.S. or Europe, we don't see any particular signs of an upturn that suggests the future is any more certain than we thought two to three months ago.

Buybacks and other short-term opportunistic strategy, they are part of long-term balance sheet management, and that's how we see it.

We still see the uncertainty, and that's why we stay with the statement we made in February.

OK.

Thank you.

Thank you.

Thank you.

The next question comes from Mr. Mark Gilman.

Please state your company name followed by your question.

Simon, good afternoon.

A couple of things.

Can you put some color on the Bonga Northwest (ph) discovery?

Early stages, no.

Yes, it's a discovery, but I can't really talk about the details or the kind of size we could be looking at.

It's in the Bonga (ph) confession.

And another attractive find, you know, up to three finds, Bonga (ph) , Bonga Southwest (ph) and now Bonga Northwest (ph) , so, looking at a good province, but that's about as far as I can go, I'm afraid.

What is your working interest in it, Simon, please?

Same as it is for Bonga (ph) , which is, I think, 55 percent, but I'll just get that checked.

Could you comment on spot LNG sales in this quarter and compare it to prior periods, please?

In Q2 or Q1?

Well, both if you like.

In Q1 I wouldn't give specific figures, but we were able to sell that LNG that we could produce.

There was strong demand for what we might term spot cargoes in Asia-Pacific, both in Japan and Korea, particularly in Japan as a result of the nuclear issue.

The one thing we did notice is that everybody who had flexibility on their long-term contracts went right up to the top end of the flexibility, and therefore, the amount of volume available for what you might term spot contract is actually lower than you might think.

However, as we go forward, we've stayed at pretty much the same in Q2, offset by the seasonal demand factors, and that's principally Korean.

So, long-term contracts are basically taken up to the hilt.

Does that help?

Yes, it does.

Simon, I was a little bit confused by two specific references you made to production sharing contract entitlement effects on your production in the quarter.

I noted an 80,000 equivalent a day number, and then, I thought at a different point you mentioned a 60,000 number.

Could you clarify that, please?

Sure.

There are two effects, there are two separate effects.

One is just the basic price effect, higher prices translate into fewer barrels because of the cost recovery mechanism.

That is the 80,000 figure, and that is in several countries, Malaysia being the prime country, but Egypt, Syria, Oman, in addition, and that is something, obviously, that reverses as the oil price falls.

The other effect is, in one of our contracts we have, part of the normal contract as it has existed for some time, a step change reduction in our entitlement from last year to this year and going forward.

And that step change reduction in our entitlement is around - is just under 60,000 pounds or the equivalent today.

So that one does go forward.

Does that help?

If you could tell me where that was, I'd appreciate it.

I'm afraid I can't do that, Mark.

I mean, basically the contracts are confidential between us and our partners.

OK.

Just wanted one more, if I could.

There was made mention I believe in the February presentation that there would be a significant one-time, $300 million pension item taken in the first quarter.

I don't see any evidence of it.

Could you update us on that issue?

There were two, $300 millions mentioned in February.

One of which was a significant one off item and that was the FAS 143 credit that we have taken, albeit slightly lower.

The other one, we did mention 300 maybe to $400 million of after tax lower pension fund credits.

We're still receiving some pension fund credits but at a much lower level than we did last year.

It will be somewhere between 300 and 400 million after tax for the year, therefore around a 100 million for the quarter.

That is spread across our businesses.

It's in the cost space in the quarter.

The largest amounts are in oil products and BP.

OK, Simon.

Thank you very much.

Just for the next question, I just confirmed the bonner (ph) percentage is 55 percent.

OK.

We'll take the next question.

Thank you, sir.

The next question comes from Mr. Richard Franklin.

Please state your company name followed by your question.

Simon, Hi.

Richard Franklin with Morgan Stanley.

A question, please, on your gas volumes.

Obviously you saw a very steep increase in European gas sales volumes in the first quarter.

I guess a lot of that was weather related.

Can you give us sort of a weather corrected figure to show what the, maybe, underlying trend in gas production was in Europe?

The weather related factors are on 80,000 barrels of oil equivalent.

Great.

Thanks.

OK.

Yes.

Thanks Simon.

Thank you.

The next question comes from Mr. Michael Mayer.

Please state your company name followed by your question.

Yes.

This is Michael Mayer from Prudential.

First, just a quick comment.

The quality of your voice coming through, I guess for those of us in the United States is very low.

So I can barely hear your remarks.

Maybe that's just my phone or maybe it's the system wide problem.

I can hear the questions from the audience very clearly, but hardly anything from you, Simon.

My question - I have two questions.

I apologize if you already answered them.

The 255 million asset obligation credit, can you tell us what that was in the U.S. and outside the U.S?

And then secondly, could you give us more color on the current status of refining profitability in Europe and Asia?

Sure, Michael.

Sorry you're not hearing me OK.

If anybody else has a problem, please let me know in the next question.

The 255 asset retirement obligation was primarily - was basically all outside the U.S, though actually in that debit in the U.S. around 25 million and 280 million credit in weather (ph) outside the U.S.

Current status on refining margins, starting at the bottom in Asia Pacific.

They've returned to levels barely positive, less than a dollar.

In Europe we've seen them return to perhaps more normal levels.

This is the shutdown or the turnaround season in Europe.

So, although, there have been various factors that have closed the wide margins in the first quarter, there is still some support of European margins in the second quarter because of the plant turnaround program.

That's an industry wide issue, not just a Shell issue.

And the United States, certainly when margins come back to more normal levels, but we've also seen the Saudi group, the heavier Saudi group coming back into the market, released as a result of the Iraq war and therefore the mire differential has opened up a bit more in favor of the Gulf caucus.

And the West Coast margins stay below our reference conditions.

Thank you.

Thank you.

Thank you.

The next question comes from Mr. Steve Turner.

Please state your company name followed by your question.

Hi, Simon.

It's Steve Turner from Commerce Bank.

I just wondered if I could ask you about Russia and the ...

OK, Tom (ph) , what do we have?

... the recent change of view on Salya (ph) and your approach to that development?

Could you explain what your standing is at the moment and what's prompted your reported change of approach to that policy?

Is the question just on Salya (ph) or on Russia generally, Steve (ph) ?

It's really Russia, excluding Sakaline (ph) .

OK.

Salya (ph) we've been discussing for some time with partners Evicon (ph) , the better a suitable development program and you will be aware that that included discussions on production sharing agreement.

The discussions on the production sharing agreement after are on the table, but we have reached agreement on the joint venture framework that we hope to issue with Evicon (ph) as we go forward.

We've not yet taken final investment decisions on Salya (ph) , but is was a significant step to go forward with that joint venture agreement with potential in the next 12 months, as human we can finalize the agreements.

We take that investment decision.

That is no real change in our strategy in Russia, but including Sakaline (ph) and excluding Sakaline (ph) , the strategy has been to look at what we would term clean affect, those that are unencumbered by previous operations or ownership or other unknown liabilities.

We look for material prospects to look - to develop those with partners in a way that makes sense for our own shareholders.

So overall strategy still very much in place, it was a good step in Salya (ph) .

We're still in discussions with Gas Prong (ph) , a better apple and oil prospect, and that has moved fairly slowly over the years.

No recent progress to report.

And Bacaline (ph) completes the three.

Thank you very much.

Thank you.

Thank you.

The next question comes from Mr. Mark Fienalty (ph) .

Please state your company name followed by your question.

Hi, Simon.

It's Mark (ph) at Merrill Lynch.

Sorry for going back to buybacks, but can you just confirm that you still have an ambition or an aspiration of delivering 50 percent higher cash to shareholders on average from '01 to '05 versus the 2000 number?

Is that still a goal of the Group?

And then secondly, if I can, just on one of the operations.

We've seen some restructuring in chemicals in the quarter in the U.S.

Can you say anything about further plans you may have for chemicals restructuring this year and then last the environment?

Shortly, Dave (ph) , back in December, 2000, it may have been, slightly before my time, we did state that our portfolio had the capability of delivering 50 percent more cash on average over five years than we delivered the shareholders in that year.

And that roughly equates to $12-and-a-half billion as a combination of share buybacks and increased dividends.

The last couple of years, we've done $5.4 billion of buybacks and increased the dividends, so we're almost halfway there in the first two years.

The portfolio still has the capability.

It was never expressed as a target.

It was the capability.

However, we did express the over five years.

As I mentioned, balance sheet management is a long-term program.

It's not about quarter to quarter movement.

So, in theory, the portfolio still has the capability.

Chemical restructuring.

We have been, as you know, looking closely at various parts of our portfolio that we term are on our watch list or in that $7 billion of assets we deemed worthy of priority management attention.

The restructuring we just announced - the CRI (ph) and within that, the CS metals (ph) - we're very much a part of that factory (ph) of assets.

We've looked long and hard at what we could do to improve the performance and conclude that it applies (ph) restructuring, which has led to the write-downs of some of the assets and the heavy restructuring charges.

There are one or two other parts of the chemicals business we continue to look closely at and that includes Vassel (ph) .

Vassel (ph) - we see steady improvements in performance over the years.

Again, improving year on year.

Still some way to go, though.

There are no other specific parts of our portfolio that we've mentioned externally - our chemical portfolio.

And that's where I would have to leave it, although I would emphasize we do look pretty closely across that piece of the portfolio.

You will recall what we said about return on capital back in February.

Great.

Thanks.

OK.

Thanks.

Thank you.

The next question comes from Mr. Bruce Lanni.

Please state your company name followed by your question.

A.G. Edwards.

Hi, Simon.

You know, I also have some problems hearing on this end.

You seem to be a little bit clearer now.

But I was wondering - I was trying to look at the production numbers.

I have two questions.

The first, is it possible to break out the contribution of Enterprise oil to the percent growth that you outlined in your release?

Because I - from all the changes that have taken place, it appears to me that Enterprise comprises most of the gain we see year over year.

Then, secondly, on refining and marketing.

And this may be a little bit more difficult, but can you also break out the percent contribution from Equalon (ph) and Motiva (ph) , so we can get a gauge for how that was doing?

Sure.

The first one relative -- the Enterprise Oil contribution was around 240,000 barrels a day or six percent add line (ph) contribution to the production.

Therefore, all of the headline production growth came from Enterprise Oil.

However, if you look at the underlying production at $16, cost production was up by eight percent and Enterprise Oil is not subject to production sharing effects.

And therefore, there was slight growth on the underlying portfolio at the reference condition.

On R&M, the year-on-year figures, both quarters include a full Equalon (ph) Motiva contribution.

So there's no change in terms of a - the acquisition effect.

The volumes - the intake was slightly down in the U.S. for Equalon (ph) Motiva.

We do see an increase in Europe, driven by the Daya acquisition, which was not - which was only 50 percent in the portfolio one year ago.

OK.

Well, what I'm trying to drive at with the R&M side with Equalon (ph) and Motiva - I understand that the year-over-year comparison includes both of them, but how can we gauge, can you see an improvement year-over-year in those assets in particular?

Can you, is there a way to quantify that or give us a percent increase that you see coming out of that business?

In volume terms probably not.

In foreman's terms, we do expect to see quite significant reliability improvement.

I mentioned seven percent unplanned shutdown, seven percent of total capacity utilization lost in Q1 on an average of, at some point last year that figure was eight percent or higher.

We have a target of four percent.

So, we expect utilization, in effect, to improve by three percent from where we are in Q1 just on that reduction of unplanned unreliability.

I'd have to think of how that actually translates into the bottom line, but that's direct free improvement.

Do we see that coming through?

It's driven by a combination of investment.

We do need to make investments in some of the plants, and we've been doing that on a steady basis, for example, the plant shutdowns we just saw.

We are roughly halfway through a four-year program of asset integrity upgrading, which also includes picking up the latest fuel specs, the environmental clean fuel.

And therefore, we wouldn't see the full improvement until maybe middle of next year or toward the end of next year.

But that plus the implementation of what we would term best in class operations across the whole of the network, something we struggled to achieve in the days of the alliance, and that process is being rolled out now in conjunction with [Inaudible] .

And we're pleased with the progress now, but there's still some way to go, so, I wouldn't put a dollar-figure number on it.

I'd just opt back to the $100 million after tax income that planned and unplanned shutdowns cost us in the first quarter.

OK.

Thanks a lot, Simon.

OK.

Thank you.

The next question comes from Mr. Burt van Hugenheim (ph) .

Please state your company name followed by your question.

Good afternoon, Simon.

This is Burt from [Inaudible] .

Very good results.

I have a few questions left on EMP first.

There was a pleasant surprise in Nigeria where, based on reports we got, I thought you had for some time a production loss of about 90,000 barrel, but I don't know if this is a like-for-like figure.

And also, in the light of what you said of the fact that two-third of the shutdowns have been restored.

Maybe you can give some illumination on that.

In gas and power, the sales [Inaudible] it is sort of a forced barter, part of the due after so many years.

And how does that work out for Tiga?

Do you still have a number of years there to go, say 20 or so, how does that work?

The third is, maybe you can give [Inaudible] varieties on the several major parts like EPG (ph) , POP, et cetera.

And finally, as far as cap ex goes, I was a bit surprised in the marketing cap ex, in view of the ongoing rebranding of the U.S. gasoline stations, which, I suppose, still have two-thirds or so, three-quarters of them left, or are those not in the marketing cap ex?

Could you give some light on that?

Thanks, Burt.

I'll try and worm my way through that.

The first question was on Nigeria.

You mentioned 90,000 barrels.

Yes, on a daily basis, at one point, we were down 90,000 barrels, but most of the disruption only occurred from the middle of March.

Some of the disruption we were able to offset through other fields.

Because the disruption was only in either the West or the East part of the delta at any one time.

And most of the effect came through in April as opposed to Q1. [Inaudible] you asked if the divestment was a result of the original contract some years ago.

And took place in line with that contract.

It is, some 20 years or so since the plant first started up.

But, fatigue (ph) , I cant really comment going forward, but it certainly very long term involvement that we have.

The oil change in the major business, as I mentioned, we don't really want to give the normalized archie (ph) .

In an effort to look at the archie (ph) as reported, you would see that BP has a very healthy launch (ph) over the last 12 months.

And, oil products and chemicals would be relatively low but in large part driven by the very poor environment that we see in chemical and the below reference condition environment that we've seen in oil products.

Last point on cap acts.

The rebound there, some of the rebounding is in fact recorded as operating expense, not just cap acts.

And, of course, some take part (ph) in Motiva.

Motiva is a 50 associate.

A 50 percent associate and any capital investment with Motiva is not generally reflected in our capital investment bubble.

Some of that investment you won't see and some of it goes into the operating acts and straight through to the PNL immediately.

Does that pick everything out?

Thank you very much indeed.

Thank you.

The next question comes from Mr. JJ Traynor.

Please state your company name followed by your question.

Simon, JJ Trainer from Deutsche Bank.

I wondered if I could just pick you up a bit on the balance sheet management fee that you've identified.

The balance sheet, there seems to be a lot of movements in short term debt and cash on the quarter.

I wondered if you could just remind me if there's any more significant outflows of cash with respect to the acquisitions and deals that you've done?

So is there anything else to come from that?

What sort of big movements, if any, in changes in capital employed left for the year.

The cash cycle that you talked about.

It required $19 billion of funds and operations conservative conditions.

What sort of cash generation have you had in those conservative conditions in the first quarter?

Share buy backs, if you started those this year what would be the minimum that you'd have to buy, have to spend this year?

And then finally, a completely unrelated question just with respect to the U.S. downstream business, in aggregate, right across the U.S. downstream to you think you were above or below your standardized conditions in Q1?

I may have to come back on a couple of the questions just to clarify them.

First, balance sheet movement short and back in cash.

We - the cash was $4 billion, cash on the balance sheet at the end of the quarter.

We were expecting, to be honest, the rural gas proceeds slightly after the quarter end and it to rise slightly before the quarter end, and it was not worthwhile repurchasing some of the CP we had out.

So that affect was a few days and therefore the more typical level of cash would have been $2 billion and that probably addresses the short term debt issue as well.

We primarily are financing our debt needs at the moment through CP less than 12 months and majority.

And that is basically because we can.

It is the most entire efficient form of providing debt and that's where the triple A rating gives us some advantage.

Significant air flows less than our three point four billion dollars to debt on the dividend in near, next May 12.

One point three five billion on Daya, remaining from the acquisition of that, I'm sorry whether that's the 30 of June or the first of July, but it is certainly.

I'm not sure whether, which quarter it will bear it is certainly in the next couple of months.

There are no, as far as I'm aware, outstanding additional capital requirements related to the acquisitions.

Capital employed however, of course we haven't yet in calculating the watch sheet, seen a full year impact of enterprise, of Daya, or of Pennzoil.

We have got a full year of Equior (ph) Motiva in May.

Therefore, one would expect to see rather diluted impact as we go forward.

Of that at least in part by synergy, delivery, and the forms and prudence we expect to bear in February.

I think the question on the cash generation, the 19 billion that conservative commissions.

We're effectively talking about normalized debt adjusted cash flow there, although I haven't given normalized returns.

I don't give too much of this day on normalized debt adjusted cash flow.

I would say we're making quite steady progress on that and I'm sure you guys do your own calculations, but if you go back to 2001, look at the growth we've achieved, look at the growth that we still have to come as we improve, deliver those performance improvements, you may get a pleasant surprise.

Buyback minimum this year is around one point five billion dollars, of course it's actually expressed in euros.

It could be plus or minus a bit as the exchange rate moves, but it's around one point five billion dollars.

The last question, could you just help me out again?

It was simply that in the U.S. downstream businesses in the first quarter, were you above or below your mid cycle assumptions?

About three percent on the marketing assumption.

Well above on Gulf Coast and slightly below on the West Coast.

So I think on a net basis we were pretty much above.

So that's on marketing.

And on refining, would you be above mid cycle as well?

On refining?

On refining we're above.

On marketing we are at three percent our recent commissions.

Right.

So in aggregate then, the whole business was above your mid cycle?

Well above, yes.

Yes.

Sorry, I just about got that the wrong way around.

The West Coast was in fact above rough and rough was just above.

And so just talking back to the 19 billion of cash generation, the definition of that, would that include proceeds from disposals?

You'll find we were not particularly specific at that point because we see that as one of the flexible tools that we have to make that cash cycle work.

We do need - what the 19 billion was driven by the commitment and not by the generation.

The commitments was 12 billion on the capital, one billion roughly to service among nature of debt service, and six billion dollars on a - six billion dollars on the dividend.

Thirteen percent of R2 was chosen as a target level that gave us a suitable cash generation from operations and divestments is the way that we - one way we can make up any cash shortfall or underlying cash shortfall.

In theory it's such as we are at the present, the way the return pulls below 13 percent.

Right.

OK.

I guess I'm just also trying to figure out whether you could have afforded to buy back shares or for cash generation in Q1.

Hopefully you understand I won't go any further on that question.

Thanks, JJ.

Thank you, the next question comes from Mr. Paul Spedding.

Please state your company name, followed by your question.

Hi, it's Paul Spedding from Dresdner.

Just two quick questions.

Firstly, is there any risk of having to write Coreb (ph) off, and if you did, how much would that involve?

And secondly, can you comment on reports that there has been some progress on the [Inaudible] tax barriers that seem to have arisen last year.

As I said, we're still evaluating Coreb (ph) as to what the next steps may be.

So it's too early to speculate from whether we would need to write down the value of the asset.

The value of the asset, of course, includes some of the premium that we would have allocated as part of the enterprise deal, but I can't really give you a figure for the total asset that is potentially at risk.

Progress on Sacklin (ph) , tax related, we have been in discussions with the Russian government, have made proposals to them.

You may be aware that the Russian government, most of Russia in fact, is on holiday at the moment.

Progress this week, not a lot happening.

But we're still in close discussion with them.

Just to clarify, one or two of the specific issues that we would like clarified before we go ahead.

Would it be fair to say that the spend to date on Coreb (ph) is around $200 million, gross?

I can't really speculate on that.

OK, thanks.

Thank you.

The next question comes from Mr. Mark Gilbert (ph) .

Please state your company name, followed by your question.

Simon, could you possibly put some parameters on the asset sales program going forward for the U.K. as well as U.S. upstream?

Upstream, we talked about, because there's two packages in the U.K., North Sea, and in the United States in Michigan and in some shallow water in the Gulf of Mexico.

Both we'll value we talked about, expectations over $500 million.

The potential associated production is around 70,000 barrels of oil equivalent a day.

Look at the other announcements we've made outside the upstream, the prime ones are the intention to sell the onshore pipelines in the United States, to divest the refining and retail interests in Sweden, and to divest XL Powerleave (ph) as a result of the FTC decision on the Pendular (ph) acquisition.

They're the primary announcements that we've made, and together they take the total expected proceeds up to something quite a bit over $1 billion.

Simon, could you give us a figure for the Royal Gas dividend last year, please?

Royal Gas dividend last year.

Around $50 million, last year.

Oh, 50 million euro.

I'm reading the wrong currency.

OK, thank you very much.

Thank you.

The next question comes from Mr. Steve Turner.

Please state your company name, followed by your question.

Hi, Simon again.

I'm still a bit confused by your share buyback program and I'm wondering, what are the key variables that we should be watching to try to gauge when you might resume that share buyback program?

Because you just had a fantastic quarter of excess cash generation and the balance sheet is in [Inaudible] health.

And so, the things that we might expect to inspire some other companies to resume share buybacks don't seem to apply at Shell.

Could you explain what are the key ones we should be watching?

I'm not sure there's too much more I can say, Steve.

We said it remains unlikely in the first part of the year.

I mean, unlikely?

It remains unlikely in the first half of the year.

We can't give a specific advance notice because that might be somewhat price sensitive.

All of the alternatives that we have, the use of that [Inaudible] health balance sheet, and remember we are generally a prudent company that has had a tradition of a very strong balance sheet.

We don't believe, necessarily, that high gearing is good for us.

So, just go back to the long-term nature of the month balance sheet management process.

But if is a long-term balance sheet management process, doesn't that imply that it should be a relatively continuous process rather than something that's turned on and off like a tap?

Probably not, no point in going on further, Steve.

OK.

Thank you.

We're not going to change the statements we've made.

OK.

Thank you.

Thank you.

We have a follow up question from Mr. Burt van Hugenheim (ph) .

Please go ahead, sir.

Two short follow ups, if I may.

First, on the Australia refinery situation after the Exxon/Mobile closure of, or intention to close at Fort Stanbeck (ph) , should we expect something [Inaudible] during this year from your side?

And secondly, on the balance sheet, the receivables going up from 28.7 to 31.1, is there any specific reason for that raise?

Sure.

Australia's situation, you're probably aware we've looked more than once in the past at the Australian refining situation because it is a very difficult refining market, over supplied.

As far as I'm aware, there has been no change to our situation applied since the Exxon announcement.

And therefore, we are continuing with the two refineries.

Receivables went up 28, or as you say 28.7 points to 31.1.

Nothing more sinister than the higher crude oil prices.

European oil products is up roughly a billion dollars within that, but that's entirely to be expected from the higher prices and also the higher euro, or the euro being stronger against the dollar.

OK.

Thanks very much.

OK.

I think we have no further questions now, so, I'd like to close the call, say thank you.

And if there are any further questions, please feel free to contact myself or any of our team.

Thank you.