殼牌 (SHEL) 0 Q0 法說會逐字稿

Welcome to the Shell Q2 results conference call on the 29th of July, 2004.

For today's recorded presentation, all participants will be in a listen-only mode.

There will be an introduction of approximately 20 minutes.

After the presentation, there will be an opportunity to ask questions.

If any participant has difficulty hearing the presentation, please press the star followed by the 0 on your telephone for operator assistance.

I will now hand the conference over to Mr. Jeroen Van der Veer.

Thank you, sir, please go ahead.

Thank you very much, operator.

Hello, and welcome to this teleconference on the Royal Dutch/Shell Group half-year results.

I am Jeroen Van der Veer, and I have with me Malcolm Brinded.

Hello.

And Tim Morrison.

Hello.

And Dave Lawrence.

Hello.

Malcolm is the CEO of Exploration and Production and also for Gas and Power.

His last responsibility, Gas and Power, he will shortly hand over that to Linda Cook.

Tim is our acting Director of Finance until Peter Voser rejoins us in October.

David took over as our Head of Investors Relations earlier this year.

The slides for the presentation will appear on the web as we speak.

But for those of you following on the download document, we will tell you as we move on through each new slide.

First, on the next slide, let me draw your attention to our disclaimer.

I will give you time to read this.

Thank you very much.

I would like to start this press conference to say that we have news from the SEC and the FSA.

This is fairly recent news.

And it is about both settlements with the SEC and the FSA, a proposed settlement with the Company.

You have undoubtedly questions about that.

Let me already start now to say that we see this as a hopeful step in dealing with the reserves issues.

But rather than going now in more details about that, I better wait your questions about it, because the press statement describes pretty precise what it was all about.

I prefer now to turn to our first-half year results because we think we have a lot of important news there as well.

So if I look at the overall performance, I think it was satisfactory.

It was helped by strong business environment, with higher prices, and refining margins.

Further, it was also affected by charges and provisions.

Net income of $4 billion for the quarter was 54% up on the same period in 2003.

CCS earnings were 16% higher.

Cash flow from operations were $4.8 billion, was okay.

A further, 0.3 billion came from divestments.

We see continued strong cash generation as an important capability to fund [ph] dividends growth in our investment program.

Interim dividends were up 1.4% for Royal Dutch and 2.5% for Shell Transport.

And I measure Royal Dutch in euros and ST&T in British pounds.

We have restated -- sorry, we have restated our share buy program in May.

But if I measure the increase in the interim dividends in dollar terms at the current rate of exchange, they represent strong increases, and this is in fact 6% more interim dividends for Royal Dutch, measured in dollars, I emphasize, and 17% for ST&T.

If I look at our returns, they were 15.5% and we think that's competitive.

Moving on to the results for the individual businesses, that was more mixed.

Exploration and Production earnings were affected by a charge, write-downs, tax increases, and lower production.

The reserves replacement outlook for this year is also disappointing.

Malcolm will say more about that later in the introduction.

Gas and Power earnings reflects strong LNG performance, offset by poorer marketing and trading in North America.

Excluding the proceeds from divestments, they are similar to a year ago.

Oil products had a good quarter.

Earnings of $1.6 billion, were nearly 60% higher than last year.

This included a much stronger performance in the U.S. reflecting better refinery utilization, as well as margins.

It is also good to see a much-improved performance by chemicals, benefiting from higher sales and plant utilization, as well as stronger margins.

Turning to investment and divestment, the chart shows how we are shaping the portfolio.

The sense of our strategy can be expressed simply, more upstream and profitable downstream.

More than 80% of our capital investment was in the upstream business.

Expenditure for the full year, capital expenditures, I mean, is expected to be some $14.5 to $15 billion, excluding the minority share of Sakhalin as we said at the end of the first quarter.

We are divesting underperforming or nonstrategic assets to initiate the portfolio.

We said that we expect divestments to average around 2 billion a year.

Last year, we did double that, and we have already reached that level of 2 billion in the first half of this year.

Taking advantage of good asset prices.

And divestments are continuing to at pace.

Turning to progress on our major projects this year, more important was -- the most important was the approvals of the major Kashagan and Ormen Lange fields.

Now Taboska Porchek [ph] is ramping up its design production.

And just recently, Shell Canada acquired 2 further leases, adding a further 1 billion barrels of oil in the ground to its significant oil resource base in the area.

I would like to point out that mining reserves are not counted as proved oil reserves.

The result will continue to make deep holes of progress in the Gulf.

In the Gulf of Mexico, the Cologne field was brought into production in record depths.

Also, the Liner field will be tied back with Orca [ph], came into production.

We continue to develop our business in China, with agreement on the retail joint venture, with Seitelbeck [ph].

Nanhai, that is the building of the chemical complex, is on track for production next year.

Agreement on the integrated development -- sorry, agreement on the integrated development of production sharing contracts for Pearl GTL in Qatar and another key milestone in this land five project.

We can continue to push forward our LNG business on many fronts.

Notable progress has been made towards making a final investment decision for Nigeria LNG for the DA LNG Gulf Train 6.

All 4 million from this train have been firmly contracted similar to FID, and 3/4 of this volume is contracted to Shell, going to the U.S. market, and the remainder to Europe. [inaudible] decided to build a gas pipeline from the Netherlands to Britain.

Finally, let me look at Sakhalin and Bonga, 2 very important but also very challenging projects.

On Sakhalin, sales to Japanese utilities have increased.

The regional LNG market is strong.

And the project is on track for first LNG by the out of 2007.

However, as we said at the end of the first quarter, our significant cost pressures on the project.

So we have reinforced the management team tackling this giant project.

On Bonga, that is Nigeria, offshore completion and commissioning is taking longer than we initially expected.

We have also restructured our approach there but Bonga is now expected to come onstream around mid 2006.

Turning to our financial framework, starting with how we manage our financing, we are determined to maintain a strong balance sheet, which gives us the flexibility to make choices.

And we remain committed to capital discipline.

In this first half, we have repaid $3.5 billion of debt and are comfortable with our overall DA [ph] in the 20 to 30% down, including other commitments.

This is consistent with our financial framework.

With half a spending program at the time of higher prices, we like to be at the low end of the range.

Recent downgrades will not have an effect on our financing.

Turning to our cash cycle, which remains key to how we manage the business.

In the first half of the year, we generated over $15 billion in cash.

Over 5 billion, this was returned to our owners in dividends, buybacks, and option hatching.

After paying off debt, we invested 5.6 billion in our business.

We continue to generate strong cash flow from operations, supported by additional cash from divestments.

This confirms our investment program, services our debt, and supports our dividends buyback program.

Moving to our returns, we see cash generation and returns, the capital efficiency of our portfolio as good indicators of our performance and strategic progress.

Our returns are being diluted by operational challenges, the ongoing shift in our upstream portfolio mix, and the increasing amount of growth in capital in our portfolio.

Our top 10 upstream projects will have over 13 billion of capital on the balance sheet by year-end.

Reducing group [inaudible] out 2 percentage points.

This will continue until major projects come on stream from 2006 onwards.

Offset by the improvements we are pursuing across the business.

In the meantime, cash flow from the existing assets will be used to support this happy investment program.

On that note, let me hand over to Malcolm to talk about the upstream business.

Thanks, Jeroen.

I will start by looking more closely at the expiration and production results and these were clearly disappointing.

You can see the benefits of higher oil and gas prices were offset by write-downs, by tax increases, especially in Denmark, and lower production.

And in addition, there was a charge of $141 million relating to the mark-to-market valuations of U.K. gas contracts.

And as previously announced, we wrote down $330 million of various enterprise expiration assets.

That should be viewed I think in the context of the benefits from the acquisition, obviously, with these prices very strong cash flow, and the new projects we've got onstream and underway, in Tahiti and Llano discoveries in the Gulf of Mexico, for example.

In Denmark, we have a very successful long-term venture, but the effective tax rate has been sharply increased.

In the first half of this year this added around $300 million to our tax bill.

Looking forward, at current prices, the quarterly impact relative to 2003 is expected to be around $200 million, as in Q2, at the sort of prices we've had recently.

Let me move on to production, the next chart, and you can see that on the left that in addition to the Llano and Coulomb start up, increasing production from the ramp-up Bijupira Salym in Brazil and NaKika in the Gulf of Mexico, and the Athabasca in the EA offshore field in Nigeria, compensated for field decline, but production fell in this quarter, effectively because of divestment, production sharing contract price effects and the unplanned shut downs of Mars and Nelson, both of which are back on stream.

Looking forward, we expect production this year to be some 3.7 to 3.8 million barrels of oil equivalent a day, down on last year's 3.9 million, and of which reduction, 80,000 a day is due to divestments, that's over the year.

Production will also form next year, as you will have seen, from the release this morning.

Partly because of ongoing field declines, and the delay in Bonga startup.

And also because of the ending of our investment in the upstream part of the gas business in Oman.

Although I should stress it doesn't affect the overall level of Oman's production it reduces group reported production in 2005 by about 100,000 barrels of oil equivalent a day, but it has a relatively minor effect on income.

Overall, the production outlook for 2005 and 2006 is expected to be in the range of 3.5 to 3.8 million BOE a day.

That's from the currently expected portfolio and that is down from previous forecasts.

Unit production costs for the first half of the year, that's excluding associates, royalties and the Athabasca project, were higher than in 2003 because of lower production, exchange rate movement, and market conditions.

I think costs will increase further in the rest of 2004, for the year as a whole they are expected to be around $1 a barrel higher than in 2003.

Unit DD&A in 2004, excluding associates in Athabasca are also expected to be higher by about 5-10% than in 2003 reflecting new production, expiration charges, and the reserves recategorization.

As for reserves, the outlook for the reserves replacement ratio for 2004 is estimated to be 60 to 80%.

Of course, this is disappointing but much work does still need to be done before the end of the year.

Nevertheless, we thought it important to flag this now.

And in relation to our longer term reserves replacement ratio, it is apparent that we are off to a slow start, but I remain reasonably confident we will meet the 100% IRR forecast as an average over the 5 years that we gave you in the first part of the year.

So you can see we've got some challenges in the Exploration and Production business and I would like to highlight how we're facing up to them, because you can see production costs and reserves placement a concern, but remember, the business generates a lot of cash, it has a decent return, around 25% on a full quarter rolling basis.

Of course, I recognize this is down to unusually high energy prices and we've got a lot to do to get our EP business right.

I'm going to give you the 5 main headlines of what we're working on.

First, we've got to ensure operational excellence in the existing assets.

Longer term internal target is that in existing assets we should benchmark in first quarter of the unit operates costs and in our time for in comparison with similar assets, in the same basins and regions.

Second, we do have to adjust our existing asset and project portfolio.

I think we've made good progress with this rationalization.

We've had proceeds of nearly $2.5 billion from EP divestments over the last 18 months, but I think we're going to have to continue such portfolio action.

And that means taking a good look at the balance between short-term projects and these long-term major investments.

And also, have we got the right mix of upside and risk in our portfolio.

Third, we will continue our aggressive program of exploration, running at around $1.4 billion this year, and new business development.

Again, the focus will be on positions where we have a good chance of long-term growth and where we have sustainable competitive advantage.

Such as in LNG, where of course we're industry leaders and you see volumes 10% up, gas to liquids where you saw the gas in milestone, deep water, unconventional oil, and tight gas.

Success in these areas will be key to reserves replacement.

We will also keep looking at suitable acquisitions along the way, though we don't expect this to be the silver bullet.

And when oil prices are high, it is clear that good opportunities are few and far between.

All the business were $10 billion a year in the investment, we must raise our game in project delivery and we are doing so.

We put new management structures in place in Sakhalin and Bonga.

We are also pursuing a worldwide program to upgrade project management skills and processes.

This Company has gotten major proven areas of excellent project delivery which we can draw on, in our LNG projects, in the downstream businesses and in the deep water Gulf of Mexico.

And our new global EP structure enables us to really roll those skills and capabilities out globally as part of this important program.

Fifth, against the background I think of increasing cost pressures in the industry, we must develop and maintain a fully competitive cost structure, and that was the rationale behind our move to a new global operating mod until 2000 three.

It is crucial that we deliver the identified costs and operational and process improvements that came with that.

I think that the cost challenges in our industry will keep on increasing.

Especially if higher energy prices prevail.

And we don't want to underspend on integrity management, nor on new business development to replenish reserves.

So I don't think unit operation costs and unit depreciation will fall from current levels.

We will be back in September to put much more meat on those bones, but I would stress that Shell continues to have many strong assets in the EP portfolio, and some excellent new projects underway, though clearly we've got some major challenges to address.

But as I go around EP locations around the world, people make it very clear that they understand the direction, they have the sense of urgency, and they are determined to meet such challenges and I am confident we'll do so.

I will turn to Gas and Power now, if I can.

You can see there are good LNG earnings which reflect a 10% rise in sales with strong global demand as well as higher production from Malaysia Tiga train and LNG -- and Nigeria LNG Train 3.

Realized prices were broadly flat compared to a year ago.

But overall, the market outlook remains one of strong growth and we're, of course, well positioned as an industry leader today.

We also have 5 more new LNG trains presently under construction.

Higher dividends from midstream business is more than compensated for the income we lost from those we divested.

But our U.S. marketing and trading business had a poor quarter, although we did make good progress with power divestments.

Earnings from gas to liquids in Malaysia rose and it is great to see the operational performance we have there.

Finally, on upstream earnings for the business as a whole, we keep a close eye on how the combined returns of our 2 businesses compare with our competitors.

You can see that at the moment, we're in the middle of the pack.

But we are in a period of real growth.

And the figures shown includes the impact of the Q2 exploration write-down and the various other charges mentioned earlier.

On that note, I will hand back to you.

Thank you, Malcolm.

Let me start with the oil products results which were very good.

The slide shows the CCS earnings which were nearly 60% up on the same day of last year.

This was driven by strong refinery margins in all regions, as well as [inaudible] utilization.

Improved results are in the refining and in the U.S.

The rebranding and upgrading of the U.S. network is on track and should be largely completed by the end of the year.

The next slide shows our steady progress with reducing unplanned refinery downtime in the U.S.

We are moving towards our global -- towards our goal but still have work to do.

What it is also encouraging is the plant utilization was up this quarter by 4%.

Although progress, this is still not satisfactory.

We continue to focus on achieving our targeted [inaudible] level of 4%.

I have no doubt we will get there.

Turning to our competitive performance in units CCS earnings.

The aim to achieve the consistent global leadership that we maintain outside the U.S., we know what we have to do to achieve this, both inside the U.S. and elsewhere and I am pursuing it very hard.

Turning to chemicals, which is after a very difficult period delivering much-improved results this year.

The good increase in earnings in the second quarter compared with the same period a year ago, was driven by a 10% increase in sales reflecting stronger demand and increased capacity.

I advised us how to offset increases in fixed costs and energy costs.

The key is to ensure this improvement that is sustainable.

We are reviewing the strategic alternatives for our Brazil polyolefins joint venture with our partner BASF in Germany.

Options include selling our stake.

I would like to say in chemicals as well, I sat in the beginning of the Nanhai complex is due to startup in 2005.

Indeed -- I said end of next year -- indeed, the idea is that the major units are completed by the end of 2005, but I think it is better to say that the real startup takes place as we think now in 2006.

Early 2006.

Finally, what are our priorities?

First is to focus on our operations and projects.

What has let us down in the past is not delivering the consistent performance that is the entry ticket for our increasingly competitive business.

We aspire to first quartile performance for operations and project delivery.

Second is to shape the portfolio.

We have -- sorry.

I come to my second part.

Is to shape the portfolio.

We have made significant progress, but we need to continue shaping it in line with our strategy to enhance our upstream competitiveness.

We will say more about this in September.

The steeling group continues to discuss with investors -- sorry.

I'm mixed up here.

Okay.

Sorry.

Sorry.

I'm mixed up in my notes here.

The priorities are as follows: It is the operations & and project delivery.

That was the first priority.

The second one was shaping the portfolio.

The third one is to ensure that we have the culture and the current behaviors necessary for success in our Company.

I think that there are things we lost over the last few years and others we didn't properly develop.

But I see a lot of progress there, especially after the meeting of the top 400 in Houston.

We would also would like to look at the structure and the governance of the Shell Group and the steeling group and the working group are doing that, they make good progress.

The review is in the leadership of Lloyd Curl [ph].

We have appointed financial and legal advisors, and they -- the helpers to analyze all those advisors, all the options.

And we are engaged and we continue to be engaged with shareholders.

As I indicated, it is our strong commitment to come with one option or more options in November.

But our actions include the appointment of a new executive, currently Lord Oxburgh, to the Chair of the meetings of our combined boards.

And the Royal Dutch board will continue the operation of the priority shares at the next year's AGM.

We have appointed Peter Voser as the next CFO starting in October.

And to enhance controls, we have reorganized our finance function so that it reports directly to the CFO rather than being split up in the various businesses.

We will continue to drive these gains forward.

Finally, let me sum up the 4 months the new team has been in office.

I will make 3 points.

First, we make progress in getting the reserves issue behind us.

The pool of reserves have been counted, the annual report and [inaudible] have been published, AGM's took place, and today's announcement have labeled that already a hopeful step.

However, the investigations by the authorities and the class actions are continuing.

Secondly, we keep focused on the business.

Our strong cash flow is used to balance growth, dividends, and buybacks.

Staff are motivated to go for first quartile performance.

We work on our aspired portfolio, more upstream, and profitable downstream.

But having looked at again at our production forecast, we have to face the fact that it is going to be lower.

Third, last, but not least, we are making good progress with the culture and the governments of the Shell group.

I am convinced we can bring the group back where we belong.

Thank you very much, and I'll open it now for questions.

Thank you, sir.

If any participant would like to ask a question, please press the star followed by the 1 on your telephone.

If you wish to cancel this request, please press the star followed by the 2.

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

Once again, if you would like to ask a question, please press the star followed by the 1 on your telephone.

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The first question today comes from Mr. Jonathan Wright.

Please state your company name followed by your question.

Good afternoon.

It is John Wright from Citigroup.

I have 2 questions, please.

The first on the dividends.

We've seen another big dollar increase today.

Is Shell still committed to the local currency dividend growth ambition or do you need to consider a move to a more a dollar dividend policy?

And the second question was on production, the '05, '06 guidance is quite wide, 3.5 to 3.8 million barrels a day.

I wondered what this range was contingent upon.

The first question will be dealt with by Tim and your second question by Malcolm.

John, thank you, yes.

We have had a local currency commitment reduction for Shell transports for many years and we've managed that successfully.

And we do regard this as sustainable.

And, of course, the current weak dollar is, at least at the moment matched, offset by high oil prices.

And actually quite a lot of our business is nondollar-based.

But we do appreciate the attention you're referring to and this is something we monitor.

Yeah, and, John, for production, if I can just say, indeed 3.5 to 3.8 is the range which brackets both '05, '06, we expect '05 to be down on '04, and '06 to be back up again.

And what will really drive '06 is the delivery of new projects, Bonga, Ehra, Pohokura, which we recently agreed to the go ahead of, Salym and Sakhalin all round oil production, year all round oil production.

I think if those will come in on time and correctly, then I expect to see '06 up on '05, both years in range.

Okay.

Thank you.

The next question comes from Mr. Neil McMahon.

Please state your company name followed by your question.

Hi.

It's Neil McMahon with Sanford Bernstein.

Just 2 questions.

First one on the European refining.

Could you give us a sense of the European refining margins you were getting and marketing margins during the quarter.

It seems to be maybe a bit weaker than people were expecting.

Secondly, I just want to find out how you're going to turn around the upstream business?

But to be honest, the 60 to 80% reserve replacement for this year is a bit of a surprise and how much of that were you getting from the rebooking of reserves?

And it seems quite clear to us that you really need to divest, certainly some of those enterprise assets with high decline rates to be able to stand the decline in production and really get yourself off to a start for new growth 2006 going forward.

I will ask Malcolm to respond to the second question because I'm quickly checking.

I know exactly the defining margins, but I don't know that I am allowed to reveal them, so I will come back to you on that in a moment.

Neil, if I could take the question on the upstream, of course, we're disappointed with the 60 to 80%.

It is an early figure.

We will wait to see how that comes out by the end of the year.

As I said, I'm still reasonably confident with the 5-year outlook, but we have to look more at that.

I think in terms of the portfolio, though, you're absolutely right.

We have to address our portfolio.

I think I have indicated such, we've done -- made a good start, but we have to continue that pace.

I think it is a question that we as to -- you know, you focused on the enterprise assets.

I'm not sure necessarily about those, some of them have particularly good upside in low political risk countries, so I think it is more a question of looking across the portfolio and asking indeed which of the low returns tail, which is the low margin areas, what's the high risk areas and what are the particularly demanding in CapEx areas which we don't think a natural long-term fit.

And I believe it requires taking a good look at.

I am conscious we need to take action there.

In terms of building for growth, we've got a number, obviously, of important long-term projects underway and we are in a period of quite heavy investment and I expect to see that continue over the coming years.

Just on those new growth projects, just looking at the huge delay on Bonga, has the production profile changed on that field?

And maybe you can just go into a few points on why it is being delayed?

Maybe as much as 2 years from the initial startup time.

Yeah, I think it is not really different from what I was indicating when we first came in at the end of the first quarter.

I mean, we are looking now at mid next year.

I think we are in the relatively early stages of offshore commissioning, offshore Nigeria.

It's an enormous FPSO.

The commissioning activity is critical.

Getting the productivity offshore is what is critical.

And that's why we have reinforced the management structure and we are working very closely with the contractors, and I am pleased that see that the results that we're getting there.

If you look back over the type of schedule, I think we were, frankly, too optimistic at the beginning when we actually set out on the project.

We had the total schedule for one of the largest FPSOs a year under the schedule of, I think any FPSO built to date then.

And so I think assumed an awful lot of things would go right and in practice, a few of them went wrong.

I think it is an important lesson to learn from, and for me, that's why I emphasized in the 5 points we are really focused on, that project delivery is a key capability and we have some areas of complete excellence in this business, we just have to get it right across the whole patch.

Neil, Jeroen here again.

Both of them, the complex margin is, what I can say is that if you take many -- they go a bit up and down, but if you take over, let's say over the past years of [inaudible], $2.00 a barrel, that both of them very complex margins, that is probably a reasonable average to keep in mind.

And just compare that, what was also the second quarter, we go more than double, just a bit more than double that margin.

So indeed, we can say it was a quarter, the second quarter of good, both of them, complex margins.

And anything from -- on the marketing side?

And we try to stay just to the one question, please.

No, we don't reveal marketing margins, Neil.

Great.

Thanks for your answers.

Thank you, sir.

The next question comes from Mr. Tim Whittaker.

Please state your company name followed by your question.

Hi, it is Tim Whittaker from Lehman Brothers.

Could I just clarify some of the answers to the previous questions and then ask my own question.

On the production guidance, 3.5 to 3.8, does that include any acquisitions?

And what oil price assumptions is embedded in that?

On reserves bookings, I think one of the previous question was how much of the 60 to 80% was from the reserves that was previously written down, you could answer that bit?

And on the previous question, I think Malcolm you said mid next year for Bonga, and I think Jeroen said earlier on 2006.

Could you clarify that one?

And on my own question, you were kind enough in the first quarter to give the split by lubricants, refining marketing, and transport in U.S. downstream.

Could you do that again, please, this quarter?

I'll have Malcolm start with the first 3 questions.

Yeah, hi, Tim.

The first question I think was on the oil price and acquisition assumptions.

I would say that the production assumptions are, you know, what I would expect to see, with normal portfolio activity of the relatively small side, either on acquisitions or divestments and nothing particularly significant either way.

In terms of the oil price assumption, well, you know, it is probably more geared on a -- in prices, you know, in the 20s, and if prices stay in the 40s like they are this morning, you would have to look at the production sharing contract impact again.

But, you know, we will have other advantages if that is the case.

On the reserves rebooking, it is not a significant proportion of the number that I referred to.

I mean obviously, we have said that reserves, rebookings will be a key feature of the sort of 10-year outlook, but for this year, I don't think it is a big part of the number I mentioned, but as I said we've still got a long way to go.

On projects, just to clarify, Bonga, I was talking about mid next year, but Bonga, I think your room was referring to Nanhai when he was talking about commissioning at the end of next year on first output on products early 2006.

Just to clarify, Tim.

The last question I will hand over, sounded complicated to me.

The break down as you asked is we can give that for the U.S. specifically, and under the marketing, it is 100, in the U.S.

I'm talking, the manufacturing is 300, and then you have, of course, a category other.

And I think the total result of the U.S. was 460.

Are you able to say what lubricants was?

Which you also gave last quarter.

I don't think as far as I'm aware that we don't split out -- sorry, Tim takes over this question.

I think with running, this is a global business, we are not splitting out the lubricants in the U.S.

Okay

Thank you very much.

If I could ask the participants please to try to limit each question to just 1 question, please.

Thank you.

Thanks, Tim.

The next question comes from Mr. Fred Leuffer.

Please state your company name followed by your question.

Hi, it is Fred Leuffer, Bear Stearns.

I will ask my one question, but again, just a clarification on Neil's question earlier, the reserve replacement, Malcolm, do you expect to rebook Ormen Lange fully and cash again this year?

And secondly, can you give us an update on capital expenditures for the group for this year?

And maybe some indication for next year and also for E&P this year and maybe some indication for next year?

Okay.

I don't think I'm going into specific fields on -- in terms of Ormen Lange and cash again in relation to 60 to 80%.

I think on Ormen Lange we -- Ormen Lange is quite a good illustration, of course, it is pretty much in the public domain now, that there are still a range of interpretations that are being placed on Ormen Lange, which highlights some of the challenges in this area.

I think your next question was about capital, and the guidance there is still $14.5 to $15 billion for the year, and I think we've always said that we would expect within that the upstream business is I think around 11.5 to 12, and the EP part of that, around 10.

And in terms of guidance, I think all we're saying really is that next year is likely to be a similarly high level of expenditure.

And I think that again, as 80% of our capital investments is in the upstream businesses this year, we would expect probably around that next year.

Does that help, Fred?

Yes, thank you.

The next question comes from Mr. Mark Iannotti.

Please state your company name followed by your question.

Yeah, Mark Iannotti, Merrill Lynch.

Gentlemen, given your signal that acquisitions is not a priority near term, that divestments are going to proceed at pace this year, with your big dividend payment behind you now this quarter, can you just tell us why you don't feel able to increase the buyback program from the current $2 billion?

Yes, Mark, Tim Morrison here.

We announced the buyback, as you know, 3 months ago, and it is indeed true, we have the heavy dividend out of the way.

That was another surprise.

We do think that with this heavy investment program, and this is not a program you can turn on and off just like that, that it is prudent to remain at the low end of it during this time of high prices and one of the things we're very keen to do is avoid a stop/start program of capital investment, so we are being prudent with our balance sheet this year.

We are also, as you have probably seen from the results, part of the way through the existing share buyback program, we still have quite a bit to do in the second half of the year.

Okay.

Thanks.

Thank you.

The next question comes from Mr. Matthew Landstone.

Please state your company name followed by your question.

Yeah, hi, it is Matthew Landstone, Goldman Sachs.

Can I ask you a bit about the Denmark tax changes.

I wondered if you could expand a little bit on the different moving parts in the increasing costs.

It looks like costs have gone up something like $11 a barrel.

And even impacted [inaudible] during the quarter.

Can you explain how you would expect that number to move as you move towards lower oil prices.

And just finally, a comment on how profitable it is now with the higher tax rates in place.

Thanks.

Malcolm?

Yeah, Matthew.

I'm not going to go into too many of the commercial details except to say Denmark continues to be a place where we want to be and continues to be a place which I think is important in our portfolio.

There were, I think, a couple of effects in it.

There was a change in taxation occurring at the same time as the end of certain tax allowances, which makes the situation slightly more complex than it is superficially.

Our expectation is that going forward, we will over, I think we've indicated earlier, the $200 million a quarter is what you might expect with oil prices as they have been in the last few months.

That's about as far as I am prepared to go on that disclosure item, Matthew.

Okay.

Thanks very much.

The next question comes from Mr. Mark Gilman.

Please state your company name followed by your question.

ThinkSmart Company.

I apologize to request a clarification once again on Bonga, but I still don't quite understand whether this field is supposed to start now in the middle of '06 or '05 and our response to the prior question as to whether there are any changes in the plateau production level in the field would also be appreciated.

My own question relates to the reserve replacement issue, and whether or not implicit in the 60 to 80% are any negative revisions that you know of for any particular reason at this point?

Okay, Mark, short answer, sorry if I wasn't clear.

Bonga, mid '05, no change to the plateau expectation.

And in fact, I believe that we will see Bonga will be able to bring in some of the satellites over time, in deep bottleneck Bonga, that is certainly our hope, so, you know, longer term, I would expect that there would be more to come from Bonga.

And your second question was are other revisions downward?

No, that is not in, you know, in any sense other than what might be considered very normal business.

I'm not aware of any specific revisions downward.

Thank you, Malcolm.

Okay, Mark.

The next question comes from Ms. Louise Huff.

Please state your company name followed by your question.

Hi.

It's Iain Reid here from UBS.

Just a quick question on your operating costs outlook.

You said in the statement that you're looking -- you expect operating costs to go up by about $1 a barrel, which is a very significant amount.

Could you say what proportion of that is real cost, if you like, in terms of service costs?

And what proportion royalties or production taxes?

Yeah, I think most of that, I think is -- this is indeed where -- there was a whole range of measuring operating costs, this would be as you will see eventually from the annual report, it is a combination of exchange rate effects, also some costs that were previously netted off revenues, that are now going to be more visibly charged as operating costs.

There are undoubtedly some issues around the market movement in terms of commodity prices, energy prices, and contracting rates.

But essentially, this is around our core operating costs.

And of course, finally, you get -- I think there's the maturity of the portfolio and the mix of the portfolio has to some extent an impact on it.

Just wanted to point out, does it include any rise in royalty rates?

Or is that excluded from this --

No, I don't believe so.

Thank you very much.

The next question comes from Mr. JJ Traynor.

Please state your company name followed by your question.

Hello.

It is JJ Traynor from Deutsche Bank.

Couple questions on the upstream, please.

First of all, the Netherlands, Ministry of Economic Affairs have published their assessments of oil and gas reserves for that country, which includes a lot of negative revisions and a big upgrade on Gronagan [ph].

I wonder if you could talk about whether you've revised up your Gronagan reserves and whether there is potential in the future to increase those reserves again.

Secondly, I wonder if you could to talk about the U.K. joint venture that you have upstream with Exxon.

Are you happy with the -- you know, that the objectives are aligned on that or do you think there needs to be change?

And certainly I wonder if you could just touch on any exploration highlights globally so far this year?

Thanks, JJ.

That's a 3 in 1 question.

Thank you, JJ.

That we've always come to know and love.

JJ, I think the first answer, with Gronagan and Dutch gas reserve, I think, you know, it is still a giant field, so you ask, do I still hope for upgrades, well, you know, in a giant field of that sort which has got a long way still to go, just over half depleted, I think there are still opportunities in the long term to look at things like down hole compression and so forth, but they are still far in the future.

Your second question was about the U.K. joint venture with Exxon mobile, and this is of course a venture I know well, we've been together since the '65 agreement and we have had a huge -- I would think between us, you know, we've spent many, many 10s of billions of dollars between us, and have always managed to stay very close to the align, through good times and bad, and I have to say we're aligned very much with Exxon Mobile at the moment.

You know, it doesn't mean there aren't some areas of difference, but overall, I think we have a great focus on maximizing the value in terms of unit operating cost reduction, extending field life, and maximizing returns, and recovery from those mature assets.

And then finally, your last question was about exploration, well our aim is -- with spending $1.4 billion this year on exploration, to the half year, we spent about a half a billion.

We've had a good success rate, around 50% or over 50%.

We're aiming to drill around 15 to 20 big cats this year.

We have had some disappointments in the Gulf of Mexico, but we've also had in the quarter, for example, new and near field discoveries in the Egypt and the Gulf of Mexico in the North Sea in the Netherlands and Amman and we also had successful appraisals in Malaysia and Norway.

So I would say our focus, I feel good about the focus we've got in exploration.

It is a long-term gain.

And I think, you know, we've been successful in success rate, 1 or 2 disappointments in terms of big cats we had hoped for, but we keep going.

Thanks.

I hope that answered the 3, JJ.

Thank you, JJ.

It does, thank you.

The next question comes from Mr. Robert Kessler.

Please state your company name followed by your question.

Simmons and Company.

Thank you.

A question on capital expenditures, noting that you've retained your full-year guidance of 14.5 to 15 billion, presumably with the 500 million of spending on short-term payback projects, and then comparing this to your lower year-to-date spending and 180,000 barrels of fuel declines in the U.S. and North Sea, I was curious how much of the 200,000 barrels a day of short-term production you expected to achieve in these areas this year has already been achieved?

And then if you still expect to achieve 20,000 to 40,000 barrels a day next year.

Thanks, Robert.

I think the answer is that we release that money after just about the time we spoke to you last, in April, so very much production, some of it is already onstream but it is mainly for the second half of the year.

And I think particularly in the U.K., and the U.S., where that expenditure is going, that is going on track.

Okay.

Just to clarify then, how much of the 25,000 barrels a day has been achieved to date?

I can't answer that question, Robert.

Is that a full-year --

Because of course it is integrated in the program.

Once we release the money, it becomes integrated in the program, of the respective operating units, who are of course spending a lot more money, so we made visible how we expected that change to be.

As far as I know, we are on track with both the expenditure and what we expect in production, although it is very much back-end loaded in the year, because it was incremental release of money.

Thank you very much, Robert.

Thank you.

The next question comes from Mr. Colin Smith.

Please state your company name followed by your question.

Good afternoon, gentlemen.

It is Colin Smith from Credit Suisse First Boston.

Malcolm, you raised an interesting point about having to improve the performance in terms of developments in major projects and, obviously, Shell has a glorious history in delivering very large scale projects which does seem to have come a little unstuck recently.

Can you just tell us a little bit more about why you think that has happened and just give us a little bit more clarity in the steps you're taking to change that around.

Yeah, thank you.

I think you're right, we continue to have great success in certain areas.

The LNG projects in Nigeria, I mean we have a consistent track record of LNG projects across the globe coming in ahead of schedule and under budget and that is something that we're very proud of and if I look at the Gulf of Mexico deep water project, there have been outstanding successes.

I think to be frank, that we did not keep our project management and project engineering disciplined sufficiently highlighted as a core area of expertise in the '90s, from the mid-90s for a period of quite some years, and as a former project manager it concerned me, I think concerned a number of us, I think what is good is we recognized and have taken action on it, and in some parts of the business there was absolutely no diminution of that capability.

So especially in Shell global solution, which does our downstream projects execution for both Shell and actually for third parties, we've maintained and built a center of excellence in relation to project execution.

So that is why -- you know, we're not starting from scratch, we are rebuilding something which I feel we have allowed to whither a bit in the '90s.

The focus is on 3 things.

It is on compliance, compliance with our whole project management procedures, building our capabilities, in terms of skills of experienced project managers, but also the support people, the cost estimators, the planners and so forth, where Shell doesn't need a lot, but we need really good people, and then contracting our skills in both contract strategies and contract management, and it is a pretty focused program, which we're putting a lot of effort into, and we have the right people to do it.

Thank you.

Thank you, Colin.

The next question comes from Ms. Irene Himona.

Please state your company name followed by you question.

Good afternoon.

It's Irene Himona of Morgan Stanley.

Question on E&P capital investment, looking at the first half numbers, capital expenditures, including expiration expense, we were basically flat, just over 4 billion.

In fact, in the second quarter, the number was down about 5%.

So are you actually going to spend the 10 billion that you are guiding us at?

Thank you.

Yes, sometimes I ask quite a lot people the same question.

But the answer is, you know, when we do the detailed review of the project phasings, and expenditure, I think we are going to do so, Irene.

We are certainly going to get close.

So yes, my expectation is that we will spend the money this year, and as I say, a lot of it is when you look at individual project profiles, you see them ramping up for spend in the second half of the year.

Thank you.

Thank you.

The next question comes from Mr. John Rigby.

Please state your company name followed by your question.

Yeah, hi, it is John Rigby from Commerzbank.

It is probably a question for Tim, actually.

It revolves around your change to FIFO accounting from LIFO accounting in the chemicals business in the U.S. downstream.

I note that it is probably -- those are probably the 2 areas where your earnings performance exceeded expectations, and also I'm aware that prices obviously in both areas were rising rapidly through the quarter.

Would you be able to sort of give the steer on what those numbers, the earnings numbers in both U.S. downstream and chemicals would have been if you had been using LIFO rather than FIFO?

Just so that we can get to sort of a benchmark between the 2?

Thanks.

We had a period end help of about 44 million in chemicals arising from that.

And U.S. it wasn't a big effect in the period.

Thank you.

Okay.

Thanks.

Once again, if you would like to ask a question, please press the star followed by the 1 on your telephone.

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The next question comes from Mr. Albert Anton.

Please state your company name followed by your question.

Yeah, Al Anton, Carl Pforzheimer & Company.

I guess it is a question for Malcolm.

You're the largest producer in Nigeria, particularly onshore and you've had a number of political and community relations problems, I know you've appointed a new Nigerian managing director.

Can you give us an idea of what this has cost you in terms of lost production, lost opportunities, and how you see the resolution going on this whole problem of onshore Nigeria?

Yeah, thank you, Al.

Actually, I was in Nigeria last week and I saw the president and a number of ministers, and we focused quite a lot on the issues around security, which are being taking extremely seriously by the government there.

I think that there's -- 2 points if I may.

The first is, I'm glad you noted that the focus that's being put into the organization, we've moved actually our EP regional CEO headquarters from The Hague to Lagos.

We will be moving it and Chris Finlayson takes charge of that and Baba Lamee [ph] takes over as managing director of SPDC is an extremely important part of our operation, and one we're very proud of.

I think that there are many parts, I should stress many excellent and peaceful parts of Nigeria where our operations continue and are extremely successful.

There are some areas where there are difficulties with local communities.

Particularly I think at 2 levels.

One is in terms of access to facilities, which on occasion we find can be difficult.

And the other, which I think is of more serious concern, is in relation to actually the pilferage, the fact of crude by essentially armed gangs.

Now, I think that is what, of course, has to be taken very seriously, because it becomes seriously organized crime.

What is pleasing is that the rate of pilferage, which is an industry-wide problem, by the way, in Nigeria, that has been brought under control from the levels that it was operating at last year, but of course it is a source of concern.

The potentially hundreds of millions of dollars of revenue, not just that they go astray, but that they find themselves in the hands of the people who organize those gangs and so, it can fuel the problem.

What is pleasing, I think, is the degree -- 3 things.

The degree of industry cooperation on this issue.

The degree to which the government is really very focused on it.

And also something a lot of people don't realize is that since this government has been in power, the amount of money being recycled to the states and put into the development cooperation for the delta is very significant and is making a big change to community relations there.

So I think a lot of the measures that are being taken are in place to all go well for the future, but it continues to be challenging.

Thank you.

Thank you very much.

We will take one more question, please.

Thank you, sir.

The next question comes from Mr. Paul Spedding.

Please state your company name followed by your question.

It is Paul Spedding from Dresdner Kleinwort Wasserstein.

Just a question on the Denmark.

If the tax change took effect from the beginning of 2004, why wasn't it evident in the Q1 numbers?

Let me answer that.

For the reason is, that there were allowances that we had which were being used up during that period.

And, of course, the rate that we say we used up was rather accelerated from expectations due to the high oil prices.

Thank you.

May I turn to your room, please?

Thank you very much for this teleconference.

And I really appreciate your questions.

I understand the background of most of the questions were, of course, on the upstream and let me say just to conclude this conference that we were quite proud what we achieved in the downstream in chemicals as well.

Thank you very much.

And I close this telephone call.

Thank you.

Ladies and gentlemen, this concludes the Shell Q2 results conference call.

Thank you for participating.

You may now disconnect.