殼牌 (SHEL) 2004 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen. [OPERATOR INSTRUCTIONS] I'll now hand the conference over to David Lawrence, head of Group Investor Relations.

Please go ahead, sir.

Welcome to our Q3 results and structure governance teleconference.

Thanks to those who have dialed in and are listening to our webcast.

I'm David Lawrence, head of Group Investor Relations.

With me are Jeroen Van der Veer, Group Chief Executive, Peter Voser, Chief Financial Officer and Malcolm Brinded, Executive Director Exploration and Production.

Before proceeding, I refer to you the disclaimer regarding forward-looking statements in your presentation.

I now turn to Jeroen van der Veer.

Good morning or good afternoon.

This is the voice of Jeroen van der Veer.

How are we going to do it?

Peter Voser, our new CFO since the first of October, he will have a very short introduction about our third quarter results.

It is followed by Malcolm Brinded, our CEO for Exploration and Production.

He highlights about the reserves update and then I have some words about a speech which I have given tomorrow and in past conferences, I highlight certain parts of that which was my first speech as CEO.

Over to you, Peter.

Thanks, Jeroen.

I intend to actually conclude this session after roughly an hour so we'll be brief in the introduction.

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

For those of you following a download document, we will tell you as we move to each new slide.

First slide, first a summary of our overall performance.

Financially, it has been a good quarter.

It's continued very strong operational performance and earnings in our downstream businesses.

Gross in our LNG business and the increased earnings in exploration and production together as an increase in production from last quarter.

We continue delivering on our program to reshape the portfolio.

On earnings, we delivered record net income and in fact, the nine months total exceeds previous record earnings for the full year.

Net income of $5.4 billion more than doubled on the same period in 2003, and current cost of supply, or CCS earnings were 70% higher.

The difference between CCS earnings and net income is due to our low product operations, we had a cost of -- of volume sold during the quarter is equal to the cost of supplies in the same period including an estimate for tax rather than first in first out as used for net income.

The difference of almost a $1 billion is in line with the rising crude prices experienced during the quarter.

These, of course, go the other way if oil prices were to come down.

On cash, first, this quarter's cash generation continues to be strong.

Cash flow from operations of $6.2 billion was showing an increase by over 20%.

The increase was tempered by $1.3 billion, spent [indiscernible - highly accented language]-- working capital mainly due to high prices.

Debt adjust to cash flow was $7.7 billion and $20 [indiscernible - highly accented language] -- 9 billion for the first nine months of the year as an average oil price of $36 a barrel.

The cash was used for our increased in western program in the upstream.

We paid some $3 billion in dividends to shareholders and spent $1billion in buybacks including purchases for stock options hedging.

Second, we continued our program to reshape the portfolio which proceeds from divestments of just under $3 billion year-to-date.

We're on track to deliver the $10 to $12 billion of divestments proceeds between 2004 and 2006.

We described in our September strategy presentation and have increased confidence in the upside.

You have seen our recent announcements regarding Model [ph] and LPG, and comments on Inkogen [ph] as we make progress on all fronts, although we are at an early stage for these.

Thirdly, moving to capital investment, capital investment for the quarter was just over $3 billion, excluding the 45% minority investment in Sakhalin.

A lot of work is going on in the remainder of the year.

However, our year end level of capital investment excluding the minority share of Sakhalin will likely be around $14 billion.

This is mainly within EP and due to the [indiscernible - highly accented language] phasing of the year.

Our outlook for future years remains at $15 billion per year.

We go for the next slide.

We will look at performance at the business level.

First EP.

Earnings benefited from the impact of higher hydrocarbons realization partially offset by the impact on production of [indiscernible - highly accented language] the Gulf of Mexico, and maintenance work in the North Sea.

Tax royalties and operations performance are key factors, but it is important to remember that high profile energy price [indiscernible] do not give a complete picture because of the different oil or gas volumes in our portfolio.

Therefore, the group realized oil and gas prices will not track these markets perfectly.

Realizing this, the group has performed well.

On the cost side, taxes and royalties increased with higher prices and operating costs and depreciations were up in line with expectations we described last quarter.

Furthermore, mark-to-market accounting for certain gas contracts in the U.K. impacted earnings by around $180 million.

These accounting affects reverses over the life of the contract.

Production was $3.6 million barrels [indiscernible] per day, up slightly over last quarter.

Production was unchanged from a year ago taking into account divestments of some of 60,000 boe's per day.

Otherwise, 2% down.

Around 15% to 20% of our production is on the PSC and fixed margin type of contracts.

Moving to gas and power.

Energy and gas to liquids performance was strong, but offset by weaker performance, mainly marketing and trading in North America.

LNG volumes increased by 6% and we recently started Northwest Shell [indiscernible - highly accented language].

LNG realizations were also up, growing our integrated gas portfolio.

We took final investment positions in Nigeria [indiscernible - highly accented language] and signed an agreement for 50% capacity in a new German import terminal in Baccara linked with supply from our Sakhalin to energy project and possibly other supplies.

Next is downstream.

Starting with oil products followed by chemicals.

OP earnings increased as a result of five globally defined margins.

An increase defining intake.

Marketing income was weaker as a result of general conditions in the U.S., but the overall result in the U.S. increased to just over 350 million for the quarter.

Reliability after refineries has improved further and we're some 90% of the way through the retail rebranding program.

The other 80% of our products earnings come from our strengths in Europe and Asia, where refining earnings were strong.

Chemicals business had another good quarter with earnings well over 500 million, reflecting the improved operating rates, margins and volumes.

We move on slide on.

Moving on to the portfolio.

During the quarter, the group announced a number of divestments of which some were completed within the quarter.

Proceeds from divestments of 800 million were from various items including the divestment of a portion of our refining interest in Japan and Malaysia and the retail and commercial business in Peru.

And in October, we completed the sales of some product [indiscernible] in the U.S. and the fuels business in Portugal.

Year-end divestment proceeds are expected to exceed $4.8 billion, depending on the timing of some transactions.

Together, this investment profile of the Company, this shifts the portfolio to upstream.

While we continue to generate significant cash and profits from the downstream.

We move slide on.

We take a more in-depth look at the forward-looking cash cycle we presented in September.

As shown in the first column of the slide, I like to look at this -- simply cash in versus cash out.

Cash in versus cash out.

And in the context of the current high price and volume.

As we said in September, $25 prices, the group is cash neutral.

The increase to $25 has come about as we made the choice in line with our strategy to increase capital investments in the upstream.

We also pay a highly competitive dividend.

Including within our cash -- included in our cash neutrality calculation.

In dollars, this is some $7.5 billion.

Again, this adds to our cash neutral position but is our choice as we consider the interest of our shareholders.

In line with our divestment program to reshape the portfolio, we expect about $10 to $12 billion over the next three years.

As you see from the progress we have made in this area, we have increased confidence in the upside.

Looking at the nine months to the end of September, the ACF and divestments equated to just under $24 billion.

This was used for capital investment of almost $9 billion.

Distributions to parent companies of $8.5 billion.

To fund dividends and share buybacks.

Additionally, option hedging amounted to some $700 million.

Through the year, the group has also paid down debt of $3.2 billion, lowering the debt ratio to to 16.3%.

The remainder of the cash used mainly working capital and contributing to an increase in cash of $700 million.

By the end of the year, we expect to have a total debt ratio of below 15%.

Given this level of gearing and the high price environment, we see currently, the group will generate significant excess cash and in this environment and on the normal trading situations, we will have the capacity to continue our program of returning cash to our shareholders through buybacks.

As we have done this year.

For year-to-date, we have spent $1.7 billion of the $2 billion target for buybacks.

Last slide to conclude, we maintained our focus in all our business and we have delivered strong results in Q3.

Obviously the effective use of cash is in line with our stated strategy and is a crucial part of our mission.

We're very focused in helping to drive Shell strategy and to deliver on our key priorities.

Let me now close my part and hand over to Malcolm.

Thank you, Peter.

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

Earlier this year, we informed you several times of reductions in our crude reserves starting in January, and then later during the course of an intensive review of our approved reserve base, which we commissioned when I started in this role in March, which we undertook during March, April 2004.

When we examined some 90% of Shell's crude reserve base with the help of the external experts, Ryder Scott.

When we completed this process, we considered we had an SEC compliant crude reserve base, and we said so.

At the same time, we announced that we would implement new procedures to tighten our whole approach going forward with more stringent control and audit processes.

Since then, we've produced new and comprehensive reserve guidelines, which [indiscernible] the SEC rules and guidance, which also -- while also providing additional guidance in areas where further interpretation is needed to help our engineers make the judgments necessary to apply the guidelines in specific circumstances.

We've also completed an extensive retraining program involving some 3,000 Shell and joint venture staff focusing on insuring the exact and detailed requirements of SEC compliance, but well understood and adhered to.

As part of the new controls process agreed with the SEC, we've also began an extensive program of internal audits with new teams which combine our own and external reserves experts.

These audits are still in progress, but so far we have examined in detail around $8 billion boe or some 55% of Shell's total crude reserves base.

As a result of these enhanced reserves review and audit procedures, preliminary findings from field and audit teams, most of which have been submitted in the last two weeks, indicate that around 900 million boe should be considered as potential reductions to our crude reserves.

At this early stage of the audit process, the actual amounts of any eventual reduction is yet to be determined, as our approach requires several steps of additional review.

Including further assessment by the relevant regional operating teams, by the reserves committee, and by the group audit committee to arrive at final figures.

For the volume so far audited, 900 million boe would be the maximum potential reduction and there are still significant uncertainties in many cases.

It is also necessary to assess which reductions would apply to end 2003, and which would be revisions in 2004.

Despite these uncertainties, we clearly need to inform the market now.

Over the coming months, we intend to audit as much as we can of the remaining 6 billion boe of our approved reserve base.

You will understandably ask, why are you suggesting possible further changes to figures which you said were correct as recently as the September 22nd strategy presentation?

The first part of the answer is that in September, I understood and we said that as far as 2003 reserves were concerned, the figures were unchanged from our annual reports [ indiscernible - highly accented language].

The preliminary results of most of these audits have only come together very recently.

Second part of the answer is that the retraining of our staff and the detailed application of the new guidelines, together with the improved control in assurance processes has led to further suggestive reductions of the size we simply did not anticipate.

Have we now got the balance right?

As I said, we're still at the early stages.

With several key review and challenge steps to go.

But the interest of full transparency were disclosing now exactly where we are.

If there is undue conservatism, then these additional steps will pick it up and correct it.

A few final comments, if I may.

First, of course, we're disappointed to once again have to flag the issue of reserves, but this is the result of the improved training processes and controls which we committed to earlier this year, and which are now working as they are intended.

Second, and consistent with our previously stated guidance, I remain reasonably confident that our RRR reserve replacement ratio over the period '04 to '08 will average around 100%.

Clearly, this will be a tougher target after today's news.

Third, it is clear that the July guidance of a 2004 RRR of between 60% to 80% is no longer valid.

This guidance will only be updated when we have completed this cycle of reporting.

Finally, I have no changes to any of the other guidance we gave on September 22nd.

Neither regarding our production outlook, nor our total resource base of some 60 billion boe, nor our plans to unlock 13 billion barrels of that resource base over the next five years.

Thank you, and I'll now hand it back to Jeroen.

Thank you very much, Malcolm.

Now, will you have picked up the far reaching announcement.

If you take the history of the Shell Group, you make it one company.

A unified board.

One CEO.

One headquarters.

It will be in PLC as [indiscernible - highly accented language] in London.

We announce that today you will now -- we have always said we would announce that in November.

How does that work.

At yesterday's Board meetings.

We plan for some months, that proposals would go to that board meeting for a decision.

And then we have two possibilities.

I and the board would say yes, as they did yesterday, and we could announce it today which we have of course [indiscernible] for the possibility that it is not necessarily concluded and then you need additional board meetings and not scheduled board meeting [indiscernible - highly accented language] in order to come out in November.

Yesterday, we made an article, a unanimous Board decision for approval to go ahead with the proposals.

And that's why we came out today.

Now, of course, I am -- what we decided yesterday as well, that I would be the CEO.

We're still now the group, the group CEO basically as from yesterday.

Now, I do that -- I sat at the past conference and mix of humility and excitement.

Of course I look forward to take on this leadership role.

We have a new executive team now complete.

You have already heard Peter, Malcolm, Rob Routs [indiscernible - highly accented language] doing town halls as Malcolm did in London, and Linda is probably gearing up to give her talk in Houston.

She flew overnight to there.

So that we have whole roll-out of our staff.

About the benefits of this announcement.

I think I like to take you back to the strategy meeting in September.

And that I said is executive team and myself, we're determined to make Shell a different company.

And if I say a different company, I think about four aspects.

To get a performance oriented, to get it more competitive, to get it less complex, and fourthly is to drive a different company culture.

I use always words like clarity, simplicity, efficiency, and accountability, and I used to describe the proposals this morning, starting with those four words.

I go relatively quickly because I realize that there may be redundancy for those who listened to the past conference this morning.

If I think about clarity, I gave the example, the strategy of Shell, you can say the five words-- more upstream and [indiscernible - highly accented language] downstream.

If I look at our assets, we would like to have them in the first quarter performance.

Having now a CEO structure, rather than a collegiate system, you can speed up.

Execution of strategy.

Implementation of excellence.

Project delivery.

Standardized practices.

Or optionality where it is not needed.

I like to say is -- together with Malcolm, we are determined to get the reservists basis debt we have and to do a very solid job.

We work ourselves through the processes that takes more time, but we said we would like to have a company where bad news travels up.

And just as Malcolm just explained, if we feel that it is bad news, we don't keep it confidential and I tell you this news about reserves traveled very fast and even has not finalized.

I emphasized that again.

It has still to go through steps.

But I think this -- the kind of Company, we would like to become and this is simply a predetermined process which is in control.

May get bad news out of it.

If I look at simplicity, clearly defines rolls.

Fewer committees.

Mass complex management.

I am convinced there is faster responsiveness in place.

Being [indiscernible] that they bring more efficiency.

And if I think about efficiency, this is the one Company.

This is the one headquarters.

This is not two sets of everything having two parent companies.

We'll abolish and it will really help us to be faster, focused and force the decisions on divestments, proprietorships, portfolios, or how we do our capital.

Of course, we'll make sure the checks and balances stay in place, and you can have all kinds of discussions but in the end, decisions must be made and they should be made with a sense of urgency.

That is what I expect we need in the coming business environment.

But the last word is accountability.

That's where it starts.

Accountability is -- on the one hand, giving power to people.

On the other hand, to coach them.

Now, this is what we do with the -- one board to one set of shareholders.

The CFO role is strengthened.

Peter has a clear line of sights throughout the organization.

So, here you see how we work those words, clarity, simplicity, efficiency and accountability.

That to say how we like to see those words embedded in our culture, and I think they're perfectly, okay, those words.

We have some technical -- [indiscernible] one company.

So, we have a single different policy.

We will switch them after the approvals of course to quarterly dividends.

Dividends will be declared in Euros but they can -- as you probably know, they can be paid in British pounds or in the case of New York, ADRs.

We stick to the same dividend policy.

Over time, at least in line with inflation.

Implementation -- changes have to wait until the ADM.

Management changes has [indiscernible - highly accented language].

The corporate structure, we do that by forming [indiscernible - highly accented language] -- the name of Royal Dutch Shell.

They'll have -- [indiscernible - highly accented language] we will have a scheme of arrangements through the U.K. for Shell [indiscernible - highly accented language.

It sounds all complicated but in -- the Royal Dutch shareholders of 60% and [indiscernible] 40%.

As far as we can see, no difference in treatment in the textile dividends for the individual shareholders.

In March, you got the documentation, 22nd of April, shareholders meeting planned.

We hope to complete in May.

I ended my speech this morning and I would like to repeat that because it is really important.

And they are my last words before we go to questions.

For me, Royal Dutch Shell is a far reaching step.

For this one Company, one Board, one CEO, one headquarters, one direction.

Clear responsibilities and accountabilities.

It's neither British nor Deutsch, we have our roots in those countries but we will have a global mindset.

Simple ownership and a governance structure that we like to be in place will really help us to deliver our strategy and to drive the culture that we want.

So, it is now up to the executive team and myself to lead that.

We look forward to that and we realize that we have to deliver.

Over to questions.

Ok, thanks, Jeroen.

Realizing that the speech is somewhat longer than normal in the third quarter, I think we would go for a 45 minute Q and A instead of keeping it to an hour.

So, let's go for Q and As.

Operator?

Thank you, sir.

The first question comes from Mr. Andrew Archer.

Please state your company name followed by your question.

Hello, yes.

Andrew Archer from Commerce Bank Securities.

Two questions.

Firstly on the reserves issue, can you tell us where the reserves under consideration are located and ideally, if you can say where the whole of those reserves are relate to just those within the 8 billion barrels that you're reviewing and not extrapolated to looking to the 14.

Then secondly, on the dividend -- on the quarterly dividend that you're going to be paying next year, will the first one be paid in June as the Q1 dividend?

Okay.

I think Malcolm takes the first one.

I will take the second.

Yes, Andrew, in terms of reserves, we're not indicating which countries at this moment.

Simply because this is a very preliminary stage of the whole process.

As I've indicated, we've got these potential reductions.

We do have to follow several steps more, and it may that countries actually fall away from actually having any issues of concern in that process.

What I can perhaps hopefully say, is the vast majority we are talking about relates to crude, undeveloped reserves.

And finally, to clarify the number I've indicated is the reductions found in the audits which have covered 8 billion barrels to-date.

So, it is not based on an extrapolation.

As I said, we're aiming not to speculate but to stick to the facts.

Ok, thanks.

Thanks, Malcolm.

The onset is yes.

It is June for the first dividend or first quarter dividend.

Thanks so much.

Thank you, sir.

Next question comes from Mr. Fred Leuffer.

Please state your company name followed by your question.

Bear Stearns.

Malcolm, like to learn a little more about the reserves process.

Regarding the 900 billion boe's, are these related to recovery, economics, or timing?

They're not down to timing issues generally.

They're mostly of a technical nature.

And it might just help if I highlight because of course, when we completed the March/April reviews which -- where we had internal and external experts and internal and external auditors, and we went through it as we thought thoroughly and at the end, we all felt -- all of those involved, we had a fully compliance reserve base.

Of course we're disappointed that we've now gone on, that we've done more work and we've got these detailed audits suggesting potential reductions so I'll try to give you an illustration of the difference and then it is mainly of a technical nature where the March and April reviews tended to focus at the level of fills or reservoirs and gave results which had already significantly reduced the previous figures we held, of course.

How are they approached now, it is much more resource and time intensive, often involving a detailed assessment of the performance of individual wells within reservoirs and the estimation of reserves abrogated from an individual well by well basis, and in some cases, this has had a -- definitely a greater overall negative effect than expected.

So, it is mainly technical.

There are some areas definitely still open to challenge which you could say are quasi-academic.

Where different assumptions are being made around gas market liquidity which still has to be resolved.

Should we read this as a high percentage of the 900 million barrels or whatever you end up with?

Ultimately will not be recoverable or is that incorrect?

No, that is -- I would suggest that that is likely to be incorrect.

I think one has to -- would be cautious in making definitive statements about the volume that we have to look at the detail of.

But as you know, crude reserves by definition, are the number on which there is reasonable certainty and we plan our business on the basis of expectation resources which is nearly all cases, a significantly higher number.

Then let me just ask lastly, are you finding systematic errors in the way that reserves were booked?

In other words, this would have implications for the remaining six million barrels -- six billion equivalent barrels that maybe there is something just systemically wrong with the way that Shell had always booked reserves which would suggest some extrapolation to the reserves that haven't been examined yet?

I've learned from previous experience to be very wary about extrapolation either to say that the remainder will be the same or less or whatever.

I think what I would say systematic is not a specific issue.

But the issue which we did flag in March/April, which is that all of our petroleum engineers have been trained throughout their career to use all of the data that is available from all sources for essentially business decision making.

Fulfilled development planning, well planning, for investment decision making and production forecasting.

And to get the culture deeply embedded where people understand that the regulatory requirements for SEC bookings actually exclude and must exclude a lot of what they believe is absolutely valid information for their own business planning purposes.

That actually is a much more deep-rooted change that we have to achieve.

And that's where the training and then the detailed following of the procedures has been so important and has had more significant impact at the detailed level than we anticipated.

Thank you.

Okay.

I think I introduce some rules here because otherwise the rest cannot ask questions.

Everybody has two questions.

You should actually ask them up-front.

Then we'll give you the answers to the two and then we move on.

Next please.

Thank you, sir.

Next question comes from Mr. Jonathan Wright, please state your company name followed by your question.

John Wright from Citigroup.

Two questions.

First on sort of strategy.

Considering you're going to be unifying the two share classes, does this mean you can consider using more material acquisitions by paper deals as part of your strategy going forward.

Second question on dividends for Peter.

Are you happy with pursuing a Euro dividend policy when the majority of your revenue is dollar-based?

About the strategy is that if oil prices, where they are, this Wall Street barrels are very expensive.

But if you take the question more generic, [indiscernible] if they are ever would like -- I say it very carefully.

If they ever would like to consider to issue paper to do some -- to reduce paper, that's a general known problem for every [indiscernible - highly accented language].

I can't look that far in the future, but at least you can say that having one company is much easier to do that.

Ok, I would like to answer this one.

It applies to debt and equity both.

So, it gives us further flexibility.

Second one is yes, I think I'm confident on the Euro side.

We're looking at our shareholder base.

And I think it is the base for us at this stage to go to Euro.

And as you have outlined already, that's declaration and A shares will be Euro paid.

The B shares will be in pounds and ADRs in the states or in New York will be in U.S. dollars.

Thank you.

Thank you.

The next question comes from Mr. Tim Whitaker.

Please state your company name followed by your question.

Hello.

It is Tim Whitaker from Lehman Brothers.

On the duel structure, the structure is not an impediment to doing business and today you have a somewhat different message.

Have you estimated synergy benefits from the merger and secondly, on the nonexecutive directors, at the moment, there are several ex-Shell executives as independent directors.

Will it continue to be your policy to appoint ex-Shell directors or will you appoint outside directors when their terms expire?

The synergies, if you think about cost synergies, of course having one headquarters, that brings synergy.

Having one company, that brings synergies.

I think that's all minor stuff compared to if you think about the structure we now have, and why we're so [indiscernible] about this is that we can better decision making as we are less busy internals so it helps for -- to not only have an external mindset but to work on that.

That will outweigh whatever cost synergies or even the cost to come to the new structure.

As far as any [indiscernible] we have announced that first Mr. [indiscernible] will step up to the chairmanship, but only until 2006.

Then he steps down, he reaches 70 then, and then we will start in the meantime to search for an outside nonexecutive chairman.

We aim to have ten nonexecutive directors, and we have posted names and you will see that it is only one name of an ex-managing director in that list after the forming of the new company, and that is Martin Vandenberg.

We have so indicated we would like to have one of our nonexecutive directors, somebody who is very ample oil and gas experience.

He qualifies for that.

Ok.

The next question comes from Mr. Mark Fletcher.

Please state your company name followed by your question.

Hello.

Can you hear me?

We can hear you.

Thank you.

It's Mark Fletcher from Goldman Sachs.

Just very quickly, I was curious on the change in CapEx in 2004.

Particularly that has been expressed as slippage and that we should expect potentially that activity level to turn up in neither 2005 or potentially some -- further on in the CapEx.

But is there any impact on the production going forward and where specifically is the CapEx rephasing which areas?

Ok, I start.

If necessary, Malcolm can add.

I think we would see the rephasing of it as being no material in relation to the $15 billion going forward.

There is one which we expected to come this year which is in the order of magnitude of 2 to 3 on the million which is now coming in 2006, because we are taking a lease out on some assets and that's only hitting the accounts when we actually get the assets delivered.

That's the one which will go into 2006.

I wouldn't consider that as material.

The rest I think again is no material in terms of changes.

I would also clarify here that this will actually not have impact on the production.

Compared to what we have outlined into September strategy meeting.

Next question comes from Mr. Bert [indiscernible - microphone inaccessible].

Please state your company name followed by your question.

Good afternoon.

This is Bert from [indiscernible - microphone inaccessible] Amsterdam.

One more on the reserve question.

Of course you can realize that this comes as a shock to a lot of people again.

I get the impression from what you have said that this time, you are sort of going down on a really physical level whereas you have only done paperwork and before, maybe you can sort of confirm or commence on that.

And the second question is you talked about Markham.

You talk about unlocking 13 billion of reserves.

What do you exactly mean by unlocking?

I don't suppose that's putting it in the category approved.

How much of that will be approved and what do you mean by unlocking?

Bert, on the first question, there was an extensive amount of work done in the April/May review.

As I said, significant reductions then made, and everyone involved in the exercise thought that we could achieve the threshold of reasonable certainty.

I think you're right to imply that there is another level of detail again possible now, given the extra resources and particularly, I've already illustrated the well by well area.

I think particularly the criteria for the demonstration of the adequacy of the audit trail of the -- which will support individual well declined [indiscernible] and so forth.

That actually, the rigger with which that's being done has also caused some challenges.

So, I hope that gives you an illustration.

I talk about unlocking resources because I mean by that indeed that the fundamental investments will have been made for the major facilities pipelines and infrastructure, to bring on stream projects such as Sakolin and Kashagan.

But the actual booking of crude reserves will be a function of when individual development wells are drilled up.

But the vast majority of the expenditure of these projects would have been made and the projects will essentially be on stream.

The crude reserves come along later or they come along at that stage, but as all of the development wells are drilled up.

And that's how I explained it also on September 22nd.

I ask this because of course, starting from the 13, 1.3 billion, if held to add up in the reserves, then decline rate of 8%, you would have much more than 100% reserve base.

We have not given any different outlook for approve reserves and replacements other than reasonable competence of five years, RRR of 100%.

Then this would illustrate what underpins our long-term production.

Thank you.

The next question comes from Mr. Robert Kessler.

Please state your company name followed by your question.

Good afternoon, Simmons & Company.

Sorry yet another reserve question.

With regard to the new reserve exposure number you put out today, and in light of the possibility that part of the reserves were improperly booked prior to 2003 or in 2003, are you now again in discussion with the SEC and the FSA regulatory authorities and are you at risk of having to refile your 2003 financial statements?

Okay.

Thank you very much.

We're certainly in contact with the SEC.

I think the answer to your second question is that's not answerable at this stage.

As Malcolm already outlined and is in the press release, we're very early in the process.

We're talking about volume and considerations.

We have to do much for the work in order to determine how these 900 million barrels will actually move.

So from that point of view, yes, contact made.

Working further on what we have seen.

Working on the 6 billion as well, and then we'll let you know.

Thanks.

Thank you.

Thank you.

The next question comes from Mr. Gordon Grey [ph].

State your company name followed by your question.

Gordon Grey [ph] of J.P. Morgan.

Question about indexation issues.

You talked about your conversations with the [indiscernible].

Just wanted you to confirm if you could with the primary listing in London, are we right in assuming the new company would not be included in any of the Euros and indexes, or the Amsterdam stock exchange index.

Have you had any conversations with any of these agencies?

Do you have a second question?

No, that's it.

That's it.

Ok, thanks, Gordon.

Due to confidentiality, you can imagine we haven't talked to most of the other regulators in that sense or stock exchanges.

We have the contact here in the U.K. and we have issued that in the press release.

With the others, we are in discussions now and as soon as we know how the discussions are going to end, we will come back to you.

I think it is a fair assumption at this stage that you can assume that we will not be in all of the indexes which so far are RT and ST&T have been.

I think that's a fair assumption but we will be more precise once we have talked to the regulators.

Thanks.

The next question comes from Mr. Mark [indiscernible - microphone inaccessible].

Mark [indiscernible] Merrill Lynch.

On repurchases, you said you have to spend [indiscernible - microphone inaccessible] for obvious reasons.

Can you give an idea how long that may last.

Will it last into the middle of next year until you saw the new corporate structure out and secondly, question to you, Peter.

You have been in the job a month now.

Can you tell us what you see as the key challenges you have over the next couple of years and the company particularly given you don't have much of a balance sheet to worry about and how you propose to address those challenges?

Thanks, Mark.

I'll try.

The buy back.

Yes, we have to spend it.

We will actually apply for a waiver with the SEC for the Royal Dutch side because on the ST&T side we could continue but we don't want to be just on one side doing things.

So we will apply the waiver then actually report back to you and the investors on what we can do.

I think challenges -- I have long talked about what I'm going to do with this call.

I opted for the easy way out.

I think I will come back in February and tell you exactly where I see the challenges.

You are talking about four weeks in the job.

I think I will count to three and a half only.

So, let me just focus on the next few weeks.

I do agree I don't have a balance sheet probably like in my last company.

But I will come back on the challenges in February.

I hope you understand.

Fair enough.

I would like to add I will make sure that he doesn't run out of challenges in the meantime. [ LAUGHTER ]

Thanks.

Next question comes from Mr. Ian Reed [ph].

Please state your company name followed by your question.

Hi, Reed from UBS.

Two questions on the share structure please.

Firstly, despite the fact you're going for simplicity, you seem to have ended up with still a rather unwieldy structure.

Listing is London with the A & B shares.

I wonder if you could explain why you didn't go for just a single share.

I know there are tax issues here but wouldn't the simplicity of that perhaps have been better than ending up with what you got in the moment.

Secondly, do you have a long-term ambition -- the desire to unify this share structure so at the end of the day, you end up with something which is perhaps ultimately simple?

Ok.

Thanks, Ian.

I think we approached the whole thing from a shareholder perspective.

We wanted to maximize and not actually change any cash received if possible for the two shareholders today.

So, the only way we could actually manage that in our opinion was going for the A and B shares where the B shares are U.K. source dividends and the A shares are Dutch source dividends.

I would not see that as a complexity.

Both shares are in London.

Both shares are in Amsterdam and both will have a yard in the U.S.

I think that is manageable.

If you ask me, like a straight question, would you like to have one set of shares, my answer would be yes.

When are you going to do it would be the second question.

I cannot predict that because that quite clearly depend on the resulting tax rulings and I'm not going to speculate on that one.

I think long-term, I clearly would not see as an objective -- for timing.

I cannot give you any further details.

Thank you.

Next?

Next question comes from Mr. Collin Smith.

Please state your company name followed by your question.

Collin Smith from Credit Suisse First Boston.

My two questions are first as follows.

Can you confirm exactly how you expect the dividend treatment of the A shares in the U.K. shareholders to work given the difference between withholding tax on Dutch source dividends and the tax treaty between the U.K. and the Netherlands.

My second question is historically on the dividend policy, you've effectively sought to pay rising real dividends looking at both the U.K. market and the Dutch market.

Does the move to a Euro dividend mean that the focus is now solely going to be based on effectively rising -- an increase in dividends focusing on the Dutch market inflation?

Okay.

I start with the second one because I think that's easier.

No, the answer is no, it is not only focusing on the Dutch market.

It is focusing in general regarding inflation and I would say at this stage, I will call it the European inflation.

For the time being.

I'm not sure I understood completely your first question about the A and the B shares.

I would say the B shares are going to the current ST&T holders.

The U.K. source dividends.

That's where you get the tax effect.

I would assume that if you are an A shareholder, you are sourced out of Holland and I have to say that each shareholder will have to consult his private tax consultant on this one, how that will affect him actually in terms of taxes paid in the U.K. for A shares.

If that is not entirely correct, we will come back to you but that will be my spontaneous answer.

Sorry.

You must have looked at this for quite some considerable period for actually going down this route.

As you're aware, one of the effects of the whole group capital applying 100% in the U.K. means that U.K. holders will probably have to buy A shares.

You must have considered whether U.K. holders of A shares will receive the full dividend or will effectively only receive approximately 85% of it.

I will come back on that.

I hope you give me that time.

Let me help on the side question is that the company will be -- taxed as a British company.

British company with a primary listing here.

But it will be tax resident in the Netherlands.

This is very complex -- it's too early.

There are some key elements of it.

We will try to give more clarification.

Perhaps if you would come back to me after the call, that would be very helpful.

We have to give that to [indiscernible] so we have to make sure that -- you understand that.

I think what I can add is all existing in ST&T shareholders have [indiscernible - highly accented language]-- but we'll come back on that.

Next question?

The next question comes from Mr. Neil McMahon [ph].

Please state your company name followed by your question.

Neil McMahon, Sanford Bernstein [ph].

I think it is frankly amazing that we haven't continued to focus on the reserve issue. 900 million barrels of oil equivalent is a huge number given the fact we're in $50 oil prices and the fact that usually you can get at these higher level reserve downgrades from an 80/20 approach.

Maybe you could just walk through what is the financial implications of this.

I know you said most of it has proved undeveloped.

If you could give us guidance around the financial impact of this, and then as the second question, just want to get an understanding of how many Big Cat [ph] discoveries have you had so far this year and if there haven't been that many, how much does that relate to the fact that 60% to 80% reserve replacement guidance this year no longer looks justified.

Thank you.

Okay, Niel, I will pass that on to Malcolm.

Neil, I think we need to distinguish a few issues here if we can.

First of all, you talk about $50 oil price.

The most immediate impact is in relation to that.

Is to hold off production which is why I'm pleased in the production this quarter which is excluding divestments, flat year-on-year.

That's without [indiscernible - highly accented language] 50,000 barrels a day and hurricane impact and 20,000 barrels a day of PSE impact.

So, in terms of reserves, which is, of course, a serious issue and a significant concern and I've explained how we are approaching it.

I can't be definitive on the financial impact because there is significant uncertainty in relation to what the final volume will be.

But what I can indicate is that the vast majority of that is proved undeveloped which is we know from before is something that is likely to have limited financial impact.

I think your last question about exploration, let me just highlight that we have had five Big Cat discoveries over the year-to-date.

That's just over a third in terms of our 1 and 3 in terms of the success rate which I think is acceptable.

We have one more this quarter which we reported which is Malachi in Malaysia.

You related the expiration record to this year to crude reserves replacement ratios this year and those issues are not really directly related.

The exploration success of this year will be through to the appraisal programs and then to the development decisions and the crude reserves replacement for years to come.

One I indicated in the earlier statement was that the 60% to 80% number essentially can't be seen as a valid guidance at the moment.

And I'm not updating that guidance until we finish the exercise because quite clearly, the amounts that come from the 900 will be a very material determinant.

I also indicated there was both an issue about volume and timing of that.

And I hope that answers your question, Neil.

Thank you.

Just a quick follow-up.

On the $50 world we're in today.

If we end the year on a high oil price, should that not affect the reserve right -- indeed the reserve recovery factor for this year on the reserves you pick?

Thank you, you were referring to the PSE impact.

I think that's one impact.

Who knows what the end of the year price will be.

Just to highlight there are other impacts from that.

Not just on production sharing impacts.

It obviously also could have an impact on -- end of billing life assumptions, et cetera, which can affect reserves.

Thanks, Neil.

Thank you.

The next question comes from Mr. Lawrence Julius.

Please state your company name followed by your question.

Mr. Julius, your line is open.

Let's move on.

He can come back once he has the line open again.

Thank you.

Sorry.

Lawrence Julius from [indiscernible] Bank.

Will there be a tax impact on the group tax charge on the change in the group structure?

Thanks, Lawrence.

No, the answer is very short.

No.

Great.

Thanks.

Thank you.

Your next question comes from Mr. Paul Spedding [ph].

Afternoon.

Paul Spedding from Dresdner Bank [ph].

A question on self-contracted gas supplies.

You somebody self-contracting the LPG supplies.

How are you treating that in reserve replacement?

Is that one of the issues behind the reserve upgrade?

Malcolm becomes a reserve specialist.

Over to him.

It is not particularly one of the issues.

It essentially is a dependent on whether we have firm contracts for all of that gas into liquid outlets and we don't self-contract on this.

We have established that value chain and that would then be an enabler for reserves.

An example of that would be with the go ahead of the Baja, California, terminal and our taking of gas into there will in due course give us confidence about the ability to book reserves.

But there are indeed issues around the gas market like that which need a lot of focus look.

They have risen in this exercise.

Thank you.

Thank you.

The next question comes from Mr. Mark Gillman.

Please state your company name followed by your question.

Benchmark Company.

Malcolm, again, not to belabor the reserve question.

It just seems to me that there is a fundamental conflict in what you're saying between suggesting on the one hand that the revisions may be largely technical and relating to individual well by well observations and on the other hand, suggesting that they are proven undeveloped reserves primarily.

I have difficulty reconciling those two and similar regard, the 60% to 80% number, I assume the only reason that you're rescinding that is the potential impact of revisions associated with this 900 million or whatever the number is and that otherwise, other than that, it would be considered valid.

Yeah, Mark, thank you.

I was illustrating with the well by well analysis one of the aspects that is pertinent to this.

There are, indeed, other issues and I also wanted to highlight that the gas market is one of those.

Another relates to water flood analogs and the acceptability of analogs just to give you three illustrations of the issues that are being addressed.

In relation to the 60% to 80%, there are several factors of which one is the -- in terms of I'm not going to provide an update.

One is the uncertainty about the 900 but we've also indicated we want to complete as soon as possible the order -- the remaining six billion.

And the last comment is this year, the particular impact of the price effect.

Thank you, Mark.

Thank you.

The next question comes from [indiscernible] Please state your company name followed by your question.

[indiscernible - highly accented language, microphone inaccessible].

A question on the reserves if I may.

For Malcolm.

When you were talking about the reserve adjustment before, you were saying that that has been mainly -- if I understood correctly, mainly due to technical reasons.

Does this mean that [indiscernible] in legal issues excluded the buy in saying technical or are they included?

I think I want to highlight that it was mainly technical.

There are a range of detailed factors different in every circumstances.

Some, for example, were economic and in relation to the gas market issue I touched on.

Mainly technical.

The water flood analog I touched on.

But not particularly to do with project maturity.

I hope that explains it.

The reason I made that distinction, just to clarify, right at the beginning of this process, it was essentially -- if we go back to January and February, those issues were mainly in relation to project maturity.

And that is rarely the case this time.

Thank you.

Next question comes from Mr. Neil Perry.

Please state your company name followed by your question.

It is Neil Perry from Morgan Stanley.

Two questions.

Firstly, BP has been commenting recently about inflation in the industry and you can say it across all companies.

Given the doubts that you're casting over the reserve data again, can you talk about what inflation you're saying in the industry in costs and I know you have increased your upstream Cap Ex numbers, but you're still only spending on a proportional basis a similar amount to the others.

Are you confident that that number is now high enough or is it another thing that needs review and secondly, one for -- one for for Jeroen.

Can you comment -- you talk about improvement in efficiency.

Can you comment on what you think the group was doing inefficiently and -- in the last few years when had the managing directors.

Ok, I think inflation cost, as you're referring to EP, I hand over to Malcolm.

Yeah, Neil.

I think you're right.

There is inflation occurring.

I think it is different from country to country, particularly those which experience exchange rate issues in dollar terms that we see.

But at the same time, we see opportunity still for global contracting and procurement to exercise leverage which is helping to -- if you mitigate the inflation impact.

I think in relation to upstream Cap Ex guidance going forward for the Company as a whole is $15 billion of which $10 will be in EP.

I think that is high enough.

Obviously we keep a close eye on it.

It is our intention to maintain our capital discipline and further enhance our project delivery and that's where the focus is.

Do you have an inflation number built into your CapEx forecast?

Not in a generic sense.

Much more on a case by case, project by project sense because that's where it makes much more sense.

It depends on the mix of whether -- is it steel or is it rig rates and which country you're in and those are very different.

So, there is no point in sort of a general inflation factor.

Okay The inefficiency, Neil, let me give a small example.

I just counted it this morning.

I made this week my sixth straight between the North Sea.

I don't think that's very efficient but why did we accept that so long because that's a logical question.

Because I think being an oil and gas company, it is essential that oil and politics that you have strong support from governments.

And it is much better to have an oil company which has the backing or the support of both the U.K. and the Dutch government.

Has served us very well over the history and we do know that.

And it is quite an art to figure out how you can make one company that still most governments can support that.

Secondly, is that over the history, we have very global staff even if I compare Shell to other competitors, we have probably even a more diversity of international style but we have to rely and ensure that we got very good excess to continue to recruit in the U.K. and their staff, sort of all nationalities can still see that there is a home for that.

I think what we have proposed today, I really think is an innovation.

How you can make one company in two countries continued government support of governments have support and their staff can feel at home and feel they can make good careers.

So, that's why we're so excited that we can figure it out.

Thank you for your question.

Next question comes from Mr. Stephen Motto [ph].

Please state your company name followed by your question.

Hi, from [indiscernible - microphone inaccessible].

I would like to know if the A and B shares will be [indiscernible - microphone inaccessible] --

The answer is no.

No?

No..

Thank you.

Next one?

Thank you.

Next question comes from Mr. Dafter [ph].

[Viden Dafter [ph] from Churchill Capital London.

My first question is why are the Royal Dutch shares being bought through a tender while the [indiscernible] is not a skew arrangement equivalent in the Netherlands.

Second question would be what happens in the case where you get less than 95% in the Royal Dutch tender?

Thank you.

Okay.

The first one is there are different rules in the two countries so they're called differently and that's what we're exercising.

So, there is nothing comparable of the U.K. system in Holland so that's why of the tender offer.

First, we will outline in the perspective exactly how it works.

If we have more or less than 95%, I think the squeeze out is only possible if you are above 95%, below.

It is different.

As I've said, we'll further outline that in the prospectus.

So, there is actually a condition for the offer to get 95%?

No.

I wouldn't say.

Okay.

That's great, thank you.

Thank you.

The next question comes from Mr. Chang Queue [ph].

Please state your company name.

Good evening.

Good morning.

My question is actually regarding the reserve.

Can you give a -- previously the impression is a $490 million now. [indiscernible] or I'm hearing anything wrong, you know.

How the technical wheel by wheel reassessment and change the situation so much.

Yes.

I think that I should highlight that this is not a replacement of the exercise that we undertook between -- and the announcements we gave between January and May which ended with -- in 2003 figure of 14.35 billion boe.

So, this is additional to that previous guidance or that previous submission and perhaps that's where the confusion comes.

I see.

Ok.

All right.

Thank you.

I think we're going to the last three now.

Thank you, sir.

The next question comes from Mr. J.J. Traynor.

J.J.

Traynor for Deutsche Banc.

Just with respect to the dividend payments, are they going to pass this triangular relationship between dollars in and sterling and Euros out and that on each -- on any given quarter, there's sometimes been slight variations between the payments and dividends and the different currencies.

I know it is a confusing question but is there going to have to be any form of catch-up payment to constituencies before you move to the new dividend structure.

Secondly, have you decided what accounting stance will be used for the new company.

Ok.

Thanks, J. J. As many others, in January, we're going to use [indiscernible].

There will be catch-up which is perceived to be small.

Can you give which shares are going to be the beneficiary of that one?

Yes, the ST&T one.

When will that catch up happen?

I would say -- that's difficult to say at this stage because we have first to go through the official procedures, propose it.

And issue the prospectus in March.

We'll outline how exactly that will work.

It is too early to say.

I don't like to have confusion in the markets on this.

This will be very, very small.

And not sure as yet because it is still [indiscernible] movement in exchange rates which can again alter the position.

And even swing the situation.

Of course, the logical thing is we have to work that out.

Basically, when the action is complete, you have a kind of -- you pay your final dividend out of the old system.

But don't get overboard.

It will be extremely small.

Why is that because the parent companies have basically -- their role is not to keep the money in their bank accounts but basically to shift it and have a constant dividend payments to the shareholders so it is extremely small.

Thanks very much.

Thank you.

Next question comes from Mr. Glenn James.

Please state your company name followed by your question.

Hello.

Glenn James from [indiscernible].

The question is the waiting of RDS goes up very considerably as we know.

Without increasing the vital supply shares, you're at risk of creating a bit of a supply/demand imbalance.

Therefore, in reference to an earlier question, you said you'll get back to us as to whether A share investors will receive their dividend gross or net withholding tax.

But perhaps more importantly, will A shareholders be able to to elect to receive their dividend in sterling or is that option only available to B shareholders.

If they're not able to elect to receive the dividend in sterling, how will the [indiscernible] be able to include the A shares in the index constituents?

Okay.

I take this one.

I think the first -- I would like to catch up on the earlier question and then come to your question.

It was -- the question was about the A share in the U.K.

The U.K. tax on the A share dividends.

Holding tax in the Netherlands which is 15%.

There is no U.K. tax credit on this one.

But the impact still varies by different degrees of shareholders as some may actually have credit for the withholding tax paid.

So, that's the generic answer.

I think the other question -- the way I heard it and understood it, yes, we are going for Euro on the A shares.

I would have thought actually in answer to your question is that both shares are going to be listed in London and actually be nominated in pounds.

So, they will be able to elect to receive in sterling A shares--

No, they will not.

They will not.

Thank you.

Final question at this time comes from Mr. Anthony Pavlovich [ph].

Please state your company name.

Good afternoon.

Deutsche Banc.

Another question on the dividend policy and I appreciate you may not yet have the answer to this.

The first point, you mentioned earlier that the dividends will increase at least in line with European inflation.

Is there any particular measure of inflation in the RPI or CPI that you have in mind to measure that or will you just take a broad survey of inflation across Euro?

And my second question is to do with the timing of dividends.

Are you able to tell us when in March you expect to pay your next dividend and when you will pay the subsequent quarterly dividends.

Thank you.

Okay.

Thanks.

I specifically left it as European inflation.

I do agree there is no tracker in that sense.

We'll take a very broad view on that and determine the inflation.

Timing wise, you wouldn't have it even on the normal circumstances.

We're going to pay March, June, September and December.

This is our -- the way we want to -- pay the dividends over the next 12 months and then the years to come.

I cannot give you a date at this stage.

Perfect.

Thank you very much.

Okay.

I think we've shot some time.

That's good. 45 minutes.

Thank you very much.

As usual, if you have further questions, you will find Dave Lawrence either here in London, New York or in The Hague.

So thanks for calling in and I hope to see most of you pretty soon at one stage or during the next few months.

Thanks to Jeroen to be here and also to Malcolm and for all of their answers.

Thank you very much.

Good-bye.

Thank you and good-bye.

This concludes the conference call.

Thank you for participating.