殼牌 (SHEL) 2005 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell Q2 Results Conference Call on July 28, 2005. (Operator instructions.) I will now hand the conference over to Mr. David Lawrence. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to the analyst and investor teleconference for second quarter results for Royal Dutch Shell. I'm David Lawrence, Executive Vice President, Investor Relations, and with me today are Jeroen van der Veer, Chief Executive of Royal Dutch Shell, and Peter Voser, Chief Financial Officer. Before we begin, I would like to refer you to the disclaimer in your charts. Please take a moment to read.

Thanks. We will begin with a short overview of our results followed by q-and-a. Now I'd like to turn this over to Jeroen.

Good afternoon or good morning. This is the voice of Jeroen van der Veer. Today, we report out the first-ever quarterly results for Royal Dutch Shell plc. Our new company is the result of a lot of effort by many people in Shell, and we have received very strong support from our shareholders. For this, I'm grateful.

As I discussed with you over the past year, through this unification process, we have delivered good financial results and remained focused on our strategy of more upstream and possible downstream. You see this in our significant new business developments. We made good progress but we are not firing on all cylinders and there is room to improve. Profitable downstream, yes. Growing LNG position and improving our exploration performance, yes. Delivering one company and returning cash to our shareholders, yes. But we know we still have much to do especially in improving our EP project delivery.

I go now to the first chart which is labeled, Good Financial Performance. We have had another good quarter building on the excellent start to the year. Our income of 5.2 billion was up more than a third over a year ago. Basic earnings per share increased by 36%. Our cash from operations, excluding working capital movements and taxes paid and accrued, grew to 8.7 billion. We brought in an additional 0.7 billion through divestment proceeds. Along with our strong cash generation, we declared second-quarter dividends of 0.23 eurosper share and we will pay out some $2 billion equivalent to our shareholders in this quarterly dividend. We invested 3.7 billion. That is excluding minority interest in Sakhalin in our business in line with our strategy.

I turn now to the slide, Second Quarter Highlights. In Exploration & Production, we have continued exploration success and production above our expectations. Gas & Power, we added to our industry-leading LNG portfolio, and continued to grow our equity sales volumes.

In downstream, oil products delivered record operating profits. Our program for operational excellence is paying out. Together with chemicals, the downstream has exceptional cash generation. We made good progress with upgrading our portfolio and towards our divestment target of 12 to 15 billion. And, of course, we delivered unification of the two companies under Royal Dutch Shell.

I turn now to the slide, Oil Prices and Industry Margins. Our operational performance and quality assets helped us capture the benefits of higher oil and gas prices and refining margins. These remain very strong underpinned by tight supply. It is likely that this tight supply situation will continue at least over the short-term. Along with these higher prices, we expect cost pressures facing the industry to continue.

I turn now to the slide, Exploration & Production Performance. I will give a brief overview of performances of each of the businesses that you see on this slide. I start with E&P. E&P earnings of 2.7 billion were 48% higher than a year ago. Stronger earnings reflected net charges of some 149 million in the second quarter versus charges of 471 million, a year ago. Excluding these charges, E&P earnings increased by 24%.

Liquid realizations were up by 42%. Gas realizations outside the U.S. were up by 36%, and in the U.S. by 20%. Segment unit earnings were $8.60 per barrel benefiting from increased production in some high-margin areas such as the U.S. Total hydrocarbon production, excluding the small impact of divestments plus the end of a production-sharing contract in the Middle East, was actually 2% higher than a year ago at 3.53 million barrels per day.

Overall, field decline rates improved and we added significant production in new fields with the ramp-up of new production of some 179,000 barrels per day exceeding fuel declines of 120,000 barrels per day. Our production guidance is unchanged at 3.5 to 3.8 million barrels per day, oil equivalent. That applies for 2005 and 2006. We still expect our production for 2005 will be in the lower half of that range, although year-to-date production has been better than expected.

We had some important milestones. Na Kika in the Gulf of Mexico has already paid out. Our Athabasca oil sands project has now produced over 100 million barrels.

I turn to the slide Exploration Success. We have had good success in five big cat prospects out of eight drills so far this year. That means one discovery in Norway, three in Nigeria, and one in Australia. In addition to our big cat program, we continue with an active program of newer field exploration and appraisal drilling. Of all in the first half of 2005, we drilled a total of 21 successful exploration wells, including the five big cats, for a success rate of 62%.

We continue to add to acreage our position through bid rounds lead sales, and direct negotiations. We have added some 194,000 kilometers of gross acreage. That is 76,000 square kilometers net in ten countries to our portfolio. Building on this success, we are increasing our exploration expenditure to 1.8 billion for 2005 and 2006, and for your information, the previous guidance was 1.5 billion so 1.5 goes to 1.8 for exploration expenditure.

I reported about cost overruns at Sakhalin two weeks ago. It is clear, we must improve our project management. We are focused on driving through project-turnaround actions we have initiated at Sakhalin. I mentioned them. Focused contract management using latest seismic well technology, reinforcing budget and cost-control systems and staffing, further strengthening the project management team, working closely with Russian authorities.

The successful delivery of this mega project has my closest attention. Our deal with Gazprom remains as we have outlined so we will have detailed discussions about the slope. These are expected to take many months as announced earlier. The strategic rationale for the slope remains very strong. I should stress, as well, as addressing Sakhalin, we have reinforced our general EP project delivery approach. And, of course, we look again at all our major projects. Given typical major project cycle times of five to seven years, we do not expect to see a complete turnaround in one year. These E&P projects are being tackled very differently now from 18 months ago, and I know we will see steady improvements.

I turn now to the slide of Gas & Power portfolio called Gas. So I turn now to Gas & Power where we have extended our industry-leading position. Volumes in our LNG business were higher by some 2% and LNG prices were up. LNG volumes included the impact of scheduled shutdowns in Oman and Brunei. Overall, Gas & Power's segment earnings of this quarter were impacted by the charge of some 226 million mainly due to the charge we took with our InterGen divestment. In July, we completed the Gasunie restructuring of some of our midstream assets in the Netherlands with net proceeds of some 1.7 billion.

I go now to the slide, LNG Projects. We have a strong record with LNG projects delivering eight new trains within budget and on schedule in the past six years. We currently have more than 11 million tons per annum capacity. Our nearest competitor is more than 20% below this. We are on track to continue to grow this business at more than 14% on average for the period 2004-2008. And new projects, which we have identified, will increase our leadership. Our operating experience in gas to liquids positions us very well to lead the way in this business.

I go to Chart Eight, Downstream. The downstream continued to have exceptional performance resulting from our elaborate focus of operational excellence and portfolio upgrading. Refining margins were up across the board. Retail margins improved from the first quarter of the year. All the light/heavy differentials remained strong globally so the U.S. Gulf Coast differentials weakened primarily over lower heavy crude priced discounts.

The slide called Oil Products. Oil products earnings were over 2 billion, up more than 480 million over the second quarter last year. We again have strong, operational performance at a time of good margins. The recipe for success. Oil product unit earnings are highly competitive, $2.80 per barrel on a rolling four-quarter basis and almost $3.00 per barrel for the second quarter alone. Oil refinery intake was up 1% versus a year ago, adjusting for a 6% decrease from divestments. Unplanned downtime was 3.9%. The refinery utilization was a little over 80%. Marketing volumes were down about 4% versus a year ago mainly due to divestments underlying the amount of PS to be holding up. Our operational performance enables us to capture margins and we see a good uplift relative to industry, taking advantage of light/heavy differentials and middle distillate strength.

I go now to slide, Oil Products Cash Generation. Oil products continues to generate lots of cash, around 4 billion for the quarter and almost 7.8 billion, year to date, including divestments. For the second quarter, the cash surplus is 1.7 billion.

Slide, Chemicals. Chemical earnings were 259 million. Excluding the provision for legal and environmental charges, earnings were down 36 million from a year ago mainly because of higher feedstock cost. Asset utilization rates at 84% were lower than a year ago because of plant turnaround activity. Chemicals also generated significant cash. Cash from operations was 850 million compared with 279 million a year ago. This improvement largely deflecting a reduction in working capital.

I will now turn this over to Peter. Peter Voser.

Thanks, Jeroen. Good afternoon or good morning everybody. I start with Chart 12 on Focus on Cash. Our cash position remains exceptionally strong. Debt adjusted cash flow plus divestments totaled some $9.5 billion. Out of this, we paid 3.7 for capital investments, 2.1 for dividends, and 2.3 in increased working capital. We paid down debt by some 300 million and the remainder goes to increasing our cash holding which now stands at 11.5 billion. Strong downstream cash contributions coupled with increased production in higher-margin areas has improved our cash neutral position. Using the assumption which we have described before, which was $5 billion in CapEx, 3 to 4 billion in divestments and 7.5 billion in dividends we're the cash neutral well below $20 a barrel, adjusting for working capital.

Gearing for Royal Dutch Shell, including other commitments such as operating leases and retirement benefits, totaling some 10 billion by now and the net of our cash holdings minus operational cash requirements is 13% well below our targeted range of 20 to 25%.

Go to the next chart. Our capital spend year to date is 6.5 billion excluding the minority interest of Sakhalin. 5 billion has been spent in the upstream and 1.5 billion in the downstream. We expect to spend around $50 billion in 2005 in line with earlier guidance.

Going forward, we recognized that along with the high oil and gas prices and the high downstream margins come increased cost pressures and this cannot be ignored. Higher commodity prices, a tight EPC market, foreign exchange weakness, and projects in more technically demanding and remote areas of operations create substantial challenges for the industry, including the U.S. - including us, sorry.

Shell's overall capital investment program in 2006 and beyond will reflect the significant progress we have made with new LNG projects as well as a continued focus on our exploration program, which is bearing fruit and market inflation specific to large construction projects and foreign exchange rate movements. In line with our planning process, our overall investment programs will be thoroughly reviewed by our board later in 2005.

Let me turn to the divestment update, which is chart 14. We have made excellent progress towards our divestment target of 12-15 billion for the period '04-06. Including Q2 proceeds of $0.7 billion we have currently banked over $9 billion. The completion of the sale of our interest in Gasunie assets in the Netherlands will have net proceeds of another $1.7 billion. That's going to be accounted for in the third quarter. And as previously announced, the completion of the divestment of the Intergen assets and Basell, each expected to generate more than $1 billion in proceeds are expected later this year.

Turning over to the next chart which looks ahead. As Jeroen has discussed, building on the successful exploration program for the first half of 2005, we will increase the expiration program for the years '05 and '06 to $1.8 billion. Our capital investment guidance for '05 remains at around 15 billion. We will provide an update for '06 and beyond after completion of our planning cycle and review by the board. With our slow cash generation, we reaffirm our commitment to return surplus cash to our shareholders. With the dividends payout of some $2 billion, we announced today ane the recommencement of the buyback program, we confirm that we expect to return at over 13-15 billion to our shareholders in '05.

As you know, we have completed approximately 0.5 billion of our 3-5 billion buyback program for '05 already. Buyback, which were not possible during the unification offer period will begin again after the end of the subsequent offer acceptance period on August 9. We will provide an update on further developments in our buyback program after evaluating results from the subsequent acceptance period, i.e. around the ninth of August.

I now turn back to Dave who will lead us into the Q&As.

Thanks, Peter. We now move into the Q&A. Please state your name and affiliation and I would ask that, in fairness to all callers, you please limit yourself to two questions. Thanks. Operator, if we may have the first question, please.

(Operator Instructions) Thank you. The first question comes from Mr. Paul Spedding. Please state your company name followed by your question.

Good afternoon, gentlemen. It's Paul Spedding from HSBC. Just a quick question on your non-U.S. downstream leadership that you keep talking about. I'm basically curious as to why you have leadership there because it doesn't seem that your European and Asian refineries have that advantage compared to the competition and especially as your Asian refineries run relatively light crudes. I wondered if it is down to, in fact, the Asian marketing. I also wondered whether you might care to give us a very rough split of refining and marketing profitability within the non-U.S., non-European region.

Thank you, Paul. I'll first turn to Jeroen.

I think the - if you look at our non-U.S. position, we have a well spread refinery envelope and I think we are not that specialized on light crude in that part of the - let's say, for instance, in Europe. And even if I look at Singapore (inaudible) is quite the Middle East in crude. Secondly is that the - I think, for quite some years or even decades, we are good marketers of the products coming out of the refinery. And that's not only retail marketing. It is in business-to-business segments as well. And I think, for instance, about our aviation business or our lubricants business.

The - and on top of that, we are a relative large player in the Far East, so that plays a role as well. I don't think we give a split exactly between the Far East and Europe. But it is quite good to see that our downstream, outside the U.S., where we have now a situation where, basically, the refinery margins are better than some years ago. But the marketing margins, as in the U.S. right away has, of course, pressures with the high prices. With a different market circumstances, we still are in the lead in the downstream.

Thanks, Paul.

Thank you.

If we could have, operator, the next question, please.

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. Yes, just two questions. The first, really going to your big cat exploration program, I think it's very great that you've had success in that program. But I was wondering if you could actually give us some rough estimates of the actual volumes you find in your successful wells so far and if there's anything you could tell us about the program going into 2006 as well. Any changes. And then, the second question was really focusing in on the CapEx number, getting the full CapEx number for 2005, including Sakhalin and trying to nail down a rough range for 2006 as well. Thanks.

I'll start with the big cats and then Peter takes over for the CapEx figure. We have - this year, we have said about 18 big cats for the full year. We have said and I just said in the introduction, we've done eight. Five are successful. A definition for a big cat is where we expect more than 100 million barrels Shell's share for oil or oil equivalent. Some of those big cats, you have to do more appraisal work or even appraisal drilling to get the exact size and we have not given any specific guidance of the big cats discovered so far.

For '06, we have not specified the number of big cats, but we have said that the old exploration (audio gap) was 1.5 billion. We increased that to 1.8 billion and as well at the press conference we have said that of the increase of 300 million, about two-thirds is for additional activity, which may be acreage or whatever you need to establish, let's say, the exploration that we do there. And one-third is basically cost increases in that segment.

Just if I could have a follow-up there before we go onto the CapEx. Yes, you said that net to Shell 100 million barrels per big cat. Can you give us just any indication, like was there a billion barrel field in there or are we roughly talking somewhere around that number on average for your success so far?

The -- sorry, Neil. We have not given that kind of guidance. So, there's only expectation 100 million or more. And let me say, I'm just thinking, for '06, I think we have said that basically we aim for the same number of big cats to be drilled. But we have not given any guidance about how big the fields may be.

On the CapEx, Neil, we are giving the '05 number for the share -- for our share rather than including Sakhalin. I think the only thing I am preparde to say that all our major projects are, more or less, spending in line with what we had planned, which, i.e. will mean the 55% in Sakhalin, which is our share as well. So, from that point, if you -- we are, let's say, on the right part. Regarding '06, let me just be very clear here. What we are doing is really factoring in now what we have already announced earlier this year, which is a few LNG projects, which are additional, which we have announced this year. And they were not part of the previous guidance.

So, we are working those estimates into the numbers. And then, we have a very close look at the market in general, the EPC pressure, the foreign exchange, the raw material pressures, et cetera, doing a full bottom up exercise as we do every year. And I would not like to go out and give now any range at this stage. I rather prefer to come out once and that's later in the year and give you then the '06 and the years beyond which will, by the way, be a range of CapEx, which we are going to spend and it will be for our total program and not for individual projects.

But it's probably fair to say we're going to be above 15 billion.

I think that's why we are doing the exercise.

Thanks, Neil. If we could go to the next caller, please, operator?

Thank you. The next question comes from Mr. Robert Kessler. Please state your company name followed by your question.

It's Robert Kessler from Simmons. Thank you. Good morning or good afternoon. Question on the lingering Royal Dutch shares that are outstanding. Specifically, I'd like to see if you could clarify the reason behind the decision to provide a subsequent offer period, despite the fact that you waived down the minimum acceptance condition during the unification process. Is there anything legally that would have then or would now preclude you from simply forcing the conversion of these shares?

Thank you. I take it, Robert. Good morning to you. Key on the Royal Dutch side is actually-- or are two things. The one you mentioned, in order to declare the unification, that's unconditionally valid, we have set the bar at 75%. Now, for a squeeze out, which has then at our option, we need to reach 95% in order then to actually proceed with a squeeze out. And that's obviously the major reason behind the extension of the acceptance of the offer to the ninth of August as we were rather close to the 95, that we have now got some days more in order to reach that level. Which gives us, then, the full flexibility in terms of whatever measure we want to take to get to a squeeze out.

Okay. Thank you. And as a quick follow-up, do you plan to convert these shares or offer cash compensation, given that you're repurchasing stock anyway?

I have to refer you here to the list in particular, where this is all lined or clearly set what we can do or can't do and what options we have. We haven't taken a decision at this stage. We further communicate after the ninth of August.

Thanks very much.

Next question, please.

Thank you. The next question comes from Mr. Neil Perry (ph). Please state your company name followed by your question.

Good afternoon. It's Neil Perry from Morgan Stanley. Two questions. One on the upstream. I wonder if you could provide a breakdown on the unit costs and, in particular, the OpEx versus depreciation. And also give us an indication of the tax rate because the tax rate at the group level looks a little high and I wonder weather you've got a particularly high tax rate going through in the upstream and also the outlook for those numbers. And then, secondly, I wondered if you could just give us an update on where you stand on the side of the LPG business, what sort of timing you expect on that.

Okay. I start with the second one on the LPG. As communicated earlier, we are looking at the selling of the LPG. A teaser (ph) has been prepared and is being put into the market. There's great interest from both trade and equity buyers. A typical process will be taking quite a few months. We reckon that it will take the rest of this year and it will most probably slip into the next year before we take the final decision to go ahead with the sale yet or no. So, that's where we are at this stage. We will inform the market in accordance to our progress going forward.

Regarding the upstream, from a guidance point of view, we have said that, going forward, the overall corporate tax rate, we reckon to be somewhere in the 41- 43%. We have also quite extensively talked about the higher OpEx. Last year, as you remember, we said we are going to increase by $1. If you take a four over three (ph) there is further cost spread in the markets, that's quite clear. And we see, therefore, the cost going up. If you compare this year to last year, in terms of depreciation, we are roughly 250 million higher. If you compare second quarter to first quarter, we are roughly 50 million higher. That is a function of various things. One, for example, is obviously that we offer - you have to take production mix into account. We have new fields coming on and then we also have some impact, obviously, from our reserves, recapitalization, which drives the depreciation up.

Okay. Is there any chance we can get the tax rate for the second quarter in the upstream there?

I think normally we haven't provided this, but let me check that back and we will get in contact.

Thank you.

Thank you. The next question comes from Mr. Tim Whittaker. Please state your company name followed by your question.

Yes, hello. It's Tim Whittaker at Lehman Brothers. Can I come back to this CapEx? You said you would increase exploration CapEx by 300 million, but I don't think you said anything about a change to the 15 billion overall guidance for this year. Given there's cost inflation in the system, is there some slow down activity on the development side to balance those numbers? And secondly, could you give an update on Bonga? We understand that the accommodation barge that's been used for the hookup has been extended - its contract been extended by several months. And perhaps it's not come on stream for quite some time. Could you update us on Bonga, please?

Yes, okay. On the deferment side, on CapEx, we have always said we are around some $15 billion. That's plus, minus a few hundred million, obviously. And I would just take the 300 million that's part of that on the exploration side and I can confirm that we haven't actually taken active positions to postpone or slow down certain things. We are spending, in terms of - in which projects we are spending in the same way. We have, as I said already, the big projects are more or less in line, maybe slightly more in this year and we have got some timing issues on some smaller projects. But all in all, we are actually moving ahead the right way.

On Bonga, we have said, clearly, this morning and other conference calls, but I will repeat that. We look for a startup in the fourth quarter and we also look at the ramp-up from a production point of view in the fourth quarter. All this news about the hotel and what we have done there, it is just normal that, in a pre-startup phase or in a testing phase and also afterwards, you still need these accommodations, et cetera. So that you have to do, irrespective of the startup date. And I would just say that's normal business. You cannot actually go back and throw any conclusions of the startup of Bonga. That's clearly all planned for Q4.

Thank you.

Thanks, Tim.

Thank you. Your next question comes from Mr. Ed Westlake. Please state your company name followed by your question.

Yes. Good afternoon. It's Edward Westlake. Two questions. First, just on volumes and then on reserves. Just on volumes, 2006 - I wonder if you're ready to give some kind of guidance in the sort of fairly broad range that you have? And then, on reserves, the LNG projects, are you hoping to have any of those sanctioned this year? I'm thinking, in particular, in Nigeria, Iran and, obviously Gorgon. And what sort of reserve rebooking are you hoping to make if you have any additional information you can give us at this time in the year?

Okay. I take the first one, start with that. We have given the range for 3.5-3.8. As you know, when we said 3.5 is going to be in the lower half and we would see 3.8 given, some projects which come on stream and some ramp ups. So, I'm talking about Bonga. I'm talking about (inaudible) next week - next year. Some New Zealand project coming on stream. So, we will see the number going into the second half of that range. One Nigeria, Iran and Gorgon, I hand over to Jeroen.

Yes, thanks. We have not broken (ph) nor we have in mind, so there's not a slippage to - I'm quickly checking my gray cells, so to say, to take an FID or an additional FID, I should say, about Nigeria, Iran or Gorgon in the second half of this year. That is what I think. I have to think what we have said about Nigeria because we have trains four and five in building and I think six is announced.

Yes, if you go to - I take this over. If you go to the chart, then you have got six. We have already taken FID. We expect Nigeria train four and five, actually, to come -- to have a startup around the year-end. If you look at Gorgon and Iran and some additional trains in Nigeria, they're not for this year. I think you go into 2006 from an FID point of view.

Yes.

Thank you. And on the reserve rebooking, from the restatement of reserves over the last couple of years?

What we have - thanks Jeroen. What we said, I think, was a half year ago, that at a certain moment, if your portfolio progresses, it is better all the time, if you get new acreage and you have new exploration and new appraisals and if you make the best choices. And we are in a different price environment now, as well, compared to some years ago when taxes are changes and royalties. So, you make all the best time between the choices you have. Also develop first and to develop later. So, there is no point to say, well, we developed the old rebooked research first in order to get the rebookings. So, we have given up to monitor that and we can't give any - we don't follow it, so we can't give guidance about it.

Thank you.

Thanks. Next question, please.

Thank you. The next question comes from Mr. Mark Gillman. Please state your company name followed by your question.

It's Mark Gillman from Benchmark. Gentlemen, good afternoon. Two questions, if I could. The gas and power earnings, relative to what we were looking for were very disappointing. I wonder if you could shed some light on several of the factors and quantify several of the factors that you sited, including the impact of the plant turnarounds, divested midstream assets as well as lower LNG shipping earnings.

My second question relates, once again, to the Big cats and I wonder if, at the very least, you could identify the three Nigerian Big cat discoveries - are they deep water, are they shelf, are they oil or gas? Thank you.

Mark, thanks. I take the first one and then pass it onto Jeroen for the second. GP earnings, indeed, they have quite a few extras in it Let's first take the Intergen out. I think that's pretty obvious. We have, then, a few impacts, obviously, on the LNG one. I think the first one is you look at the 2% volume increase. If you actually start to neutralize the shutdowns which we had then, below the line, you would have had, actually, some 9% volume increase. So the business has developed in the same way.

We have, quite clearly, some - all the shipment and on the trading side some more negative results than we used to have. I'm not going to give the details there because that's not - we are not going to give segmented earnings in an LNG type of environment. But overall, the business has developed very well around volume and prices and nothing has changed in terms of our guidance going forward. In terms of the divestment earnings losses, you can go for some 70 million of an impact in this quarter. So, that's where I'm prepared to give you the numbers so that you can actually take that out.

Mark, Jeroen here. We have, of the three announcements in Nigeria, the first one is called Bobo - B-O-B-O 1X . It is in, basically, in Block 322. It's very deep water. It's 2,480 meters of deep water. And that's a Big cat. We have a 40% share in that prospect. The second one is call Etam - E-T-A-M. That is an OPL245. That is in 1,700 meters of deep water and we are 100% owners of that block. The third one we haven't announced as yet exactly where it is.

Thank you, Jeroen.

Thank you, Mark. Next question, please.

Thank you. The next question comes from Mr. Mark Iannotti. Please state your company name followed by your question.

Yes, Mark Iannotti, Merrill Lynch. Two questions. First of all, do you have a target, explicitly, for finding costs? And secondly, on the buyback, Peter, asked this before, but can you just try and explain to me again why you still have this range in target buybacks for this year? And it doesn't appear to be a huge amount of liquidity problems and then you shares are trading. And can you also maybe say a little bit more definitively. You've talked about another 4 billion of disposals. And the second half of the year, clearly, your gearing is well below the target already. Can you see anything else on potential distribution policy at the year-end or the full year results?

Okay. Thanks. I take both, Mark. I think, typically, on the first one, one would say between $1-2 on a BOE basis for total results in that sense. On the second one, yes, we ask, given the range, it's quite clear, that is the guidance. But we also have said clearly now, a financial framework, that if the prices stay high, that after having maybe dealt with some bolt-on acquisitions, et cetera, quite clearly, surplus cash goes back to shareholders. And we have quite clearly said it's not in the form of dividends or in form of buybacks. For this year, we have elected to come with buybacks.

We will do as much as we can. We will quite clearly watch the market closely, watch volumes are being traded, et cetera. You can imagine we are coming into this period like you all as well with new volumes, new shares traded. We want to watch it. So, that's why we keep the guidance still open. But I think, given where the oil prices are, given what we have said about our key policy to push money back to shareholders, you can expect that we are going as fast as possible after the buybacks, once we are out of our closed period.

Thanks very much, Mark. Next question, please.

Thank you. The next question comes from Mr. Peter Hutton. Please state your company name followed by your question.

Good afternoon. This is Peter Hutton from NCB in London. It's a follow-up, very effectively from Mark's question. You stated that you were cash neutral. If I understood it, you were cash neutral well below $20 - did I hear that correctly when you were talking on the slide focus on cash?

Yes, you heard - that was correct. Yes.

Previously, you're basing your cash cycle based on something more like 25. Will you be changing that?

We have said that 25 is actually over the planning horizon. So, we are not going to change that. But clearly, we had stronger upstream performance in terms of cash earnings than what we had in the plan and we had, quite clearly, stronger down, mainly all product earnings performance. And from that point of view, clearly, we have performed based on we are well below 20 in that sense. But I'm a rather cautious person. I leave the planning premises the same until I've got a few quotes or even one or two years behind us and then we may switch these things around.

What is the refining margin assumption behind that cash mutual below $20?

We are not talking about those refinery margin assumptions because you can see - clearly see these are some competitive things, which we don't want to quote. It's also clear, sorry, just to be absolutely precise, that well below 20 does neutralize some of the working capital which we have obviously seen increasing over time.

Okay. Thank you.

Thanks.

Thank you. The next question comes from Mr. Gordon Gray. Please state your company name followed by your questions.

Yes, Gordon Gray, JP Morgan. Two questions, please. Firstly, can you give us, at this early stage, a rough feel for future CapEx requirements and volumes for the Zapolyarnoye asset swap. And secondly, if you can just quantify on that cash neutrality question whether that's inclusive of disposals. And if it is, what the level would be without the help of disposals proceeds.

Well, I start with the swap of the CapEx requirements for Zapolyarnoye. This is - we have a framework on outlines. We expect that the development cost of Zapo is a lot lower of course, than Sakhalin. With all the detailed discussions, were already scehduled but that was already before the announcement of the Sakhalin cost overrun. They have to take place, they are expected to take many months because, in the value discussions, of course, both CapEx and expected cash flow plays a major role. And that is exactly the subject of those discussions. So, we are not in the position that we know the answer to your question as yet.

But in terms of future, let's say, net reserves to you and future production expectations.

Not reserves. What we said so many weeks ago that, basically, if you take oil and gas total, thisis not proved reserves, total hydrocarbons. And we said Sakhalin is about 4 billion. When we talked about, at the surface, 25%. So, quarter of 4 billion is 1 billion of hydrocarbon base is coming out of Sakhalin. In Zapo, we said the total hydrocarbon base are still to do evaluations, but could be of an order of magnitude of 3 billion. And we get back 50% of that. So, you get out is going 1 - in is coming 1.5. Let me say, this is (inaudible) work. But of course, it's a (inaudible) work that looks okay for us. But realize that Gazprom, they look on it total different. They have a huge reserve basis. So, for them, the rationale is much more that they get an expert position by coming into the Sakhalin project into the Far East as far as gas is concerned. And that's exactly what they like. So, Gazprom likes.

Going to your second question, on the disposal side, yes, indeed, we have included in those numbers some divestments and they are just around $3 billion. That is based on our historical performance where we always have had some portfolio optimizations and we had gross proceeds in the order of magnitude up to $3 billion. So, that has been included.

Thanks very much.

Thank you.

Thank you. The next question comes from Mr. Matthew Lanston (ph). Please state your company name followed by your questions.

Good afternoon. It's Matt Lanston at Goldman Sachs. I just wanted to pursue the issue on the upstream unit margins and just understand how that's likely to develop going forwards. It looks, from the results released, you had a very good quarter for realized oil prices and a pretty decent one for gas prices as well, relative to market crude and gas prices. But the margin per barrel, the net profit per barrel went up by around 40 cents. And obviously, the high depreciation you've already flagged, which I think you said was $50 million, which is getting off of 16 cents a barrel. So, I wanted to understand, of the remaining increase in costs, which depresses the unit profitability, how much of that is sort of fairly well geared to the oil price and how much is actually more like your cash lifting costs and how those are likely to develop going forwards. And should we expect margins to grow if oil prices stay where they are or should they shrink as costs continue to go up? Thanks.

Yes, thanks. I'll go at this one. I'm not going to give you too much forward-looking estimates here, but let me just summarize a few things in order to give you some anchor points for the current quarter. The 50 million depreciation, that was against Q1. If you go against Q2 last year, it's 250, so it would be quite a bit higher. The liquid realization - that is correct and you have to compare that, obviously, again to your Brent, WTI and your gas prices, which are in the release as well. If we strip out all the unusuals, we would say that, on a similar basis, q-on-q, our clean margin has gone up in the mid-20s.

Now, that is driven by three things. A - we were better than expected in terms of production, in terms of ramp up of new fees, et cetera, and most or partially of that is actually in areas where the taxes - there are the lower tax rate and the higher tax rate. So, that's one which helps. That's offset by the depreciation as I have said. And the third one is then yes, that is obviously cost pressure. We have already said and informed the market that we have cost pressure there, like the industry had and that has certainly not eased so far.

What we are doing now in order to counter that is quite clearly we are implementing some global structures which are showing some cost savings, which are also showing some success like on expiration. Better procurement handing, et cetera. Quite clearly, the cost pressure is still in the market. But all in all, I think a good quarter is in the mid-20s in terms of unit earnings.

Thanks very much. Next question, please.

(Operator Instructions) The next question comes from Mr. Jon Rigby. Please state your company name followed by your question.

Yes, hi. It's Jon Rigby from UBS. Two quick questions. The first is, to go back again, I'm sorry, back to CapEx. Can you just talk to us about the plan for the process? I think it would be fair to say that your CapEx program, both being too high and too low has got you into trouble in the past. So, is there an issue with you going back and looking at the methodology by which you construct your CapEx outlook? And having a CFO in place, will that improve the process? And to add onto that, is any length increase merely to be getting the price right for the work that you're going to do or are you going to be doing more work? And if you're going to be doing more work, do you actually have, internally, the capacity to do that work?

And a second question is just an accounting question on the balance sheet. Of course, the balance sheet is now reflecting the full group. And I think that - I think it's about $2 billion of extra cash on the balance sheet. Are there any other accounting quirks that we should be aware of going forward? I think you won't be providing for share buybacks and dividends as a provision in the balance sheet now. Is that correct?

Thanks, Jon. I'll start and Peter takes over. When I already more than a year ago, I started a speech in Houston that, for me, to say important for leaders and middle management to find what I call the middle of the river. So, on the one hand you have - on the one side of the river, you have stretch targets. And on the other side of the river you have what I call complacency. And the middle of the river is achievable targets. And the hardest step, especially in large projects, to figure out what that is. And you have to, if you take Sakhalin as an example here is they have certain things you didn't know at the time or it was difficult to forecast the steel prices or accident (ph) rates.

But especially to work and form theories, probably you enter when you alone, when you have to take into account in doing your preparations of certain capital project that you get unexpected problems. But on a statistical basis, how you don't know what - You don't know what you don't know. But maybe you should think about contingencies in your whole methodology. So, your question about process. Yes, of course, we look at that. And we will take all the learnings out of the Sakhalin project and getting to other projects. The reason that, in my introduction, I mentioned the eight LNG projects and I could have mentioned the Nonghai (ph) project, which is a 4.2 billion project in China, which is basically on time and on budget. And that is where - that is the first time we execute - at least we execute such a large project in China. And I think it is almost the largest ever executed in China - shows that we can do it. But the art is, of course, to get all those projects right.

Now, just about the methodology and the process. Of course, we strengthen a lot of controls as to how of in our finance. And so, we introduced a year ago, as well, or a bit more than a year ago, that all finance people in the world - they all report to Peter now. And why do we do that? So we have more internal checks and balances, not only for projects, but for operations as well. Over to Peter.

Okay. I just add once sentence as you directly address the CFO, on the corporate side. There is clearly - having a structure with the CEO and the CFO, the key levers for us are, from a strategic point of view, from a capital allegation point of view and from a appraisal point of view, it's clearly all these process that Jeroen described have been or are being closing looked at and revised and these are key processes which Jeroen and I will drive in the years to come.

On the balance sheet side, cash side, I think you asked about provisions for buybacks. No, there's nothing in there. There are no other accounting gimmicks or so or whatever word you used ...

Quirks.

... quirks are in there. The only thing which I would like to say and we haven't actually finally concluded how this will be shown and how we will do the presentation, the reporting of it, is obviously in Q3. We will start to have a minority interest in RD. We don't know the level yet. As you know, we are in the extended offer acceptance period, et cetera. But that has to be accounted for and we will make sure that everybody in the market, analysts and investors will know how we are going to treat the minority now in RD.

Thank you very much, Jon. If we could have the last question, please.

Thank you. The next question comes from Mr. Angus McPhail. Please state your company name followed by your question.

Yes, hi. It's Angus from ING. Just a very quick question on Peter's comments regarding cost pressures. I understand that you mentioned there are a number of technical demanding projects. Excluding Bonga and Sakhalin, could you maybe detail which projects those are or in Jeroen's words, which projects are on the other side of the river. Secondly, looking at your balance sheet, you now have 11.5 billion in cash. What would be your optimal level of cash, given the current high oil price?

Okay. On the project side, I think when we talk about these big projects, frontier areas, or also technology-wise complexities, we are talking about Kazakhstan. We are talking about Nigeria area. Later in the decade, you will talk about Gorgon We will have to cut our GTL. We will have the LNG project and Qatar gas project as well. We are currently doing (inaudible). It's not operated by us, but we are involved in that. So, these are the kind of projects in very different geographies as you just can see from the list. So, these are what we mean with projects which have either frontier nature or high complexity nature or, technology-wise, are different.

In terms of cash, I think, as the guidance I've given in the past few months that this group needs to run with $2-3 billion of cash just to feed the pipeline and to run the business on a worldwide basis. You always need some cash in your back pocket as well. I leave it up to you to decide what prudency if all would like to have more. But these are some key components you have to take into account.

Thanks very much, Angus. With that, we will close this teleconference. Thank you all very much for calling.

Thank you very much for your questions.

Thanks. Bye.

This concludes the conference call. Thank you for participating. You may now disconnect