殼牌 (SHEL) 2007 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell Q2 results announcement call.

There will be a presentation followed by an Q&A session.

(OPERATOR INSTRUCTIONS).

I would now like to introduce our host speakers, Mr.

Jeroen van der Veer and Mr.

Peter Voser.

Good afternoon or good morning, whatever.

This is the voice of Jeroen van der Veer.

Peter -- sorry, I do the first part of a presentation.

Peter is doing the second part.

And then after that we go to Q&A.

We got first a disclaimer.

Thank you very much.

The objective of Shell is to make competitive returns.

Competitive returns for our operations and competitive returns for our shareholders.

I think we have delivered on that in the second quarter, and Peter will give you an update about that.

Before that, let me say how I look at the industry.

I think fundamental changes are going on in the industry.

What do I mean?

The amount is up, and quite significant up, the amount for energy in the world.

It is not only the Far East, China, India, it is also because we have economic growth in the West.

And is that a surprise that the amount is up?

Now we have the amount up whilst the prices are now on a much higher level than we have seen seven years ago.

The amount up, price up, new competitors and OC, other companies, whilst at the same time the access to easy producible oil or easy producible gas is running out.

And that means that new oil or gas or gas of tomorrow will come out projects with much higher complexity, much higher investments per unit and much higher risks.

And that is parallel with all the concerns about CO2 and climate change.

So if you add the amount, prices, competitors, project complexity and climate change concerns, that together we call the energy challenge.

Now what -- how we see that in Shell.

I think this energy challenge means basically business opportunities, good business opportunities for Shell, but then we have to position our Company well.

So that means that we should have the technologies where we can differentiate ourselves for us to develop those complex projects.

That we have the people for it, and that we can all do that in a sustainable way, which is accepted by the public.

So taking CO2 into account what that means, or biodiversity where the local people living nearby an operation, whatever it means.

That is the general philosophy.

And of course this energy challenge is not a surprise for us.

And many of those aspects help position this Company, we started 11 years ago with that.

More specific, we rejuvenate our portfolio in light of that energy challenge.

So we like to build worldwide growth projects for new legacy assets, that are those assets which come out of those huge projects.

And we prefer them, if you have built them that you can work very long with them.

Easy examples are oil sands in Canada, gas DTL in in Qatar, gas to liquids in Qatar, or our (inaudible) we still have in the Sakhalin project.

And those kind of projects they will form the foundations for the first and the first half of this century for our Company.

It is not only about portfolio rejuvenation of it, it is of course also what do we do, what we have to operate today.

And what we do there is to simplify it, to standardize it, and to have very clear accountabilities.

Why do we do that?

And we do that -- we drive that on a global basis -- and I will give you some examples in a moment -- because I'm convinced that having a more simplified and standardized organization is that we have lower costs, you get higher reliabilities, and basically it enables to make better and more quickly decisions.

I go now to the second quarter highlights.

What were they?

I think we had a good set of competitive results.

Peter goes deeply into that.

We continue to refocus our portfolio.

That means diverse -- divesting noncore, and at the [freed] capital or the [void] capital which you have to invest in the noncore, that frees up capital you can put into the growth areas.

Now in this whole process to go from A to B with our portfolio we may have some volatility in the near upstream -- in the upstream and the downstream capacities.

And that is how it is.

But if I look at the total picture of the portfolio, I think that our strategy is on track and we can deliver competitive cash.

And we do that, all this rejuvenation of the portfolio, with a strong capital discipline.

We don't do wild things, but we work in an organized and systematic way on that.

At this moment all our key projects are on track for startup as planned.

And I am really pleased with that.

I can give you some examples.

BC-10 in Brazil offshore, that is to tie four fields at water depths of more than -- about 2 km.

Singapore we're building a large petrochemical complex next to our refinery, which gives continued and sustained competitive advantages by integrating the two.

At this moment in LNG -- and you know we are -- from the IOCs we are the leaders in liquefied natural gas -- we have five trains under construction.

One of those trains is Qatargas IV.

We only started a few years ago with that, and it is now 50% complete.

In Qatar we're building gas to liquids as well.

This is a huge projects.

So far, so good.

In Russia the Sakhalin project, where Gazprom is now the majority shareholder, but we have still 27.5% of the project, gas development drilling has started.

And we expect that it is first LNG plant in Russia that is under construction now, that commissioning starts in the second half of this year.

If I now give you examples of simplification and standardization is my first example is how we approach -- what we do in Shell Canada, and how we have approached it after we have taken the minority shareholders out.

We basically bring the operations of Shell Canada into the standard organization of Shell, including our standard systems.

We will complete that before the end of this year.

So we made a very clear program on high speed, and we are determined to deliver on that.

And that will bring cost savings.

What we do as well, not only in Canada, is that to make very clear what you have to do global and what you have to do by country.

What we do global is how we integrate our portfolio.

So we take, for example, gas from Canada.

We have mining of oil sands in Alberta.

And then we look what is the best place where to upgrade them.

What we do globally is technology, how we drive that.

And what we do global it capital allocation.

Going back to Canada specifically, in Alberta we have now oil in place.

Some 60 billion barrels as oil in place in the oil sands in the in-situ activities.

Now of course (inaudible) technology development we will see how many barrels we can recover from that.

But this is really quite a resource.

The mining part differs from our other businesses.

Whilst (inaudible) has been mined, the upgrading of heavy oil is basically a refining activity.

So we have decided that oil sands mining activities will report to Rob Routs in the downstream.

Peter will come back how that will go in future accounting.

Then if I look at the downstream, we see that we have built a competitive downstream.

This is not only a story about margins, but we are competitive it is because already for years we have a focus on operational excellence, a focus on costs, and a focus on capital discipline.

Here we have, of course, made the disposals, or we are making disposals, of noncore assets.

This has freed up money we invest mainly in the East in growth investments.

Two examples, we have both a lubricants company for 75% -- and 75% share in Beijing.

It is called Tongyi Co.

And that [breaks] together with our existing lubricants sales that the Chinese market is now for Shell the second lubricants markets after the U.S.

In chemicals the Nanhai complex, $4.3 billion in a joint venture, a 50-50 joint venture, is running well.

And as I just said, we built a new cracker in Singapore.

I will hand over to Peter now in a second, but before that let me update on exploration.

As you know, we have been following a big cat strategy.

So where we rank our prospects on a worldwide basis, basically try to find large new provinces.

2007 has started well.

We have made four material discoveries this year, and we are assessing the potential.

So they are material, but we don't know as yet whether they are a big cat.

One of them is in Australia.

It is early days.

But the Prelude gas discovery is in the [Ittis] area, and that could be an important new gas resource for us.

So I think overall we're making good progress with our strategy.

With that over to Peter for the results in the second quarter.

Good afternoon everybody.

We had another set of competitive results in the second quarter of 2007.

We delivered $7.6 billion of CCS earnings in the second quarter of 2007.

These competitive results come through a combination of strong industry margins and competitive operating performance from Shell.

And they come despite continued cost challenges industrywide.

Our Q2 earnings included onetime gains totaling almost $0.7 billion.

These reflect the ongoing restructuring of the portfolio.

When you exclude the onetime items, our CCS earnings per share increased by 9% compared to last year's quarter.

Cash flow was also strong at $10 billion for the quarter.

We are confirming the dividend for Q2 '07 at $36 per share, an increase of 14% versus year ago levels.

Gearing, including off-balance sheet items, was 12% at the end of the quarter.

And on the share buybacks for Q2 they were almost $1 billion, and the pace of buyback has increased from the first quarter of the year.

Oil prices decreased slightly versus levels a year ago.

Global gas prices also declined slightly, but U.S.

gas prices did increase.

Oil prices increased at the end of the quarter and they remain at relatively high levels.

The industry refining margins were higher in all the regions compared to a year ago levels, except in Asia where margins declined.

U.S.

Gulf Coast and Europe also notably strong headline margins in the middle of the quarter.

However, the light, heavy spreads narrowed, which is a disadvantage for Shell.

So far in the third quarter margins in the U.S.

Gulf Coast have declined.

Both Rotterdam and U.S.

West Coast margins have fallen considerably, while Singapore is essentially unchanged.

On the retail side the marketing margins were up in all regions in the second quarter.

In the chemicals, U.S.

industry (inaudible) cracker margins declined, whereas the EEU, so European industry (inaudible) the cracker margins slightly improved from those a year ago.

Overall cracker margins are weaker going into the third quarter.

Finally, the U.S.

dollar has weakened significantly into Q2 and again in Q3.

As I highlighted in the first quarter, that does impact our earnings through an increase in the non-U.S.

dollar cost base.

Let me talk a little bit about the details in the business performance.

Excluding onetime items, upstream earnings declined.

The numbers include an increased cost for feasibility studies, $200 million higher exploration write-offs, higher taxes and increased industry operating costs.

However, overall upstream profitability remains at relatively high levels.

Oil and gas production declined by 2%.

Oil production increased by 1, driven by a recovery in North America, whereas gas production declined by 6% driven primarily by lower European offtake.

LNG equity sales volumes were 14% higher than the same quarter a year ago, driven in particular by increased feed gas supplies in Nigeria and stronger volumes in Malaysia and Australia.

We have seen a good ramp up of LNG volumes in recent quarters from new startups.

The next tranche of growth should come in '08, with startups in Russia, Australia and Nigeria.

Earnings in European gas and power marketing were down versus a year ago levels as a result of poor market conditions.

So far in Q3 for production we continue to see the impact of downtime in Nigeria.

We also expect to see the impact of offshore maintenance and the deconsolidation of Sakhalin where production is concentrated in the summer months.

So this is phase 1 of Sakhalin II.

Jeroen had told you the new report in line for oil sands.

We will be reporting earnings from oil sands as a separate segment from Q4 '07 rather than as part of EP earnings.

Now let me turn to downstream.

Downstream earnings increased significantly with firm refining margins and a strong impact from marketing.

Refining availability increased to 92.4% compared to 90.7% a year ago.

Around 85% of the 2007 plant downtime shutdowns has come during the first half of this year.

The plant downtime for Q3 '07 is expected to be at slightly higher levels than the quarter a year ago, when you might recollect that our refining availability was 94%.

In chemicals results continue to be strong, so 42% higher then Q2 '06, benefiting from high cracker margins, especially outside the U.S.

Chemicals availability remains firm at 92.6%, but down slightly from 94.5% in Q2 '06.

This was really due to the plant downtime at the Norco complex in Louisiana.

This turnaround is the largest for chemicals this year.

Chemicals availability for Q3 '07 is expected to be around the same level as Q2 '07, notably higher then Q3 '06, which was impacted by heavy turnarounds.

On the portfolio side we continue to restructure our portfolio, while focusing on capital discipline and capital efficiency.

We have completed the exit from the Wilmington refineries, so L.A.

refineries, in the United States.

We have sold certain assets in our midstream gas businesses in the United States, and propose a further sale in the southern corridor, which is Bolivia, (inaudible), Brazil.

And we have launched new projects in upstream.

For example, enhanced oil recovery in Oman and in downstream at Buchan.

From the next chart you can say that we have a high proportion of capital under construction compared to what we can see in our peer group.

This is because of our ambitious program to rejuvenate the portfolio with new legacy assets, so long-life assets as we also call them.

These positions will generate cash flow for decades to come, but do require significant upfront investments.

Our capital allocation discipline is a key component of our strategy.

We must make sure that the Company retains the right balance between risk and profitable growth, which you can see on the right hand side of the chart.

You'll see how I expect the risk weighting in our capital to evolve between '07 and the period 2012 and 2014 when we go through our investment phase.

I think this is a satisfactory trend.

We continue to review our portfolio and investment choices on a global basis.

We're selling assets with limited future growth potential, or assets with high future capital spending requirements, where we would prefer to invest elsewhere.

Now we have sold over $23 billion of assets since the beginning of 2004.

Just over 50% from upstream.

Our organic spending program is making good progress.

In '07 we have completed over $7 billion of asset sales at the end of Q2.

And we have several other disposals outstanding.

So our plans for $22 billion to $23 billion of net spending for 2007 are on track.

These also applies for a guiding CapEx of $24 billion to $25 billion, and the net on the acquisitions and disposals as outlined on the chart.

With that let me pass back to Jeroen.

Let me just summarize.

I think it is another set of competitive results, driven by operating performance.

Investment plans are on track.

I am pleased with the progress in the downstream and on exploration.

We are rejuvenating our portfolio with distinct investment in new legacy assets as well as disposals -- disposals, both upstream in downstream.

We continue to see competitive growth opportunities for our Company.

And those are based on our technological strengths and by making disciplined capital choices.

We do that in an industry where we see now higher energy prices, but higher costs as well.

I open it now for your questions.

(OPERATOR INSTRUCTIONS).

Neil McMahon, Sanford Bernstein.

I've got a few questions.

Maybe the first one for Peter, then another few for Jeroen.

Just on your dividends growth strategy, I think there is a clear difference between a number of the large oil companies that are focusing on dividends and some that are focusing on buybacks.

Can you give us an update, given the cash that is on your balance sheet at the minute that you're carrying, what your dividend growth strategy is going forward, and how much excess you expect to beat inflation trends by over the next year or so?

Just ask your second one as well and then we take both.

Okay, the second one is really around exploration.

What are you terming as material exploration success?

And does your increased exploration expense mean that the Orphan Basin well offshore Canada was not successful?

I take the first one on the dividends.

As you know, we have a policy, A., to pay the dividends in U.S.

dollars.

And we let it grow at least by inflation.

Over the last two years we have an increase of 9%, and this year we have a 14%.

So we are -- that is our policy, and we're not changing that policy at this stage.

But we always take the full financial framework into account when we look at our balance sheet, which is clearly still the same, as told to all of you before, which is first is dividends, competitive.

Second, it is organic growth.

Third, maintain a balance sheet which throughout the cycle around the maximum of 25% of gearing.

If there is cash left over we either invest in long-term further organic growth.

We have done some smaller niche acquisitions in the past.

And we have also done some buybacks.

So that is how we are optimizing.

We have increased the buybacks slightly in the second quarter.

And as I have said, we have increasing the dividends by 14%.

But I will not give you for the next two, three years growth rate.

I think the policy is clear.

It is at least inflation.

And over to Jeroen for the second question.

The material success.

The four exploration successes I mentioned, being two Australia, one Malaysia and one Nigeria.

Then when we started drilling you have hopes to be at the big cat.

In those four cases we have found the good stuff.

Then it takes a bit of time and evaluation to make, if you might, how big it is, and rather it fulfills the definition of a big cat.

So that is why we have said material, that we can only update later.

They make the criteria more profound, big cat.

Orphan, as you probably know, Orphan is a joint venture.

Chevron the operator, Exxon in it as well.

So it is for Chevron to comment what is going on there.

Maybe just one other thing on Canada then.

You mentioned 60 billion barrels of in-place reserves in the oil sands.

If you presume over the next 20 years your technology strategy comes off, what do you think your average recovery factor is going to be, as we sort of presume around low 20s at the minute?

Do you think you're going to get very much higher than that to access that significant resource in-place?

If I think about oil sands, I split my thinking immediately.

The part that you can -- where you can scoop it up.

And that out of those 60 billion barrels in-place, order of magnitudes don't be precise, but to get a rough feel we have said about 6 billion is where the scooping up part, for the mining part.

And there you have pretty high recovery rates due to the nature.

I think about 70, 70 maybe 80%.

But then you have still many -- or the larger part oil in place where you have to in-situ technologies.

In-situ technologies we have -- you have coal technologies, steam technologies, (inaudible) technologies that will be much lower than the 70 or 80% I have just mentioned a moment ago.

I'm convinced that over time we get those recoveries percentages up.

You can say roughly that this is a wild guess in my view to think about technologies you have.

You can think about some to 40%.

Whichever way you deal with it you can see that we have very long-life assets, so that is not the first problem for us at this moment.

But it is to make sure that you get good competitive technology which works very reliable.

And that is exactly what we have been developing over the past years, and will continue to develop.

Mark Iannotti, Merrill Lynch.

I just had a quick question.

I would like you to maybe talk a little to your recent agreement with Rosneft, and what types of opportunities you think could emerge from that agreement?

Rosneft is something we signed nearly two weeks ago now.

It is upstream and downstream.

It is Russia and outside Russia.

But what does that mean?

But is a bit how Russian companies work.

You have first ideas.

And then it needs the high level or the chief executive blessing before you start to work very seriously, and how you can develop it, how you can swap it or whatever.

So we have identified upstream, downstream, Russia, non-Russia so basically this is the first step in a journey.

And an encouraging step, but I have to say a first step as well.

But also we have [Sergey], which the chief executive of Rosneft we will review with the progress made in those specific studies in the fourth quarter of this year.

Edward Westlake, Credit Suisse.

I have two question.

Obviously, costs are still inflating and the surface environment is still difficult.

The very helpful slide on page 19 with an update of projects.

But against that surface environment which of those projects in the choicest category, such as Olokola LNG, Gorgon, Gumsusit, Bonga, etc., are you most hopeful to FID say over the next 18 months?

And which do you perhaps feel look a bit more at risk in terms of having to reduce -- to review concepts to reduce costs?

And then the second question is really around further rationalization.

You have given us some guidance on disposals for this year, but it does feel as if there's potentially more that you can do.

Could you give us an idea of potential for '08?

Thank you.

I'd tackle both of them.

On the first one let me just look from a general point of view and then get into the more specifics.

If we -- and you have external information, you have also internal information.

What we have shared with you is between '05 and '06, we was a 10% increase in costs.

What we are seeing in the market is that the ramping up of costs have somewhat slowed down, but it is still ramping up in that sense.

There are some pockets, either geographically or in certain areas, where you see some slowing down.

But we could not say this stage where we are in the curve.

I think that is too early.

There is another interesting statistic, which has come out from (inaudible) which actually predicts that 2000 to 2007 cost increase to be around 80%.

So that gives you another kind of statistical information.

On the FID project, of the one still to come, that is typically what we don't do and comment on them.

What I can say is that out of -- the way we have changed our process of taking FID -- and we have talked about that in the past as well -- if needed, we take longer in order to get the right tender.

We even may do some re-tendering in order to get the right costs, and see if the projects are economic.

And then we go actually forward and take FID.

And that is when we will tell you.

On the projects which are running, as Jeroen said, they are on track.

And I can also reconfirm that the bigger projects like we have in GTL, in Pearl, in Sakhalin and some others, they are really on track.

And we are pleased with the progress there also from a cost point of view.

On the portfolio rationalization I have given you all the numbers.

And I think for us it is key that portfolio management stays actually as part of our strategy where we have noncore assets or non-strategic assets or assets were someone else can actually manage it in a better way -- who comes to mind here is long-life -- late-life assets in the North Sea.

For example, we have done an announcement.

Or we have some stranded assets where our marketing assets are no longer linking into a refinery asset, like in France.

We're looking at portfolio actions in those areas.

We will continue to do that.

We gave also at one stage a kind of number, which -- where we said kind of 2 to 3% on capital employed on an annual basis is a typical thing you can expect out of a portfolio rationalization.

I think I'll leave you at that rather than to speculate more where we, and what areas, we're going to do it.

It will be upstream and downstream, so both businesses.

Neil Perry, Morgan Stanley.

I've got two.

One is you're moving the tar sands and Rob Routs.

And you're going to disclose what you make there directly, which is very welcome.

But if you're going to do that, why don't you move GTL into the same thing?

And in fact why not go one step further and create some sort of unconventional divisions so that we can actually see what is going on in the growth part of your businesses?

Secondly, on your disposal program and your CapEx, your disposal programs seem to be, given what you still got to sell and could well go later this year, you could well exceed what you talked about at the beginning of the year in terms of disposal proceeds.

What does that do to this net CapEx thing that you used at the beginning of the year, the $22 billion to $23 billion?

Do you compensate for that or does it take it out of the disposals that you would have gotten for next year?

In other words, your net CapEx next year, will it go up because you'll get more disposals this year and less disposals next year?

I just wonder how this profile is going to look?

I think on the first one I think we are, as you I'm sure have seen, we're very transparent in the way we actually communicate to all of you.

We have said that on the tar sands.

We also have said it quite clearly, or we have given the example this time of giving you further insight into the cash flows like we have done in the fourth quarter.

So we have done it now again in the half-year.

So I think we're very forthcoming there.

The Rob Routs tar sands -- sorry, oil sands -- is clearly driven by our integrated model.

So it is quite clear that we have stretched that.

If you do oil sands, you do the upstream and you do also the downstream.

The downstream with the upgrade, and then also the marketing side to the market including pipelines, optimizing North America is very important.

Now in order not to actually have some parts in upstream, some parts in downstream, we have decided to actually show that differently.

On all the rest of GTL or other unconventionals there is no decision on that at this stage.

These are firmly embedded in the main businesses where we have been now.

Let's see over the next five to ten years how they grow and what they do, and then we can talk about that later on.

On the next CapEx figure, in the speech itself I have been very clear that $22 billion, $23 billion stays.

I'm still operating with the four, the five and the seven.

So four Sakhalin, five other divestments, nine -- and seven the Shell Canada one, and the $24 billion and the $25 billion for this year.

We will see how that evolves during the second half and then in 2008.

You may remember in the fourth quarter update we said we are expecting this net CapEx to be in the order of magnitude in the years to come as well.

So I think we will manage the various parts of that.

But more importantly is the growth CapEx number for '07 stays at the same level.

Can I just come back -- one thing -- just in terms of disclosure.

The one place where no oil company is particularly forthcoming is the downstream.

Can you give us the split between the refining and non-refining part of the downstream for the quarter, because I know you have provided that in the past?

Yes, we have provided that for the full year, always in Q4.

That is our policy at this stage.

Rob always showed that in the strategy or in the fourth quarter update.

We will certainly do that again, otherwise I have heard your suggestion.

Gordon Gray, JP Morgan.

Just a couple of quick questions.

Firstly, whether you could give us a little bit more clarity on that $200 million increase in exploration write-off, whether it is purely activity related or whether there's something else?

And the second one was just a point of clarity.

I may have missed it.

Do your comments on 3Q E&P volumes affect your full year 3.3 million to 3.5 million barrel a day target?

I take both of these questions.

The answer to the second one is very simple, is no.

So we are in the 3.3 million to 3.5 million, and we have said we are at the lower end of that.

On the exploration one it is activity based.

We said $200 million.

It is mainly driven by Australia, Canada, Malaysia.

Nicki Decker, Bear Stearns.

As far as the projects that you will consider for FID, is there any significance in the order of the projects that you have listed in this table?

It looks like they could be listed sort of in terms of likelihood to be sanctioned this year.

No, that is not the case.

I'm interested in Gorgon in particular.

Maybe you could talk about how you see that project moving forward?

Gorgon again is a joint venture which is operated -- this is nearly the same answer as the previous time -- it is operated by Chevron.

Exxon is a shareholder.

So it is for Chevron -- and that are simply the rules now in our industry -- Chevron has to inform the markets about progress or whatever the problems are.

We are the shareholder.

We think it is a long-term important strategic project.

If I could just ask one more quick follow-on.

In the downstream you talked about increased downtime in the third quarter relative to a year ago.

Could you just give some clarity on where that downtime will occur.

U.S., outside U.S.?

We normally don't break that down.

It is Peter here.

But it is rather small, so I wouldn't put too much emphasis on that.

So we're not talking about big and bigger stuff.

So I think we don't break it down refinery by refinery.

[Stefan Foucoult], Societe Generale.

Two questions as well please.

Coming back to the exploration charge and the fact exploration looked fairly high this quarter with those $200 million for wells written off, would you say see this level of increased cost in exploration as an ongoing feature for next quarter, or do you think this is a one-off?

My second question is around Canada.

Would you now be in the position to perhaps quantify a bit more precisely the amount of savings that could be generated by the ongoing structural simplification?

Thank you.

I will take the first one on exploration.

You know we are running a $2 billion plus project here on an annual basis.

These write-offs come and go, so you can't actually take them forward as something which will happen again next quarter.

So you cannot take that as a charge which will stay.

On the cost savings in Canada, as Jeroen said, we're making good progress to integrate Shell Canada into our global processes.

We intend to finalize that towards the end of the year.

And I think we will quite clearly put some emphasis on that in the fourth quarter.

We have given you earlier in the year in Q4 when we did the strategy update, we gave you a pretax $500 million cost savings across the group.

So I think that is the way we're managing cost savings with you and investors and analysts in the markets, rather than actually specifying each little cost-saving initiative which we have in the group.

So it is the $500 million which drives it.

Jon Rigby, UBS.

Two questions actually.

One is can you give us a little bit more color around the separate contributions of the LNG business and gas trading and gas power?

I mean you do indicate that gas trading was rather lighter this quarter.

Maybe some (inaudible), maybe some indications of where you're falling down a little bit in this quarter would be useful.

The second is just on North America.

Once Canada is folded in will you be operating your businesses across the continent?

So, for instance, say your gas business you will think of it as a North American business rather than one that set in Shell Canada, one set in U.S.?

And is that one of the benefits you see from the consolidation of Shell Canada forward?

Peter starts and then I take the second.

On the first one, we give that normally as you have seen over the last two years also on an annual basis.

But I think what I can say on the LNG side, LNG performed very well.

We had 14% more volume.

Prices were roughly 2% down if you compare Q on Q.

Typically you can think about 70% plus a little bit off the TP result is actually LNG driven.

The rest is then driven by marketing and trading, and to a certain extent GTL.

Now the European one is very important to remember.

It was really the marketing, trading environment was not very positive, which had a weather impact on one side, for example.

And it had also a pricing impact in certain areas.

I give you an example.

In Spain, for example, there was less gas consumption because there was much more rain, and hydro was much predominant.

That is quite difficult for you to forecast going forward.

So I think the best I can really do is about 70, 80, 70, 75% LNG and the rest is the others, where we have some volatility in it.

A good question about how we organize that.

Indeed, we organize on a North American basis.

That means that we take an integrated look for Canada, say the U.S.

And as you know, we have LNG import terminals in Mexico as well.

So later that will be important aspects to take into account.

It is a solid case it will not be all run from Houston.

We will retain in Calgary because there is good talent close to the oil sands, how to say, and maybe close to new unconventional technologies.

So we will keep there.

And good basis of people as well, we will work in a very integrated way in Houston.

These are the main lines basically we have already defined and announced that organization.

And so far we get good reactions on that.

Paul Spedding, HSBC.

A couple of questions.

Firstly on oil sands.

In the past Shell Canada has given an indication about cash costs, admittedly two or three years ago.

I wondered if you could give us a broad brush operating cost per barrel number for both mining and in-situ?

The second question was just a bit of whether you could give us perhaps an update on any discussions you have had with Canadian government about the possible removal of some of the tax incentives that currently do go towards tar sands?

I take both of them.

On the oil sands, I think you have to distinguish between what we are operating today and in terms of production, which is our 155,000 barrels.

There what we said is actually cash costs is roughly $20.

You have to take into account that one-third of that is energy cost, which will go up and down depending on what prices you use.

So take that into account.

For the expansions to come, we're working on 100,000 barrels expansion.

What we have said is -- and this applies to most of the other unconventionals as well -- we need $30 plus as an oil price in order to actually meet our return criterias -- hurdle criterias.

I think that is the best I can describe to you at this stage where we are from a costs point of view.

On the government side, I think let me give you one general remark and then a specific one on Canada.

The general remark is we are interested as Shell, but also as an industry, in stable, fiscal regimes in the longer run.

And specifically if we start big projects we expect them to be actually in line with the assumptions at the beginning.

Now I would put Canada into that category.

So far they have been very forthcoming in terms of taxation.

With the latest changes we have seen, I think you have to distinguish where you are in your project development, because the tax law actually or the changes does highlight if you are actually implementing your projects, you will still be treated under that tax ruling.

If you have new projects, then it is different.

So we are obviously in discussions with the Canadian government, but that is for us to discuss with them.

But I think we're slightly different -- in a different way positioned as we are already operating there and have already an approved expansion ongoing there.

Irene Himona, Exane BNP Paribas.

I was wondering if you could perhaps give us some guidance on your tax rate in the second half of the year?

I think the first half was a little bit below.

And secondly, going back to the process of simplification and standardization, you gave us the example of Shell Canada, which is obviously newly acquired.

Just thinking about the existing Royal Dutch organization, would you say that this process of simplification has now spread from top to bottom since the unification?

And if not, how long would you expect it to go on until completion?

Thank you.

I take the first one.

Our tax guidance in that sense has not changed, which is 41 to 43% on an ongoing short, medium, long-term basis.

I think it is important that you take into account how downstream and upstream are contributing to the earnings.

Because quite clearly downstream normally has lower tax rates, and significantly lower tax rates, than upstream.

So in a quarter like the second quarter, and to certain extent the first quarter, where downstream actually has a higher proportion of the earnings, then normally you get some movements in the tax rate.

So when you can tell me how the refinery margins and all of that works in the second half, I can give you a better insight there.

But I think you need to look at the downstream and the upstream proportion of the earnings, and then you can be more precise there.

On the simplification standardization, I pass on to you, Jeroen, or should I take it?

You take it, because I missed the first half -- something else (inaudible) but I don't know has.

Yes, (inaudible).

I take that.

As part -- when we came in as a new management team and when we unified we have said quite clearly that we want to embark on an enterprise first culture, which has leadership, accountability as some key elements in it.

At the same time we also started in all the businesses, but also in the functions, some rather larger programs to simplify, standardize, or first eliminate some processes, standardize some processes, and simplify some processes, and then actually automate them.

All have their targets to become first quartile performance through these standardization simplification ones.

So these things are embedded in the annual operational plans.

And they have been working now for quite a considerable time.

So you see major progress in downstream.

You see major progress in some of the functions.

And you also see progress on the E&P side where we have globalized our business model.

So I think, yes, we have reached the front line.

We have reached all the hierarchical levels.

But we are implementing that, and that is not a program which you can do in one or two years.

That, you do over time.

So there's another two, three years at least to come on this one.

And that is why we have also said out of that we expect on an annual basis some $500 million of pretax cost synergies to come out.

[David Klein], ABN AMRO.

I have two questions.

Firstly, on your list of key projects in the presentation, the pre-FID options are significantly shorter -- a significantly shorter list then you have shown in recent presentations.

Although you had added Pluto, I think there are five projects that have disappeared from the listing.

Is that just a presentational matter, or has anything changed at any of those five projects that are no longer listed?

Second, just on your decision to ring-fence oil sands for accounting purposes, I wondered whether that might change the concepts of reserves and resources that you use in presenting your results and ambitions in reserves replacement to the financial community?

I take the first one.

This is a purely definition change.

We have tightened the definitions for what projects go on this list.

From that point of view you should not read anything more into that.

So some projects have fallen off because they are more of what I call infrastructure maintenance projects of ongoing fields and not growth projects in the sense of enhancing our production.

I think we have tightened that quite a bit.

And that is the new list which you have in front of you.

Also, these are the bigger projects which we're showing here, which are really sizable from a capital means as well.

On the second one, I think going back what we have done we have been very open in showing what comes out of proved reserves additions from oil and gas reserves and what comes out of oil sands, because they are following two different standards in an accounting sense.

So one is the mining, the other one is the oil and gas one.

So we will just continue to do that so you'll get full transparency on where we are at in the reserves and resources.

Let me also remind you that the RRR is for us not a target.

It is not an objective in itself.

It is an outcome of our investment policy.

And we are typically measuring the RRR not on an annual basis, we actually measure it on a three, four, five year average basis.

Because that is what you do when you are investing in large infrastructure projects because they come on stream in a more lumpy kind of manner.

So don't put too much emphasis on the annual one.

Dan Barcelo, Banc of America.

It is Dan Barcelo from Banc of America.

Two questions if I may.

Firstly, just a few details on the quarter.

Is there anything further you can give us on crude oil production (inaudible)?

Sorry, start again because you got a voice in the middle of it.

You have two questions and start again.

The first one is regarding crude oil production in Africa, both Q on Q and year on year.

I fully understand the comments around Nigeria.

I didn't know if there's anything beyond that, such as PFC effects or shifts from profit oil to cost specifically from Q to Q.

And the second question, just at a bit of a higher level, on slide 14 you do highlight that Shell has more capital employed under construction relative to peers.

Is there any sort of assertion in this that perhaps now you're spending a little bit more in a phasing mode, or does that level of CapEx have to be sustained to keep the growth?

Or should we think that that capital spending or overspending would then drop down to a normalized level?

Thank you.

Peter?

Thanks.

I think the first question, if I understood it correctly, and I'm looking at the numbers, in Q2 we 404, and in -- so '06 -- and Q2 '07 we have 409.

So there is a 1% change.

So from that point of view I can't see any big swings there.

What we have is, just to repeat the business model, you have got shut-ins on the onshore quite clearly.

Now that number hasn't moved that much between the two years, just a little bit.

But we still obviously take some of the ramp up on the Bonga and Erha side, which is the offshore one.

So from that point of view, I think that will be my explanation.

On the capital employed, I think from a strategy point of view what we have said is we're aiming at 1 to 2% growth before the end of the decade, and 2 to 3 later on.

Now we are quite keen to actually progress our investment portfolio which we have on an ongoing basis, so not do a stop and go on depending on the oil and gas price.

Our project pipeline currently is quite significantly filled and full.

So we have got good visibility for many years to come that we can actually develop significant projects.

Now this will always depend on the economics of these projects, because we're not shy actually to kill them or to stop them if they are not managing or do not actually come to a certain profitability level.

I think it is difficult to say -- I normally do a forecast on CapEx for how many years we want to actually keep the spending there.

It depends on the opportunities which we have and what returns we can expect.

The second thing I would say is with the big infrastructure projects we do, where you put a lot of CapEx into the ground upfront, in order then actually -- and in areas where the production will then stay at a relatively high level without a lot of follow-up investments in order to offset the decline.

Because these fields will not have high or more or less no decline rates.

We are derisking somewhat the CapEx needs in future years.

But we may decide we want to grow more, and hence keep CapEx levels actually high up.

So I think that we will decide from a strategic point of view during the next few years to come.

Lucas Herrmann, Deutsche Bank.

Two questions.

The first for you, Peter.

Very simply, I am often asked what your transactional currency exposure is.

So if I say the dollar moves by about 10%, what does it actually impact your reported dollar profits by?

If you can give me some idea that would be much appreciated.

And the second in ways I think goes back to Dan's question.

It is on Nigeria.

One of the things that perhaps was more intriguing this quarter was to see the Nigerians operate OPEC constraints and shut down production at Bonga and Erha, or ask you to shut down production at Bonga and Erha for a period.

On the basis that at some point the onshore production is going to come back, and that the returns the government sees for onshore are far higher than those for offshore, I just wonder where it leaves you in terms of thinking about planning for the future, given the weight of your growth is in offshore production, and given the extent to which Nigeria is going to potentially be beyond quotas in the future?

I take the first one.

I think what I can give you, and then you can calculate a percentage, etc., in the second quarter across the group the weakening of the dollar has cost us some $150 million to $200 million.

I think you can more or less take half downstream, half upstream on that one.

Thank you.

Nigeria -- the way we look at it is basically we see the three companies, which have all very different characteristics.

You have the offshore -- sometimes hundreds of kilometers offshore where you have very different tax regime.

Recent developments usually from a platform FSPO type, etc., save it straightaway.

Then you have the LNG company, the NLNG Company, a joint venture, very large now.

So far in spite of all the difficulties, that company keeps on producing gas.

And then we have onshore where we have all the troubles at this moment, onshore companies, Shell Petroleum development.

Still a very large company, we have to realize that.

That is about -- is the joint venture, it can produce say 1 million barrels per day or more.

It is that type of company.

So on a world scale that is quite important.

What SPTC does as well, not as the only one, but they produce a lot of gas.

That gas can go either to the LNG plant or -- and what we don't like -- it is flared, and that is all the projects we finished out.

And over time if you stop this flaring, that gas will be used basically for electricity production.

And in spite of all the troubles in Nigeria, the economy is making progress.

They have in fact quite an economic growth.

And you see a lot of electricity growth in Nigeria.

And that will all be basically based by gas-fired production.

So that is the scene there.

We take an integrated view.

We worked for decades in that country.

We realized our three separate companies.

We realized that our profit and risk profiles are very different.

But we are committed to all those three companies.

Now of course we don't sit back, and we explain actively to the government that if we go (inaudible) government take as long as the delta producing production is halted, and the new President is very aware of that.

And he is in fact giving very right statements how to approach that.

The art is of course that those statements are now translated into deals.

Probably we see a lot more of that because the ministers are now being appointed.

And then we hope that step-by-step we can return to the areas to get -- basically [the owned parts] where we have real troubles with onshore production, and that we start to get that back.

I can't put a date to it.

It wasn't much about the production coming back.

I mean, in some respects it is great that it does.

It was more that if it comes back and you are in a quota environment, the temptation for the government must be to ask you to reduce production from the deepwater, which is far more profitable.

And whether you've got any comments you would care to make on that observation?

You're right, you mentioned that.

We were a bit surprised that at certain of moment there was the idea of the wells we have production halted from the Niger Delta, that at the same time they had ideas to curtail offshore production.

We felt that -- what is the logic here, because basically we had a lot of production already out of action.

And only way I can say that is it is sometimes very difficult to understand all the Nigerian policies.

What we expect to see -- what you see in most OPEC countries is that they run the [SA] curtailment, it is a kind of an equal misery basis.

Now that still leaves a lot of scope for negotiations.

But that is in general our experience.

It is too early to say.

And that let's realize that over the past years there haven't been many curtailments of OPEC production at all.

So that is what we say is not tested in recent times.

In the end these are government decisions.

And we have to realize that so we can advocate as an industry what we would prefer.

But the government they are the deciders in the end.

[Hans Mitt], Dresdner Kleinwort.

Really for you, Peter.

Gearing in your definition is at 12% now, which is obviously quite a long way short of your sort of stated target range.

And I just wondered if you had any view about sort of time frame you would be willing to live with it down at that level, and what happens to maybe bring it up to something closer to your target range?

Thanks.

A few comments here.

I think the first one is despite the fact that we have this, together with the divestment process, a very significant inflow of cash during the first half year, we managed to actually use that cash and distribute it into organic growth and also to the shareholders.

So I have not further (inaudible) the balance sheet.

And there are some others in the industry which are much lower.

That is the first point.

The second point is I think when you have high oil prices and high gas prices, and the costs have maybe not yet caught up with you, so you're still running at rather high returns, etc., that is where you would expect to be at the lower end of your gearing range.

As soon as you either go up in terms of -- or down in terms of oil and gas prices, that is where your gearing will naturally come up.

That is the way we look at our balance sheet, so we're optimizing that going forward.

We are doing the planning on various prices.

And I think that will stay with us.

The commitment I have during the full cycle period is to get to 25%.

And what we have so far achieved is clearly not to go further down in the degearing side, and use the capital wisely in terms of organic growth, but also on niche acquisitions, like Shell Canada, etc, but at the same time also increase the dividend and use buyback.

And I will continue with that with the clear aim to get throughout the cycle to what we have as a framework, which is 25% gearing.

So working on it.

Bert van Hoogenhuyze, Jefferies & Co.

Most questions have been answered.

There is one remaining.

In one of the -- in a few of the former conference calls you hinted to talks going on with Venezuela on technology to extract super heavy oil.

In view of what happened in this country, also with the actual IOCs working in that sector, are these talks all but dead, or are you still seeing yourself as a technology provider?

And is there a chance that this comes to something?

Yes, basically we have many provinces in Venezuela, but we continue to operate what is basically Lake Maracaibo with our Empresa Mixta.

And of course, we are developing, not specifically for Venezuela, our technologies for super heavy oil.

This is not a technology for application today or tomorrow.

So it makes sense that basically on let's say technical, civil service level I assume that the contact simply continues, so that they are aware (inaudible) that there is a broader understanding, not only on the political level but on the technical, civil service level what may it mean for Venezuela.

So over time I can see good combinations between Venezuela and our technology.

And then like all oil projects we have to take political considerations into account.

But that is basically too early to speculate on that today.

My second question was the ramping up schedule of the current oil sands projects.

Can you give us some idea what sort of production you will end up the year with as from now?

The phase one projects, the 155,000 barrels per day, that is the up and running part so to say in the joint venture of which we have 60%.

At this moment we are building the first large extension, which is about 100,000 barrels per day.

But that part will not be up and running this year, and it was never scheduled to be.

Mark Gilman, Benchmark.

I had a couple of things.

First, one of your competitors has gone to great lengths recently to try to provide some clarity with respect to IFRS and derivative-related accounting impacts on inventories, which have played havoc a little bit with downstream earnings.

Are there any IFRS-related effects for inventories and derivatives in your downstream results that we should be aware of?

Peter is already smiling.

So --.

Okay.

But ask the other questions, then we take all of them in one go.

Okay.

The second one, I wanted to see if you could give us any kind of an update on your carbonate recovery technology that you have been working with vis-a-vis sands?

The third question relates to exploration.

You cited Onyx, Jeroen, as an appraisal success.

Yet I hear something quite to the contrary.

In fact, that the appraisal well on Onyx was somewhat disappointing.

I was also struck by the fact that in your choices slide in the project list there is no listing whatsoever of several of the other seemingly significant deepwater Malaysian discoveries that you have made.

Could you clarify and comment on that please?

I take the IFRS one, and then carbon technologies I leave to the technology man, Jeroen.

On the IFRS side, yes indeed, obviously we are following the same accounting procedures like that particular competitor.

We have (inaudible) a slightly different approach to trading in the sense this is part of our business.

We run a global trading business, but it is really -- the results are shown in the various businesses.

And it is an integrated business.

It has physical, it has paper, etc.

So this is -- all this EITF adjustments -- mark-to-market adjustments at the quarter end, they are part of our results, and we will just leave them there.

So if they are positive or negative we will deal with that as part of our quarterly announcement to give you ideas on if it had a positive or a negative impact.

But we have a slightly different approach to this one.

And I can also not say what that competitor actually said, that they are measuring it internally in a different way.

I don't know how they do that internally.

We run our results in a certain way, and that is how we're communicating to the market.

CO2 and oil sands.

If you look at oil sands, and we take the (inaudible) from the oil sands in the ground until it is a usable product.

And then you measure the CO2 per unit.

We are determined to be a first quartile operator.

How do you do that?

That is technology, energy conservation, how you operate it, and how you integrate it.

And so the basic philosophy is there we realize that oil sands operation can be relative CO2 intensive.

But if the governments decide that oil sands can be exploited, that is a good thing if people know that if Shell is involved in it, they do relatively the best job, or the best in class job.

That is the philosophy there.

So in the operations this is designs and technology, what else can you do?

You can try to capture the CO2, whether it is from electricity or rather from other operations doing the production of the oil sands.

And then you have to do something with the CO2.

We may have in Canada relative nearby possibilities to inject it into the ground, or further away you have to construct pipelines.

At this moment studies are going on for that.

And then the third one is a classic one, are offsets.

I think offsets are longer term probably not that satisfactory.

Your third question about operation, exploration, Onyx.

I'm not so sure you have the correct information.

We are not so sure.

Maybe you have to work off-line with our Investor Relations people.

But we think that this has (inaudible).

On Malaysia I don't have additional data here compared to what I have presented in our analyst call in our press conference this morning.

Jeroen, what I had asked about was your carbonate reservoir oil sands recovery technology that you have been working with.

In-situ conversion of that, yes?

This is the new technology that we developed for in-situ conversion, the SURE technology.

Right.

That is the one.

We at this moment we concentrate basically on two countries, on Canada and on the U.S.

We have different tests going on.

But we have not given further insight to the markets or to the competition about that.

The Malaysian discovery I referred to was Malachi as well as several others.

I'm afraid I can't help you.

Okay, thank you.

(multiple speakers) or other people you know.

What is somewhere in the public we can share with you, but it is not to my knowledge at this moment.

Jason Kenney, ING.

Three short questions, if I may.

Firstly, could give us some outlook for DD&A progression?

I know it is a function of your capital intensity, but certainly year-on-year I was quite surprised at the increase.

Secondly, could you give us Shell's view on progresses in Iran, and any concerns you may have about the criticism from some U.S.

funds about your involvement there?

And then finally, going back to Mark's question earlier in the call, have you got a probability of the JV with Rosneft actually bearing fruit, given your experiences in Russia?

And I'm thinking here about a defunct JV with Gazprom back in '97, and you pulling out of the IPO for Rosneft back in 1998, and not necessarily recent Russian troubles.

I work them in the reverse order.

The only signs which an agreement with Rosneft of course that we have more than hopes to bring it something to success.

Now if you go back, and we just published our 100 year history, not everything we brought to success.

But the fact that we published a book of 100 year history and we are a pretty big Company, we brought many things to success.

But you don't know which one as you start.

And of course we have a lot of know-how and we have even more know-how in Russia.

And I always say in Shell we are long-distance runners.

So we don't give up easily.

Your second question about Iran, indeed we received from four American pension funds a letter.

The letter is dated on the 19th of July.

It came in on Friday.

And in that letter they asked to describe our policies and safeguards, what we do or intend to do in Iran.

What we intend -- what we understand from the newspapers as well that letter has gone to more companies.

We will answer them basically in line with my earlier Iran remarks I made today.

DD&A is for Peter.

I take that.

First of all in the opening sentence I have to say is with the 20-F obviously next year we give the update.

So you can expect that in March.

I think from a general description point of view, it is driven -- and it is indeed higher and it is driven by new fields on one side, and on the other side low ACC reserves bookings over the last three to four years, specifically when we restated the reserves back in '04.

That quite clearly has an effect on the DD&A.

I think these are the two major, major trends I can give you.

And the rest we will update in March next year.

Do you see the trend continuing through the rest of this year and into next as well?

I think we talk about that in March next year when we see the rest of the year.

There are no more questions at this time.

Exactly.

That is why I like to finish this analyst call.

Let me thank all those who asked questions.

Thank you for your questions.

And let me finish this to say that we were pleased with our second quarter -- pleased with our second quarter.

I know there's always more to do.

And that is exactly for what we go for, the short one line in our Company.

It is all about delivery and growth.

We concentrate on the delivery, because if we don't deliver, we won't -- we will never come to good growth.

Thank you very much.

I end this call now.