殼牌 (SHEL) 2008 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell Q2 results announcement call.

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

(OPERATOR INSTRUCTIONS)

I would like to introduce our first speaker, Mr.

Jeroen van der Veer.

Please go ahead, sir.

Hello.

Welcome to the Royal Dutch Shell second quarter conference call.

Peter Voser, our CFO and my selt, will update you on the results for (inaudible) activities and exploration.

And then we will take your questions.

First, a disclaimer, thank you.

We delivered another (inaudible) of competitive results in the second quarter.

This was helped by good operating performance.

CCS earnings were $7.9 billion, and earnings per share, excluding identified items, increased by 15% from the second quarter last year.

Payout to shareholders was $3.8 billion.

Oil and gas prices were high during the quarter and supported up stream On the other side of the business, down stream margins remain under pressure for our industry.

At Shell, the strategy is all about good operating performance and competitive returns to date, and making some significant investments in the company for the future.

We are generating large profits, and we are making large investments to create value for our shareholders and to play our part in providing safe, convenient, and competitive cost energy for customers.

We have the largest investment program in Shell's history underway to date, and one of the biggest in the world.

Key projects are on track for start-up as planned, with 1 million barrels per day of up stream under construction, and 300,000 barrels per day down stream.

We are increasing our investment program with new short-term drilling opportunities, and new low-term positions both up stream and down stream.

For the most part, these extra investments are going into countries where we see acceptable political and fiscal risks, and, at the same time, we are increasing our asset sales program.

Peter will give you all of the details in a moment.

But, if you put it all together, I expect net capital spending this year to be $35 to $36 billion, assuming we are successful with the [Duffany] Acquisition.

This is an increase in our net capital spending of some 50% from 2007 spending levels.

Our strategy remains on track.

We are maintaining strong capital discipline and focusing on creating long-term shareholder value.

(Inaudible) is a competitor, and we are making significant returns to shareholders.

We are making good progress with the construction of new projects.

For example, in the Gulf of Mexico, the Ursa, Princess, Multi Fruit project came on stream in July.

This will add some 30,000 barrels per day that extend the fields by another -- by further, 10 years to a field that has already produced over 400 million barrels.

Over the next 18 months or so, we expect to see start-up [out of four to five] important new projects.

In total, these projects should add capacity of over 250,000 barrels per day of oil and gas.

And 3.6 million (inaudible) per year of energy for Shell -- energy AM.

Despite the operating environment, we expect the (inaudible) from gas fired power project to come on stream in the next few months.

It's good to see a success story in this difficult area.

In deep water, we made good progress with the BC-10 development in Brazil and the (inaudible) project in the Gulf of Mexico.

We built (inaudible) in Finland and has turned a [220,000] (inaudible) facility has now arrived in Texas.

The BC-10 floating production and storage facility should leave Singapore for Brazil later this year.

These are high-tech projects, which will produce (inaudible) [depths] of 2,000 meters for complex reservoirs.

At (inaudible) we expect year-round oil production from this (inaudible).

L & G production should begin in early 2009.

And at Northwest Shell, Australia, (inaudible) expect first L & G from (inaudible) by the end of this year.

We have stepped up our spending in new growth options for the future.

Let me give you some of the highlights so far this year.

In down stream, shell has joined PetroChina and Qatar Petroleum International as a preferred partner to asses plants for a new refinery and petro chemical plant in China.

We have increased our stake in Iogen, which is a Canadian company evolved in cellulosic ethenol, a bio fuel made from (inaudible) that can be blended with gasoline.

This is a so-called second generation bio fuel.

In upstream, besides a preliminary agreement to buy into assets belonging Arrow energy and to development (inaudible) methane projects with them in Australia and across Asia.

Turning to exploration.

e have added important exploration acreage positions in the Turkey sea, the Gulf of Mexico, Peru, Columbia and Australia.

In total these (inaudible) cover more than 40,000 square kilometers which is roughly the size of the Netherlands.

We have made four discoveries in the first half of this year.

These wells were in the Hansfield area in the US onshore, and in offshore, Nigeria, Australia, and Brunei.

Our technical people are reviewing these results in detail with early indications are positive.

And we have launched an offer to buy (inaudible) a Canadian tight gas company for some 5.9 billion Canadian dollars.

Tight gas is an attractive play for shell.

Tight gas reservoirs, resources can be very large, and production can last for decades.

However, what we call reservoir quality is very poor.

So, the production flow rates from the wells can be very low.

So, there are some technical and economical challenges.

So, you need to have a manufacturing mentality, where you standardize the best technology and procedures of hundreds of wells and many years.

This is in order to keep the cost down.

Shell has a good track record in tight gas operations.

We start (inaudible) at Finedale with some small acquisition since 2001.

Since then we have grown production substantially.

And at the same set new standards on efficiency and environmental footprint in the area.

To put it simply, we hope to repeat the success that we have had at pine Dale with the (inaudible) assets.

I think overall we are making good progress with our strategy.

With that, let me hand over to Peter on the results in more details.

Yes, thanks, Jeroen, and hello, everybody.

We had another set of competitive results in the second quarter of '08.

Oil prices have continued to reach new highs in 2008.

However, industry refining and chemical margins declined in most regions quarter on quarter due to limited transfer of oil prices into product prices.

US refining margins saw the sharpest declines versus 2007 of the same quarter.

Industriative refining margins declined in the first week of July, while (inaudible) margins remained under pressure.

Excluding identified items, CCS earnings per share increased by some 15% compared to Q2 2007.

Excluding working capital movement, cash flow per share increased by 54% from Q2 2007.

During the second quarter, oil and gas commodity market prices increased significantly.

This had two accounting impacts.

Firstly, working capital increased by about 12 billion, mainly due to (inaudible) evaluation effects and increased net income net accounts receivable.

Secondly, there were no cash charges of some 750 million in oil products and gas and power, as required under IFRS accounting for commodity (inaudible).

We usually include these non-cash P & L impacts in results which are part of normal business for Shell and (inaudible) material.

I highlight these figures for you today, because the impacts are rather large in the quarter.

Dividend increase by 11% to (inaudible) per share, and share buyback for the quarter was 1.4 billion.

Bringing the total payout for the quarter of 3.8 billion.

Let me talk about the business performance in more detail.

Let's start with upstream.

Upstream earnings increased by 84% to $6.8 billion.

Shell oil and gas realization remained competitive compared to industry market price.

However, there are continued pressures industrywide from operating costs and tax.

Underlying quarter on quarter oil and gas volumes were unchanged from year ago levels.

Volumes were supported by stronger European gas demand, combined with growth from (inaudible) gas in Norway, (inaudible) in Russia, and other small ramp ups such as (inaudible) in the UK north sea.

These smaller projects can be very profitable with great payback in current oil market conditions.

Energy volumes decrease by 5% Q on Q due to the cargo delivery scheduling and some impact from plant maintenance and reduced features.

Q3 to Q3 energy volumes are expected to decline slightly due to the plan's maintenance.

In oil (inaudible) production declined (inaudible) a year ago levels with an earnings offset from higher prices.

(inaudible) production was reduced due to the mining operations in lower grade oil layers.

So far in Q3 '08, mining and operating performance has been satisfactory.

We expect Q3 production to be at similar levels to Q2.

Turning to down stream.

Down stream earnings declined by 70% to 958 million.

Weaker industry of (inaudible) margins in most regions led to a reduction of all products earnings.

At Shell, refining earnings were around 60% of all products, 0.9 billion earnings in the second quarter of 2008, compared to around 50% in Q2 '07.

Earnings from retail lock and B to B activities declined from year ago levels.

Marketing volumes increased by some 2%, excluding the impact of disposals, especially in (inaudible) where we have signed up new customers.

Refining availability in Q3 '08 is expected to be around 92%, a similar level to that of a year ago.

Chemical earnings were impacted by feed stock cost pressure, especially in the United States.

Chemicals availability in Q2 '08 was 95%, and we expect that availability in Q3 will be similar to a year ago levels, which was 94%.

We continue to make good progress with asset sales.

So, far this year, we have completed 2.7 billion of disposals in both up stream and down stream.

We have sold from 18,000 barrels of oil equivalent today of upstream production capacity this year, and I expect this to reach over 40,000 barrels of oil equivalent capacity per day by the end of the year, as disposals continue.

We have also completed the exit from the 300,000 barrels per day French refineries, and the pipeline assets in Canada.

Total disposable proceeds in '04 have reached over $28 billion.

So, expect disposal proceeds of -- to increase from 4 billion to 5 billion in 2008, as we have stepped up the pace in upstream.

Let's talk about cash.

Both the up stream and the down stream segments continue to generate cash flows above [their] capital requirements.

At a group level, operating cash inflow plus asset sales over the last 12 months was around $54 billion, including $5 billion from asset sales.

Over the same period, we invested some 45 billion in (inaudible) acquisitions and payout to shareholders.

So, the cash flow position remains a healthy one.

(Inaudible) stood at 14.5% at the end of the quarter.

That excludes the impact of (inaudible) acquisition and the Arrow deal, which we hope to close during the third quarter.

(Inaudible) at the end of the second quarter would have been around 18%, including the impact of Arrow and (inaudible) Mattiace.

This is a satisfactory balance sheet position.

You can see an update in 2008 capital spending plan on this chart.

This assumes the successful outcome of the (inaudible) deal.

The figures include the impact of industry inflation and exchange rates, whereas I have said before that there are considerable pressures in the industry.

It also includes acquisition costs, plus CapEx associated with these new assets, and some discretionary investments in short payout drilling activities.

We are making large investments for the future, which of course does impact near-term (inaudible).

Returns overall, and on an underlying basis, remain healthy.

Net capital spending since 2004 is some 74 billion, and we have returns more than 60 billion to shareholders in '04.

As you know, we are committed to get a good balance between investing in the business for the future and paying competitive returns back to our shareholders, which is a good sign of the confidence that we have in future profitability of the company.

So, with that, I return it to Jeroen.

Thank you, Peter.

So to recap, I think we have delivered another strong set of results in the second quarter, helped by good operational performance.

We have made good progress with the portfolio.

We have the largest investment program in Shell's history underway and one of the biggest in our industry.

Now our strategy is on track, operational excellence, competitive cash flow, capital discipline.

With that, let me stop here and of course we go now to your questions.

Operator you can open it for questions.

Thank you, sir.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question.

And the first question comes from Edward Westlake.

Please state your company name, followed by your question.

Yes, good afternoon.

It's Ed Westlake, Credit Suisse.

Two questions if I may.

You were talking about a new sort of stable higher plateau for CapEx, and I understand the reasons for the increase.

How much additional scope is there to hike CapEx even more to capture opportunities and are you seeing any signs that cost inflation is slowing?

And then secondly, just on the exploration side can presume from the appraisal success or this is the term significant, that these are above the sort of 100 million barrel range, or could you talk a bit more about the reserves?

Thanks turn on the.

Let me start and we'll see what Peter likes to add to that.

If we talk about capital expenditure, then in our thinking in Shell, we divide it in organic CapEx, and organic CapEx may include small acquisitions, real small ones, probably below your radar screen, and a kind of once off acquisitions.

If I take those organic investments, there we are very careful that we don't like to ramp them up too fast or the other way, if you would be on a too high level, you don't like to bring it back suddenly.

And why is that?

Because to spend this organic CapEx, you need a hold a (inaudible) of professionals working (inaudible) have you, and I think it is not good quality investments if you ramped up all the time (inaudible) up and down.

You never get that very high quality project management and so on.

Now, the balance, of course, can be large acquisitions, and of course you have to look where you like to be operator and non-operator.

So, (inaudible) not only balance sheet arguments of what we do with our organic CapEx.

Having said that, if you would like to have a relative pattern of organic CapEx in activity levels, then you have to look at your cash flows over time, the policies for returns to shareholders, and, of course, the strengths of your balance sheet.

That is how we look at it, and we feel that this year $35 to $36 billion, that compounds to the combination of the organic program, together with the net balance of the acquisitions we do and in the divestments.

Yes, the -- let me stop there.

Let me maybe just ad to the CapEx discussion.

So, I think if you look at organic spending plus asset sales, then I expect a relatively steady trend of net spending going forward, and Jeroen heightened the acquisition part, which is a very opportunistic way of looking at opportunities.

I think what I would like to add is the valuation around inflation for an exchange impact and timing effect, et cetera, but let me stay a little bit with inflation.

I think we have seen 20%, which is the number off of (inaudible) is quotes.

I have said previously it's around 10% when I look at what we do across the board in the company, and I think I still stay with the 10% in that sense.

But I would like to add that I still have a question mark how much of the inflation at higher oil prices, and we have seen a ramp up, I don't think that's already in the prices, so I would still have to have add a little bit as a question mark at this stage on how inflation will impact.

But I think as a kind of a general policy of organic spend (inaudible) relatively steady trend that will be the right number to go forward.

We said disposal is typically 2% to 3% of our capital employed, but it will decrease over time as we are ramping up the capital employed.

Your question about the reserves, I think this is a little bit too early to say.

I think we are happy with the progress so far, the first half a year from an exploration point of view.

We drill these things as big cats, quite clearly.

Now, we are in the data analysis in the four which we have mentioned, so I think you need to be with us for while on this before we can give you a better insight on what that means.

So, I think as we normally do, we give updates twice a year on the exploration, so we'll quite clearly come back on those once we have more information.

Thank you.

Thank you.

Next question, operator.

Thank you, sir, the next comes from (inaudible) please state your company name followed by your question.

Hi, good afternoon, gentlemen.

[Tepum] from Morgan Stanley.

A couple of questions, actually.

Just firstly, could you talk a little bit about the reasoning on the acquisition of the position you've taken on Arrow energy, and sort of in particular talk about your view in terms of the Asia Pac gas markets and how the L & G markets are evolving both shorter term and in the medium term.

And secondly, in terms of the CapEx increase of this year, you talk about opportunities in terms of -- in the short term.

Could you give a bit of flavor where you've seen those drilling opportunities and what sort of returns you're getting off them?

I take the second -- well, the first one, and then Peter can take the second one.

Arrow energy is again, this is what we call, another plane this unconventional gas.

This one is in Australia, and a bit is outside of Australia as I mentioned.

We think of -- if you look at the markets, as we see that in Asia, say if you look at the expected cost and technology development for these kind of unconventional gas, we see that as a strong, growing business.

So, implicitly, we say that the gas coming out of those developments is a combination of domestic gas and export gas.

Peter?

Okay.

I take the second one on the opportunities.

Yes, we have some areas where you can drill wells quickly and relatively cheaply and get a quick buyback (inaudible), especially in current market conditions.

Examples are US tide gas, for example, where we have kept 13 rigs, versus planned 10 rigs.

So, we have actually gone up there.

We had whole steam side track in Europe.

We have (inaudible) sea sub sea tide back and some others.

All of these deep projects are (inaudible) using normal criteria (inaudible), so from that point of view, they are obviously very, very profitable to us.

We don't give precise production guidance for these incremental drillings, but clearly we are pursuing them as much as we can, given current prices, and given current state of our balance sheet and the capacity which we have.

But they, too, actually rank and have to perform in the same way than all of the other projects, so they are screened in the same way, so we are not taking any kind of forward curves type of news on these.

They have to fly under normal criterias which we are screening.

Thank you, Tepum Next question, operator?

Thank you, sir.

The next question comes from John Rigby.

Please state your company name followed by your question.

Yes, it's John Rigby from UBS.

Two questions.

First is on the --

You are difficult to hear, John?

Can you do something with your telephone?

Can you hear me any better?

Yes, slightly.

Okay.

Sorry about that.

A quietly spoken guy.

Two things.

One on the disposal program.

I'm just interested to know how you kind of magic up further assets to sell.

You know, to what degree are you bringing forward disposals that may have happened in '09, '10, and what to degree to you have flexibility about what you sell, and what changed your mind about what is appropriate to be disposed of?

And sort of just following on from that, how should I think of the way it affects your up stream production outlook?

Can I think that your additional organic CapEx plus some of your acquisitions balance off against the capacity that you're selling through the -- the second question was a bout Nigeria, Nigeria train 6 in particular.

To what degree should we assume that essentially Nigeria L & G -- produces L & G under it's nameplate capacity, and what has to happen before we can assume that the L & G coming out of that facility look looks more like the potential that it can actually produce?

Okay.

Basically Peter shall answer the questions, we will see how we deal with Nigeria.

Yes?

Okay?

Our start (inaudible) is Nigeria.

So, all contracts so far, John, have to met from Nigeria L & G.

And we expect that to be the case for at least the rest of the year.

I'm referring to this really also because of the security situation.

So, obviously we can't foresee problems, but that's our current planning assumption.

The gas (inaudible) comes from a diversified rig with several fields and supplied pipelines.

So, as we have always expected, train 6 has been running this year at a reduced rate and there are some economic benefits as we switch (inaudible) gas into it when there is down time on the other trains.

So, the major new project to supply T-6 gas is (inaudible).

We are making some progress there on the organizations with funding, because that plays it all there on that project, and construction continues at the site of this stage.

We don't have a precise start-up date for the (inaudible) full capacity at L & G train 6, since there are (inaudible) insecurity uncertainties.

So, we have put it into the 2010 and 2011 time frame.

This assumes we are successful in the funding (inaudible) which are by the was progressing very well.

So several free exposed Shell and partner operated has been identified to back fee, current production, and to feed future growth.

So, but, the timing of the development is also depending, as I said already, for those projects on funding.

On the disposal side, as we said, and I said, this is part of our petroleum management, and there is a constant screening of our projects or our assets in that sense.

This is concentrating also from the market point of view, so prices being paid for the barrels which we have, et cetera.

So, I think you can take it at that we have to have more -- more assets in our divestment lease than we normally take, let's say, our forecast at the early part of the year, because you want to keep some flexibilities.

So, I wouldn't say that actually we are selling earlier our assets in 2008, and therefore in 2009 and 2010, would have different guidelines, so from that point of view, I stick to my 2% to 3% in that sense.

We have dominated a little bit more last year as you remember now, its a little bit less this year, kind of half, but we are still happy with the progress.

I think 40,000 barrel will be our using this year as coming out of the divestment process, so that you need to take into account when you look into this year's production.

I think it's a little bit too early, as I said already, what is quick payback, bring what's impact Nigeria had, et cetera, but when we go through the quarters, we will update you on these ones.

But I think if I look at the first half year, for example, we are seeing some (inaudible) uptick in -- or demand uptick in Q2, whether in the first half.

We are seeing a little bit better than Nigeria, but we have seen much higher prices and we have these divestment (inaudible), so so far we stay with the guidance or the description we have given for 2008 production.

Okay.

Thanks a lot.

Thanks, John.

Next question, operator.

Thank you sir.

The next question comes from Irene Himona.

Please state your company name followed by your question.

Good afternoon.

It's Irene Himona, (inaudible).

You decided to disclose for the first time the mark-to-market effect of derivatives due to the large size.

Should we expect ongoing quarterly disclosure of that?

And my other question relates to L & G.

Could you possibly tell us what percentage of cargos you diverting and has that changed year-on-year?

And my final question question on CapEx, in the face of the 50%increase that you mentioned in net spending since 2007, can you help me understand how I should interpret your reference to strong capital discipline?

Thank you.

All of those questions are for Peter.

Okay.

et me start with it's -- we had the L & G on the cargo.

I think I start at -- normally -- good afternoon, sorry for that.

We typically move some 55, 60 L & G cargos every quarter, most from our joint venture companies, so typically we are diverting 10% of cargoes, so that's kind of the rough estimate.

I can say that we had in the second quarter slightly more this year than last year, but it is not that many in that sense.

So, I think that was the one.

And two.

Could you repeat?

Mark-to-market.

Let me -- this is -- in our case, as I have always said, trading is based on physical.

So, we are coming out of our normal business stream and we are dealing with physicals where we put derivatives already in order to take the sharp price falls and movements out.

Typically, in a normal quarter, we have got 50 to 100 million swings on this one.

Normally GP is around 50 and a 100 million in oil product.

We do not -- we do see that a normal business for us, and these amounts of 50 to a 100, we just absorb them normally now in our normal results.

If you go significantly above that, so after 50 and 100, I think you can expect us to be very transparent and show these numbers.

Now, you obviously will think about Q3.

The way I look at Q3, having had these big ones this quarter and certainly on the oil product side, most of the contracts will expire somewhere in the third or the fourth quarter.

We will be very transparent on the effects there.

So, you can take it that we will be open on these ones.

But if it's normal business for us, then we will just keep it in our normal results.

It works for us from time to time, and again in some other cases.

Then you have had also the capital discipline one.

I think I take -- I'll give you two answers there, which is first a little bit of (inaudible) will be (inaudible) into '04.

We had a net CapEx spending, and I've always put emphasis on the fact that we are doing gross CapEx, we are doing acquisitions, we are doing divestments, so we are constantly turning over our portfolio, so that CapEx was 74 billion, payout was 60 billion.

And we had 20 (inaudible) billion of disposals.

The capital discipline process is actually quite strong, and I think you can see that, because the way we explained the gross CapEx, which is increasing by 2 billion, had actually three particular parts to it.

Some is inflation and effects, and that is actually experienced everywhere in the market.

And then we have said we have more CapEx because we have done certain acquisitions.

They come with CapEx.

Clearly, and the third one is short term opportunistic investments.

Now, the 2 billion, you can take it roughly 0.3 each, and I can tell you, they all are screened in the same way as we have screened our capital now for many years in that sense, a very rigorous process, and I think that's what I call capital discipline, maintaining the discipline in spending and maintaining the discipline on the returns and on balance sheet management.

Thank you.

Thank you, Irene.

Next question, operator.

And the next question comes from Colin Smith.

Please state your company name followed by your question.

Good afternoon, its Colin Smith from Dresdner Kleinwort .

My question just is on succession.

There has been quite a lot in the press, it looks very well informed, about succession to the CEO position, and obviously we're no less than six months from Rob Routs retirement, and wonder in you could comment on those reports and at least give us some visibility and when we may get some definite answer on what might happen

I'll give you a bit of same answer I give to the Shell staff because, and not only media, but of course Shell staff likes to speculate a bit at the coffee machines, as well.

And the first answer is how does it work, when we unified the company two years ago, we made it very clear that it is the primary lead for a chief executive succession or executive directors succession, its with the nominating committee.

Now, for good order, the nominating committee are all -- (inaudible) executive directors.

So, I am not part of the nominating committee.

Then the nominating committee advises the board, the total board, about succession, of course, if it is my own success I stay out of that debate.

And so that is the process.

Now, (inaudible) has the nominating committee made permanent basically two things, first of all, and they are correct, as I can confirm, (inaudible) I retire in the first of July next year, and Rob Routs, our down stream director retires at the end of this year.

The nominating committee itself as well we expect to announce the succession of the Chief Executive in the first quarter next year, and they have not said when they will announce the successor for (inaudible), but if you look at our past, we will do it before Rob, of course, before retires.

As I've said to staff, as well, this is not an American election.

There is no need to campaign or to gain votes.

There is no need to appoint running mates, and what have you, so you waste your time to speculate on it, and my request is, and I have been probably only partly successfully, don't spend your time on it, just wait on the day that the boards will announce who succeeds in which capacity.

That's my answer, Colin.

Thank you.

Okay.

Next question, operator.

And the next question comes from Lucas Herman.

Please state your company name, followed by your question.

Thanks very much gentlemen.

Good afternoon.

Its Lucas Herman with Deutsche Banc.

A few, if I might.

The first is that you've kindly taken the opportunity to inform us of how certain CapEx programs are developing, but you've omitted probably the two largest and most significant, mainly pearl and (inaudible) basket phase I.

So, I just wander again if you can make specific comments on the timing of those the projects.

Initially they were indicated first production in 2010, and also how CapEx is progressing, whether it is still within budget.

Second I'm following on, and I would really appreciate some serious consideration which I'm sure you'll give anyway.

If I look at the amount that you're investing in your business and that you've invested in your business over the last three years and I look at your share price performance, what seems to be -- what strikes one is that, you know, in part shareholders are voting with their feet, and by and large, after investing 60 billion or so of capital into your business over the last however long, the net increase you've seen in equity, or we see in the equity of Shell, is some 13 billion, and thats after allowing for buy backs.

I just wonder whether you really feel that you're getting the balance of the distribution of the very good cash that the business is generating at the moment, you know, correct between investment for the future and return to your shareholders at the present time?

And, thirdly, just a follow-up on inflation.

Something I don't quite under standard.

I'm sure that when you put your CapEx budgets forward for the year, you've got an inflation figure in mind.

If the inflation figure or if the CapEx is now expanding by 2 billion, of which a third is for inflation, is it simply correct to assume that actually inflation has been worse than you had anticipated?

Okay.

Good questions.

Peter start?

Okay.

Thanks for we questions, good afternoon.

Start with pearl and (inaudible) timing wise, I would tell you they're both on track.

We are not immune from inflation, or in the case of (inaudible) are also not immune of the strengthening of the Canadian dollars, so that gives us pressure.

But I think we are still in the area of where we have profitable projects, and in the (inaudible) case and the Pearl case, we are actually where we have been clearly when we took FID.

So, from that point, if you're progressing on track in both areas, which as I've said we are not immune.

From production impact, I think I can confirm that on the (inaudible) side I would say that the production impact has a full year will be firstly seen clearly in 2011.

The full-year production impact.

I think on the Pearl side, just take into account the same, in the sense that we have got a 12 month ramp up period, so, I think you will, then, towards the end of the -- clearly have the full ramp up and then see the total capacity certainly being there in 2012.

They are both timing-wise on track, but I think, you how this works from a ramping up basis, it takes some time, like we have in any other project.

On CapEx in general, I think you -- or let me talk about inflation.

You talked about the (inaudible) inflation, and yes indeed we take inflation into account.

We take inflation into account for various price texts quite clearly.

The price texts have been clearly going up more than will be anticipated, but I would say inflation is not our major job (inaudible), it is actually quite (inaudible) driven by foreign exchange.

That's where quite clearly the weakening of the dollar and the strengthening of some of the currencies where we invest have been more than what we anticipated.

So, I wouldn't put a (inaudible) or too much on the inflation for (inaudible) quite a bit on FX.

On the shareholder side, I think we try to keep the short, the medium, and the long-term balance in terms of capital investments for the longer term, which the right returns in order to have long-term shareholder value.

We are obviously building the project pipelines on a constant basis for the next five to 10 years, and that's what we are doing.

We have, as I said, returned a significant amount back to shareholders, and we have clearly always said that the priorities are dividends, which increases at least by inflation in US dollars.

It has the organic growth, and it has the balance sheet, which is kind of -- has some flexibility in it so that it can go through the cycle, and then we decide clearly on -- at the end, between special dividends, or dividend increases, buybacks, acquisition, organic growth, and we take further organic growth, and we take the yields out of this into account when we take position.

So, I think we are optimizing this well at the moment.

I would say, but there is no doubt over the last two or three years we have clearly with our big projects, which we are bringing on stream, and you have heard (inaudible) saying that we are looking at 250,000 barrels coming on stream now in the next 18 months, that we are now getting into the phase where significant barrels coming into production, which will deliver obviously, quite clearly, significant cash flows, and on top of that, we have got 3.6 million tons per year of L & G.

I think that answers all the questions, if I'm not a mistaken.

Thanks.

Yes, Lucas, the only thing I would like to add is the long term is every day, one day nearer.

So, we are coming there.

Next question, operator.

Thank you, sir.

The next question comes from Chad Potter.

Please state your company name followed by your question.

Hi, Chad Potter with RBC Capital Markets.

Two-prong question.

I guess first off, on the Hainesville Shell in the US, can you comment, provide a little additional detail and the discovery wells, kind of their location and test rates, as well as your acreage position in the play and activity plans.

And then second, just on a higher level, just your thoughts on shale plays in the US in general, and potential to make a concerted effort to step up activity here?

Yes.

Only, as a way of introduction is, that you see that we have been quite active, if I would include (inaudible) in all kinds of activities around natural gas in North America.

Now, I hand over to Peter to ask you for the precise figures you asked for.

Okay.

I think your question has a kind two parts of it, which is one on the production, and the other one of specifically on Hainesville.

I think if I look at tide gas today, Shell is around 80,000 barrels a day, and we still would maybe would add 20,000 to that, and then some 70,000 that will grow to some 70,000 by 2012, and obviously they're also ramping up in that sense Pine Dale, so I think it's becoming a very sizable business.

Now, in Hainesville, as well, Shell and (inaudible) have an exploration agreement to explore the significant (inaudible) position in North Louisiana (inaudible) in (inaudible) Shell gas plates.

Each part got 50% working interest there, covering roughly 300,000 acres of an area of mutual interest.

And we have an agreement which commits to attend well exploratory program.

Following that each party will have the right to operate 50% of the total acreage.

So, from that point of view, we have been very active there as well.

It's a little bit early to give you more details on the production there, but I would go as far as saying that the signs are actually positive of what we have seen so far from the wells, what flow there at the early stages.

So, we'll clearly update you later in the year again on this one.

But it's a very active area like Jeroen has said, and we are pleased with the progress we have made over the last 12 to 18 months.

Okay.

Did you guys operate those wells?

I'm sorry, we didn't hear that.

Say again?

Did you guys those wells, or were those in (inaudible) operated?

I guess you're referring to Hainesville?

I think I would call this as joint venture in that sense.

Okay.

Thank you.

Operator, next question.

And the next question comes from Neil McMahon.

Please state your company name followed by your question.

It's Neil McMahon with Sanford Bernstein.

Just a few quick questions.

Maybe just going back to refining and marketing, and the current trading conditions, maybe you could give us a sense of operational hedges that could have been in place during the -- during the second quarter.

What I mean is sort of purchasing crude and selling it forward on the futures market to sink in the timings of product, making from the refineries versus the crude purchases.

So, maybe if you could go into that, and if you could give us some indications on Nigeria, as well, in terms of how you're looking at that going forward, given the disruptions from the oil site, not the gas site, that's happened so far this year.

Let me start with Nigeria, Neil.

Then Peter can think a bit about your question about how those hedges, exactly what types of hedges they were.

In Nigeria, the problem is, is that the area where we operate the oil site, so SPDC the onshore, is as large a state as England.

And what we (inaudible) to see, if you put it in those terms, then you have a production disturbance or (inaudible) for security problems in New Castle, and (inaudible) you can continue to operate in Corn Wall, and then several months later later you work with the local chiefs, local government sometimes, (inaudible) government, and then you find a solution that people can work safely, and we start in New Castle, but then in the meantime, you've got a problem in Corn Wall.

So, there's not the same field out of action all the time.

So, we talk about west Nigeria, east Nigeria, specific pipelines, et cetera.

So, even if we say that the order of magnitude of oil out of production, say in the second quarter this year, if I compare that with the previous quarters, it is not the same fields, or the same lines.

Because all the time its a changing scene.

Now, how that will go forward, we don't know.

I like to recall you that we have substantial progress of less production [shut out] in the fourth quarter last year, but we lost part of that in the first half of this year.

And even then, if I look -- sorry, (inaudible) but I like to be open about that, is this Bonga attack.

There was an attack on an offshore production facility (inaudible) away from the coast.

This was relatively new.

This was taken extremely serious by all of those operators who have offshore facilities.

We talked to the government, of course the local measures taken, preventive measures.

We don't publicize that, of course, but we were quite taken back by it, especially by the safety and security concerns, because we had not expected that such a way.

If I look at the production impact of Bonga, that was taken over the second quarter, only 6,000 barrels per day.

So, that's mainly a safety concern.

I hand off to Peter for your other question.

Jeroen, just before Peter jumps in with, I'm sure a great explanation to tell me I'm probably wrong.

Just on -- back on Nigeria, given the fact that there doesn't seem to be one core area or one core fields at site all the time, maybe you could give us your feeling as a CEO in terms of, like, what is going on in the evolution of getting the whole province sorted?

It really doesn't appear that a solution is anywhere imminent in the next few years, and this is all thinking about how we should forecast oil production from Nigeria going forward, at least in the near term.

Yea, I don't -- I'm being very open about I it, Neil, I don't dare to give any guidance on that.

What I still see is that, is that of course, you have a change from government from one President to the other President.

And let's hope this President is finally reconfirmed in this job in coming September and (inaudible) to Nigeria is that process will certainly not go longer.

I have to say we have had many contacts, including the most senior (inaudible) in Nigeria this year.

The eyes of them is really on the ball, but this is very complex to get it right, and I think there is not a certain moment that they get it right, but it is not true to say that people don't do anything, or they are not actively involved in thinking and trying to do things to improve that security situation.

There's very good awareness how serious is this.

That's of course where it starts, and now we need the follow through of basically good ideas that the government on the various levers that they have.

Thanks.

Peter?

Yes.

Maybe just to add to Nigeria, I'll give you some numbers so that you know where we are from a barrels point of view at this stage.

So, average (inaudible) in Q2 was 195,000 barrels a day.

The first three weeks, we're talking Shell share now, the first three weeks were 178,000.

What happened earlier this week with the pipeline blowups, which we had, that would add another 40,000, 42,000 Shell share to it.

So, that's a little bit of what we are dealing with at this stage, and may also explain why we are slightly careful in how we describe our annual production numbers.

On your first question, which is obviously could be an evening filling question to discuss that, I think let me just be clear on the one side, we are not like some, let's say, smaller or medium term players.

We are not selling our production forward, and actually take the prices and hedge them in.

So, that's not our business.

We are big enough to actually just take the pricing risk from that side.

But then quite clearly on the refining and marketing sides, we have typically activities in these businesses that are backed by some physical products, and in some areas, we need actually, facilities to storage -- like storage and pipeline.

But it is a business really dominated by physical.

So, I think it will be normal as part of risk management we set up some derivatives, hedge contracts on the products which product us from very large movements.

I think this is very standard practice, so I would use the example you store in summer and you sell forward into the winter, and you have got the margin there, et cetera.

And then there IFRS rules, we have no other choice than to do the counting as we have done it.

And I already said while these things are per quarter by and for GP and for (inaudible) product, I think that's as far as I could go, so you should not see us as a big kind of hedging company taking the price risks out of our business.

We are quite sizable than we can actually absorb the prices.

Great thanks, maybe Peter just back on the IFRS.

It's certainly -- it's not made it any easier forecasting numbers for companies with exposures to long term contracts like UK gas, et cetera.

Have you given IFRS any feedback from a CEO point of view on the volatility this causes to numbers, and maybe if you could see any discussions that have been going on with regards to mark-to-market a kind thing of long term contracts?

Yes, maybe two answers here.

Let's be clear that at the US (inaudible) I've got similar issues, so it's not just IFRS.

I think, in accounting words it is could all make reality, what I call it, and yet we have made it clear what we think about the volatility, and I know some of my colleagues have done the same.

So, I just tell you when we look at our results internally, you look at economic reality, and not at the quarter end kind of driving price, and its just as a side comment you have seen on the whole reserves discussion, and the SEC now is also rethinking of not using year-end pricing, using something a little bit wider.

So, quite clearly this is an issue, and what you get from me is just well, it is big, and you need to know it, and then I will tell you, but I can't take the market volatility away from you, but yes we are talking with the corresponding kind of authorities, but I mine you guys, we all sit in banks and try to value accounting, et cetera, is a big issue there as well.

So, it's not just the oil industry, it is a wider issue when I think everybody is focusing on.

Thanks.

Neil?

I -- if I made add a personal comment at this teleconference, I think this is really, even if it is already difficult for analysts to forecast the figures or to analyze the figures, try to think about the normal media.

They hear figures from today of 11.6, then you go to CCS, then they hear a figure of 7.9, and then you take a usual of 7.8, and then you talk to our investor relations, and you say this is how you have to see it, in the line figures 8.6.

This does not help.

Not only the public, it even doesn't help me, and I fully -- I have a lot of sympathy for your comment.

Can we not make a better system?

This is just a personal reflection.

So, we go to I in next question, operator.

And the next question comes from Mark Iannotti.

Please state your company name followed by your question.

Afternoon gentleman, it's Mark at Merrill Lynch.

A couple of questions.

You attribute a portion of your 2 billion increase in CapEx to step up in -- in drilling activities, where you can get quick feedback.

Can you maybe just give us a little bit more detail about how and where you're drilling, how long you could continue to drill, assuming prices stay high, even what are the opportunities, and thirdly what difference it can make in the short term to what's been flat volumes now for some considerable time?

And then secondly, maybe this is a question for the management next year, but I'll ask it anyway.

(Inaudible) this afternoon has admitted their very much smaller integrated in your sales, has indicated that it's going to start a review on the potential merits this year, all those (inaudible) emerging the business.

Are there are any sort of concerns in what you would consider this type of review, and if you've done one, what were your conclusions?

Yes, let me start with the second, and Peter will do the first.

If I -- it just depends on your business model for the future, Mark, is that if I look at Shell, we already started quite some years ago now, at least this is all about technology, to make sure that we are at the forefront of technologies.

And then the ability to do what we call large, integrated projects, not only to construct them, but to run them as well.

All the time this world wide learnings.

Take the examples, I give you three examples, like pearl, the gas to liquids project in Qatar.

Take the oil sands and what it needs to have an acceptable footprint working at the minimum of oil sands, and take things that will come over time, sour gas.

I could have added Shell gas and further conventional gas.

What you see all of the time there that we combine up stream and down stream know how, and we combine them with basically (inaudible) operational experience of new technology we develop ourselves.

So, what I try to say in the business model that we have chosen, we strongly believe in an integrated company.

Now, other companies may prefer to play different business models.

That's their view.

Having said that, and that I think Pete will stay clear on that, having chosen for a large integrated business model, it does not rule out that from time to time you sell certain parts of the company, as we have been very active over the past years, and basically we indicate we expect that to continue.

So, that's how we look at the business model.

Peter, the question about the drilling activities and how long you need for prices.

Yes, Mark, thanks for that question.

I think that's a little bit too -- too long term of a question, so I'm not going forward and keep you kind of price assumptions.

But I would like to use the Pine Dale example of running 13 rigs, for example, versus 10 rigs.

The beauty in all of this, is you can run it.

If you want to slow it down because prices aren't (inaudible) where they are, you can actually slow down, and think that's exactly what we are looking for.

So, we have some of this price going.

Some of the work which we are doing is then also related to appraisals, so, we drill these wells, we look at this, and then we take a further view on how long we should continue this one.

So, this does add quite a bit of flexibility to us.

It does add -- or gives us, lets say short term based pay backs, and that's what we are driving.

So, I've used Pine Dale as an example, but quite clearly we have some others.

We already talked about some other North American (inaudible) ,business like in Hainesville, et cetera, where you can apply, obviously, exactly the same.

So, that is part of our strategy to get more flexibility to that, that you can actually do more short term payback, but when times get tough, you can actually also again slow down if you want to.

I realize there are probably still probably some questions left.

I would like to say it will be very hard stopping seven minutes from now.

So, we will try to give the remaining questions relatively short answers.

Back to you, operator.

And the next question comes from Mark Gillman.

Please state your company name followed by your question.

The Benchmark Company.

Good afternoon, gentlemen, a couple of things.

First, Peter, I believe you called our attention previously to the potential implications of L & G contract exploration rollover and renegotiation.

Could you give us a bit of an update and a quantification if you can, as to anything that's occurred in this regard over the course of first half of the year?

Yes, Mark, thanks for the question.

Yes, this is indeed ongoing, on a permanent basis, but because of commercial kind of confidentialities, I can't actually start to talk about individual areas of contracts.

Many of these negotiations are also actually led by our joint venture company, so that makes it even a little bit more difficult to talk about it.

But I can repeat that this in full swing, given that where prices are and how contracts are written, so this is a positive upside for us and that continues.

Okay, Peter, could I ask you just to clarifying something that I thought I heard in your direct remarks?

Did you suggest that Q3 volumes were both L&G sales and Benjamin production were likely to be roughly in line with Q2?

And if you did, I'm not sure I quite understand, given the abnormally low levels in Q2 for both of those items?

Yes, indeed, I did, and we -- I have said that in the L&G case, have maintenance coming into the third quarter, so this is according to our plans just normal, and that -- so these planned maintenance are higher than last year, and I think that's why I wanted to flag it, because that may not be known entirely.

And that we are working through our lower levels in the mining.

We would expect this to be more or less on a similar level, using the same royalty and calculations as we have used in Q2.

But I think I would also like to say that we are digging ourselves through that part in the mining, and once we are out on the other side, we will let you know.

Just one more, if I could, please.

You have some exploratory success in the Eastern Gulf of Mexico, in terms of Vicksburg, Shiloh, I think you're drilling Fredericksburg currently, which you did not mention.

How -- how do you stand in terms of a commercial development project in the eastern gulf with the successes you've had?

I think Mark on this one, I can't go into details at this stage, so I suggest you call our IR guys to see they can give you any more details on that one, because I have nothing in my material at this stage.

Okay.

Finally, just one more.

Is it correct you and Exxon have pulled the Infinion sale, which previously I believe you intended to sell?

If so, if it's true, well, why did you reach that decision?

We have done a strategic review with Exxon, and after that strategic review and certainly market testing, we have decided to actually continue to operate ourselves, that means Exxon and Shell.

Okay, Peter.

Thanks very much.

Thank you, Mark.

Operator, the next question.

And the next question comes from Lucy Haskins.

Please state your company name followed by your question.

Good afternoon.

Lucy Haskins from Lehman Brothers.

Perhaps, if it allows you a chance to wrap up a actually, [your own], because what I was going to ask you about was an outlook statement in the near term.

And in the past, you've expressed some satisfaction that demand has been relatively robust to higher prices.

Is that still your view obviously one of your competitors was perhaps a bit more bearish about the near term outlook particularly with reference to the down stream product base.

Thanks, Lucy.

We (inaudible) deliberately that we see a reaction to the high prices, and that reaction is basically North America States and Europe.

Of course far east is a different story.

If you look at our worldwide market share, we -- yes, we are some millions of barrels in a total market of 85 millions of barrels, so a lot of our outlook, if I look at the margin side, is, of course, yes, if it is a total, let's say if you get substantially more supply than the margins will suffer.

But we are relatively a worldwide market share, we are not that big.

So, for us is simply local tasks, is simply to do it especially in the down stream, better than the competition.

That's how we make our money.

And I can understand that, but is the problem not that you may be competitive relative to just a very poor -- I mean what would be your view about the general market trend over the course of the year

I have learned some good lessons over the past years.

Usually thought I had a pretty good and solid forecast, it turned out not be true, Lucy, so I've been more modest, and I try to guess all of the people in our company are prepared for all situations and I can give you an example.

Think about refining.

(Inaudible), far east, increased demands, for new production capacity coming on stream?

How will it work out?

What you see in the west, there, of course, yes, maybe some lower demands.

You see demand shifts, gasoline to middle distillates.

Different companies are in a different place for that.

By the way, we are in a quite good place in such a shift.

On the other hand, there's hardly any expansion of the refining capacity or even close or smaller ones.

How it all work out, and how markets will anticipate on that as well is very tough to see.

Being who I am, I always try to assume, not to be optimistic, but our company should be prepared for all different kinds of markets.

Operator, may I ask you to go to the last question?

Thank you, sir.

Thank you.

And the last question today comes from Jason Kenny.

Please state your company name followed by your question.

Hello its Jason from ING.

Glad to be the last, I suppose.

I was just wondering if you could enlighten us as the future operator of cash again, if you'd any initial thoughts on CapEx for that first phase development, and then, secondly, I'm still curious about the Infineon exercise.

Do you envision you being 100% of Infinion in the future, or are you likely to exit from that?

No, I think detailed capital (inaudible) would cash it down than what was even exactly phase one or phase two would be an experimental phase.

We have not given -- at least this company has not given any specific guidance, nor do we intend to do that.

Of course we are big, and as you can see (inaudible) picked up, at this moment the whole joint venture is under restructuring, and the various shareholders will pick up various parts to do in the future, but even there all the details have still have to work out.

Infineon, it is a joint venture for the years, we have reviewed it, and I think that as far as I can see, and I know at this moment the intention is that we run together with Exxon, as we continue now to run it.

Okay.

Sorry to -- but I'm under time pressure.

But let me close.

But before I close this conference call, thank you, of course, for listening, thank you for your questions.

The third quarter results meeting of announcement and this teleconference, will be on October, 30.

Okay, and Peter basically, as we do it for the -- for the -- for the first and the third quarter, basically Peter will do this teleconference call.

Thank you very much.

Conference closed.

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

Thank you for participating.

You may now disconnect.