殼牌 (SHEL) 2008 Q4 法說會逐字稿

Welcome to the Royal Dutch Shell Q4 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.

Thank you.

Hello, welcome to the Royal Dutch Shell first quarter full year 2008 results presentation.

I sit here with Peter Voser.

I take you through the results in our portfolio activities.

First, please take a moment to read the cautionary statement.

Thank you.

Now I turn to the highlights.

We delivered another (inaudible) competitive results in 2008.

Earnings were [underpinned] by satisfactory operating performance, the key to capital discipline in the Company.

For 2008 net capital spending was $32 billion and returns to shareholders were $13 billion.

We made good progress on portfolio by adding new upstream resources and rebalancing downstream with new investments on some asset sales.

We are taking a prudent approach to the economic downturn.

This means maintaining the core strategy to add one million barrels per day upstream and 300,000 barrels per day downstream, and getting the right balance between affordability and investment.

Net spending for 2009 will be $31 billion to $32 billion and we have made some tough choices in this discretionary areas.

I'm preannouncing the first quarter '09 dividend today which is $0.42 per share, that is an increase of 5%.

Dividends is a signal of confidence in our future.

As I told you at the third quarter stage, we are steering the Shell ship through rough waters and so far okay.

Let me make some comments on the industry landscape.

We see a reflection in '09.

The amount of energy deteriorated as we ran through the fourth quarter.

The oil industry is now facing some significant challenges.

Downstream conditions, that's refined, marketing and petrochemicals are as (inaudible) now as during the early 2000s.

And oil prices are better at the level than we have in 2004.

Okay.

So that's the picture.

At Shell we don't complain about it.

We are working hard to cope with this new environment.

I think you are all familiar with the roller coaster ride of oil prices.

Basically there was quite a (inaudible) over the last few years and now we are back at around 40.

And if you look at the cost side, the industry costs are about double the 2004 levels.

So oil prices flat, costs are double.

That's a hard landing and it puts a lot of pressure on the industry.

We do expect costs to come down.

And this is already happening in some of the commodity segments like on shore rigs and steel.

But this does take time, typically 12 to 18 months in our industry, and after some help and not just below our utilization rates to take a bit of (inaudible).

So, how do we manage these cycles?

We screen our projects in a grid of low (inaudible) price scenarios and we don't get carried away at the peaks and troughs.

Most of our FIDs, final investment decisions, we're taking-- were taken in a lower price environment and we typically try to lock in about 70% of capital costs where we take FID.

This is something we learned from the cost algorithms that we have had in the past.

We avoided the worst of the (inaudible) inflation recently and at the same time this (inaudible) this gives us some upside in the market if prices come down.

In addition, we have deliberately postponed new FIDs in the last year or so into the peak of the cost cycle.

We can come back to these projects later when price and technology has moved on.

This is all normal behavior in a cyclical business like Shell.

And how are we looking at the domestic change in conditions as we come into '09?

This is all about how we manage affordability.

Of costs, we have an ongoing cost focus in Shell and cost focus is not new for us.

Of course, in this environment, there are new opportunities to take out costs and we are sharpening the focus.

For example in the service company area, the supply chain and our ongoing [organization], as we focus on [capping] to top quartile.

On the capital spending side, a substantial part of our '09/2010 CapEx is already committed to post FID projects and maintenance and we don't slow down there.

As we look further into the future of the '09/2010, that the committed CapEx levels do fold depending on the pace at which you take new FIDs.

So for 2009 budgeting we will of course continue with committed projects which we have slowed down some discretionary investments and pushed back potential 2009 FIDs.

This gives us the opportunity to look for lower costs in the market and to manage affordability in '09 and 2010.

Having a conservative balance sheet is key and I feel good about that.

In the end, this is all about using the flexibility that we have created in the portfolio and the balance sheet and choices between spending restraint and growth.

Sometimes these are tough choices.

Now, let me turn to our portfolio.

We have a series of start ups across the year which contributed some 80,000 barrels per day to quarter four '08 production as we have made good progress on creating new long term positions in '08.

One example is in (inaudible) gas with the (inaudible).

That example is some 40,000 square kilometers of the new exploration area worldwide.

40,000 square kilometers is the size of the Netherlands.

We have made good progress as our large new projects in '08 and we are on track to add one million barrel per day upstream capacity and 300,000 barrels per day downstream.

Let me update you on one of these new projects, Sakhalin, the oil and liquefied gas project in the east coast of Russia.

I'm very pleased with the performance of Sakhalin Energy and the relationships we have with Gazprom.

Shell, as you know, has a 27.5% of the Sakhalin project.

As we will produce 400,000 barrels per oil equivalent per day with LNG capacity of 9.6 million tons per year.

Off shore the project has three production platforms.

On shore, there are two pipelines, one for oil, one for gas that runs for 800 kilometers each.

That's the equivalent of the distance from the (inaudible) to Milan.

We have built Russia's first energy plant and explore facilities.

All of these have been built to high engineering, safety and environmental standards and some in the most difficult operating conditions in the world.

In fact, we got just recently a couple of distinguishments about that.

Year around oil production has begun at Sakhalin.

Gas from the pipeline arrived at LNG plant in December and commissioning is going well.

The joint venture company has spent some $30 billion on this project and they will start to exploit LNG around the end of the first quarter '09.

Turning to pay out, firstly,on share buy backs.

This is really an up cycle activity.

And we stopped buy backs last November as we entered the down cycle.

But it is the dividend there I put my focus.

Growth in dividend signals our confidence in profitability in future and I'm extremely committed in this area.

Shell has a long history of progressive dividends and I am pleased that we continue with that with an 11% increase for '08 and a 5% announced today for the first quarter '09.

Now let me hand you over to Peter Voser and Peter will take you through the fourth quarter results in more detail.

Peter?

Thanks, Jeroen.

Let's start by making some comments on the macro environment.

Macro conditions deteriorated sharply in fourth quarter 2008 and continued to be under pressure so far in 2009.

Average oil prices in the fourth quarter were some $32 lower than the year ago levels.

Market LNG prices were higher and the lower prices in Q4 due to pricing lag affect.

However we do expect LNG prices to step down in Q1 '09.

The industry is seeing the impact of weaker demands across the board and especially downstream where volumes are weak.

On the refining side, US margins declined although Asian and our European margins did increase reflecting strong (inaudible) and further supported by some capacity outages.

For chemicals, US and Europe benefited from falling feed stock costs in Europe and in the US but were weak in Asia.

The macroenvironment today is clearly a challenge for the industry.

Now, let me turn to Q4 '08 financial performance in more detail.

So excluding identified items, CCS earnings were $3.9 billion and earnings per share decreased by some 30% compared to Q4 '07.

The quarter was characterized by lower earnings in both upstream and downstream.

Operating cash flow doubled with a large flow back from working capital.

As Jeroen said our rate dividends increased by 11% in US dollars which is the currency we set it.

Now let me talk about the business performance in more detail.

First, on the upstream.

Upstream earnings decreased by almost 30% to $3.4 billion in Q4 '08.

There are continuing pressures in industry wide from operating costs and tax and margins are under pressure.

Oil and gas production was essentially flat versus a year ago level.

Fourth quarter oil and gas production was boosted by some 80,000 barrel per day from a series of fee start ups both large and small over the last year.

These new growth styles help to offset the impact of plant fees decline and the impact from the Q3 hurricanes.

LNG (inaudible) volumes increased by 1% and include a new capacity from Australia which offsets the impact of gas supply shortages in Nigeria.

In Nigeria we have taken the SPDC Soku gas processing plant offline in December to repair damage caused by the security situation.

Shell's share of production from Soku is about 70,000 barrels per day and there is an impact from this in Nigeria Energy where volumes have been reduced.

So we estimate that Shell (inaudible) volumes at Nigeria LNG are reduced by about 150,000 tons per month until Soku comes back on line.

Let's go to (inaudible) some earnings.

They declined by 25% to $0.8 billion.

[Headline] margins were resilient in some regions.

However, earnings were impacted by lower demands which resulted in reduced sales volumes.

Demand pictured deteriorated across Q4 and remains under pressure in Q1.

Defining earnings were around $70 million in the fourth quarter of '08 compared to a loss of $30 million in Q4 '07.

Refinery availability was lower than in Q4 '07 mainly due to heavy turn around schedule and the on plant downtime.

Refining availability in Q1 '09 is expected to be around 90% and about 94% for chemicals.

So those are the results.

Now, turning to disposal strategy.

We received some $7 billion from disposals in '08 exceeding our target of $5 billion.

Most of these deeds were finalized mid-year before the markets deteriorated and we achieved higher prices for many of the assets than we had expected when we opened the (inaudible).

Upstream we sold feeds that will reduce '09 production by some 50,000 barrels per day or about 1.5% of '08s production.

At (inaudible) we sold some 340,000 barrels per day of refining capacity or about 8% of our total.

So we are pleased to have sold these non core positions across the peak of the cycle.

Totally disposal now proceeds since '04 have now reached some $33 billion which is about 25% of average capital employed.

Now, let's look at cash.

Upstream and downstream segments have both generated cash flow in excess of capital spending requirements.

At the group level the cash inflow for '08 was well balanced against outflow.

(Inaudible) is now sitting at 7.5% or 23% including certain off balance sheet items.

Now, let's turn to '09 on the spending plans.

Net spending for '08 was $32 billion which is below the $35 billion, $36 billion that we had started it for last year.

The difference for '08 comes mainly on the disposal side where we have achieved higher prices and completion rates than we had expected.

For '09 disposals the market is very weak so we are not assuming any further activity at this stage.

Overall for '09 we are expecting around $31 billion to $32 billion of spending.

This is a more modest increase than in prior years balancing on the one side Shell's commitments to projects on the construction and growth and on the other side, the more challenging economic landscape in '09.

You can see that after several years of $5 billion increases in organic spending, the spending levels are stabilizing.

Future spending levels will depend on the timing of new FIDs and our growth aspirations.

With that, I fall back to you and summarize.

Thank you, Peter.

I recap.

We have delivered satisfactory performance despite pressure on demand due to a weaker global economy.

Our strategy remains to pay competitive and pay progressive dividends and to make significant investments in the Company for the future profitability.

Industry conditions remain challenging and we continue with the focus on capital discipline in Shell by taking a prudent approach to the economic downturn.

We are steering the Shell ship through rough waters and so far okay.

Before we go into Q&A, can I remind you that we are having a strategy presentation on the 17th of March.

That is where we are planning to give you updates on reserves, exploration and our portfolio in more detail.

So please could you leave your questions in those areas until the 17th of March.

Also, before we go into Q&A, we have some good feedback from some of you that the question-and-answer session is too long.

Therefore, please limit yourselves to one or a maximum of two questions each so everyone has the opportunity to ask a question.

Peter and I, we will try to give short answers and we will go around again if there is time to spend.

Operator, please poll for the questions.

Thank you, sir.

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

(Operator Instructions) And the first question today comes from Michele Della Vigna from Goldman Sachs.

Please go ahead with your question.

Hi, it's Michele Della Vigna.

I will ask only one question.

On the operating working capital movement which was very large in Q4, what should we expect in Q1 if the oil price stays at the current level?

Peter?

I thanks for the question.

I think from an oil price perspective, if the prices are staying the same compared to where they have been towards the end of the year, I think the affect is actually not going to be too big again.

I think there will be a little bit but not that much.

As you remember in Q3 I said actually that we will have some affect in Q4 but that has quite clearly been accelerated by the falling price.

So I think there is a little bit still to come but it is not going to be too much.

Thanks.

Next question, operator.

Thank you, sir.

The next question comes from Neil McMahon from Sanford Bernstein.

Please go ahead with your question.

Thank you.

Just two quick ones hopefully.

First of all, in terms of previous acquisitions, have-- you've looked at North American unconventional gas or tight gas acquisitions.

Anything sort of planned for this year in terms of are you still screening companies that stay under the $5 billion mark?

That is one question.

You said you had two questions.

Right, well I'll keep going then.

And the second one is I think given the entire markets' focus on the reserve write-off issue, doesn't look like you took any substantial write-offs in terms of any balance sheet capital or any significant amount of reserves.

Maybe you could just run through what you were doing there?

Thanks, Neil.

I'll do the first question, Peter does the second.

Tight gas, if I look at our total North American position, normal gas tight gas, what you'll have is that I feel for the past say five or six years that we came from a relatively near gap in our portfolio to quite an acceptable position.

We did that in bits and pieces and we've concentrated basically on fields where we hope to have basically a kind of [agility] flow of life and where we can work either with our technology for a good profitability-- productivity, think about Pinedale.

Having said that, we have the largely (inaudible) in my view from the portfolio a relative weak position.

So taking it forward is basically, we are normal businessmen, yes if you get additional very good opportunities we should certainly consider that.

But then it has to rank vis-a-vis other opportunities, sorry vis-a vis, other possibilities what we can do with our money.

Peter for the second part of the question.

Yes, thanks Veer.

This is all about impairment.

This is about fair value testing for assets.

The way we do it is we test these things normally obviously for the long-term because that's the nature of assets we have.

We test these things at various price sets and see how they perform.

If it's downstream assets we also take the cyclicality of the refining margin but also the sharper than expected demands, slow down into accounts.

So we looked at all of our assets.

We also test the goodwill and we have the fuel but minor impairments which we have recorded in the fourth quarter.

The biggest one being in North America and you have seen that in the results.

So all in all, tested all the assets and went through the books and we are pleased with the values we have of those assets reflecting our cautious and conservative policy on the investment side.

Next question, operator.

Thank you.

Thank you, sir.

The next question comes from Mark Iannotti from Merrill Lynch.

Please go ahead with your question.

Afternoon, gentlemen.

A couple of questions.

Firstly on the US upstream, the number looks pretty weak and the realizations look quite poor.

Can you maybe just make some comments on the possible realizations, and secondly whether you're happy with the performance of this business?

And secondly just looking at the (inaudible) calculation in the back of the statement.

You're offshoring an $11.8 billion underfunded pension not versus zero last year.

Can you make any comments on your desire or requirement under Dutch law to start making payments back into the fund?

Yes, again first question I do, second question Peter.

You ask if you look at the upstream position, fourth quarter you had quite an impact on the going impact as well of the hurricanes.

You have to take that into account.

So we had not only that for during the hurricane but it simply takes time to get the production back up to where it was.

I think that's the major impact.

If I look at the total US production figures here, and if I assume that it comes back, I think we are where we should be.

Peter, the pension fund.

Yes, hi Mark, thanks for the question.

First let me explain the $11.8 billion because it's important to understand that because it's actually an elimination of balance sheet item.

We charged $3.5 billion for post retirement health here and in it is well mainly in North America and the US.

So what we call the pension unfunded position is $8.3 billion.

This is a snapshot obviously as you know per at the end of the year.

To put that a little bit into perspective over the last 10 years, we had roughly $10 billion over funding or surface funding between '98 and 2001.

We were $3 billion negative 2002 to 2005.

'06 and '07 we were $10 billion plus.

And each time you can see when the equity market is actually accelerating or when it is crashing in a way, obviously you get these swings.

But this is for the long-term.

Now, this is the sum of 50, more than 50 pension funds across the world with all their legislation, et cetera.

So you have quite a variety of funding needs which are coming out of this.

Obviously at Shell, we will comply with our legal obligations.

You asked about the Dutch fund, the Dutch regulations are pretty clear.

You have got three years to get to 105 coverage ratio and you have got longer term than actually for further kinds to increase your coverage ratios.

In all of these countries including in Holland, there are huge discussions at this stage in with the regulators or among the regulators on what rules they really want to have in the near term and in the let's say the medium term.

So it's a picture which is not very clear at this stage and we will have to see how this unfolds over the next few years.

If you actually go back over the last seven, eight years in the early part of the decade you had some $300 million funding every year more or less and then later on we had $1.5 billion every year.

So we are used to these kind of swings and we built that normal into our cash flow and into the short-term forecast for the next few years.

So this is nothing new for us, and we manage that, we will not change our long-term investment strategy which has equity owned in cash and real estate in it.

Okay, thanks.

Thank you for your question, Mark.

Operator next question.

And the next question comes from Irene Himona from Exane BNP Paribas.

Please go ahead with your question.

Good afternoon.

I had two questions, please.

First, you mentioned some tough choices on the discretionary part of spending.

I wonder if you could give us some examples of the type of projects in this environment that would go?

And also after 2020, sorry 2010, can you say roughly what discretionary CapEx would be?

And my second question, in 2009 in terms of production trends, could you give us some guidance between oil versus gas, please?

Thank you.

Yes, I see-- thanks, Irene that Peter has the whole list of projects already in front of him.

So I suggest he takes all of your questions.

Okay.

Hi, Irene.

Projects what we have done, we have a few things which we postponed, I give you Gulf of Mexico, (inaudible) and the announced already the second expansion to the oil sands.

So where we go more to be bottle necking, that was one.

We refaced Common Creek which on the more heavy oil side and we also refaced PS in the UK for example.

This is on top of seven or eight projects which we have done in '08 and in '07.

So this is actually not new for us.

We are quite in that kind of let's say prioritization mode every year.

That's why I said many times we have actually more projects than what we want to spend at this stage.

2010 CapEx and the split, I think (inaudible) said we will go ahead with our projects where we have CapEx committed.

You know how our projects are coming on stream.

This year we have Sakhalin towards the end of the year we have got BC-10 coming, (inaudible) coming.

So you have all these projects next year then the next.

So from that point you view that (inaudible) part obviously comes down.

We will now see how many new FIDs we take and how we are refilling the CapEx side.

So there's quite a bit of discretionary going to come but quite clearly we want to grow the Company as well so we will take a look at that.

But at this stage, in this environment I will not give you a splinter.

Your third one on the production, I will-- we don't do actually the split between oil and gas.

What I can give you is actually that the production out for '09 is similar to '08.

It's pretty assumed flat or about flat with a chance of a slight decline.

Depending on the, and you know all these ifs.

That's weather related, that's OPEC related, that is Nigeria related.

But after that I will view at this stage.

Thank you very much.

Next question.

Thank you, sir.

The next question comes from Kim Fustier from JPMorgan.

Please go ahead with your question.

Yes, hi good afternoon, gentlemen.

Just two questions on marketing.

Obviously a large proportion of our RNM profits came from marketing this quarter.

Now how much of this was due to the temporary time lag effects?

And how do you see your marketing margins stabilizing so far in 1Q?

And also in terms of sales volumes, it seems like like for like sales they were done 3% year-on-year.

That's slightly per than the average drop in the OECD which was closed at 5% I think.

So can you comment on your market share, whether it's increased at all?

Thank you.

der Veer?

I start with the second part of your question, Kim.

Is that the 3%, this is split -- this it is not an easy figure to calculate because we sold certain positions.

It is too early to say whether you are gaining or losing market share.

Having said that, if you compare apples-to-apples, we think it was guided at 3% in OECD, but this is not a very precise figure.

Needless to say that the economy as it is now and as it developed at the end of last year, and then we see that in deed lower demand and much more drastic figures you see at the capital side because destocking had placed an even more important role.

I think that if you always look back then you may have in theory that the finally march is a marketing margins can move independent from each other.

That is not what we see.

You have to realize that a lot of the devalue of the stocks is (inaudible) of the figures.

So we don't know how the prices will develop but we expect basically a quite gloomy environment for the downstream until either the economy starts to recover or you have even the case that, let's say the most expensive capacity will be closed down.

That's great.

Thank you.

Thank you, Kim.

Operator, next question.

And the next question comes from Jon Rigby from UBS.

Please go ahead with your question.

Yes, thanks.

Two questions.

The first is on the US downstream.

This direction of travel of profitability seems pretty worrying even if you clean up for specials and probably worse than the bad old days before you restructured that business.

Is there something going on there or is it just a reflection of your business mix vis-a-vis the operating conditions in the US at the moment or is there something else going on?

I wonder if you could comment.

And the second is just to go back to Athabasca and Common Creek.

When you defer (inaudible) Shell the project, what is the process for revisiting that project and sort of how fast can you get it back on stream in terms of going through the process of assessment and project sanction?

Thanks.

Yes, Peter starts and we will see what we do with the special Common Creek.

Yes thanks, Jon.

On the US downstream, you say if you strip out the special item, we had one as you know there.

I think you need to take the two things apart between chemicals and oil product.

In general, I think the oil products business is performing well and is performing as expected.

It was quite clear that we have got compared to the year before refinery margins were down.

Retail margins were actually coming under pressure and the volume came down quite significantly in December.

So you had that quite clearly the recession affect actually slightly earlier than you had them let's for example say in Europe or maybe even in Asia.

Asia was a little bit earlier than Europe.

So I think from that point of view oil products performing as expected so nothing special there.

Volume (inaudible) for example, lubricants was also down quite clearly but actually it's obviously due to the car manufacturing companies is also linked obviously to let's say the transport sector in general.

On the chemical side, I think the key issue there was that the feed stock prices actually -- or the prices came down not, let's say as-- the feed stock prices came far down as the sales prices.

So we had that mix but you know how we are positioned in the US on the chemical side in terms of liquid stocks or liquid capacity and in terms of gas capacity now attractive, that didn't played well for us in the fourth quarter item.

So I think chemical story is as seen before and the oil products is just a deterioration of the market.

On the project -- on the second question, on the process.

I think what we normally do both in Common Creek and in oil sands, you actually keep the possibility of a (inaudible) coming back of these projects alive.

So you normally spend a certain amount in terms of OpEx to keep the thing going.

So you do some commercial testing or you actually, in the case of oil sands when you go into a debottlenecking mode, you keep some key resources in place so that you actually could switch should the market actually take some heat out of the cost side, et cetera.

So we keep this quite clearly on our radar screen.

It is ranked on an annual basis.

We look at these projects, we lood at our strategy.

So we are not stopping everything and then you need to restart and it takes you two/three years before you have actually the whole thing up again.

So we try to be as flexible as possible there in order to have all the flexibility going forward.

So you keep the work and the status of where you've got to and just try and hold it there?

Yes, more or less, yes.

Maybe you'll go a little bit down in terms of resources you put in but you keep it quite steady so that you actually can take off.

In the case of carbon, carbon treat, you do some testing on technology, et cetera.

But you may do it at lower fire then you do at, when you actually are full speed going ahead.

Okay, thank you very much.

Thanks, Jon.

Next question operator.

And the next question comes from [Ian Reid] from [Inquiry].

Please go ahead with your question.

Hi, gentlemen.

I've two questions on both an LNG actually.

I wonder if you could update us on the progress of Qatargas 4 in terms of the percentage completion on the project?

And also could you say where you are in terms of sales contracts from the plant in terms of long-term contracts?

And secondly, I wonder going into the first quarter you can make a comment on how you see the H&L and G markets in the downturn and what sort of falls in deliveries you're seeing there particularly in the spot traded LNG side?

Thanks a lot.

Let me be open, Ian.

I know the answers but I don't know if I'm allowed to disclose.

So I refer to Peter.

Okay.

No, we don't give completion rates et cetera.

I think in Qatargas 4 we are within the kind of framework we have set ourselves both in terms of margin and timing.

So I think that's all going well.

And it's all on track and we look at the 2011 ramp up which kindly-- it obviously points you towards kind of a 2010 start up.

And on the contractual side as far as I know, there are two things in place, one is into Dubai and one is into China.

So we have got very long-term contracts there.

So we are pleased with pricing there and how we have closed them a few months ago.

On the type of the Asian one --

LNG markets --

LNG markets, you need to remember that obviously on our side we are along in terms of long-term contract which clearly gives you an advantage in this kind of decreasing market at this stage.

So there is obviously-- we deliver these things and we are therefore have quite a reliable cash flow on these contracts.

We had a good fourth quarter in terms of diversions into the Asia/Pacific markets so we couldn't actually see too much of a slow down.

I think we would expect this to-- the longer the year go-- that you get less spots for possibilities it looks positive into the Q1 still.

But I think the longer the year go, I think the spot market will be tied to that.

But all-in-all our strategy of long-term contracts pays off.

Okay, thanks a lot.

Thank you, Ian.

Next question, operator.

Thank you, sir.

The next question comes from Theepan Jothilingam from Morgan Stanley.

Please go ahead with your question.

Hi, good afternoon, gentlemen.

Two quick questions.

One just on CapEx for this year.

I was wondering what sort of cost inflation assumptions have you incorporated into that $31 billion to $32 billion?

And then secondly I think you've talked about sort of ongoing-- an ongoing cost savings program.

How aggressive could that be and does that mean reduction in head count?

If you could give a bit of flavor where you see scope to reduce costs.

Yes, thank you.

Peter starts with cost inflation and I take your second question.

We have -- at this stage we are looking at $31 billion, $32 billion into 2009.

As we have outlined in the opening speech and what we have said before, it takes a while before the oil cost inflation comes down.

If you believe in the statistics which you have seen, the cost have peaked according to some to zero for example in Q3.

So we have built in our assumptions, but at this stage the world is quite, quite volatile in terms of costs.

So we are looking into that on a.kind of category-by-category basis.

So at this stage we will not update on an inflation assumption which we have built into 2009.

We took our views but I think we are more or less looking at all the contracts which we have and where we have got opening clauses and then we go after these things.

So I think this is a very kind of moving, moving beast at this stage but I think we are -- as we have given the guidance now, we are okay with $31billion, $32 billion and we are working on the issue.

Costs over to you.

Yes, ongoing costs and jobs.

I think the difficulty is probably for many outsiders.

We've also had a goal (inaudible) additional things that were going on in Shell, and we think that this part of normal business is bringing IT to India, bringing (inaudible) back offices from OECD to the Philippines and Malaysia and to India now as well.

We brought HR back offices from say from the UK the Netherlands had even go to Poland.

That all the time means is not necessarily a direct job saving total group wide, but it reduces jobs here in Europe and the States and it increases jobs in Asia.

That is one.

Secondly, we have-- and we had already quite a cost ride over the past year because we never knew when the cycle would term and we have frankly -- have term fade drastically as well.

The long-term costs are always important so we built it in as normal management and then the use as the criteria for all our location managers, for commercial managers, have what we call top quartile, your bench mark your operations with the competition and try to figure out how to get it into top quartile.

And we were very busy with that program.

Of course, we have used the present market circumstances and whether we can sharpen it and whether we can accelerate the delivery.

Now by doing it that way, you build it into your normal business and we don't think there's any point in trying to add it all up and to come as a kind of headline figure.

We don't see the merits of that.

And so there's a bit-- just do it is open to the managers, we control that of the making of progress and there you see that not before too long, you see the quality of our operational results.

Can I have the next question, operator?

Thank you, sir.

The next question comes from Robert Kessler from Simmons & Company.

Please go ahead with your question.

Good afternoon, gentlemen.

A quick question on petrochemicals demand.

Your volumes being down 20% year-on-year in the fourth quarter citing weakness in demand and I believe on the call you also referenced destocking.

I'm curious if you were to try and strip out the destocking component what your view of underlying end user petrochemical demand is right now?

I handled chemicals for years.

And we have gone through many cycles, I have given up to split it in destocking and the huge amount.

There must be huge destocking because in the end there is short-term-- is relative if you take the stock affects out with, there's a relative good correlation between GDP development and chemical demands.

There's always some product substitution, plastics for steel or steel for plastics.

But it doesn't go that quickly.

So I'm sorry, I can't help you.

Okay.

Thanks for trying.

Next question, operator.

Thank you, sir.

The next question comes from Mark Bloomfield from Citi.

Please go ahead with your question.

Good afternoon, gentlemen.

I had two questions, please.

First of all, I wondered if you could give us some sense of the absolute level of committed CapEx of 2010 if possible?

And secondly I think in the past you've indicated the impact on production of PSC contracts, I just wondered if you could tell us the extent of the presumably positive affects in Q4?

Thanks.

Yes, Peter?

Yes, thanks, Mark.

On the committed one, I'm not going to do a forecast for 2010.

I described the best way I could with all of our projects which are now calling on (inaudible) falling out of it in '09.

You know in '08/'09 we bring on 250,000 barrels of production.

'10/2011 will be some further production coming onstream.

So that will work itself out and we will replay some of it quite clearly with new projects.

But at this stage, given the uncertainty in terms of the costing environment as well, I'm not going to go into that.

On the PSC affect, Q4, on Q4 it has been 30,000 barrels, 3,000 barrel sorry.

Yes, Q4 PSC is 3,000 barrels.

So limited, minor.

Thanks.

Okay, next question, operator.

Thanks, Mark.

And the next question comes from [Joseph Toby] from [Toby and Company].

Please go ahead with your question.

Good morning.

I was wondering about two items if I may.

Number one, as Shell's exposure to the tanker market such that it is right now benefiting from the reduction in the pricing there or does Shell have contractual exposures where it's actually at a disadvantage relative to its competitors as it perceives it?

The second question--

Joseph, Joseph, may I stop you?

You said your first was tanker rates -- freight rates?

Yes, okay.

Yes, thanks.

Second question.

And the second question, or should I wait until that one is answered before I ask a second?

No, you can ask a second question, Joseph.

Okay.

Are you seeing opportunities for buying more cheaply than building in terms of assets that you would be interested in acquiring long run as some of the less financially prudent people find themselves forced to sell to you perhaps at pricing that is relatively more attractive, or has that not yet happened in the marketplace?

Freight rates relative to crude tankers or product tankers.

We have very, really for I think for decades I was involved, and I was very young in Shell, is you have a whole mix of what we owe, what we charge the long-term, what we charge the short-term and who is carrying which cost, et cetera.

So this is a whole potpourri of things.

I'm not aware of any additional let's say or unlucky exposures.

On the contrary I think we have very professional shipping management.

On your second question, buying distressed assets or something like that.

Yes, we are normal business men, we do realize that we start at least at this economic cycle, at the downturn of this economic cycle, with a strong balance sheet.

On the other hand, we are not (inaudible) and we will be prudent.

We will always consider every opportunity that we get and then we rank that with the other opportunities that we have, whether that is on the acquisition side or organic.

That is simply the discipline which I meant when I said yes, we are prudent and the discipline if our CapEx.

But on the other hand, you have to be good businessmen as well.

Needless to say if we buy something it should always figure into our base strategy and we have made choices of what kind of businesses we like to be engaged and it should fulfill that picture.

Thank you, Joseph.

Next question, operator.

Thank you.

Thank you, sir.

The next question comes from Peter Hutton from NCB.

Please go ahead with your question.

I'm just trying to get some understanding of the-- behind the different performances in the E&P between the US and WOUSA.

When you look at profit per barrel.

Profit for barrel in WOUSA was about half what it was in Q3 last quarter.

But in the US it was down nearly 90% from about $45 to about $5.60 per barrel.

There is clearly some specific costs in Q4 in the US, probably recovery from hurricanes et cetera.

Are you able to quantify what those are?

Yes, I answered already the question with Mark, apparently you are not happy with it so I'll ask Peter what more he can say about it.

Can't say much more.

As earnings in the US decrease mainly as a consequence of reduced prices quite clearly.

The US generates high margins for Shell as a consequence of their royalty regime normally.

Realize crude prices in the US reduced by some 40%.

In addition, production volumes are still being impacted by the third quarter hurricanes which formerly the Company expected to end in the first quarter.

So I think that's all what I can say at this stage.

So there's nothing special in there.

I'm guessing that there would have been a phasing affect because as you were building up production back from the hurricane later in the quarter, that's when prices were-- have become lower.

So that explains why there was a bigger differential to the average over the quarter and that's not something we should expect to see in the first quarter?

That is absolutely correct.

You will have it on a much smaller scale which is from still outstanding depends on how, obviously, the price has moved but it's quite clearly we needed a few weeks and (inaudible) months before some of the production came back.

So that is quite clearly part of the explanation.

Okay.

Thanks for taking (inaudible).

Next question, operator.

Thank you.

The next question comes from Lucas Herrmann from Deutsche Bank.

Please go ahead with your question.

Yes gentlemen, good afternoon.

Two questions as well if I might.

I mean the first is on the sands and clearly given the expansion plans, you're pouring capital in.

But you've realized a loss of the time when your average realized loss price as being $47 which I think one would simply say given the historic cost base of the business isn't quite good enough.

So first question, really, is observations there and is there something you can do to improve the base level of profitability in that business?

And the second a more difficult question.

and it's one that I'm asked frequently and I just wonder how you'd respond.

And very simply it's when do I start to worry about your commitment to the dividend?

40, 50 years of history says I shouldn't.

So how long the thing -- it's almost a year, how difficult do things have to stay?

How starved of growth capital does Shell have to become before its absolute commitment to shareholders and driving income growth goes by the wayside?

I will answer the question about the oil sands because probably you're difficult question is much more relevant as you ask that to the incoming CEO.

I'm absolutely committed.

Oil sands, realize that the existing operation, we said at the past conference as well you need $38 per barrel including energy costs.

That's the kind of figure that we have in mind.

Of course, in a specific quarter you may have additional costs where certain problems, I think you had some tailings problems last year.

That is one.

The second thing I would like to say oil sands you do reinvestment and then you pump it up for decades.

And so you-- it is very much based on the long-term view regarding how -- and that is basically the view how do oil sands fit into the total energy mix.

And as far as we can look down the road at the longer term prices and the energy alternatives that you have, we think oil sands is a very good mix to have it in.

Having said that, we delayed the additional expansion of oil sands because we expect by delaying it, that we have later lower construction prices in Canada because we expect a substantial less overheated market in Calgary, in Alberta.

Over to Peter for the dividend

Jeroen just before you do change over, you're saying it breaks even at $38, the average price is $47.

So you're effectively telling me there's $9 of associated cost with the expansion at the present time or other run offs?

I think run offs.

I look at Peter as well, I don't know if he has--

Hi, hi, sorry.

I-- let me just give you some numbers here which may be then is easier.

The $38 actually per barrel is an '08 figure which reflects 7-- let's say 80,000 barrels of production.

If you take the same in 2007, you get $29 on the production of 87,000, let's put it this way.

So you quite clearly have a cost increase also related obviously to what the old (inaudible) management, et cetera.

But you also obviously have a heating up environment in Alberta as well and the current operations are actually not free of those.

So you need to take that into account.

Roughly 20% to 25% is energy costs.

So energy costs actually is up between the two years by $1.80, $1-- $1.80 roughly.

So you need to take all of that into account when you look at these figures.

So you can't just take the year end or the last quarter, I'm-- what I'm giving you is actually average numbers.

Okay.

Thank you.

On your second question, I think I answered it.

Still has to see it fold because it hands a lot together with how you actually plan your balance sheet.

And we have always said that we look at our three, four legs, and you know the legs which is dividend, which is organic growth, the balance sheet which is throughout the cycle, we're reasonably leveraged in that sense and then we do with cash surplus a little bit more.

So when you look at the plan-- balance sheet planning going forward, you stress test your balance sheet and you form it in a way that you can actually go on with your committed CapEx for awhile-- for-- to bring these projects to an end for a while and you make sure that when you're in actually-- you are in a low cycle, you are careful on how you actually fill that CapEx hole which you generating by working yourself out of the current project.

So what you do all the time and you are in a prolonged down cycle, you start to look at your cash in and your cash out and you use some of the flexibility which you are generating and you lose some of the debts for the early part.

We have a lot of finalists coming upstream that will increase our operational cash flow starting with the (inaudible).

So this all contributes to a long-term financial plan which has as one of the cornerstones the dividend policy you actually you know.

So from that point if you've committed, we have structured it in such a way that we can actually go through quite a long period with what I just explained to you.

Thank you, Lucas.

Next question, operator.

And the next question comes from Mark Gilman from Benchmark Company.

Please go ahead with your question.

Hi guys, good afternoon.

I had two questions.

One relating to the dividend, the other relating to the upstream.

On the dividend following up on the last question, I'm curious what kind of long-term commodity price planning scenario underpins the announced increase you [ruined], which frankly surprised me a great deal?

On the upstream side, within the new-- newly announced 2009 capital budget, what is the expected outlay for exploration in that figure compared to what it had been in 2008?

Also Peter's comment about flat 2009 production.

What oil price is assumed in terms of that comparison to 2008?

Thanks.

Thank you, Mark.

The dividend is that I think it is -- we look always at the kind of various scenarios, long-term, short-term, and we don't get very nervous by the oil price of one day.

And then rather than to repeating what Peter said, is realize if you look at the kind of cycle we are in as a Company, I don't mean economic cycle, is that we spent heavily over the past years for our growth and it takes a bit of time and sometimes you feel it takes a long time, those big projects they will come in, they start to produce cash and we do know that.

Said that in our whole total planning.

And so you look at your balance sheet, you look like of view (inaudible) CapEx even if the oil prices are still going up and down.

We felt that the 5% dividend increase was appropriate to do.

Regarding your second part of the question, I refer to Peter.

Yes, thanks, Mark.

First, start with exploration.

The 2009 includes some $3 billion of spending on exploration which is a slight increase from 2008 levels.

If I treat, for example, the (inaudible) acquisition and I know it's part of that spend.

This is actually a reduction from what we were planning in the mist 2008, so we are actually adjusting given the circumstances.

We have deferred some deep water exploration wells from 2009.

North America tank gas drilling spending will increase but at a lower pace than previously actually planned and concentrated in Canada.

So this is an area where we have particularly good flexibility on spending but we all-- this is also an area where we will deliver future barrel.

So we will always try to find the right balance.

Production target, the outlook for '09 was based on 50.

And maybe I can add to this one that we have (inaudible) you may have heard or are already see new guidance on PSC.

So far we always said that a dollar change so related to the 50 now is 2000 to 4000 barrels difference.

Now we say it is 1000 to 2000 barrels difference, or BOD .

Mark, thank you very much.

Next question.

And the next question comes from [Neil Morton] from MS Global.

Please go ahead with your question.

Thank you, good afternoon.

Just two questions.

I'm looking at Slide 15 of the presentation.

I'm just wondering with the capital under construction at $30 billion in 2008 , your best estimate of when that would peak, 2009 or 2010 and perhaps at what level it might peak at?

And secondly on disposals, is it that you intend not to sell any assets in 2000 and given low asset values.

Or is it simply a prudent assumption and you are in fact still actively looking to sell?

I started just a second so Peter can look at exactly at the graph of the first.

We-- your second question, not to sell, is no we think that good portfolio management is that you always -- just keep on reading we sold $33 billion of asset since 2004 which is quite-- basically a quarter of our capital employ.

Having said that, we think that the '09, and so we say a lot of (inaudible) basically on the peak of the cycle.

We think '09 will be a much more difficult environment.

So that's why it is a prudent assumption to keep that figure very low.

Peter on the CapEx of the peaking.

Thanks for the question.

Historically on the capital on the construction, we always have used 20% to 30% more around the 30% base of our capital employees is normally on the construction.

So that's historically.

We normally don't give a forecast for the future.

But to say -- I would say this will not change dramatically if the spending keeps going at the same level.

If obviously the spending changes because the spending depends obviously on FID, that could have an impact then on let's say on the capital on the construction.

But we will see that in going forward.

But I think historical rates are good rates to keep.

Okay.

That's great.

Thank you.

Thank you, Neil.

Next question, operator.

The next question comes from Bert van Hoogenhuyze from De Vries & Co.

Please go ahead with your question.

Good afternoon, gentlemen.

I hope the last one won't be the least.

Two questions, one is I saw that your, your sort of total margin on oil and gas compared with the last 12 quarters is about 2/3 to 70%.

Now in view of what you said about obvious reasons, of course, lower oil price, higher costs and probably higher taxes as well.

In view of what you've said about cost peaking in Q3, what sort of an acceptable margin levels going forward in the next two to five years would be?

Would you expect it to be up to $11 or $12 again or has the ballgame changed?

And the next question is versus the inventory losses.

You have large trading division of course, oil price guessing is everyone's guess.

But last summer it was pretty clear that prices had come somewhat over the year over the barrel, so to speak.

And to what extent have you indeed been able to hedge your losses with smart trading?

Peter?

Okay.

Of the first one which is what you're really asking for is kind of a profit guidance for the future which we don't do so I'm not going to give you kind of margin expectations.

I reiterate that quite clearly the cost picture is changing but we also said it will take 12 to 18 months.

It depends a little bit in which category you are.

You have some commodities are already coming off, some onshore rigs you're coming off.

Some other categories like deep water rigs, we don't see much movement at this stage.

So this is a whole basket of things which we will work ourselves through and then see what margin comes out.

So I'm not going to give any guidance on stat side.

Trading, the [SND] we have a trading business which is imbedded in the various businesses in downstream.

We have clearly a successful trade in business.

We work quite strongly together there and we take obviously our, rather we have a big physical position which we obviously trade given our equity production, given our refining capacity which we have but we have never split it out in terms of how much we hedge away from the FIFO, the FIFO losses.

I find it actually quite dangerous to try to actually go and look at FIFO losses because FIFO losses are actually not the way Management looks actually at our FIFO numbers at the business.

We are really on a current cost of supply basis on a day-to-day basis and that's why-- how we are driving it.

And quite clearly the trading environment doesn't share to that and that's how we manage the business.

So I'm-- I can't give you any numbers there because we would actually not look in the way you describe it like this.

Thanks.

Next question, operator.

The next question comes from Colin Smith from Dresdner.

Please go ahead with your question.

Afternoon, gentlemen.

I've got a question, or a couple questions on [gearing], so I guess these are for Peter.

Just coming back to the pension shift, I wonder if you could provide a bit more color on how things are moving between the assets and the liabilities?

Because even if you strip out the healthcare impact it looks like a $22 billion swing between the end '07 position and the end '08 position.

And related to that, I wonder if you could comment on what point the bond markets would start to worry about [gearing] on your definitions to including the operating leases and the unfunded pension liabilities?

Thank you.

Okay.

Both sides of the equation obviously have moved in 2008 , asset and liabilities, so you know that we are using obviously mortality tables, we are losing for a discount rate AA rated bonds, et cetera.

So what we normally do we publish all of this in our 20-F which is in March.

Everything is being brought together at this stage so I would feel it is not rightly placed if we start to talk about all these features.

But the one thing I can tell you on the liability side, we have followed with even more strength and now in kind of conservative view on our assumptions in order to have the liability questions actually covered in the right things.

So if you look at previous years and also this year, our expectations from an asset return point of view, from a solid inflation point of view, but also mortality rate, discount rate, we are normally actually more conservative than the markets are in this sense.

The second question on the [bulk] markets, we have had now a financial policy for a few years where we said throughout the cycle we will manage the balance sheet around 20% to 25% [gearing] ratio.

We will be quite significantly below that at the high end of the cycle which has been the case when you go into the other side of the cycle, you go through this, you may temporarily be [awash].

I think this is a policy which we have shared with the rating agencies.

We have launched a bond in December.

We have been active in the CP market as well and the way our balance sheet and our future cash flow generation is viewed is strong, so from that point of view, we are going through 2009 in a positive way.

Just to remind you also, we have maturing debt of $1.3 billion which is hardly anything.

That is also a big difference to many other highly competitors or companies.

We have started to lengthen our maturity profile over the last two or three years because that's part of when-- of how you run a financial framework.

We have not optimized only the interest which we are paying interest rates.

We have gone for other long-term and I think that is now working to our benefit.

So we'll just go through that

Thanks very much.

Thank you, Colin.

Next question, operator.

The next question comes from Paul Andriessen from Fortis Bank- Netherlands.

Please go ahead with your question.

Good afternoon, gentlemen.

Are you still committed to your 2% to 3% upstream growth targets for the early years of next decade?

Could you give some more definition of the period that actually accounts for and does that at all allow you to throttle down on CapEx in the coming year?

Thank you.

We have some, as Peter mentioned this, but if you look at the prediction outlook, you have many uncertainties apart from Nigeria, weather, product sharing agreements what have you.

And we have said we expect the [agility] of flat development or even a slight decline until our major projects kick in.

And our major projects don't kick in before too long.

Then how does that fair compared with 2% to 3% (inaudible), that if a major project kicks in, it kicks in with a lump especially if you have a fast (inaudible).

So the 2% to 3% is a kind of average figure that are around those projects are coming onstream.

The longer term, so if you take more years out, then of course there's (inaudible) of balance between (inaudible) and (inaudible) you've got more in production then if you put all the FID definitions on hold, you have one date, and you're decline rates will (inaudible) from your new investments.

That is simply too early to say.

So what we have decided (inaudible) flat development or even a slight decline than 2% to 3% growth over the years from now a major projects kick in long-term is all subject to FIDs that we have still to take.

Thank you, Paul.

And I think, operator I will sense only one question left, yes?

Thank you, sir.

And the next question comes from Mr.

Neil McMahon, his follow-up question and he's from Sanford Bernstein.

Hello, Neil.

Yes, okay you take your chances.

Yes.

Just a few follow-ups.

First of all, in terms of storage globally, are you taking much advantage in the first quarter so far of the contango that's being going with your decent storage systems worldwide?

And then just secondly, an update on where the LNG utilization is in '09 in Nigeria.

It looks like, based on Peter's comments, that when you're fixing the Soku's terminal you'll be down about 1/3 of your capacity if you include Train 6 at Nigeria and LNG a little, I'm not even sure if that's fully operational.

And also we heard that '09 is running a bit below capacity too.

We look at each, whose taking the question, we can do both, yes?

We did, our traders did some storage of cooled and cooled tankers which is, that's correct.

I think two (inaudible) at the press probably people have pictures of pictures.

But if you look at the total scale of operations, yes it helps but it's not that large.

The contango has become a bit, has become a bit smaller in the markets and I think it was announced two days ago that one of the first position was (inaudible).

I think this is not-- this is a kind of short-term optimization that is where we try to take a (inaudible) off the markets in a transparent way.

How that will develop over this quarter, don't know.

LNG utilization in the-- first of all in '09 we have quite a capacity and the plants are running fairly well and that enables us at sometimes to sell more gas but you have a whole- the supply problems and the structure of the upstream operations, you have to make sure that you get enough supplies to the plants, and that's a story in itself.

But from time-to-time indeed there have been-- are the joint venture companies have a certain over capacity, they have to be-- and it has to do with the supply upstream.

In Nigeria so far, and I get (inaudible) to the our Nigerian operations in LNG joint venture, but in spite of all the security problems, they have a very good record sticking to the contracts.

We have built on many trades, I think the sixth trade is ready, But here we have that due to the security problems, and due to what happened in Soku, which is a kind of (foreign language) how do you call that in English for gas supplies that this-- we have serious problems and we have to get Soku back to come back to the full capacity.

And of course people are working hard on that but I don't know that we have given more guidance about that.

People say no here.

Okay, so we have to do with just that, Neil.

Thanks.

Operator, any more questions?

We do actually have a question, sir.

It's from Jason Kenney from ING.

Yes.

Please go ahead, sir.

Thank you very much for taking the question.

I just follow-up on the earlier exploration question.

You mentioned that deep water was one area where you could be cutting back in the exploration budget and I think in September you mentioned that you plan to drill 10 wells over two years in Brazil.

Is this a region where waiting is perhaps prudent?

Oh, yes.

At least that's what Peter-- Peter not only see (inaudible) is Regional Director of South America and he has been recently in Brazil.

That's right and actually the statement came from me when I talked to you at [Sandolly] Conference and that is still in our plans to go ahead as outlined back then.

So that's not an area where we are going down.

Great, thanks.

The questions all finished I understand,operator?

No, no further questions, sir.

Now let me-- now thank you, thank you for your questions.

I repeat the update which will take place in London on the 17th of March and I look at Peter having like anything more to say?

No but you know March is also the ones where we find out which rank is and there you will get all the questions about, or all the data about reserves and further updates on the exploration and any such update.

That's all.

So thank you very much for calling in.

Yes, thank you for your questions.

Analyst call closed.

Ladies and gentlemen this concludes the conference call today.

Thank you for participating.

You may now disconnect.