殼牌 (SHEL) 2009 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell conference call.

(Operator Instructions)

I'd like to introduce our first speaker Mr.

Peter Voser.

Yes, thank you operator, and welcome to the Royal Dutch Shell second quarter 2009 results presentation.

I'm here with Simon, who will take you through the results before both of us will take questions afterwards.

Please take a moment to read the cautionary statements.

This is my first time speaking to you as CEO.

I've been in this job for 30 days and I'm just going to make some brief points at this stage and tell you what I want from Shell.

Firstly, let me first say decisions about changing our strategy.

Upstream, Shell is set to deliver 2% to 3% growth into 2011 and 2012.

We have options in the portfolio that can deliver gross to 2020 and we have announced six new discoveries today.

Downstream, Shell has leading brands and clear plans to improve our manufacturing base.

Yes, we are in a recession and that puts pressure on the financial side, but I don't lose sight of the fact that Shell today is in a very competitive position in the oil and gas industry.

However, we need to sharpen our focus on delivery of the strategy and on managing our financial framework, what I call affordability.

We're facing a very challenging environment in 2009.

And that puts industry earnings under pressure at a time where we have a large capital spending program on the way.

So what are we going to do about that?

I want to sharpen up to focus on delivery and affordability.

By taking these steps and combining with our Shell portfolio we can bridge the company and our shareholders into a period of strong growth in 2011 and 2012.

Looking longer term, we have a strong portfolio in Shell and are working hard to create the best value for all of that for shareholders.

Let's look at energy supply demand picture and costs.

Firstly on the oil market, we expect global oil demand to fall by over two million barrels today in 2009.

This breaks a trend of average one million barrels per day growth since year 2000.

This is the steepest demand drop since 1980.

Today OPEC has over four million barrels per day of spare oil capacity, which is a 5% overhang on the market.

On the refinery side, there is over two million barrels per day of new industry refining capacity coming online this year.

That's a 15, one-five million barrels per day overhang on the market or 15%.

Looking at the natural gas SD, after 30 years of near continuous gross, we expect Europe natural gas demand to fall by 5% this year.

Also US gas demand is falling.

This all comes at a time when global energy supply is increasing by about 10% this year.

There's a simple point in all of this.

There is ample energy supply and not enough demand.

This is quite a turnaround from the picture a year-ago.

Turning to costs, industry wide cost pressures are easing as activity levels come down.

But costs are still high by historical standards.

We simply don't know when the global economy will recover and we have to plan on the basis that this downturn could last quite some time.

So if I look at the industry landscape today, it's a picture of oversupply in both upstream and downstream and general slow down in capital spending.

This is all a bit counterintuitive in an industry where you have natural decline rates about 5% a year.

So we see it best return opportunities in upstream and the more difficult jobs to find attractive returns in downstream.

So our long-term thinking hasn't changed, but I want to have more urgency in Shell.

We simply have to respond quickly to near term conditions we are now facing.

Medium turn fundamentals are positive for Shell.

And there's a sharper focus in affordability and delivery, we can bridge the company and shareholders into a period of strong gross in 2011 and 2012.

We have an (inaudible0 organization of the company recently.

Our transition 2009 program is a fundamental change to the way we are running Shell.

To simplify the upstream to created a new division for project delivery and technology, activities that were previously dispersed across the company.

By dividing the new upstreaming into two geographic segments, we have increased accountability to deliver good operating performance and profitability.

We're also improving Shell's representation to governments and other stakeholders, the oil and gas industry is facing a complicated world with increasing service risks to manage and I want our most senior people working on that.

Projects and technology division will manage the construction of major projects including the preFE design and final investment decision.

Project and technology will run Shell's global procurements and technology activities.

A series of internal mergers in project and technology is creating new efficiency gains and cost savings in a pool of over 10,000 staff.

We are moving quickly.

We have reduced the number of senior management positions by 20%, the top 600 leaders have all been announced, and this has allowed us to reduce the number of senior managers by 20%.

The full reorganization will be finished by the end of 2009.

Overall, I expect that this and other programs will result in significant cost and staff reduction.

This is more than simply about quick wins on costs.

We simply have too many people doing business with each other.

We're all going to miss the outside world.

I want to strip away the layers that are not earning value and put much more focus on front line activities.

This means changes in businesses and functional areas like corporate affairs, human resources, IT and finance.

It means fewer people thinking about strategy and more people actually implementing it.

It's more standardization and lower costs in project design and in procurement.

And even more emphasis on global strategy and capital allocation.

We spend some $60 billion a year on contracting procurement.

That's $150 million per day, with over 120,000 suppliers worldwide.

There are savings to be had there.

So I want to make Shell a simple company with more accountability for delivering results.

This will take time and the transitional 2009 program is the beginning of the change we are going to make.

Let me turn to costs.

Industry costs have increased in recent years due to strong inflation and increased project complexity.

We have seen these pressures in Shell and we have also deliberately chosen to spend more on exploration, feasibility studies, and maintenance programs.

We have a series of cost cutting programs on the way at Shell.

These cover things like negotiating lower prices from our suppliers and simplifying and standardizing our activities.

Review Shell's operating costs by some $700 million pretax in the first half of 2009.

Now this is the figure which is a good snapshot of what we have achieved.

It excludes exchange rate movements which have reduced headline costs by about $2 billion and it excludes loan cash accounting effects.

Turning to capital spending, looking at the capital cost trends that we see in the market and our plans to launching new project, we'll be reducing spending into 2010.

2010 capital spending will be more than 10% lower than 2009 levels and around $28 billion.

There's still more flexibility into the spending program and there is scope to CapEx further in 2010 if we need to do that.

This is all part of managing affordability in the company and in down cycle Turning to downstream.

On the downstream side, Shell has good product offerings, strong brands and a low cost base.

We do well in marketing and we continue to make selective growth investments.

But clearly we can do more to refocus the portfolio, both in marketing and in refining.

You can see that in refining, we are looking to exit from further 8% of our capacity and to concentrate the portfolio in the most valuable sites.

These noncore refining assets will be sold if the market is strong enough, or could be converted to oil terminals which can be used as hops in the supply distribution and trading areas.

Now let me turn to upstream.

We have a significant development program on the way in upstream.

And you can see the key projects on this map.

Two new start-ups in 2009.

Sakhalin II energy in Russia and (inaudible) in Brazil.

They will add some 140,000 barrels per day of peak production on a gross basis and these two projects are running well.

Looking into the future, we have around a million barrels per day of upstream under construction and all these projects are on track for the start-up timings we have previously shown.

Exploration remains the most attractive way to add new barrels to the portfolio and typically costs us just $2 to $3 per barrel.

We are investing about $3 billion this year in exploration and appraisal and we have made six interesting discoveries so far in 2009.

It's early days in terms of affecting these world results, but we're estimating that year-to-date, exploration and appraisal have added around 0.7 billion barrels for Shell with more wealth to come in the second half of this year.

Now let me make some comments on Nigeria.

As you know, there are three main Shell businesses in Nigeria: deep water, oil and LNG, where we generally have safe and reliable operations.

The HPDC joint venture where there are some significant security properties.

This is a high-tax environment so that Shell earns low margins on these barrels, typically $2 per barrel.

HPDC assets are spread over a very wide area, 31,000 square kilometers, about the size of Belgium with about 6,000 kilometers of pipeline.

This is in the Niger Delta with numerous river channels and creeks, and very difficult section for the authorities to police.

Shell's production has more than halfed in 2005, with disruptions to gas supplies for the LNG on (inaudible) Island.

This is all to do with a tax from various armed groups and left of oil at the very large gate.

The Nigerian government is very focused on resolving these issues.

New initiatives are underway.

In addition to the security situation, there are some significant challenges on financing the joint venture.

The Nigerian government is also planning to reform the industry and tax system overall.

It is too early to say what the final outcome will be, but we are going into very uncertain period here.

Now before I hand over to Simon, let me make some comments on the production outlook.

We are reconfirmation the gross outlook for upstream that we presented in March.

This is a 2% to 3% growth rate in upstream from 2009 to 2012 and more selective growth in downstream.

In upstream, we are seeing pressure on volumes from the demand environment, and the HPDC is a wild card in these four costs.

The underlying growth strength is clear and it's an attractive outlook for Shell and our shareholders.

So now let me hand you over to the new CFO, Simon Henry, and Simon will take you through the second quarter figures.

Over to you, Simon.

Thanks, Peter, good afternoon.

Macro conditions remain tough in the second quarter of 2009.

This is a very difficult environment overall for the oil industry and we need to be clear about that and the impact on results.

The operators basically half from over $120 a barrel last year to $60 a barrel in the last quarter.

Natural gas and LNG prices also fell from year-ago levels and declined since the first quarter 2009, it's different pattern to the oil prices which actually increased since the first quarter of this year.

Refining margins were under pressure for the whole quarter and conventions remain particularly difficult with increased oil prices and weak demand for products and the chemicals environment remains challenging.

Demand conditions overall remained weak so far into the third quarter.

However, given this background, I am pleased with Shell's operating performance.

Excluding identified items, current cost of supplied earnings were $3.2 billion of earnings per share decreased by about 60% compared with the comparative quarter in 2008.

The quarter was characterized by lower earnings in both upstream and downstream, mainly a result of the lower oil and gas prices and the lower industry refining margins.

As we indicated with the first quarter results, we made a $3.6 billion cash contribution to the pension if I funds in the second quarter and that deducted from the operating cash flow.

Excluding this effect and networking capital movements, the cash flow from operations for the quarter was some $7.4 billion.

So let me talk about the business performance in a bit more detail.

First, on upstream.

The upstream earnings decreased by 69% to $2.2 billion in quarter two.

The foreign oil and gas prices were the main thing behind this decline as well as higher expiration costs.

Upstream production fell by around 5% quarter-on-quarter to some three million barrels a day.

If you set aside the security situation that Peter has just described in Nigeria, and exclude the other external impacts such as OPEC, the PCS price effects and disposals and production in the quarter was broadly set to the year-ago levels.

And the driver behind this underlying performance was the new production.

First half production volumes were boosted by some 210,000 barrels a day versus a year-ago from new field startups mostly in Russia Malaysia and the ramp up of other sales around the world.

These new barrels more than offset the impact of plant field decline.

LNG sales volumes decreased by 6% year-on-year but excluding the Nigeria impacts the LNG volumes increased by 7%, the up strength in capacity driven by the new trains in Australia and in Russia Sakhalin ramping up.

The demand for LNG, especially in Asia remains under pressure.

However, the gas and power earnings were supported by LNG cargo diversions and by natural gas trading activities.

And again, the underlying performance is strong, despite the generally weak environment for LNG.

Turning to downstream.

Downstream earnings declined also by about 70% against year-ago levels to $0.4 billion.

This decline was due to losses in refining and weak environment partially offset by strong earnings from marketing.

Refining margins were down in all regions versus year-ago levels.

Shell's margins were generally better than industry markers except on the US Gulf Coast where the narrowing of the light heavy spread was a disadvantage in particular for complex refiners.

Shell's quarter-on-quarter refinery intake fell by 9% as a result of soft demand and some run cuts.

Marketing earnings increased versus a year-ago with support from retail, trading, lubricants and the business to business activities.

And overall the marketing portfolio has been resilient in the face of that very tough economic environment.

So those are the earnings, the results by business.

Turning to the cash flow on the balance sheet.

Looking at the cash position over the last 12 months, upstream and downstream segments, cash inflows have been broadly balanced against the outflows.

Although clearly, the quarter by quarter picture has been tougher over that period.

Shell has a significant investment program underway, one of the most ambitious programs in the industry today.

We kept the conservative balance sheet to make sure we can finance all of this across the cycle.

In the last quarter, gearing has risen and stood at 12.5% at the end of the second quarter.

This is part of our prudent increase in debt across the downturn.

We've been active in the debt markets and issued $13 billion of debt in the year-to-date, average debt terms issued six years.

It is our intent to balance our debt maturities over time.

Gearing is still well below the 20% to 30% long-term average range that we see as acceptable.

As we said with fourth quarter results, we expect the gearing ratio to be in the low 20%s at the end of this year, based on Q4, 2008 macroconditions.

That guidance and the guidance we've previously given for 2009 CapEx is unchanged.

Before I hand you back to Peter, just let me update you on disclosure plans.

We aim to be transparent and to give the market the numbers you need to understand the company and its results.

Following on from the reorganization of the company from the third quarter, we will report on three basic segments: upstream, downstream, and corporate.

There'll also be more detailed information supplement for investors, essentially additional data, when I expand the spreads on upstream geography and breakout of integrated gas earnings and the two downstream businesses.

Historical information will be available from investor relations in good time for the third quarter results.

Now back to Peter.

Yes.

Thanks, Simon.

Let me just summarize.

We are facing a very challenging environment in 2009.

There is excess energy supply capacity in the world today and that is both in upstream and downstream.

Shell is sharpening up to focus on the cost structure and delivery.

By taking these steps we can bridge the company and our shareholders into a period of significant growth in 2011 and 2012.

So looking further into the future, we have a strong sector of further options for growth and we're looking at launching selected projects in the near term.

To put it simply, we have a strong portfolio in Shell and we are working hard to create the best value from it for shareholders.

So with that, let us take your questions.

Please can I ask you to limit yourself to one or two questions each, so everyone has the opportunity to ask a question.

With that, over to the operator to start the question session.

Thank you.

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

(Operator Instructions) Thank you.

The first question comes from Gordon Gray from Collins Stewart.

Please go ahead.

Good afternoon, gentlemen.

Quick question, a single one, about the slide you have on page 20.

You have this slide which you've shown several times giving your calendar construction as a portion from the capital employed.

If I'm right, you're at the highest level you've ever been give or take a quarter of entire capital employed.

I wonder if you could just give a feel of what that figure could look like on a one year and two year view.

Obviously new FIDs come into play here, but your best idea of how that proportion of unproductive capital would change over the next one to two years.

Thank you.

Thanks, Gordon.

Simon.

Good question.

Tota capital employed at the end of the quarter was $165 billion and the amount actually unemployed and that including the non-producing leases was $55 billion.

Of that, around just over four tiers under construction, and the 40% of that is in Qatar and [apabasca].

So you can expect to see that come off over the latter end of 2010 and 2011 and effectively move into production.

Those are the two biggest slugs in the amount.

As we go forward, of course, we'll can taking new FIDs and that capital as we spend that, will help increase at the unemployed demands and therefore we can expect that the amount won't decrease by quite the amount I've just indicated as we take the new FIDs.

Hopefully that helps.

Yes, that's great, thanks.

Yes.

Next question?

Thank you.

The next question comes from the Michele Della Vigna from Goldman Sachs.

Please go ahead.

Hi, just had a question on your CapEx guidance for next year.

So you're indicating about 10% lower CapEx, I was wondering how much of that will be lower activity and how much would be lower costs?

And those in terms of your 2010 CapEx, I wondering if you could already give an idea of the split between your new project and the base and how different that is from 2009.

Thank you, we are investing $31 billion to $32 billion new this year and we will complete that program as intended.

That is the largest program in the industry and even with a 10% reduction at $28 billion, we expect to be at the top end of the industry spend level.

So this is not a major cut or change in strategy.

We'd expect the reductions relative to this year to come partly from activity and partly from a reduction in the unit cost.

Of course we do have projects completing at the moment.

Cycling, no longer spending in Brazil, BC-10.

We expect the Gulf of Mexico to come on stream at the end of the year.

So as projects come off, we would expect to take new FIDs and potentially at lower unit cost than we're currently spending.

That should enable us to be able to deliver the investment program next year without having a significant impact on the growth figures in the medium term.

There is no intent to reduce the spend on the big projects that are currently in progress.

All of which remain pretty much on target on both schedule and on cost.

Is that sufficient?

Move to the next question.

Thank you.

Next question comes from [Ernesto San] from Nomura.

Please go ahead.

Hi, Peter, I wonder if you could reflect upon the move to restructuring about how you're benchmarking the company against the peers.

What do you see out of line relative to your peers?

Cash costs?

Profitability?

The way you reinvest?

What can we track to help measure your progress over the coming years?

Yes, thanks for the question.

We have quite a sophisticated base marking system actually in the company.

We go down to the asset level and benchmark that in order to see we are keeping on track and out performing our competitors.

I think from a more top level point of view, it is clear that we are going into a period where there'll be strong growth.

So for us key will be project delivery and you can measure that in a pretty simple way over the next two to three years.

That clearly will also bring us more production and as we always said, more cash flow, that's easy to check as well and to follow.

And the third one, on the cost side, quite clearly with all the programs which we are driving we are moving towards a more competitive cost base both on the upstream and the downstream, and you will see this quarter by quarter being delivered, and our competitive performance on a units per barrel basis will therefore go up.

That's what we'll use internally as well as the three four key performance measures apart from achieving returns, long-term returns on the investments and steering the capital allocation according to our internal profitability criterias.

I think that's a kind of snapshot on how I'm going to track and that'll be transparent on this with the market over the next few years and how we are improving here.

Thanks for the question.

Next question?

Thank you.

The next question comes Irene Himona of Exane BNP Paribas.

Please go ahead.

Good afternoon, I had two questions, please.

Firstly on cost reduction.

You referred to the $700 million of pretax costs achieved in the first half.

Can you give us a sense of what that is as a percentage of the total?

And is there any target for the total cost reduction by the end of transition 2009?

And my second question, concerning the expected increase in gearing to 20% by year-end at the Q4 conditions, is there anyway you can restate that to say what it would look like in the current environment, please?

Thank you.

So I take one and two and the the last one Simon will take on the gearing.

Maybe I'm going to be a little bit longer on the cost side, but I think it's important to explain how we are driving this or how I'm driving this.

So to begin, let me explain that we haven't just started on cost and reorganization.

This has been going on for some time and we see this as a normal business at Shell and all the short-term reactions.

But I have clearly upped the pace and the scale of it this year.

So today, there are several programs on the way.

The transition 2009 program is the largest one, announced in June and it resets the definition of what is done in each business and how they link together.

Business is calling into three, plus projects and technology.

Those internal mergers will impact large numbers of staff.

There are also other costs on the reorganization programs in hand from earlier initiatives, which were within the business under functions.

So this is about share servicing to globalization of functions, supply chain costs, etc.

There are smaller scales, but we are obviously now linking them with the 2009 transition project.

And I've already said that in the first kind of 30 days, we have now announced the top 600 leaders.

We have taken 20% out and they got their marching orders in terms of cost targets, etc.

So cost saving opportunities run into the billions of dollars.

I expect the reorganization, as I've said, to be completed by in 2009 so that we can actually benefit, after benefit flowing to 2010.

So the absolute base for the first half year of the $700 million will be around $20 billion, it's $19.8 to be precise.

I have set targets to all the businesses and all the functions for the second half of this year and there'll be sharper targets also for next year.

I've said earlier today in the press conference as well, I have a strong belief that the leaders now have their marching orders and we are managing the company in a normal way, and I don't need external pressure to get internal compliance on the costs.

And we'll keep the targets affecting internally.

I will watch this and we will follow it up this way.

So these will be my kind of two answers to the two cost questions and the gearing I give to Simon.

Thanks, Peter, and thanks for the question, Irene.

On the gearing we set the low 20%s based on the Q4 2008 environment.

Since then we've probably seen oil better than that, but actually the gas prices and refinery margins in particular worse.

Also may have picked up at the end of Q2, increasing working capital around $3 billion, 2/3 of which was in trading where we are investing in working capital because of the opportunities the market present.

If those opportunities are still there, we may still use the working capital in the balance sheet by the year-end.

So it's difficult to give a precise figure.

I still expect it to be in the low 20%s and depends obviously on how the gas refining margins come back as well as the oil price.

Thank you.

Thank you, next question.

Next question comes from the John Rigby from UBS.

Please go ahead.

Yes, thanks.

Two questions.

First, can we visit the corporate FX lines?

Seems to me that ever since the merger of the Royal Dutch Shell TNT groups, that corporate in particular has sort of changed its sign.

I wonder whether something coming out of that merger maybe has changed the way that earnings are being recognized in the income statement.

And probably supplemental to that, is there anything unusual in the FX earnings this time around?

Because the movement in currencies from one quarter end to the next quarter end to the next doesn't seem to explain such a large movement.

The second is just on your downstream.

I think you explained some of the strength in marketing is being lubes and business to business, and this is somewhat close to the question I asked last quarter.

We're in the worst recession since 1930s, and a lot is manufacturing recession, how are you generating good earnings or better earnings from those businesses?

Thanks.

You take the FX and I go on the downstream.

Thank you, John.

Corporate FX, since RDS was formed, I haven't been tracking it that length of time, so I'll take your word for it, but there is nothing unusual in that figure this particular quarter.

What we see in the DIE, the FX in particular in corporate, the movements on inter group balances and other assets and liabilities held in currencies other than US dollar.

We have a significant number of companies, particularly in the downstream, that operate in the functional currency other than dollar and the -- it's just a translation difference when we see significant movements in the dollar at particularly the end of the quarter.

That's the only thing I would say.

The other thing, I would guess in 2004 is the interesting expense that appears in the corporate sector, and we've had typically a large cash balance.

That is of course, reversing now as we go forward.

So you can expect to see that effect.

Our guidance remains zero plus or minus $150 million third quarter in the corporate sector, excluding the FX impacts which can be more volatile.

As we go forward, of course, we are changing our segmentation as we put the upstream and downstream businesses together, and I believe it's incumbent on us to give new guidance on that as we have completed that process.

But that guidance will probably apply from the first quarter of next year.

Peter?

On the downstream side, John, let me give you a little bit further insights on this.

Both businesses have actually gone through major restructurings over the last few years.

They both were heavily globalized and both actually started to concentrate on very specific business segments, where through differentiation of service offering, of product quality offering, of other services, we could actually enhance our margin take, and some actually got out of the pure volume focus.

That actually applies to both.

So that has remained through additional services and other product offerings which we are giving.

We could actually maintain on the margin a little bit at the lower volume which has carried us through this one, so through the recession so far.

So these are general remarks to both.

Now let me take lubricants to explain to you, lubricants is a business which is exposed to many industries in the world and it really depends on how you have structured your detailed channel management, and in our case, I give you one number.

Our lubricants business is actually only to what I call the early cycle industries, like the car manufacturing, etc.

You're only about roughly speaking 20% exposed from a volume point of view.

So we have actually concentrated in other value segments over the last few years.

So this explains actually the resistance and resilience of both businesses.

Retail, I could give you the same story.

So very pleased with the marketing side from that point of view.

Thanks, and the next question.

Next question comes from the Theepan Jothilingam from Morgan Stanley.

Please go ahead.

Yes.

Hi, good afternoon, Peter, good afternoon, Simon.

Just a couple of questions, actually.

Firstly on, I think Peter you mentioned you wanted more urgency within Shell.

I was just wondering how you sort of change or go about changing that culture.

Are you looking at changing the incentivization program there?

And then secondly, just on the downstream, you're looking to sort of reduce your exposure to refining by around sort of 8%.

How realistic do you think that is in this type of sort of depressed environment?

Thank you.

Thanks, Theepan, for the two questions.

I think on the first one, this is not about [regeneration] systems or payment systems.

This is about what I call internally walking the talk and demonstrating what you want to do.

This is about speed, this is about decomplexing your organizational structures, this is about pushing the accountability down to where it actually should sit, which means you need to remove layers in the organization that actual decision making can really speed up in the accountabilities at the right level.

From that point of view, over the last few weeks, I've been very clear on speed.

We're pushing this reorganization through in a very fast time.

The organization is responding very well, the leaders is taking this on, taking the accountability, taking also the burdens of delivering with it, and I think that's the way they're going to drive this one.

This is about getting a better business and be ready for the growth period in the right way.

On the refining portfolio, undoubtedly the market is tough out there, but I think portfolio management is not something you actually switch on and off, it's something you do on a constant basis.

So you're testing the market on a constant basis and will normally find buyers in the market.

But I've said, if that is not the case and we can't actually get the proceeds which we want to get for these kind of niche refineries, then we are prepared also to transform them into terminals, etc., or even close some of them.

So I think we will go through this and move it , as fast as possible and I'm convinced there are enough possibilities in the market and we will not stop portfolio management.

Thanks for the question.

The next question comes from Mark Bloomfield from Citi, please go ahead.

Good afternoon, gentlemen.

Just wondered if you could offer us some color on how you're viewing the trade-off between sanction and profitability on some of your key growth choices.

Specifically wondering if you can give us a sense of the critical path [mars B] Common Creek and prelude please?

Okay, thanks Mark.

I think the way I would do it is we are on track for the growth as we have shown to 2011 and 2012, and those changes to the targets.

The PFIE portfolio is a good one.

It can support growth to 2020.

I would say that the $28 billion of spending is, on the one side, lower than 2009, but this is still a high figure in the industry.

And it's an investment for me in term growth.

So we don't feature production targets at this stage for you which will demonstrate the growth for 2012 and later.

But I do not expect a falloff in production after 2012 or 2013.

We will continue to invest and have enough projects there.

Now on future projects of coming FIDs, as you know, we have slowed down on FIDs in 2007 and 2008 and that's because actually CapEx more costs on the highest levels.

Now we're seeing some easing on the cost side, so we're looking into the next few projects.

What we are looking at at this stage are some projects which we have in the books, very early ones, I think we see coming is as we're working together with our partners in Oregon which is a Chevron and Exxon, we'll expect FIDs to be taken shortly.

We have our floating [SLNGs] into floating July so that is the first one of SLNG if you take FID and quite a few of them afterwards.

In the Gulf of Mexico is also moving forward and we're considering that and then (inaudible) development in North America are also possibilities over the next 12 months.

So I think we are moving forward.

I do not comment on prelude or other projects, but these are the kind of next steps which you will see us going through and taking FID.

Thanks.

Thank you, next question?

Thank you, the next question comes from Mark Gilman from The Benchmark Company.

Please go ahead.

Peter and Simon, good afternoon.

Had one question of a financial nature and then one with respect to LNG.

On the finance side, Simon, I'm wondering what particular financial parameter, if any, goes into defining the $28 billion 2010 CapEx guidance number, because based on our numbers in 2010, you will be at or through the 30% debt ratio ceiling at that time.

Okay, your second question, Mark?

Give me both.

The second one relates to LNG.

The comment that the LNG sales, in the quarter, were down in part due to demand, suggests that you're not running certain facilities at capacity which I guess I find to be somewhat surprising.

Could you respond to that?

And also, provide some color as to realizations and in particular, the benefit which is referenced in the release of contract renegotiation as well as cargo diversion.

Okay.

Thanks, Mark.

I'll take the first one.

The parameter on the $28 billion limit.

As I mentioned earlier we expect to be in the low end of the $20 billion to $30 billion gearing by the end of this year.

We have, we believe, enough levers available to take us through 2010 comfortably within that range and the levers are obviously CapEx, what we choose to divest or dilute as per the portfolio.

And the cash generation from operations which will be driven into large part by the macro environment.

So $28 billion is a level we're comfortable enough, gives us enough flexibility and as indicated if we need it there is more flexibility there as well.

So it is the 30% we look at and the dividend, all the parameters that help to set the capital for any given period.

Peter?

Your second question, which was about plant availability or LNG in general.

First plant availability, I think cargo diversions was the third element in that.

I think if I look at the LNG, mainly, obviously in Asia-Pacific, what we've seen in the second quarter is quite clearly that long-term customers are listing at the lower end of the agreements they have, which gave us actually some spare capacity in some areas which we could actually use for diversions and Sakhalin goes into the same category that we, the first cargos of Sakhalin we could use and send them into India where we could actually achieve good prices in a market which was quite clearly no longer a market which we used to see last year.

That's the first one.

On the capacity side itself, indeed we have one or two of the plants not running at full.

I think it was clearly the case in Malaysia and in [Oman] where we had not full capacity at this stage.

We also, as you know, we had problem areas in Nigeria which with [Soku] not operating, we obviously did not have full capacity in Nigeria itself, but there again, Sakhalin and some others came handy into the equation and we could actually use those cargos for that.

So all in all, I think a very good result in LNG and in the second quarter we are very pleased with gas and power, including the marketing and trading, and so that was a good result.

Thank you and the next question?

The next question comes the Kim Fustier from JPMorgan.

Please go ahead.

Hi, good afternoon gentlemen.

Two questions if I could.

Firstly going back to costs, within the $700 million of cost savings achieved in the first half of this year, could you roughly quantify the contribution of self-help programs versus reductions in third party costs?

And secondly, oil sands returned to profitability this quarter.

It looks like your units were down something like 6% versus Q1.

Can you confirm this is broadly right?

And where do you see break even now in oil sands?

Thank you.

Yes, Simon takes it.

Thanks, Kim.

Good question.

The $700 million we achieved year-to-date is roughly half self-help and some energy cost reductions and the small remain portions of other third party costs.

We are actually seeing reductions in negotiations that we've been involved in in the last six to 12 months, but they will not typically show through into the results immediately and quite a lot will be targeted at CapEx than OpEx.

Overall in deflation, we are expecting, we published and in one of the slides we used the Cambridge energy index which topped out around 250, headed down towards 200, and we would expect it to fall a bit further, maybe around another 10% or so, but not a lot further than that.

That of course is for current negotiations.

Most of us current spend reflects negotiations held one, two, maybe three years ago.

On the oil sands unit costs, yes, you're correct.

First of all we're back in profit, secondly the unit costs have come down.

Some is in fact energy-cost driven.

We did have some down time on the manufacturing units.

We have a lower up grading yield than we might have hoped for, otherwise results would have been potentially $50 million better.

There are some reductions in unit costs being achieved on the site.

Not as high as the 15% to 20% that you see quarter-on-quarter, but we are improving our operations there steadily overtime.

Next question?

Thank you.

The r next question comes from Alexander Weinberg from Petercam.

Please go ahead.

Yes.

Good afternoon, gentleman.

Just two questions.

Maybe first on the CapEx flexibility for 2010 on the $28 billion.

Could you maybe indicate us what are the sources of the additional flexibility and also maybe give us some indication of the part of this CapEx which is for preFID projects?

And secondly maybe regarding the refining business, and considering that many refineries are current loss making, would the temporary shut down be an economical alternative for assets that consider this as core or noncore?

Thank you.

Okay, thanks for the questions.

I think Simon could start with the second one, which is refinery and I take the first one.

Thanks for the question, Alexander.

The refineries, if we're looking around the world, we have made several run cuts for economic reasons, particularly in Asia, where over 20% of capacity was not being utilized in the last quarter as a result of the economic situation that we saw.

Overall we're about 3% higher or actually lower throughputs so higher run cuts than we were a year ago for economic rims only.

To actually temporarily shut down a plant incurs significant costs in terms of safe (inaudible) and operational activities that need to be carried out and of course costs of the refinery doesn't go away.

Shutting down even temporarily is a, is a difficult economic option to get to and at the moment we're not looking at that for any of the sites.

Other than where Peter mentioned in portfolio terms, not so much temporarily, but there are assets that we can't sell, then we will consider converting them into terminals and effectively reducing the refining and dislocation capacity in that way.

Peter do you want to comment on the $28 billion?

Yes, I take the first one, sorry but I will not break out further the $28 billion and split them and also don't give you preFID.

We are in mid-2009 at the moment.

So we'll further update early next year.

I think we wanted, or I wanted to give you an early view on how certain things are into our early views on the CapEx and I think I'll leave it at that.

Thank you, next question?

Thank you.

The next question from Mark Iannotti from Banc of America-Merrill Lynch.

Please go ahead.

Afternoon, gentlemen.

I just had a quick question on this idea of disposals.

I mean, you, you seem clear that you're prepared to sell assets in refining where others may have a value in those assets higher than you're own.

But I think realistically it's not going to add much cash to your business, because there isn't a great market for these types of assets and it becomes a portfolio cleaning exercise.

There is a very good market for assets, particularly the Chinese, Indians looking to appear very strong prices.

Why wouldn't you consider, particularly in light of a new CapEx that is lower than before and suggest slowing down some FIDs, why don't you consider accelerating monetization of an E&P portfolio with a more aggressive disposal program in E&P, certainly would help your balance sheet?

Thanks, Mark for the two in one question.

Let me start with the refining side, again.

Quite clearly it is not only that you make a cash in, it is also that you actually operate one or two or three less refineries which allows you to take costs out but it also allows you actually to use your brain power for other things in the refining side.

That'st one.

The second one is many times we look at these things, they are refineries of lower scale, so lower complexity, but it is also, we are always linking refineries to our marketing activities as well.

We are always having very careful look at our supply and distribution envelopes.

You can have impact there as well, which makes it necessary that actually certain refineries just don't belong to us anymore, because we have major changes on the way with supply or we do marketing.

So that's quite clearly one.

Portfolio management in general is quite clearly high yore our agenda and we're looking constantly at both businesses, quite clearly of where we can use assets to either generate cash, as you were mentioning or you can also generate other opportunities with assets you have.

I think time will tell how much we do about all of this.

And this is always the question is when do we go into the market with these things.

Everything needs a little bit of time, of preparation as well.

So I want to be early and ready in order to actually capture the market at the right time.

So we're quite clearly, optioning is always a possibility as well.

We have good examples in the past, over the last 40 years we saw more than $30 billion of assets and we picked the markets very well both on upstream and on downstream.

Thanks for the question.

Next one?

Thank you.

The next question comes from the David Kline from RBS.

Please go ahead.

Good afternoon.

Two questions if I may on the indications on 2010 capital investment.

Firstly at the level of the divisions, do you see the projected decline in capital investment being broadly balanced across each, or is capital spending in one or other of the divisions likely to hold up better than the others?

The second thing, just on a longer term perspective on capital investment, I know it's very early days, but would it be reasonable, how should we think about the 10% decline?

Is it temporary or is it a new benchmark for future spending beyond 2010 or is it the beginning of a period of declining spending do you think?

Thanks, David.

Two questions.

I'll pick them both up.

2010 CapEx, we're actually in the process of ensuring which division gets which amount of CapEx at the moment, so I can't give you any specific figures, but typically we've been an 80/20, 70/30 upstream/downstream split.

And that split is likely to persist.

We will continue the completion of the major projects of course the Singapore cracker project we need to complete, we continue with Port [Arthur].

But the majority of the CapEx will remain in the upstream we will likely give an indication of America's versus international as we go into next year.

Longer term investment levels.

We actually have a portfolio that would enable us to continue to spend at the $30 billion level for most of the decade.

We'll choose the rate at which we spend with the conditions we see in terms of revenue, but also the balance sheet that we referred to earlier.

So we think $28 billion is the prudent level for next year.

Our strategic aim is always of course to invest through the cycle.

Therefore we don't intend to be volatile to a huge extent around with the numbers we talk about.

We could go up or down from the $28 billion depending on the macro environment we see.

Thank you.

Next question please.

Next question comes from Lucy Haskins from Barclays Capital.

Please go ahead.

Hi.

Couple questions if I may, please, Simon.

Firstly, on the LNG business, could you give some steer in terms when you think [Soku] might be contributing once more?

And also what element of benefit you got from the trading conditions in the second quarter.

And the second question is what, if we X out the sort of cash out flows required by the pension contribution this quarter, what kind of level of oil price you felt you had a cash break even at during the course of the quarter?

I think I gave both to Simon.

Thank you, Peter, thank you Lucy.

The security situation in Nigeria remains a bit unpredictable.

Difficult to call.

And while we've had encouraging news on Soku, I really can't give you a date at which time it'll be back on stream and making a difference at the LNG cargo level.

The gas and power results as I reported them did include much better results year-on-year in both North American gas trading and in the European marketing and trading business.

It's early, year-on-year was in fact around $200 million, but that was against a relatively low quarter a year-ago.

On the cash break even, it's fortunately not something I worry too much about, cash break even in any given quarter.

Our aim -- clearly our cash break even over the year as a whole, investing at the [31, 32] level ahead of the increase in the cash from operations that we expect in 2011, 2012 is going to be higher than current oil prices.

Our aim is certainly by 2011 to bring that break even price down to below current oil price levels and we're on that with the $28 billion we'll take us on that journey.

And the break even price though this year is clearly above the current level.

Next question, please?

Thank you.

The next question comes from Ian Reed from Macquarie.

Please go ahead.

Hi, gentlemen.

Two questions please.

Firstly on Nigeria.

Of the volumes which you've lost to disruption is it feesable to think that at least some of that might be recoverable by the time you've got your production growth in 2010 starting, and how much of that do you think it's possible to forecast that could contribute to that?

And secondly, returning to costs you talked about the $700 million I wonder if you could break that down into a unit cost reduction, specifically for the upstream so we get some idea, because obviously our volumes are full year-on-year?

So be interesting to see what unit cost that represents.

Thank you.

Okay, thanks for the two questions.

On Nigeria, as I've said in my introductory remarks, Nigeria is a little bit of wild card over the next two to three years, for the two main reasons, which is really security, but is also funding, which are unpredictable, and on top of it, the new petroleum build which we do not know yet the outcome.

That's why we've actually spread it out on the production growth chart which we used during the presentation.

We have actually spread it out in Nigeria there, because it's too uncertain at this stage to predict.

It's also quite clear that over the next two or three years, we have also, in our plans, we have slowed down capital investments in Nigeria because of the security issues, and we are clearly just doing what we have to invest at this stage to keep going.

So there might be gross, we will take it, but I wouldn't bank on it.

I'm not going to give you a percentage.

Now on the cost side, I do not have the number with me, because we haven't broken it out into upstream and into downstream.

So let us come back on this one, and we'll give you the insides afterwards.

Thanks, next question?

Thank you, the next question comes from Bert van Hoogenhuyze from De Vries.

Please go ahead.

Good afternoon, Pete and Simon.

Nice to speak to you again.

One follow-up on the refineries, I assume the utilization rate you meant for Asia, 80%, is more or less system-wide and regarding that is it fair to assume that you're trying to go back to about 70% refinery capacity in view of your prediction capacity?

And the second question, again on Nigeria, I'm afraid, of course, one much your peers has evoked either ridiculed or admiration by his decision to go for a $2 margin in a very large oil country.

Oil country with the same security problems.

That justification is that there is still so much opportunity there.

Should I think this is the same justifications you have for staying in onshore in Nigeria or is it just that it's unthinkable for you to go out of the onshore production and just concentrate on the LNG?

Okay, now I'll start with the second one and Simon will pick up the first one on the refineries, but thanks for the questions.

On Nigeria and the comparison to Iraq, etc.

Let me just say first about Iraq, we're concentrating on two things, quite clearly on the south [cap] where we have already started on both in (inaudible) and in Basra, we're moving from the MOU towards a final agreement and that the progress there is encouraging.

At the same time, we were involved in three of the much the, let's say the fields, on one that came first and operated on the other one as a partner.

The third one we were a little bit further down.

Given the risks in the country, we just didn't feel that it was right actually to go at such low levels of returns, particularly the risks are around similar things like in Nigeria, around security, etc., etc.

So going into Nigeria, two comments really.

RDS shell depending a lot on Nigeria on the part in terms of growth if you go four, five, six years back.

We have success successfully over the last few years actually built different growth pipelines that we are using now in order actually to build the growth for the next 10 years after 2020.

We would love to have this growth out of Nigeria.

We're just very careful at this stage.

But we have been operating for a long time in Nigeria.

We have reduced now our, kind of, focus on the growth side in the delta, but we want to manage the situation together with the government and I think some of the new initiatives they are taking are positive.

But it's quite clear, as you have seen from the chart, it is very difficult and hence we are slowing down on the investment side and we'll just take stock on an ongoing basis over the next few years to see how we are going to operate in Nigeria.

That's as far as I can go at this stage.

Thanks, and then to the refinery question, over to Simon.

Thanks, Peter.

Bert, I think the question was about refinery coverage and strategically we will reduce our coverage of marketing sales.

We are around [80] at the moment.

Yes we'd go down into figures that you postulated if we were to divest our refineries that we talked about.

If I could just followup on the previous questions as well about the unit cost, the impact and the upstream of the $700 million is probably between $0.40, $0.50 a barrel.

Pretax, probably $0.20, $0.25 post tax.

Thanks, Simon.

Next question?

Next question comes from the Collin Smith from ICAP.

Please go ahead.

Good afternoon, gentlemen.

A question for Peter just on the changes you're putting in place in your organization.

Obviously there's been a bit of a discussion about personnel and cost savings.

But in the context of your discussion about sharpening up the organization, I wonder if you could give us a view as to whether you think it's the cost savings or the more important part in terms of driving earnings or whether it's the fact that you expect the business to run better once it's been refocused.

Yes, thanks for the question, Colin.

Very important one.

This is not about costs quite clearly, this is about value generating.

This is about one the one side bringing the technology together, bringing the EP technology to global solution to downstream technology together in order to actually deliver project better in the future, or even better also cheaper, hopefully applying our technologies which are second to none, applying them across the world in the same way in order to deliver value.

On the two geographical upstream businesses, quite clearly there at the beginning, a lot of costs will come out because we are clearly bringing EP and GP together, and in many areas, actually the savings we have in terms of people in the structures or actually higher than the 20%, because you're bringing typically an EP and GP regional office together.

And that will give us more savings, but that's the start.

And the second one is clearly that we have got one stake towards the stakeholders, to the customers, to the governments, etc.

Talking about the upstream, talking about Shell, and that will help us also to generate for the value.

Decision time will be faster, because there are less people involved in a certain country.

Planning will be simpler, because there is just less involved.

You'll get, I think a much faster, much less complex, less bureaucratic way on running the two businesses and they're really front-line driven rather than actually what I call back office driven in that sense.

I think, this will give us a much sharper operation and also value generation.

So that's really the long-term focus.

Short-term will be a lot of our cost the next two, three, four quarters of even 2010, but at the same time this is about value delivery in the long-term.

Thanks for the question.

Next one, please?

Next question comes from Neil McMahon from Sanford Bernstein.

Please go ahead.

Hi, just wanted to get a bit more clarity when you were talking about LNG plants running at lower capacity, such as [Oman] and Malaysia, are these structural changes that we know Oman is suffering from a lack of feed stock gas, but also just wanted to get an update on Malaysia, just are declines in the feed stock going into that plant or some other reason?

And then second question, really on your exploration success in the first half of the year you commented on .7 billion barrels of oil equivalent net to you.

What sort of field sizes are we talking about that you're classifying as large discoveries?

Thanks.

Yes, thanks, Neil.

On your first question, Simon will take the exploration one.

On the LNG in the plants.

Let me start more from the a macro point of view, the far east, particularly we had roughly 30,000 barrels a day or 5% less demand in our system.

Now, I think they are predominantly, these are not structural reductions.

This is really a reaction to the lower demand in most areas, quite clearly in Oman there is some structural, element in it from a supply feed stock point of view, but the predominant effects which I have explained actually were market demands driven rather than the other way around.

That'll be the LNG answer.

Now I pass to Simon for exploration.

Thanks, Peter.

We don't use a particular indicator for the size of the significant discovery anymore on the grounds that volumes and value are not always directly related.

So significant could mean lower volumes, significant value.

We added 700 million barrels, six significant new discoveries.

We had four good exploration appraisal follow-up successes as well and we didn't actually include the veto well which announced by the operator on the dock here last night which we have a 55% stake.

So overall it's been a very good quarter, very good half.

We actually produced about 600 million barrels more to replace production in that sense.

They were, in this particular period as well, pretty valuable barrels.

They were in the Gulf of Mexico, in Norway and in Australia.

So very successful program.

Very pleased to see the additions, and you can work out it's only six main discoveries and four appraisals and 700 million barrels, each of them pretty significant.

And just a quick follow-up on, what are your plans on drilling in Brazil?

We currently have limited activity planned in the rest of this year in terms of drilling in Brazil, but we do have interesting wells in the portfolio to be drilled.

Okay, thanks.

Thanks.

Thank you.

The next question comes the Jason Kenney from ING.

Please go ahead.

Hi, there.

Now I missed some of the early part of the call so apologies if you've already covered some of this.

Firstly, on, Russia, you've been invited back into Sakhalin three and four, just wonder if you could give color around that opportunity, kind of development timing, resource opportunity building on the Sakhalin LNG across there?

And the second question on diversions in LNG.

I understand that there was some upside in Q2, mainly in Asia, do you see the chance for diversions in LNG dissipated going forward?

Okay, I'll take the Russia one.

I was in the meeting in Moscow.

I think, taking you back a little bit in history, when we take the dilution to [gastrom] before we finished the Sakhalin project, we also signed actually an AMI that which actually covers to Sakhalin for future developments, the partners in Sakhalin II would actually try to work together.

Given the successful termination of the Sakhalin construction and the good start-up, we are now have been offered by the Russian authorities to work first on Sakhalin III, I think I would call it,, which is additional trains III and IV, Mr.

Putin said.

We are now in discussions with our partner [gastrom] it's too early to say.

It's too early to say, that there are exploration and there are blocks where we know that there are volumes there are resources there.

We are now going into that and we will quite clearly talk to our Russian partners and others over the coming months.

Too early to give you more details, but it's an encouraging message back from the Russian authorities that the initiation of delivering Sakhalin together with our partners Japanese and the Russian partner [gastrom] was well received.

On the diversion, I'll pass over to Simon.

Thanks, Peter.

Yes we were able to divert cargos in the quarter, part of it -- the lack of supply from competitor projects or from Nigeria, definitely benefited from having the global organization in place, but that enables us to bring together those cargos and those customers, plus the regas terminals that we do have in place.

For example we booked cargos into India.

We have a deal to provide LNG cargos to Kuwait across the summer.

And at least one of the Sakhalin cargos was in a chain that included the UK LNG import terminal.

So it's important to remember that the majority of our volume is long-term contract and marketed through joint ventures which we don't control.

But at the margin we have a very efficient method of joining the molecules with customers who are prepared to pay good money.

So what is the outlook going forward?

What?

So what was the outlook going forward for the trading side of LNG?

That might be giving away our actual commercial position if I gave too much, but that global position remains a big advantage structurally.

Okay, many thanks.

Next question, thanks

Thank you.

The last question comes from Neill Morton from MF Global.

Please go ahead.

Yes, good afternoon.

A couple of questions, left.

Both in the US, on chemicals, I'm afraid it's the perennial question about your loss making operations there.

I know it's the bottom of the cycle, but now that you're in charge, Peter, I just wonder what you think can be done differently about your operations?

They seem clearly to have a structural disadvantage both regionally and with regards to the cost structure.

And just secondly on the upstream business.

I'm struggling a little bit to try and reconcile the very sharp recovery up from small losses in Q1 to $700 million plus in the second quarter.

I know higher oil prices, but lower gas prices.

Perhaps help me a little bit there, thank you.

Yes, I take the first one.

Simon will cover the second one.

On chemicals, you put the finger on the right thing that we have some disadvantages with the liquid cracking we have made in the US.

We have worked on this one and there is a plan in place which we are going through, which should get us in a better competitive positioning over time.

The changing for example in Deer Park, but also in others, we are adding some gas feed into our chemical side in order to be more competitive from a feed stock point of view.

So we have a program to get our North American chemicals business more competitive and we are working on this one and you will see improvements over time.

I think that's more or less what's going on at this stage so it's at hand and we are working on it.

The second one to Simon.

Many thanks, Peter.

Yes, the US E&P earnings did go from a slight loss in the first quarter to $500 million profit.

There is a one-off item in the operating segment in Q2 related to litigation segment for a couple hundred million, we had better oil prices and fundamentally we get a stronger performance from that oil price, the realized gas prices and it's a letter issue for us, so we just benefited from a better environment.

We also had some expiration write-offs in the first quarter that were not repeated in the second.

Hopefully that covers that.

Could I also assume that the amortization costs in Q1 continued into Q2?

Yes, they did.

Okay.

Thank you.

Good.

Thanks for the question.

This brings us to the end.

Thank you very much for all your questions and for joining the call today.

The third quarter results are on the 29th of October and Simon will take the call on that one.

So on behalf of Simon and myself, again thanks for calling in and have a nice afternoon.

Cheers, bye.

Thank you.

This concludes the conference call.

Thank you for participating.

You may now disconnect.