殼牌 (SHEL) 2009 Q3 法說會逐字稿

Thank you.

Good afternoon, good morning, wherever you maybe.

Welcome to the Royal Dutch Shell third quarter 2009 results presentation.

Let me take you through the results and developments for the third quarter, and we will leave plenty of time for some questions..

First, please take a moment to read the definitions and cautionary note.

Good.

First, just a quick summary.

We are facing a very challenging environment in 2009.

Against that, I am pleased with the operating performance in the quarter.

But earnings are sharply lower in upstream and downstream, compared with the year ago levels.

Earnings on a constant supply basis were $3 billion, and cash flow from operations were $7.3 billion.

The dividend has been increased by 5% versus year ago levels.

And we are taking a prudent approach to the downturn, although there is some evidence that the economic environment is actually bottoming out.

We continue to focus on our own cost, and we are maintaining the financial flexibility to continue with our investment program through the down cycle.

At the same time, we are keeping an eye on the medium term, launching selected new projects and continuing with relatively high levels of exploration.

By taking these steps, we can bridge the Company and our shareholders in to a period of growth in 2011,

Let me update you on Transition 2009.

We announced the reorganization program during the second quarter of this year.

Transition 2009 is all about increasing accountability within the Company, simplifying the organization and reducing costs.

A simplified top level structure has been in place since the first of July, and you have seen the results today presented on the new basis.

Series of internal mergers is creating new efficiencies gains, and cost savings through the group, and we are moving quickly.

We achieved a 20% reduction in senior management positions by the end of July.

Broader reorganization is now underway, and we expect a 10% headcount reduction in the redesigned divisions and functions, mostly in management and nonoperational positions.

Today and at the moment, Shell staff are re-applying for some 15,000 roles within the divisions that we have restructured.

Around 5000 staff will leave the Company as a result of this restructuring, and the reorganization as a whole will be complete by the end of 2009.

We do expect to take a restructuring charge to reflect this, with the fourth quarter results.

Moving onto the portfolio.

We are making good progress with the portfolio.

Upstream, we have around a million barrels a day in the construction, and substantial additional options under design.

Downstream, we have an asset sales program from the noncore portfolio, together with selected grow projects.

Let me give you some highlights of the third quarter.

On the upstream, two of the new projects in Sakhalin II and Ormen Lange in Russia and Norway respectively reached production plateaus.

Production performance in the ramp up stage of both projects has been better than we had expected.

We also made good progress with the next generation of upstream production.

We took FID on 15 million tonnes per year Gorgon LNG project in Australia, and entered in Front End Engineering Design for what we hope will become the world's first floating LNG development.

Looking further into the future, we had exploration success in the quarter with the Vito oil discovery in the Gulf of Mexico, and Achilles-1 gas discovery in Australia.

In the downstream, we agreed to sell our activities in Greece, and we used GTL gas-to-liquids jet fuel for the first time on a commercial passenger flight on a flight from London to Qatar .

Sakhalin II has made very good progress this year, the September average production was some 335,000 barrels of oil equivalent per day and ahead of schedule.

We reached daily production of more than 400,000 barrels a day oil equivalent per day in October, which is the planned peak production.

Both of the LNG trains are online, and LNG is being delivered to Japan, Korea and other customers.

This has been a very well executed start up and in a difficult operating environment.

Now let me update you on the third quarter results, and I'll start with the macro picture.

If you look at this picture compared with the third quarter of 2008, oil prices were significantly below the 100 plus levels we saw a year ago.

Natural gas and LNG prices were also down from year ago levels.

Refining margins remained under pressure for the quarter, and were significantly lower than year ago levels.

The chemicals environment remains challenging, with low margins than a year ago in the Europe and the US, although we have seen an uptick in demand in China.

Given this background in Q3, I'm pleased with our operating performance.

Turning to earnings and to highlight to you, there is a detailed information on the quarter available in spreadsheet form on our website, and I hope you find that new disclosure is useful.

Earnings for the quarter included identified items of $371 million, and that credit.

But that included an asset impairment of $1.1 billion offset by other gains.

Excluding identified items, CCS earnings were $2.6 billion and earnings per share decreased by about 67%, compared with the third quarter in 2008.

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

The cash flow from operations for the quarter was $7.3 billion.

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

First, upstream.

Upstream earnings decreased by 73% to $1.7 billion in Q3 '09, (inaudible) oil and gas prices were the main factors behind this decline in earnings.

Much of the Shell natural gas and LNG portfolio has price realizations that are lagged to spot oil prices, typically on a four to six month time lag, and longer than that on some of the LNG contract.

What this actually means is that although oil prices did increase from the second quarter levels, Shell LNG earnings didn't increase by the same extent due to the contractual lag effect.

In addition, the environment for gas and LNG trading activity was poor and has deteriorated, both the second quarter and the year ago levels.

These factors have all combined to soften the upstream results.

The upstream production was similar to year-ago levels, at around 2.9 million barrels of oil equivalent per day, but within that, the new fields and ramp ups more than offset the natural field declines, adding 180,000 barrels of oil equivalent per day to our production.

Our LNG sales volume increased by 13%, 1, 3 percent, Q3 to Q3, with increases from Sakhalin in Russia, and the Northwest Shelf in Australia more than offsetting the security-related gas supply shortfall in Nigeria.

The upstream operational performance has been good, but against a background of weak pricing and trading environment.

Moving to downstream.

Downstream earnings declined by 62%, versus a year ago level, to $0.8 billion on the clean basis.

This decline was due to losses in refining, partially offset by earnings from marketing.

Chemicals earnings have improved, and mainly by Asia.

Shell's Q3 to Q3 refinery intake fell by some 8% as a result of weak demand and economic run cuts.

The marketing earnings did decrease versus a year ago levels.

However, marketing earnings actually increased from second quarter 2009 levels, with higher earnings from retail, from aviation and commercial fuels, a slightly weaker trading result.

Shell's marketing portfolio has proved very resilient in the face of the really tough economic environment.

Those are the results.

Turning to the cash flow and the balance sheet.

A look at the cash position over the last 12 months, the rolling twelve months, upstream and downstream segment cash inflows have been broadly balanced against the outflows.

Cash flow positions improved from the second quarter 2009 levels, which is something we watch very closely.

We are using the balance sheet to finance some of our medium term growth projects across the bottom of the macro cycle.

As a result the balance sheet gearing was 13.7% at the end of the third quarter.

Gearing has increased across this year but it still remains below the 20% to 30% guidance range.

Before we go to your questions, let me make some comments about the costs.

We reduced Shell's operating costs by some $1 billion before tax in the first nine months of 2009.

This figure is a good snapshot of what we have already achieved.

It excludes exchange rate movements which have reduced headline costs by a further $2.5 billion, and it also excludes other noncash accounting effects.

This improvement comes from a number of areas.

Transition 2009 Program, simplifying and standardizing our activities to reduce supply chain costs, a hold back on discretionary spending, a low utilization rate and energy costs.

But good progress here, and of course there is more to come.

Let me summarize, and then we'll go for your questions.

I am pleased with the operating performance in the quarter, despite the difficult environment.

We are taking a prudent approach to the down turn.

Our cost programs are on track, a $1billion of cost reduction year-to-date, and staff reduction of some 5000 expected to conclude by the end of the year.

We have the financial flexibility to continue with our investment program.

And at the same time, we are keeping an eye on the medium term, launching selected new projects and continuing with exploration.

And by taking these steps, we are bridging the pier to the Company, and the shareholders into that period of growth that we expect in 2011 and 2012.

With that clear, I'll move to take your questions.

Please could we just try and restrict ourselves to one or two each, so that everyone has the opportunity to ask a question.

Thank you for helping out with that.

Operator, I'll conclude now.

Please, could you poll for

Thank you.

(Operator instructions)

First question is from Mark Bloomfield from Citi.

Good afternoon, gentlemen.

A few questions on the asset payments, please.

First I just wondered if you could clarify how much the $1.2 billion was in the E&P.

And second of that E&P impairment I just wondered you could state whether any assets were individually, a material part of that total, if so, what those assets were?

And thirdly, I wondered if you could run us through the main reasons for those writeoffs, exploration, was it change in timing on awaiting development or perhaps any change in commodity price assumptions on producing assets?

Thanks.

Thanks, Mark.

Good start.

The $1.1 billion is the total impact on the identified items of which $800 million was in the upstream, and it was all of what we might want to call EP.

The largest single item was some Canadian heavy oil in situ properties, but that was less than $300 million.

So there was a variety of the assets in here.

So about a quarter of the total was downstream, which again there are multiple assets.

The prime reason for the impairments is every third quarter, we do a comparison of future cash flows expected from an asset against the carrying value.

And if one falls below the other, we do an impairment test and normal ISR rules.

So a variety of reasons affecting this, from a low expectation for future cash flows, to maybe a later development in the case, of for example, Canadian heavy oil is taking a later view on later development than we otherwise might have expected.

So that's what's driven it really.

There is no major single item in there.

Thanks.

Okay, I'll take the next question.

Next question from Jon Rigby from UBS.

Please go ahead with your question.

Yes.

Couple of questions.

First is the on the pensions, and the cash out.

The charge that you are making.

If we just assume all equal, as we stand right now, leaving marks where they are, how much you paid into the pension fund et cetera, can you just comment on how much you expect more to pay from the pension fund if anything?

And also how this would then feed out through your P&L, into 2010?

We could be taking any further charges, et cetera?

The second is just on the likely benefits of the job reductions that you are talking about.

Obviously, you probably at this stage, can't comment on the value.

But from your judgment, what would you say are the associated costs that come with each person?

So what could we think about sort of multiplier of the payroll effect that you save by losing jobs on your staff?

Thanks, John.

And I'll work my way through the pension situation overall.

Differentiating the cash and the P&L issues, they don't run in the same phasing.

Earlier this year we said we expected to book $6 billion to $8 billion into the pension fund in cash terms, and to address some of the deficit we were carrying forward.

Of that, the annual amount contributed under normal circumstances is somewhere between $1billion and $2 billion and that normal circumstance contribution will be $1.5 billion, or slightly over.

We have in the third quarter injected additional funds such that the total contribution to the pension funds, we now expect $5 billion this year, of which $4.2 billion has already been paid out by the end of Q3.

Another 0.8 to come, which is basically the phasing of the normal payment.

That is slightly less than the 6 to 8 guidance we gave, has been helped by equity market recovery, our Dutch fund, with it's regulatory requirement is now back in surplus.

So we don't expect equity markets staying where they are, so a further additional supplemental contribution this year.

The P&L charge is also typically between $1 billion and $2 billion, given where the -- was at the year end, and that is again around $1.5 billion level this year.

It was actually a credit last year, so the year-on-year difference is quite material.

And under the staff costs, benefits from the jobs we take out, the 5000 jobs reduction so far in Q3, by the end of Q3, there is only a few hundred that have actually left payroll.

But the 5000 should feed through from Q1.

At least in part from respect for staff I think it is best we update on the costs right when they are actually done.

And off the $ 1 billion dollars that we've already saved, very little comes from the 5000.

Maybe a bit from some of the reorganization and the supply costs that we did, but the $1 billion dollars everything that comes from the 5000, should be incremental going forward to the $1 billion dollars we have already delivered.

But would I be right, in assuming that along with the payroll costs associated with those people, a quite significant, the secondary costs of pensions, relocation, office space?

Real estate, IT, yes, you would be right from making that assumption.

Okay?

Thank you.

Next question?

The next question comes from Alejandro Demichelis from Bank of America.

Yes, two questions if I may.

The first is coming back to the impairment.

My understanding is you have some tax credits offsetting these.

Should we assume that you should be paying a lower tax rate going forward?

That is the first question.

And second question, about the costs savings that you have seen so far.

How much are you factoring in, in this $1 billion here for foreign exchange gains?

Thanks, Alejandro.

The tax credits were all essentially were all in our favor, related to settlements of outstanding issues, or a recalculation effectively of interpretations being available on deferred tax balances.

So that will not have any impact going forward.

Normally we are sort of 45% to 47% tax rate.

It's lower this quarter because of those one off items but they are really generally one off.

In the cost, the $1 billion is actually any impact from foreign exchange movement.

Our actual costs in year-to-date were $2.5 billion lower just as a result of foreign exchange movement.

So, been a very significant movement, but it would be imprudent of us to comment about including them, as the exchange rate just gone in exactly the opposite direction.

And of course the costs will go back up again because of that.

So it's a cyclical affect on the FX.

The $1 billion is clean of FX.

Okay, thank you.

Thank you.

Thank you, and your next question from Theepan Jotghalingam from Morgan Stanley.

Hi, Simon and good afternoon.

I have two questions, actually.

Firstly, in EP and your exposure on to European gas.

I saw demand and prices negatively impacted the profitability of that business.

I was just wondering what you see going into Q4 and then into 2010 if you could give us some visibility there?

And the second question is on DD&A Again, so stripping out for impairments is not a huge sort of increase in DD&A.

I was wondering if you could give again a little bit of visibility on where you see group DD&A moving both in Q4 and then into 2010?

Theepan, thanks and thank you for the question.

The European gas market has been a significant factor.

We have seen reduced demand through all sectors really particularly industrial and commercial demand in the industrial heartland.

That has had a not an impact on prices at the margin.

However, more than half of our European gas is sold, linked to oil prices, usually a combination of distillate and fuel, and by definition, of course that lags the oil price roughly by three to six months.

Sometimes longer.

And therefore, our EU realized gas price headed downwards in the third quarter, relative to the second quarter.

One thing you don't see and what we actually report is the Netherlands gas prices, which is a significant part of our gas production, but is not a consolidated company, and therefore, doesn't hit the average that we report.

So overall, sequentially, European gas prices were moving down in Q3 because of the lag.

That does mean they are going forward into Q4 2010, there should be some reversal there, as the gas price reflects the improvement in oil price that we saw from March April onwards.

So at the moment gas prices are really reflecting that March, April trough.

As we go into 2010, obviously two things matter, one is the weather, initially.

And secondly is the pace of recovery, if there is one in the commercial and industrial sector.

The weather is by far the most significant factor in the short-term.

Hopefully that covers the question.

DD&A, not a large increase, actually the impairment above, that is correct.

We have two factors at work here.

Obviously we get depreciation on new products coming on stream which tends to increase.

But over time, we are booking more reserves against already producing assets, which tends to reduce the unit cost over time.

Or the unit DD&A on those assets over time.

The more conservative your booking approach, the more you see that effect.

And this year, those effects are roughly offsetting each other.

As we go forward and we'll bring more new production onstream so you can expect the DD&A on rise over time.

Hope that covers it.

No, thats perfect.

Could I just come back on European gas.

Are you seeing sort of from an underlying perspective any improvement in industrial or commercial demand?

As of today, to be honest, no, we are not.

Move onto the next question.

Thank you, the next question comes from [Ian Reed] from Macquarie.

Hi, Simon.

Just one question please, on Nigeria.

There has been a fair amount of news recently, with a reduction in insurgency.

And also the renegotiation of various contracts you have there.

Could you just bring us up to date on exactly what your, what's going on in those areas as far as it affects you, and how you see any potential production recovery on the basis of reduced insurgency?

Good question, and there are many moving parts in Nigeria.

I'll try to give -- do justice to a couple of them.

First of all, the reduction in the insurgency, or as a result of the amnesty process that the government initiated, yes, there has been some good progress.

It is good to see.

There are however still security issues.

We have challenges from theft, as well as just security, as our production is about 1,209,000 barrels a day down this year relative to last year in the quarter.

So quite significant.

And it really is too early to say, how sustainable the more positive climate will be.

We, as Shell, are working, actually with both parties, both the government, and the parties in the delta to help try and ensure we can create positive economic activity and opportunities, such that we will result in a more stable situation overall.

But the situation has been volatile, likely to be awhile before we can give you a more definitive answer.

But it is actually more volatile place than we were three months ago.

And the renegotiation of various licenses there?

The license, yes there have been a lot of press comments.

Not all of it consistent with each other.

I know you are aware of issues between Nigeria and China.

We wouldn't comment on any particular assets.

The speculation that you have seen suggests that the Nigerian government would sell their share.

And it's another one of those issues where we actually wait for the government, and any candid parties we are really talking to come to, what the actual impact might be on our situation.

The -- one thing you probably will have seen and can be sure of, both ourselves and the industry will defend our interest.

Of course the overarching issue of the petroleum industry though, is also in the background.

And we are in discussions with the government, You will have seen that Peter Voser met with the President last week.

And we do see relatively positive developments recently, relative again to three months ago.

and the level of discussion the type of discussion that is going on, not just with the industry, but with multi-lateral agencies and multiple stakeholders within the country.

So Move to the next question please operator.

Thank you, the next question comes from Irene Himona from Exane BNP Paribas.

Good afternoon, Simon.

Two questions, please.

Can you briefly comment on the results of oil sands, which is now sort of hiding in the upstream.

And secondly, looking at the $1 billion cost reduction, how much of that is due to the environment?

In other words, lower energy costs?

Cost deflations versus internal?

In other words, how much would be sustainable if oil and gas prices moved back up again?

And related to that, since transition 2009 in July, could we anticipate an acceleration next year?

Thank you.

Thanks, Irene.

The oil sands is back in profit but that does benefit from the oil price going back up but still remains relatively immaterial.

Given the production you see that is maintaining at a reasonably stable level now.

What we are seeing, is over time, we are squeezing costs out of the operations up there.

So, we are pleased with the performance as it stands.

The $1 billion dollars, how much is due to the environment?

Well, not much in terms of energy and fuel.

Most of this is sustainable and most of it in the downstream actually for year-to-date.

And some of it reflects lower supply chain costs as well, which are sustainable as long as you can negotiate the third party contracts.

So with the almost all of the $1 billion dollars being sustainable into the future, Transition 2009 isn't really kicking in much at all yet because people haven't left the system.

We do expect of course a significant severance role, or redundancy provision in the fourth quarter, but anything benefits we see will be fully additive to the $1 billion dollars.

Thank you.

Thank you, the next question comes from Lucy Haskins from Barclays Capital.

Hi, Simon.

Two questions, please.

The first is the cash flow clearly was a lot more resilient in the quarter than the earnings.

Was there any sort of things you particularly draw to our attention in respect to that?

And the other thing is actually in the statement I think Peter Voser referred to, taking shareholders into significant growth in coming years, is that a reference to the growth period that you referenced in your address of 2011, 12 or is this something beyond that?

Thanks, Lucy.

The cash flow, the $7.4 billion is more a reversion to the mean, it was the second quarter that was all -- largely because of the pension fund contribution and the increase in the working cap.

There are no special items really in that cash flow.

As we go forward Q4 has some one off tax payments that are normal for phasing for the Q4, and may not be as high as 7.3, but this was pretty much where we expected it to be.

I guess -- where it seems good was relative to year ago levels -- down sort of 25%?

So was there anything -- sort of a year ago that we missed?

A year ago -- a quarter very significant oil price movements.

This is stripping out working capital movement?

Inventory movements were quite significant.

I wouldn't actually -- I'd draw more attention to this year than last year, just as what we would normally expect of cash flow generation.

On the growth comment by Peter, it's really a reference to the same period of growth, the million barrels a day of production that we are constructing that's currently on the balance sheet in effect, and that will and is progressively coming on stream.

Of course 150,000 barrels already on from BP 10, Sakhalin, but Gorgon's added to the queue as well, so roughly around a million barrels, and in 2011, 2012.

Would you feel given, the best sort of the fastest delivery of plateau, and some some projects we have seen at this quarter stage, that you might feel more optimistic you could manage some growth into next year?

Theoretically, it would be good to be able to say that, but I also got a few variables such as Nigeria, I wouldn't want to commit myself on until I have got more certainty.

So we are actually very pleased with the factors we have achieved, and let's hope we carry that forward into next year.

We will be holding a strategy update in March of next year, and that will be a good time to take stock on some of these questions, on the different parts of the portfolio and how they will evolve.

Thanks.

Thanks, and move on to next question please.

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

Good afternoon, Simon.

Wanted to see if you could give more color on the integrated cash segment, just noting profits down 222% sequentially while LNG volumes were up 20%.

In particular, wondering if you could split out three primary components at least as qualitatively.

One being any timing effect on dividend receipts, recognizing income from liquefaction ventures?

Secondly, the rate of change in trading which it sounds like was down sequentially, perhaps considerably so.

And finally any negative effect from the absence of cargo diversion capabilities in the third quarter, relative to the second quarter?

Thanks, Robert.

You almost answered your own question.

Yes, all three of those were negative.

I wasn't looking for a yes or no, but more a dollar amount, but --.

All three have has an impact, I would say the first two are around $100 million each, give or take.

The negative effect from cargo diversions.

We put the cargo as well where we could put the cargo is where we did, and what could it have been the margins been, is a moot point.

Okay.

Any just general thoughts you may have on whether or not the increase in volume you have exhibited already, and are expected to see going forward, particularly the Soku coming back online.

To what extent that is sort of canaballistic in that higher supply going into a flattish or slightly improving demand environment, deteriorates margins, more than it improves the volumes?

Well, most of our volume is still effectively built on long-term supply contracts..

and Nigeria effectively declared majeure.

And of course winter is coming in Europe, so the weather should give a boost of demand there.

Most of our (inaudible) cargoes have gone into the middle east and Asia, and it has been a good opportunity to develop new markets such as Q8.

Thanks, Simon.

We'll take the next question, please.

Thank you, the next question comes from Neil McMahon from Sanford Bernstein.

Hi, Simon.

Just a few questions.

First of all, looking at your refining -- refinery asset sales, is it fair to presume that the refineries you have got on the block are not making any money at the minute?

And you have alerted 15% of your asset is that a minimum number, or should we be thinking about that actually increasing if you continue to see weak refining conditions?

And I got a second question, please.

Is it possible to take the second question, if I don't get pulled into market pulse now?

Sure.

The second question is on your exploration success so far this year.

Could your run through sort of what your hit rate is, and what have been the key successes so far this year?

Thanks.

Thank you.

Refining up 15% of production or capacity as it was, Europe, New Zealand, and Canada, and within Europe, it's the UK and Germany.

And I wouldn't like to say it, is the current profitability but the European margin is certainly not that profitable at the moment.

There are active buyers out there, and we are looking to negotiate an exit there.

I can't put my hand on my heart and say we will be able to do so, because we are not going to give the refineries away.

The refining as a whole, did make a loss in the quarter, although it has improved, the loss is less than the one made in the second quarter.

On -- as we go forward, you said, could you see 15% as a minimum?

The overall aim has always been to focus our refineries and and the larger assets and more complex assets.

I can't rule out further reductions in the footprint, but at the moment they are the ones -- and the one that I mentioned.

In terms of exploration, at the half year, we have700 million barrels oil equivalent added in the first six months, and since then we can add further discoveries in Vito and Achilles.

The primary discovery were in Australia, and the Concerto discovery which gave us the volume which will make the Prelude floating LNG project potentially economic.

In the Gulf of Mexico, we had the West [Boreas] discovery which will do the same for the Mars-B field new TLP opportunity.

it is additional volumes that we can hopefully monetize relatively quickly, the Cardamon-d discovery is adjacent, so we should be able to bring that on fairly quickly.

Vito, of course, is the (inaudible) planned in the Gulf of Mexico.

So we look forward to seeing how that one develops.

Achilles was adjacent to the Gorgon fields, and was quite helpful in thinking about, well, is three trains enough in Gorgon?

Chevron had announced earlier, so it is additional volumes there.

And the final one I would draw attention to is [Krog] in Norway, which was quite a large structure, but we only got one well in it, and it is a long way from land.

So we'll need to do a bit after appraisal work on several of the above.

But particularly Concerto in Australia and West Boreas and Cardemon in the Gulf of Mexico have quite early development capability.

Just on floating production, Simon, any idea the sort of gas prices or LNG prices I should say, you would require to make that feasible?

It would depend on the cost of course.

We are going through the feed now.

So it would come.

We expect that feed by early 2011 to give us an answer to that question but the answer would need to be competitive with projects such as Gorgon.

We wouldn't look at them differently, necessarily so, it would need be attractive relative to other opportunities.

Could we go to the next question?

Thank you, the next question comes from Richard Griffith from Evolution Securities.

Good day, Simon.

I just wanted to come back to you cost savings of a $1 billion..

Have you got a view on what you may or may not be able to achieve in 2010, particularly in light of the progress one of your competitors have been making on the cost savings front?

The $1 billion we have saved, we believe will be fairly sustainable.

It's mostly in the downstream.

Anyway, we haven't yet identified the exact amount, but we'll be expecting people to build into their operating plans for next year.

But we have said publicly several billion dollars of opportunity relative to the 2008 baseline, which is a total cost of 42, $42 billion that is.

And we would seek several billion dollars of opportunity, and that is on what we regard as a sustainable basis.

It is likely that the transition 2009 cost reductions will come through, from relatively early in 20109.

So the staff change there.

But there are several ongoing continuous improvement programs such as that in the downstream and corporate functions which will continue to contribute over a period of time.

Okay,thank you.

Okay, take the next question?

Thank you, the next question comes from David Klein from RBS.

Good afternoon.

Two questions if I may?

Firstly on, Sakhalin II.

Can you say anything at all about its earnings or cash flow contribution in the quarter?

Even generically?

And second, in terms of your previous guidance about gearing being in the low 20s for the end of this year, given that gearing only moved just over a percent in the quarter, is that previous guidance now out of date?

If so, could you update us on that and say what's changed?

David, thank you.

Sakhalin II is building up average 335 in September.

It was actually 64,000 barrels a day overall higher production than it was a year ago.

Because we were producing oil.

It's in profit and growing.

What we don't see yet necessarily, because its an equity associate, the cash flow will come from either dividends or equity redemption.

And the amount there remains relatively low, because obviously, the company is using its own cash flow to continue the drilling program.

So it's income positive or earnings accretive, not yet making much contribution to the cash flow.

On gearing, 13.7% at the end of the quarter, a good quarter of cash flow.

We do expect gearing to continue to increase in the quarter, absent any major changes in the macro, probably because of some of those one off tax payments as I referred to.

But also dividends in the CapEx.

We still expect to spend the $31 billion, $32 billion this year in investments, so that comes through in the fourth quarter.

So we are on the right side of the gearing advice of the guidance we've given.

I might expect it to come in a bit below where we originally expected it.

At least in part, because I think I mentioned earlier, the pensions, we've injected less cash into the pension fund than we expected, which is worth a couple of points on the gearing.

And overall, we've been squeezing cash out in one or two other places as well.

So maybe -- we'll see where it ends up in the fourth quarter.

But it is likely to be on the lower side of the previous guidance.

Thank you.

Okay.

Next question please.

Next question comes from Mark Gilman from the Benchmark Company.

Simon, good afternoon.

I have two questions.

First the on the upstream earnings, at least based on our preliminary thinking, and taking into consideration your comment a moment ago regarding trading, it very much looks to me as if costs went way up in this quarter, as opposed to falling.

Unless there are some other tax related effects that are buried in there.

And I was hoping you might be able to comment on that.

My second question, relates to the comment in the release, regarding the fact that underlying production increased, despite being flat on a reported basis.

Now it's clear that entitlement volumes under production sharing contracts, and a lower price environment were probably up.

So I was hoping that perhaps you might clarify what you mean by underlying, whether it includes -- excludes OPEC quotas, and being able to reconcile those two statements.

Thanks, Simon.

Well, the Benchmark, good to hear from you -- the upstream earnings did costs go up.

Well, fortunately I mentioned earlier, the supplementary data , hopefully you will be able now to see exactly what the upstream cost is.

And no, they didn't go up, they remained flat.

So the upstream and earnings were basically hit by the fact, their earnings sensitivity.

The $18 million per quarter per dollar of movement on the oil price, $90 million per dollar movement in the Henry Hubb gas price per quarter.

And that explains basically most of the earnings movement, as there aren't that many other factors.

The underlying production.

The PSC jets (inaudible) they gave us about one percent of production, but offsetting that was about same amount on OPEC acquisitions -- divestments basically offset, so that left the weather.

So we didn't have hurricanes this year, which gave us an additional 90.

Nigeria where we lost 120.

New field ramp ups, just under 180 and decline has run around 140.

So the underlying production, if you work out back, effectively the ramp ups against decline is an increase.

But overall headline is flat.

So that is really what makes the difference in the financials, what we

Thank you, Simon.

Next question?

The next question comes from Colin Smith from RCAP.

Good afternoon.

I have a fairly similar comment to Mark's, because I think certainly if you look at the production movements sequentially you have delivered a pretty low result compared to peers in the upstream.

I wonder if you could go back to that additional segment information, and just talk to the various line sit temperatures there on the sequential basis perhaps, and just identify any you think might be going down coming up or staying the same going forwards from here?

There are some quite big movements there.

Okay.

We have maintenance season in Europe and gas demand is been well down in Europe, so that has taken us sequentially down quite materially, Q3 against Q2.

We have some growth in Asia pacific as a result of a Northwest Shelf gas volume.

And Nigeria of course, is down year-over-year, but flat sequentially.

Elsewhere -- although we did come back up a bit offshore in Nigeria which is a help.

Elsewhere, Russia is the main contributor going up.

In the USA, sequentially, we were down down again, the maintenance effect in there.

But primarily, those are the main factors that we have seen.

I don't know if it helps but just check on.

I mean for example, if you are looking at $35 million -- $45 million for example, for production manufacturing expenses in the third quarter, against 32 66 for the second quarter, is the 3.5 the number we should be thinking about going forwards, or is it come back to something lower?

And the same kind of comment for the others.

I guess the much lower profit from equity account investments you kind of touched on I guess, in the LNG comments and the comments for gas pricing for (inaudible)?

Yes, of course, Woodside is in there as well.

So equity associates is almost all price effect.

And everything I have said about cost does not relate to costs within the equity associates themselves.

Or tax for that matter.

So the sequential performance is largely as a result of the volumes that you see.

The cost sheet you refer to, both upstream and downstream, are probably running around trend levels, but will go most likely back up again in Q4, at least as reported, because the dollar has weakened materially as we have gone through the year.

And I would expect to see some severance provisions.

Because the underlying costs we expect to move in the opposite direction sustainably.

For the -- hopefully -- the advantages of the greater granularity we've given will be to give you and maybe veterans insight into the key drivers of the business performance.

Okay?

Take the next question.

Next question comes from Jason Kenney from ING.

Hi, Simon.

Hi, Jason.

Have you got a potential range for the restructuring charge that might be taken in Q4?

And secondly, I see there is a couple of headlines on Peter Voser's comments this morning that a dividend freeze is certainly possible in 2010.

Would you say possible or likely?

Thanks, Jason.

The potential range for restructuring charge could be quite significant, it would be hundreds of millions.

I don't think it will top a $1 billion.

But to be honest with you we don't know until we have gone through the full process and we know the names and the countries involved.

Dividend freeze, I think at the current macro and the current expectations for investment, there is a reasonable probability that we will freeze the dividend as we go forward.

But of course it is a decision reserved for the board, and not one that's been taken yet.

Thank you.

Time for a couple more questions I think.

The next question comes from [Alissa Sim] from The Moore.

Hi, Simon.

To come back to the question of upstream equity affiliates.

I guess you hinted that a lot of this is due to Nam and Woodside, down what is the main profit driver of Nam, in particularly in the fourth quarter, is it contract pricing or is it spot pricing?

Most of it is contract pricing, and the main driver is production.

The driver there obviously is the weather.

So more than half for NAM itself, well over half is long-term contract pricing.

So it's oil and gas

(Audio difficulty)

on average four or five months ago.

Thank you.

Okay.

We'll take the last question please.

The final question is from (inaudible)

Hi, Simon.

I have a quick question on gas price,s or a request on gas prices.

Given most of us don't model associates separately, or at least I don't, would it be possible to consider giving us an estimate of group European gas prices, and group Asian gas prices in the next set of quarterly results, because you have already highlighted, the lack of having NAM realizations in their mix in those numbers and perhaps a little less helpful than they could be.

It is a really good suggestion.

One we might consider.

But I would point out that it is actually not easy to get prices from all our parts of the companies.

Something like NAM is rather more transparent than some of the other companies.

So point taken and it is in our best interest to help you understand this gas pricing, because clearly, as we go forward, we are seeing an increasing proportion of gas in our production mix.

So thank you for the suggestion.

All I can say, is that now more than fact lower in Q2, it should lower than Q2, it should improve again in Q4.

Okay.

And thank you very much.

I think we have exhausted questions now.

Thank you for joining us today, and your time and thank you for the questions.

The fourth quarter results will be released on the 4th of February, 2010 that is.

And we are planning a strategy update for March the 16th, 2010, which hopefully will be an opportunity to talk a little bit more in detail and in-depth about some of the themes underpinning your questions today.

I look forward to speaking to you all then, if not before.

Thank you very much and have a good day.