殼牌 (SHEL) 2015 Q1 法說會逐字稿

Welcome to the Royal Dutch Shell first quarter results announcement call.

There'll be a presentation followed by a Q&A session.

(Operator Instructions)

I would like to introduce your host, Mr. Simon Henry.

Thank you very much.

Ladies and gentlemen, welcome to today's presentation.

We announced first quarter results this morning.

I'll take you through them, because there will be plenty of time for questions, and Ben will join us for the Q&A session.

And just before I kick off, an auspicious day today.

Not only do we have the BG acquisition in the background, but it is my 25th opportunity to discuss with you as the CFO, the results.

And believe it or not, the 100th time I have done this within Shell.

So I look forward to appropriate treatment later.

Before we start, let me highlight the disclaimer.

Earlier this month, we announced a recommended offer to acquire BG.

This is an important transaction for Shell.

The combination with BG would accelerate our financial growth strategy, particularly in deepwater and liquefied natural gas, both of these already growth priorities for Shell, and areas where the Company is one of the industry leaders today.

We have assessed this transaction on range of parameters, including the intrinsic value.

Now this is a transaction which delivers value for both sets of shareholders, across a range of oil prices.

The transaction would be accretive to earnings per share and cash flow per share in a relatively short time scale.

It would have a strong complementary fit in the number of countries, and this plus the efficiencies that would come from joining the two companies together, should leave the substantial value creation for shareholders over time.

All of this should be also be a springboard for a higher rate of portfolio change at Shell, with an increase in asset sales, a reduction in the combined capital investment, and a reduction in the number of longer-term portfolio themes.

This should enhance our future dividend potential, and of course, the potential for share buybacks.

Though it is an exciting next step for both companies, but let me just say there is no change to the strategic priorities set out for Shell a year ago by Ben.

We are driving an improvement agenda today throughout the Company.

This is all about getting to a more competitive financial performance, improving our capital efficiency, and ensuring that we continue with the strong project delivery.

The strategy is working, and it is a leading today to a more competitive performance from Shell.

And that emphasis won't change, and it is important we continue to drive that agenda in 2015 and beyond, as we prepare to consolidate BG into Shell.

Our current cost to supply earnings for the quarter at $3.2 billion excluding the identified items.

They were, of course, impacted by lower oil prices, although some offset from our integrated business model.

Dividends were confirmed at $0.47 per share for the quarter, and $1.88 per share for 2015.

We are continuing to curtail our capital investment, guidance today around $33 billion or less in 2015, and that is a reduction from what we announced three months ago, of around $35 billion.

Although the market for asset sales is difficult, we have made progress in the quarter, completing certain divestments in Nigeria, and making new announcements in Oil Products.

And as I've mentioned, we have announced a recommended offer for BG, which we expect to complete in early 2016.

Turning first to the macro for the quarter, which has had quite some significant impact.

Shell's liquids and natural gas realisations declined substantially from the first quarter of 2014.

Brent crude oil prices, some $55 a barrel lower or around 50% than a year-ago, and similar declines in WTI and other markers.

The realised gas prices, 27% lower than the year-ago levels, with an even stronger decline in the gas prices in North America.

On the Downstream side, refining margins around the world were supported by lower crude, and higher levels of industry planned and unplanned downtime, particularly in the United States.

Industry base Chemicals margins declined in Europe and North America, as ethylene prices fell along with crude.

However, intermediate margins increased on the back of reduced feedstocks and energy costs, but also improved market conditions.

Now exchange rates moved sharply.

Compared to Q1 2014, the US dollar strengthened against the euro and the Brazilian real by more than 20%, and the Australian dollar around 14%.

In the quarter, the average movement was smaller, but still 8% and 4%, respectively, it has quite a significant impact on our results.

Now turning to those results, excluding identified items, our current cost of supply or CCS earnings were $3.2 billion for the quarter.

That's a 56% decrease in earnings per share from the first quarter of 2014.

On a Q1 to Q1 basis, we saw significantly lower earnings in Upstream, but higher earnings in the Downstream.

In the Upstream, earnings obviously impacted by the significant fall in the oil and gas price, but also lower trading contributions and exchange rate effects.

In the Downstream, results improved.

This reflected the higher industry margins, but also the steps taken by Shell to improve financial performance, such as from the divestment programme and the underlying improved operating performance.

The return on average capital employed across the group was 8.4%, excluding the identified items, and cash flow generated from operations was some $7 billion.

Our dividend distributed for the first quarter of 2015 is the same as year-ago levels, at nearly $3 billion or $0.47 per share, and we repurchased around $400 million of shares earlier in the first quarter.

We have more recently, of course, halted that share buyback programme to conserve cash in the lower oil price environment.

Our Upstream earnings excluding the identified items for the first quarter were nearly $700 million.

That's a decrease of some $5 billion compared with Q1 of 2014.

And this figure includes $4.7 billion reduction just from the oil and gas price alone, a very large move.

And many of our LNG contracts are time-lagged against oil, by somewhere between three and six months.

Therefore, the first quarter of 2015, the LNG earnings do not yet fully reflect the drop in oil prices that we saw to date this year.

Now, on a Q1 to Q1 basis, we also saw an $840 million reduction in earnings, Upstream total, due to the increase in deferred tax and balances, as a result of that weakening Australian dollar and the Brazilian real.

This was not taken as identified item, but negative $840 million in the clean earnings.

These were very large movements which masked some positive effects from the growth barrels, from lower costs and lower exploration charges.

The headline oil and gas reduction for the first quarter was 3.2 million barrels oil equivalent per day, excluding 190,000 barrels oil equivalent per day reduction from the asset sales and license expiries.

While the overall volumes decreased, the underlying volumes increased by around 1%.

The volumes are supported here by the ongoing ramp-up in deepwater sales, Nigeria, Malaysia, Gulf of Mexico.

Maintenance impacts compared to last year increased.

This included Pearl Gas-to-Liquids train 1 in Qatar, which was in planned maintenance in the first-quarter, and production there at Pearl has recommenced during April.

In the Netherlands, the Gronigen gas field production was impacted by curtailment -- of a capacity curtailment requested by the government by 105,000 barrel oil equivalent per day.

But this was fully offset in the quarter, by the release of volume from underground storage.

But that is just a Q1 effect.

Now both effects are included in the performance category on this particular slide.

Our LNG sales volumes in the quarter were almost 6.2 million tonnes.

That is up 1% year-on-year, reflecting good operational performance, but partly offset by the impact of the Woodside divestment in the second quarter of last year.

Turning now to the Downstream.

The underlying earnings were $2.6 billion, 68% increase driven by higher Oil Products results, slightly lower Chemicals.

In Oil Products, we benefited from increased refining margins, but also had much better operating performance.

We have higher trading results, lower costs, some offset from lower contributions from marketing.

Chemicals earnings was slightly lower than the year-ago levels, but stronger intermediates offset the lower base Chemicals results.

The refinery availability averaged some 95% in the first quarter, strong and improved performance compared with last year.

In fact, probably our best ever.

The Chemicals availability at 84% was lower than the year-ago, and that's basically due to the downtime at Moerdijk in the Netherlands.

But that itself was improved from Q4 2014 levels, as we continued to make progress with repairs there.

Now Moerdijk cracker is on track for a second half 2015 start-up.

That should be earlier than expected, and at a lower cost.

Exchange rate impacts in the Downstream are a mixture of positive and negative.

They impact costs and margins, but probably minimal overall impact for the Downstream results.

Overall, this was a stronger quarter for the Downstream.

Return on average capital on a clean CCS basis was 13.4 percentage points at quarter end.

Downstream CFFO was around $10 billion over the last four quarters.

Now just looking at costs, these are actual cost that we see reported.

There are cost reduction programmes in place across Shell.

They look not only at our own costs, but also the supply chain.

It was good to see the progress on costs in the first quarter.

The total operating costs as you will see them in the P&L excluding identified items, fell by almost $1.1 billion in the quarter or around 10% year-on-year.

About 65% of that movement is a result of stronger US dollar exchange rate effects.

The remainder comes from our own actions to exit the non-core portfolio, to cut back on our pre-FID options, and ongoing cost reduction activities across the Company.

I remain convinced, there's a lot more to come here, as we drive down costs in 2015.

Moving on to the cash flow.

The cash generated from operations on a 12 month rolling basis were some $38 billion.

That's an average Brent price of $85 per barrel.

Free cash flow, that's cash generated less investments adjusted for M&A, was $2.7 billion in the quarter, and nearly $22 billion over the last 12 months.

Gearing at the end of the quarter was just over 12%, or 12.4%.

The returns to shareholders, dividends declared plus the buybacks were $14.4 billion over the last 12 months.

Just let me remind you of our financial priorities.

We expect gearing to increase in 2016, now particularly as we close the BG deal.

We updated our financial priorities with the BG announcement a few weeks ago.

The first priority remains debt paydown.

Secondly, growth asset sales, and then, project growth, a very important part of that.

Secondly, dividends remain our main route to return cash to shareholders.

And then, share buybacks have moved up in the priorities, will be assessed alongside capital investment, reinvestment in the business.

We did announce plans for at least a $25 billion buyback in the 2017 through 2020 period, assuming of course, successful completion of the BG acquisition, progress with the debt paydown, and oil prices recovering towards the middle of the long-term planning range.

Now we appreciate that at this particular point in time, modeling our results can be a challenge.

So to help you with this, this slide has some indications for the second quarter, also covered in the results announcement.

But you will also see an update on the sensitivities at the end of this presentation.

I won't talk to this slide, but I would emphasize it does cover the foreign exchange currency effects.

Asset sales in the quarter, these totaled $2.2 billion.

2013, we set out a strategic review of the Nigeria onshore portfolio, with an aim to reduce our onshore footprint, particularly the oil, and to refocus SPDC onto the gas value chains.

Now we've now come quite a long way here.

This has involved asset sales of some $4.8 billion in the last five years.

All in line with the Federal Government's of Nigeria's aim of developing indigenous Nigerian companies, in the countries upstream oil and gas business.

So recently, we completed the sale of the oil mining license, OML 24, and that was done by the end of 2014.

And OMLs 18 and 29, together with the Nembe Creek trunk line were completed in March this year.

Now together, these marked very significant progress in the onshore asset sales programme.

Going forward, SPDC will continue to focus new investment on the associated gas opportunities.

Now we've also continued to work on Oil Products divestments, where the assets sales including the MLP, Master Limited Partnership, last year they totaled around $4 billion.

Now recent announcements in Q1, covered marketing positions in Denmark and the UK.

Turning now to capital investment.

We set out a programme over year-ago, to moderate our spending in 2014, with a reduction in both the headline and underlying organic spending, and we are continuing with that approach in 2015.

On the one hand, we need to make sure we have an affordable programme, and on the other to maintain an attractive growth portfolio for the shareholders.

But I can update you today.

We now expect spending this year 2015, as around $33 billion or less.

So in other words, that's a $2 billion reduction of the $35 billion ceiling on spending, we set out three months ago.

Now we were very clear three months ago, this is a dynamic picture.

We don't make all our decisions on January 1. But what you see now, includes a series of pragmatic decisions on new opportunities.

For example, we pushed out the final investment decision on Majnoon, the full field into 2017 or later.

We've continued to reduce spending in resource plays or unconventional shale, by around 20% this year, and we've rephased the development pace of Carmon Creek, heavy oil in Canada, Phases 1 and 2. We aim to optimize the design, and then re-tender some parts of that project to take cost out.

And these steps, come on top of the cancellation of Al-Karaana Chemicals in Qatar, and the other portfolio decisions that we made earlier this year.

Now we did curtail our spending anyway coming into 2015, to get down to that $35 billion level, and we continue to review the appropriate spending levels in the Company, aiming to deliver that strategy of balancing growth and returns.

And lastly, just let me update you on the competitive position.

Now clearly, in the absence of a target, our actual performance on a competitive basis really matters.

So you know, we take a dashboard approach.

We are looking for a more competitive performance on a range of metrics over time, not just single point outcomes.

We have been trending higher on return on capital employed and cash flow, and last year we saw a significant uptick in the free cash flow.

Clearly, the oil price movements we've seen, will push a number of these metrics downwards, for at least the next few quarters.

We have seen though, that our competitive position is improving.

We will continue to focus on that.

There is no complacency here.

There remains still a lot we can do within our own arena.

So with that, let me sum up.

The results reflect the strength of our integrated business against the backdrop of lower prices.

Meanwhile, in what is clearly a difficult industry environment, we continue to take steps to further improve the competitive performance, redoubling efforts to drive the sharper focus on the bottom line.

Looking ahead, the proposed combination with BG should create a stronger Company for both sets of shareholders, and we are looking forward to completing this transaction in 2016.

The priorities that we set out, at the start of this year have not changed.

The strategy is working today, and is leading to a more competitive performance from Shell, and all of this underlines our commitment to shareholder returns.

So with that, I would like to move on to take questions.

Please could we have just one or two each?

The usual request, so everybody has a chance to ask a question.

Operator, please could you poll for questions?

(Operator Instructions)

Theepan Jothilingam, Nomura International.

Hi, Simon, hi, Ben.

Simon I don't know whether to congratulate you or commiserate you on the quarterly results.

But just coming back to the capital investment decision process.

Could you just talk about what further decisions you can make in 2015 that would reduce that $33 billion?

And does the decision to make an offer for BG change your view on CapEx going forward?

The second question relates to Downstream.

Strong performance with earnings, but I see a working capital build in terms of -- on the cash flow basis.

So could you just talk about how you see the working capital, particularly in the Downstream evolve through 2015?

Thank you.

Thanks Theepan.

The capital investment we -- there are two sort of levels, there is large decisions, some of which are just mentioned.

And then, the smaller projects, the $500 million or less that essentially are managed on a portfolio basis.

We are aiming overall to do two things.

One, just take costs out in the supply chain.

A lot of that activity refers to decisions or investment decisions not yet taken.

So while we make get cost reductions, they may not impact hugely in the current year, except on some of that small project suite.

The other areas really, deferring capital where that can be done without losing value.

I think though the balance that we've taken so far, shows you we're taking a fairly well-considered approach to that, working within our means.

There are one or two large decisions still coming up.

The first couple I guess, are the Appomattox investment, deepwater, a very large project decision, middle of this year.

And we also have other investment decisions on Vito, Bonga Southwest, and Libra in Brazil.

So Vito is also Gulf of Mexico, those are four big deepwater decisions.

LNG Canada and the Chemicals plant in Pennsylvania are probably the other large decisions in the next 12 months.

In all of them, we are looking at what's the right time, and what is the right cost base to go forward with.

In total, there remains 17 final investment decisions in 2015, 2016.

We are not thinking about just the one year of CapEx, we're looking at essentially the next three to four years.

Where we are well aware that we need, even without BG to be retaining some, as much flexibility and strength on the balance sheet as we can.

Now BG doesn't change our view on CapEx, well, for 2015, not really.

We do what we can do.

Our options are relatively limited.

Going forward, what we did say is that we would expect even in 2016 that the total investment, should be less than the simple pro forma addition, i.e.

to add up to less than $40 [billion].

Going forward, difficult to say anything more than that at this point in time, but clearly richer portfolio, set of options.

Hopefully we can make sure we get a good balance of choices.

Downstream capital build, the main reason it is come back a bit in Q1 is the price increase by the end of the quarter.

So we are heading up towards [$60] or so, and that will continue.

As long as the price increases, the working capital will increase.

If the question is partly about trade and working cap, yes, we did give them an open credit line, probably about eight or nine months ago now, which they've utilized up to $2 billion at from time to time.

I can't give you what there was any given point in time, but that's the level of working cap they've been using.

In addition, additional regulator requirements in terms of putting transactions over the exchanges is chewing up capital over time.

I don't have a figure for that, but we've previously spoken about $1 billion to $2 billion because of additional, and in our view not only unnecessary capital requirements.

But ones which increase the total risk in the market, and decreased the liquidity, and the ability to match risk for our customers, so worrying regulatory development which are not helpful.

But the primary factor at the moment is the increase in the oil price.

Thanks, Theepan.

We'll move onto the next question.

Jon Rigby, UBS.

Thank you.

Hi, Simon.

I have to say, I think your starting to get the hang of it slowly, on the quarterly.

So keep the good work up.

On the questions that I have, the first was your -- one of your competitors indicated that a likely delta to reflect the very strong trading condition as sort of $400 million to $500 million.

Would that be sensible number to think about in the context of what Royal Dutch Shell was able to do, just in the oil trading side.

I understand the cash trading was not as good this quarter.

The second thing is just on CapEx itself.

You referenced that you had the option to defer spending.

You clearly have the ability to go back to suppliers, and discuss lower pricing, lower invoicing.

But there's this third element to this, I think, would probably goes to the real problem the industry has, which is just how you go about doing stuff.

So do you think over the next two years to three years, we will actually start to see something fairly material, in resulting from some reviews and re-examination of how you go about doing projects, scoping them out, and then executing them?

Thanks.

Thanks, John.

I think you may be close to your own century actually, so thanks for the comment.

The changes in trading, and maybe I will ask Ben to comment on changes in projects.

But trading -- remember our trading business essentially is adding value to molecules that are flying through the system, the fuels value chain in practice.

So we produce 1.5 million barrels a day, we refine 3 million, and we sell 6 million.

So we double -- we refine twice what we produce, and we sell twice what we refine.

And trading is basically the glue and the activity that enables us do this in the most optimal way.

Now two years ago, Ben changed some of the organization, the accountability, the way we think about managing that value chain, building on somewhat we have been doing, including systems development.

And that transpires to a change in the accountability you have in practice, helped us add more value, certainly to optimize the value in our Downstream business.

We talked last year about that plus cost reductions, as adding maybe $1 billion in pre-tax to their earnings performance.

We are continuing to deliver that.

So trading is not a separate activity, it is embedded in adding value to molecules moving to customers.

Yes, the desks do operate 24/7 and they are operating some open positions with quite a limited value at risk.

But it would be wrong to characterize the activity as a standalone or separate from the day job of meeting customer requirements.

We did earn more on the Oil Products trade - or products in crude trading side, but it is only the order of a few hundred million.

And it is almost impossible to extract that from the pure refining results as well, which also had one of their best quarters.

Partly in at least, because they operated extremely well in the quarter.

I can't say too much more than that I'm afraid, other than that the improvements made are structural and will last for some time.

Now you asked a question about the -- will we see structural changes in the way that companies operate together, particularly on the project side, everything from scoping through design.

But there also maybe the complexity that we sometimes have, but Ben probably -- a good one for you to pick up.

This is about competitive edge as well.

Thanks, Simon.

Yes, thanks Jon.

I think a very good question.

It -- you have to derive -- at the moment it is all about making sure that we get the projects right, in terms of timing and decision-making.

So it is very, very much challenging, can we afford to take this on?

But also if we take it on, is the cost competitive in the environment within which we made a decision.

And if not, then we have to find a way to work harder on that.

And by and large indeed you can, of course, rescope to some extent, But if you assume that you didn't give the concept wrong to start off with, it is basically trying to either retender, or get a more competitive deal.

Now fundamentally, after you derive, a lot of the escalation that we have seen is somewhat more fundamental and structural, and we need to get a handle on that as well.

I've made it very, very clear with our projects organization, (inaudible) no doubt getting our projects to be absolutely competitive in the industry, and more generally getting our development portfolio more competitive.

I think it is a long-term license to operate issue, I don't think you can see it -- in any other way.

Now what are the things that we can do?

First of all, have better teams on it, and have better practices, better approaches, better scoping, less reworking, better upfront decision-making, front-end loading, all the sort of things that we have been doing for the last 10 years, which basically has moved us, by and large into the first to second quarter, depending on what types of projects you look at.

So I think we are probably getting at that point where we understand how to do that well.

But that clearly isn't good enough either.

We have to -- and I think -- and there's the right time for it.

Can we take complexity out of projects?

Can we have a more standardized approach to projects?

Because if you look at how projects have evolved over time, they are just taking a much more time, much more efforts, that take longer to build.

And some of it is the result of less experience in the industry, more overheating in general.

Probably also the result of higher and more difficult requirements that regulators and other, and maybe society in general puts on us.

But some of it is probably also sophistication, and perhaps we didn't quite need as much.

So simplifying, standardizing is another approach to take.

Now with it, actually very closely related to it, you can think of how do I transform the entire supply chain?

So this is not going back and renegotiating contracts, but actually working differently with core suppliers, be it technology suppliers, equipment suppliers, working much more with standardized solutions, long-term solutions, replication of designs.

Ordering multiple items, at the same thing, at the same time, because you know you're going to use it going forward in multiple projects.

And these are the sort of things we have been working on as well.

We are making progress in the sense that we have good enterprise frame agreements, that have strategic relationships, that we have investment themes like deepwater, like integrated gas, that we take sort of multiple project views on things.

But there is more to be done, Jon.

And I think yes, you will see leading companies, and I like to think ourselves being amongst those, taking different approach to projects, going forward along those lines.

Thanks, Ben.

Next question.

Oswald Clint, Bernstein.

Yes, thank you very much.

Maybe can I ask a question about the European gas business?

And kind of related to the NAM volume shut-in in the second-quarter, which is a decent chunk of volumes.

Does this especially in terms of not been able to store gas, does this pose any customer delivery gas contract issues for second half of year, certainly through winter?

And then ultimately, if you could just talk about the NAM be potentially shut in for longer?

Or is it an opportunity whereby pricing could strengthened, and could you can actually sell forward some natural gas into the winter months?

That's the first question.

And then secondly, I was just curious about going back to BG.

I kind of remember the slides, back on the day, it was $2.5 billion worth of synergies, plus some further upside potential.

And I think Simon, you were a bit -- I think the wording, your comments was much more about substantial value creation this morning.

So I just wondered, is that a change in wording over the last month?

Have you had a better look at this, is there more scope for that kind of value creation side?

Thank you.

Thanks, Oswald.

The gas business, no supply issues at the moment.

[Groningen] in field is historically active as the gas central bank for Europe, in terms of demand being driven by the weather.

It is actually been a pretty warm year so far as you're probably well aware, and no supply issues at all.

As we go forward to next winter, while cold winter could obviously put pressures on, the gas storage underground can be filled from sources other than Groningen.

And I would expect there are many more sources than just Groningen that can help prepare.

So we don't know actually what the government will request as we go forward.

The actual levels have changed a couple of times already, but we are not expecting significant impact on pricing.

In BG, the $2.5 billion [sales] synergies were externally verified, audited, then subject to regulator reporting rules.

Therefore they are real, but about as far as we can go.

It is only three weeks into it now, so of course, even though it seems longer in many ways.

So we've not done a lot to change that detailed view, and it is unlikely that we will for sometime.

What the substantial value refers to, is what I might call a rather more difficult to identify in value synergies.

So the $2.5 billion is reduction in spend, auditable.

The real value comes from what can you create, for example by bringing the two LNG portfolios together, from the deepwater expertise, technology, operational, that we can bring for example to Brazil.

And in general, as the BG portfolio matures more into development and production assets, they have perhaps more an area of strength for Shell, than it was for BG, which build great value around exploration and LNG market development.

So some complementary skills.

But obviously, value opportunity, while we see it, we cannot claim it, until the combination is in place, and we are delivering it to the bottom line.

Thanks, Oswald.

Move onto the next question.

Irene Himona, Societe General

Thank you, good afternoon, gentlemen.

I had two questions.

Firstly on OpEx, you mentioned Simon that you had a $1.1 billion reduction in costs in the quarter, of which such high percentage sales helps.

So that's $385 million, out of a $45 billion I believe cost base for Shell.

My question is how sustainable is the 65% which was FX related, and I you don't communicate external targets, but any comments would be much appreciated.

And secondly, I just wanted to ask if you can provide some visibility perhaps on the components of the Upstream Americas loss this quarter.

It lost over $1 billion -- Canada was half of the production.

Can you give some insight on the different bits of it, such as unconventionals oil sands, et cetera.

Sure, Irene.

Thanks.

So the $1.1 billion is year-on-year figure, so there's always a bit of seasonality in there as well.

In general, if the currency rates stay where they are, we would expect maybe a couple billion dollar reduction year-on-year, because they did move during last year.

I hesitate to stick my neck out too far, but we ought to be seeing, not entirely dissimilar numbers from self-help as well.

But it will be offset as new projects do ramp up, and create their own cost as well.

So very focused within the Company on delivering those numbers, and we will update you on a quarter by quarter basis.

We also aim to take the cost out forever, not just temporarily.

And Upstream Americas loss of $1 billion is -- you know the business, deepwater, heavy oil, unconventional, plus a bit of exploration.

Now deepwater and heavy oil absent the Brazilian currency movement, were about breakeven.

Brazilian currency movement, $300 million plus Alaska exploration spend plus -- roughly similar numbers these -- it's actually about a third each -- the ongoing loss in the unconventionals contributes to the $1 billion loss overall.

In practice, the unconventionals is in a much better place than it was a year-ago.

The challenge is a $2.50 Henry Hub gas price, and realized liquids prices well south of $50, given the nature of the market within North America.

I think it is fair to say that everybody is showing either a loss in the Americas or very close.

We may have what is apparently the biggest loss, but please reflect that $300 million is Brazilian currency, and a similar number for the spend so far in Alaska.

Okay, hopefully, that goes out.

Next question please.

Fred Lucas, JPMorgan.

Thank you.

Good afternoon.

A question around impairments and provisions.

On provisions, can you remind us what provisions have been taken by NAM, related to the [substantive] issue there, and what hedge do you have over those existing provisions, how much of the provisions have been consumed?

And on impairments again, you haven't taken any significant impairments.

We've seen today Statoil take a very substantial impairment, which I think is explained by them as a change in their medium-term price deck.

So on the same subject matter, could you remind us how you calculate, or how you do your impairments tests?

And at what point you overlay your medium-term price, beyond the curve?

And perhaps also indicate, if you were just to use the curve, as far as it can be seen out 2022, whether you will still be safe from those impairments?

Or whether the absence of the impairments relies upon that recovery to the midpoint of your $70, $110 price you -- so the question is really around, provisions and impairments, please?

Thanks.

I'll do the NAM provision first.

NAM, I can't remind you, because [I wasn't the one who told you].

It's not major at the moment, but we are looking obviously very closely at the developments in terms of compensation, can and should be calculated.

You may be aware of the parliamentary debate this week in the Netherlands.

As of the moment there is very little impact in the results.

The biggest impact has been the reduced production.

On impairment policy generally, we basically look at forward cash flows, using the midpoint of the $70 to $100 range.

So we take long-term $90.

We test, not only short-term with a lower price as well, but from time to time -- and we did some of this in Q4 with the flatter and lower price, at the bottom end of that range.

The assets that are closest to the impairment, you very kindly have say haven't taken impairments.

I think we have in the past, particularly in the Shell and conventional -- shale and unconventional activity in the US, both taken impairments, but also divested quite significant parts of the portfolio.

We have said that there remain a couple of assets there, Groundbirch and Appalachia or the Marcellus.

But were we to take a different view on gas price -- not oil, but gas -- we could come with the different outcome there.

Or for we decided not to proceed with the LNG Canada, because that's where gas from Groundbirch is ultimately targeted.

Elsewhere the portfolio, there's not that much that is close to the edge.

And we've had discussions previous see about Kashagan.

And that's really question of when does it come up and running.

It's a strong cash generator once does.

Until that point, it would be vulnerable to a change I'm sure, in oil prices assumptions.

But overall, the portfolio remains fairly robust against lower oil price expectations.

We've not run the forward curve out 2022, basically because I thought what we believe the prices should be, and not necessarily that should be the basis for impairment.

Hopefully, that helps.

And that's not a change in policy, that's basically ongoing policy.

Thanks, and go onto the next question.

Lydia Rainforth, Barclays.

Thank you, Simon for putting up with all the analyst questions for the last 25 quarters.

Two quick questions, and then one for Ben, if that's okay.

On the cost base, and the chart that you showed, indexing costs back to 2011, was there a particular reason that you chose 2011?

Is that this the sort of scale of opportunity that you are thinking enough of, or was that just -- or is actually the opportunity greater than that?

And then just very quickly, can you remind us how much investments in Arrow has been to date?

And then just finally for Ben, can you talk through the reaction that you have seen from stakeholders?

Say, the governments and whether it is the other operators post the announcement of the BG deal?

Thank you.

Thanks, Lydia.

And nothing sinister in the selection of 2011, it is just to go back several years, and I guess it is post -- we had a bit of wobble in the cost base between 2009, 2010.

If you remember, cost and oil prices dropped a bit then.

So 2011 was sort of the first year of the $100 run.

And so, it also, of course, excludes the Macondo year as a baseline, with quite a bit impact on individual companies.

The investment in Arrow, I'm not sure if we've given this before, but it was several billion dollars upfront.

Obviously, to enter we then divested down 50% to Petro China.

And we've had ongoing activity, but in terms of Shell investments, several hundred million per year rather than billions.

Now clearly, Arrows in a position where, we need to think about best way forward to monetize and to create value from the position we have.

Now there's an additional element which we can't consider yet, until we are at the point of closing the deal.

But depending how we monetize, I cannot and should not rule out any impairment on the carrying value of Arrow.

But it will depend on how we choose develop, which in itself could over time depend on the combination with BG.

Ben?

Yes, thanks, Lydia.

Of course, had an interim update with some of you earlier on.

Let me just say that, by and large going around the markets, it is fair to say that the logic of course is very well-understood.

Everybody thinks it's compelling, it is logical to do this, it makes sense.

I think there was in the beginning, of course, quite a bit of discussion to what extent to -- at what oil price does this work.

I think that is beginning to settle as well.

People see it works in a wider range of oil prices.

I think there is a little bit, and I'm sure you yourself will be right in the middle of that -- a little bit of the modeling, sort of perfecting going on, sort to understand the numbers that we have given out.

But by and large, I think that is starting to converge and settle as well.

I think what I've heard, in the mix, if I add it all up I believe the consideration -- the way the offer has been struck, and the way we have approached the valuation is being seen as sensible and fair, for both sets of shareholders.

But in the meantime, I have been speaking to key stakeholders in the business as well.

I have been to Trinidad and Tobago, which was a very positive and good meeting.

Met with the Prime Minister there, who was very much welcoming, of course, of the development.

If the transaction goes through, we will, of course, the largest integrated player in the country.

So it will be important for them to understand where we come from, and I think, a very, very good understanding of what we like to achieve, and what our long-term view is in the country, and the assets, et cetera.

Brazil, similar, if not even more positive meeting with President.

The President was very positive.

Meeting with Petrobras was very positive, the meeting with the (inaudible) was very positive.

Next week it will be Kazakhstan and China, let's see what will come out of that.

I think what we of course hear is again positive and logical, and likewise we have good and positive reception and messages coming out of Australia.

It is of course incredibly early days.

We are as you can imagine right in the middle of getting all the applications filed for the regulatory approvals.

I think at some point in time, we will probably need to give a formal update, but at this point in time, it will be premature.

But I think so far so good, but early days.

Thanks, Ben.

Next question please, operator.

Lucas Herrmann, Deutsche Bank.

Yes, good afternoon, gentlemen.

Thanks very much for the time.

Two relatively straightforward, I think Simon.

CapEx, I just wondered if you could talk about what you are actually seeing in the market across the different service sectors, in terms of pricing as you go in and discuss.

Secondly I just want to go back to OpEx and just walk through -- I'm getting rather confused, apologies, in the context of the savings you hope you will be able to achieve on operating costs.

I guess almost from the time that Ben started to push for change more aggressively or for efficiency more aggressively at the start of last year?

Okay, many things, Lucas.

What are we seeing in the market?

Well, a variety of reactions.

We can take a standard response to asking for reductions on the cost.

I think Ben captured it pretty well ultimately, around the capital investment in totality is as much about design and scoping, and then efficient management to the supply-chain.

So it is moving out the demand profile attached to it,.

It is about the unit price.

It is also about working in a more collaborative way with various certain elements in the supply chain.

So in some places, yes, you can take cost out.

You could see that happening in places like the North Sea, and you can see that happening with rigs, both onshore and offshore, particularly if you want a short-term offshore rig.

It is not happening as much, and the more oligopolistic parts of the business, the sub sea equipment for example.

But there are some good discussions ongoing that may, basically as Ben, lead to much longer, more structural, and more constructive cost take-out for everybody.

It is quite difficult to say more than that, without getting lost in the weeds, Lucas.

We do expect though that over time CapEx, the unit cost level in aggregate trends in line with the oil prices.

The two are not independent metrics.

And on the OpEx, I will try again.

But the baselines do differ, but let's take $45 billion as a baseline number, it was last year's OpEx.

It is where we -- roughly where we've been.

We are seeing a 5% reduction in that from foreign exchange, like-for-like, and that would flow through this year, if FX rates don't change.

We are targeting at the micro level, not a big hairy goal at the corporate level of X billion dollars, but within a business, within a function, within a geography, within a business.

We've talked about unconventionals, for example.

They, together with the Upstream Americas team, they talk -- they know they need to take a $1 billion-plus out of their cost base.

And some of that is overhead, some of that it is -- that the front line in terms of the drilling activities.

Some that comes into CapEx, some of it comes into OpEx.

We have the Downstream.

John has talked about $10 billion of cash flow from Ops, and a 10% return on capital across the bottom of the cycle.

He has cost targets embedded in that, and he's part of his business whether it is manufacturing or marketing.

And we are currently looking the international Upstream businesses to the total level of cost in that business, as to where that should go, particularly in areas where maintenance costs have been increasing over time inexorably, and think of the North Sea.

And lastly, the functions.

I personally have targets that are in the billion dollars, in the finance and IT area, from the spend we were at a year or so ago, similarly, my other functional colleagues in legal and human resources.

So we're talking some nontrivial numbers by the time these all add up.

But there is no big hairy goal, either internally or externally for a very good reason.

We do not want to divert the entire organization from creating and adding value through a multiplicity of value levers including cost, and switch them onto just single thing.

Because if you cut cost too much, and with too much gusto today, you almost always regret it tomorrow.

So I can give you that, but probably no more.

The direction is clear.

It is going in the right direction.

Ben, is anything you would add to that?

Because it is as much about the leadership psychology, as it is about the numbers?

Yes, thanks, Simon, and thanks Lucas.

It is a -- I think of course it is incredibly topical at the moment, and it is of course very tempting to put all sorts of high-level, big, hairy cost packets out there, to show that the organization is responsive.

I think in the end, the -- as Simon says, it quite often also leads to the wrong behavior and wrong outcome.

Just going around the organization, saying give me what you can do, or maybe even more stupid -- I will tell you what you should do, and then see whether we can deliver against it.

Never really gives anything, which is either sustainable and most likely also not targeted enough.

So you have to -- and that's the philosophy that we have adopted -- you have to go deeper down into the weeds to understand where costs can be taken out.

And it is either because you look at efficiencies and functions.

You look at efficiencies in our IT systems et cetera.

Or you look into individual pieces of business, often down to the performance unit level, where you just say, well, either, first of all, how is my cost base, and how can I benchmark this to see whether it is competitive or not?

And, quite often you can already find therefore the inefficiencies in a very targeted way.

Why would my maintenance spend be 3 times higher, or even 20% higher than what is first quartile in the industry, and then, try and think that through, and maybe there's a good reason for it, but maybe also not.

And that will get you much more precise focus on where the waste is.

You can also take a slightly different approach, which we often do in performance units as well.

And just if you want to have this as a competitive business, what sort of cost levels could you afford, and how could I get to that cost level?

And if you can't get way to that cost level, then maybe the business is fundamentally weak.

You better get out of that business.

Or maybe you have to think of the business model, or how you create margin in that business or whatever it is.

But you have to have that type of approach.

So cost related to value creation, and specifically targeted at an understanding of how the operation is doing, if you want to make the right sort of decisions, that are sustainable and do not end up in regrets later on.

Now as Simon says, we have hundreds, and maybe even thousands of target points throughout the Company, where people work along these lines on what are the right things, with many, many metrics on, what is my return on this piece of OpEx?

What sort of utilization do I get out of that piece of work, et cetera.

Now we don't add it up, and we don't put a bow around it, and we don't say, oh, it's X billion, and you're going to measure us against that.

Because again, that would fundamentally go against the grain and the philosophy on how you manage for performance.

Now I know that other companies do that.

The way that we want to do, sort of approach it this time around, is that look at what we deliver.

Yes?

This is not about where I'm going to get quarter on quarter.

This is basically how our performance looks like terms of value delivery.

And, of course, you will take a cut out of the costs as well.

So you can see how we are doing in terms of OpEx delivery.

I think that should be a better way of judging, whether we have the right approach to this.

Makes sense.

Next question.

Thomas Adolff, Credit Suisse.

Hi, Simon.

Hi, Ben.

Two questions, please.

The first one, I just wanted to go back to Jon Rigby's question.

Yes, indeed, the industry can improve, and the IP has good statistics on that, when you talk about simplifying, standardized approach, take complexity out.

But even with the old approach, and if I look at Exxon, they are so way ahead of everyone else, so I why wondered whether there is simply a big knowledge gap, or whether the industry has just been complacent because the oil price was $100.

Second question, I guess is just on the capital intensity of the business.

I think most companies, most of your peers would say, the portfolio decline is around 3% to 4% after some spend.

If I look at the business pre-and post-BG deal, obviously, you have some long life assets coming on-stream over the next few years.

But given that BG overall, is a business is relatively more long life, even the Brazil stuff, how should I think about portfolio decline as a combined entity?

Thank you.

Okay, thanks, Thomas.

Let me talk to the first point.

Yes, it is probably true, that companies like Exxon are way ahead of everyone.

They are every day, working in the same league as we are, yes.

So I would like to push back to the idea that anybody else is ahead of us, when it comes to taking costs out, but I do understanding how you do projects well.

We have been on this journey to improve the way we do projects since 2004.

We, very, very clearly, for all major projects squarely benchmarked in the first quintile, these are done in quintiles, indeed quite often together with Exxon or ahead of Exxon.

So I just -- if you do not buy that, just look at their reports.

It will be very, very clear, and maybe we should bring them back at some point in time, as a proof point as well in one of our presentations.

So yes, this is complex.

This is difficult.

But again, I do believe we are on track.

And there are many examples to make that point.

If I just go back to this year, look at what we have done with Mars B. It is very, very clearly an example, where if we know how to manage this stuff, we will deliver outstanding performance.

We have unfortunately, also the ability to benchmark an awful lot within our own portfolio, if we look at nonoperated assets.

And also there, you can see that systematically, if not without exception, we are ahead in terms of performance in our operated portfolio, compared to a non-operated portfolio.

So that is a bit of benchmarking that we have in-house as well.

Thanks, Ben.

Capital intensity.

It is a complex question, so I will try and be as quick and simple as possible.

There are portfolio effects in any overall measurement.

Clearly, decline rates are different whether it is conventional, LNG, stroke, heavy oil or shale.

Arguably, you need to separate them out.

But overall, our portfolio has been running more like 3 percentage points decline year-on- year, and that's what we saw Q1 versus Q1.

And that assumes some level of in-field drilling, and pressure maintenance, et cetera.

As we go forward, not just through BG, but through the choices we make ourselves to upgrade, it is likely that we will be focusing on if not zero decline, through less mature assets.

So our exposure to high decline and high cost of maintaining production assets is likely to decline overall, and give us a portfolio not only with a longer life ahead of it, but one with lower capital maintenance requirements.

But it is difficult to say to more than that, without getting quite granular.

So yes, the direction is correct.

Gas plus [baked], people which are offshore, well, you continue to have to drill, but typically the aim is to keep a facility full, as such as we have PSOs in Brazil or in Nigeria, or the TLPs in the Gulf.

And that's what the choice is, the big investment choices will be targeted at, ensuring we have assets that, while we need to drill to keep them full, there is enough resource to do exactly that.

If we are to look just -- we would also say, look at the dollar per barrel metric, they are also highly driven by the portfolio.

I don't mind a higher dollar per barrel investment, if in fact the margin is available that justify it.

And that's very much a measure of the fiscal regimes we choose to invest in.

And we strategically make quite large shifts in our portfolio, some years ago to what we felt were more attractive fiscal regimes.

And you can see some of that coming through their earnings and cash flow per barrel now, and what are in effect, lower tax rates in the Upstream.

Thanks.

Ann, suggest we move onto the next question please.

Christopher Copeland, Bank of America.

Hi, there.

Thank you.

I'm not really sure whether I'm allowed to ask questions, given the restriction that the recent M&A activities put on me.

But I will try anyway, very briefly.

The sensitivities that the backend of your slide pack, would I be right in assuming that your are referencing this very much in year-on-year context, rather than a quarter-on-quarter?

Because if I apply the Brent and Henry Hub sensitivities you've given us to first quarter 2014, which I remember was a very strong quarter, to first-quarter 2015, and obviously adjust for the FX effects, this looks to me like it has been a very strong quarter in 2015 again.

Would that reflect the earlier gas price lag that you mentioned?

Sorry for very long question, probably only has a very short answer.

Second question, is purely on the refining margin outlook.

What are you seeing at the customer, and in terms of demand growth coming through or not?

And what do you expect directionally for the rest of the year?

Thank you.

Thanks, Chris.

I think as long as the Chinese rules are in place, you are to welcome to ask anything you wish.

And the sensitivities, in simple terms, you're right.

It was a good quarter for the Upstream.

Operationally, we did well.

The other thing is our production was impacted by more turnaround on high-value activities in the Gulf, and in [Qatar].

So actually terms of the actual performance of both Upstream and Downstream, we were quite pleased with what we were able to achieve.

We continued to improve safety statistics as well.

Unfortunately, in a $55 world, it doesn't all show through.

So it was generally a good quarter.

And refinery margins, they have started to come off anyway.

They were helped by demand.

In North America, that -- certainly, US demand grew stronger than we might have expected, coming back a bit.

Cheap gasoline is always a bit of a boost to an economy.

And in developing markets, it is less clear, when there is demand growth coming back.

And last year, was just below 1 million barrels a day.

I think the growth, we would expect somewhere between 1 million and 1.5 million barrels per day growth in any given year.

And this year, so far it looks like it will fall in that range.

But it is a little early to say, is this going to be enough to close the supply demand gap, in and of itself?

The answer is no, because the supply overhang is potentially quite a bit higher for some time to come.

But over time, yes, it will.

And just on the basing, the FX impacts, therefore any given quarter -- so if you see the Australian dollar move by $0.05 during a quarter, you should see roughly a $300 million-dollar earnings impact after-tax included in the earnings, clean earnings.

And similarly for the Brazilian real, although of course, that's a much lower sensitivity.

Many thanks.

So let's move onto the next question.

[Jason Gallos], Jefferies.

Thanks very much.

I just wanted to square a couple comments you made over the course of the call, Simon, related to the deepwater FIDs you would potentially take mid-year to, before the end-of-the-year.

And contrasting that with the idea that you haven't really seen much in terms of savings on very specific deepwater items.

But I would think deepwater in general, other than rig rates, what's the advantage and moving forward with those FIDs this year, rather than waiting and seeing what happens from a deflation standpoint?

And then, just within the context of that question, are you able to move forward with the Bonga Southwest FID, given the uncertain status of the PIB in Nigeria?

Good questions, important.

Basically it is four big, big decisions, Appomattox, Vito, Bonga, and Libra.

At one point, all four of them could have been 2015 decisions.

LIbra is just the first FPSO, of course.

And Appomattox has license conditions, where we do need to reach a decision on how to develop during 2016.

The good news is, it is a very significant discovery, 700 million, 800 million barrels, we're already 80%.

It is a new play.

It's got still further exploration potential around it.

So in resource terms and potential value, it is the right one to be first.

We went into feed, just about a year-ago, and there's been a significant focus in that process on taking cost out, particularly around the drilling programme, which is close to half of the total spend.

And that comes up for decision in a few months time.

Vito, we are exploring around it.

We've had success.

It may end up being bigger than we expected.

Great opportunities to do precisely what you said, although our original intent was to make the most of the two projects, and take synergies from the standardization in that they both buy opportunity, two for the price of one.

Bonga Southwest, we have been out to tender.

We don't like the costs on some of those responses we've had.

There so -- there are ultimately quite a few moving parts.

One of which will be re-tendering some of the elements of the project.

And the government, there has been an election.

We are very pleased to see the peaceful handover of power.

But the government has not -- the new government hasn't actually taken their seats until the end of May.

And this project has many partners.

We will be the operator, but it includes almost all our large competitors.

So there are some complexities in getting everybody to support a project.

I can't say anything about the PIB.

We will look for some stability in the fiscal framework, if we're going to take a decision of this magnitude, and that obviously, will need the new government to play that part as well.

But in practice, that decision is moving backwards.

And in Libra, we are going ahead to the original plan.

Obviously, there's new Petrobras management place.

But that plan was to look to place the order for the first FPSO, take the investment decision there by the end of this year give or take.

Now that is still the expectation, but that's very much in the hands of Petrobras, which as you probably realize is under new management.

So there could be some movement there.

All of these projects, other than Appo, will benefit from the suggestion that you made, as to just bide by your time, and take the costs at the right point of the cycle.

Appomattox is probably the most attractive project amongst them anyway.

Hopefully, that gives the perspective.

Move onto the next question, please.

Anish Kapadia, TPH.

Good afternoon.

A couple questions or me.

On the BG deal, going back.

It sounds like you see completion risk as relatively low.

And if this is the case, so was just wondering given BG shares are trading at -- currently at $0.11 discount to fair value, why not buy the BG shares in the market?

Or are you waiting to get more certainty on the deal?

And then, the second question is, just more generally on Nigeria, you've had pretty significant change in regime over there.

Just wondering how that is expected to impact various things such as the onshore asset sales process, some of the gas projects you've got in place, and future investment decisions in Nigeria?

Thank you.

Thanks, Anish.

I will say the first, and then maybe Ben can think about the second, because it is very important countries for us, and remain so even post-divestment.

Simple answer to the first one, ultimately, we having made the offer, we are not really allowed to buy any stock, or anything less than the offer we've made.

And so, it is not an option open to us.

Clearly, the merger orphans are playing part at the moment, and if you assume that they typically look for a 10% return over an annualized basis.

But we've said it could take up to a year to complete, but there are dividend differentials in between.

The difference is reasonably easy to explain.

It is not a concern to us.

And yes, I can confirm that there are no prima facie reasons why we should not complete.

We know the regulatory processes.

We are just probably testing the edge, in terms of scale and scope of [fief], there a couple of countries such as Brazil and China.

And Ben, Nigeria?

Nigeria, yes, well, first of all, let me also add my very, very positive reaction to the fact that transition so far has been very peaceful.

And without disruption or security or safety risk to Nigerians in general, and also in our operations and people in-country.

Of course Nigeria remains a very important country for us in many ways.

It is a huge resource base.

It's also very significant resource base, where we could get access to, in terms of gas, in term of the integration into LNG, and in terms of deepwater.

Bonga Southwest, being just one of a number of very attractive opportunities for us there.

So we will continue to take a look at Nigeria, if we want to invest there.

We, as you know, have been on a journey reduce to gradually our exposure to onshore oil, where we see the risk reward balance not being appropriate.

But it would be completely different, of course, for onshore gas for domestic purposes, onshore gas into LNG which has been very, very robust and successful business.

And as I said, deepwater in Nigeria.

All these businesses are -- have been robust, in terms of returns, have been also quite resilient despite the challenges that's quite often attributed to Nigeria, and are fundamentally very, very attractive.

Of course, we will take a view on -- generally, on all the aspects of country risk, like we do for many countries.

For that matter, also in the Netherlands and UK, so don't think for a moment that Nigeria is just out there in a special category.

And we will look to take our decision, in the context of a good appreciation of that risk, and adequate reward or it.

But I think that is going to be available in Nigeria going forward, certainly, given the prospectivity of the of the country.

Thanks, Ben.

Next question, please.

Rob West, Redburn

Thanks very much.

My first question again, is on the integrated gas business.

And really I'm trying to get a sense of moving parts there.

So you have gone from I think $3.2 billion contribution to earnings in 1Q 2014, to up $1.2 billion this quarter.

And they clearly had one of the two trains off-line for most of the quarter at Pearl, and some of the impact of lower gas prices coming through.

I know, sort of getting more detail on Qatari tax exposure risk, the chance is about as tight as unfractured shale reservoir.

But anything you can say about that?

I would be very interested in some of the trajectory of where that's going, as Pearl comes back and the extra, the extra gas lags flows through.

And then secondly, on Brazil.

So I think that's clearly one of the best assets in the whole industry, that you've just gotten exposure to from BG below the ground, and Petrobras has some challenges with balance sheets, and financing where you look really, really good.

In terms of increasing exposure there, what are your options to accelerate value creation?

Is there anything you're looking at, in terms of extra ways to help make sure the right amount of investment goes into those assets?

Thanks very much.

Thanks, Rob.

I'll take the first one, and Ben, do you want to comment on the second one, Brazil?

Because again, that's got quite a strategic element to it.

The integrated gas business, it's relatively simple.

There are three elements around $0.5 billion, $500 million each.

The first is the tax move in Australia.

Second, is the gas-to-liquids turnaround.

And the third is the LNG trading business, relative to the spot prices we're seeing last year of [$20].

You're talking single-digit this year, of course.

The rest is just pure LNG pricing, and across all of the different activities we have.

So those numbers are very much rounded and approximate, but that's the basic step down year-on-year.

The AUD500 million, I could claim it's a one-off.

It has actually happened three times now, so this was in the past three quarters, but it's entirely driven by the FX rate.

Ben, on Brazil?

Thanks, Rob.

Brazil indeed, You are absolutely right, it is a very, very strong asset, and we of course, hope to and expect to make the most of it.

I'm also very much aware of the Petrobras challenges, but as I said earlier on, I'm also confident that Petrobras, which is after all very, very competent organization on many fronts will be emerging from this as a stronger company as well.

Having said that, you are absolutely right also, that they have announced a significant divestment programme, which is going to spread across the Upstream, Downstream, and midstream.

And we will be looking out what else -- what comes out of that.

If you look at the exposure that the combined company will have in, by the end of the decade to Brazil, it is going to be of course, significantly higher than what we have today.

But in my mind, it is going to be low enough for us to have appetite for more, especially considering again the tremendous attractiveness that sits in that resource base.

So even if things were to be offered up, in the presalts, in areas that we understand, we would look at it with keen interest.

But of course, it would have to be of the right value for us to consider it.

Okay, thanks, Ben.

Next question please.

Hodee Bertrand, Raymond James.

Yes, hi, Simon, hi, Ben.

Just two quick questions, and coming back on your potential final investment decision 2016 in the quarter on Appomattox.

Looking at the [different] costs in the deep offshore sales over the last 12 months, 18 months, when we look at the kind of [different costs] projects have been low.

It was in the range of $25 to $30 a barrel range.

And my view is that is clearly not compatible with creating value at around, let's say, $70 a barrel.

So what will be the criteria you will use to test and launch a project like Appomattox?

And then the second question on Appomattox.

Simon, I understand you referred to a deadline into 2016.

If you don't take final investment decision on Appomattox, you will have to relinquish some [lots]?

Is that correct?

Thanks for the question.

A simple answer on the second one is probably.

These things are always negotiable, but the aim is to take our decision, and we are well in place to do so.

What would drive the decision criteria?

Obviously unit development costs is one of those, because it impacts the returns.

So fundamentally it is returns, net present value.

And I'm confident that we can deliver, because there's always some level of uncertainty, both in construction but also subsurface.

The Appo is relatively unique, because it is a new play in the Eastern Gulf.

It is, at the moment, Shell is the only Company really drilling there, but there's more exploration potential as well.

We will need to look at pipelines to shore, or evacuation routes as well.

But having constructed the ability to make more from the first hub in any given area, particularly if you have developed the infrastructure is well established.

It is been the core of our development of value in areas from Mars basin, through to the recent [Perdido] development.

It is how fundamentally you make good returns on your first investment, but excellent returns on all the follow-up.

So Appo is very well-placed to be a good project at the first investment decision.

But then to be a hub to capture value for many years to come.

So in totality, it's most likely to make the cut in return terms, on affordability.

We will have one more question, final question, please, operator.

Asit Sen, Cowen and Company.

Thank you, and good morning.

Ben, just wanted to come back to your comments on Brazil.

Brazil has always offered very good promise, but operational reality is always been different.

Two questions for you if I may.

Based on your recent visit, what did you see or hear that makes you incrementally more positive?

And second as investors, what should we be focused on to figure out if things are really getting better?

Are we looking out local content policy issues?

Supply chain issues?

Presalt policy changes?

What should we be looking at?

Thank you.

Okay, thanks, Asit.

Yes, you are actually right, Brazil is a country with a lot of promise, and I'm sure that as investors, you would look at it in a mixed way as well.

I think for us it has worked actually very, very well.

The Brazil has been for the investments that we have made including, the [Dangemesa], of course has been very, very good, a very, very good country.

The only thing wrong in my mind with Brazil, was that it was just too small, and that we needed to have more exposure to it.

Now can we be more positive about what is going to come?

I would be a bit hesitant to comment on that.

It is always tempting to think that, of course, with the stresses that Petrobras may be under financially, the opportunities that may be there from divestments, the need and the desire from the government, and Petrobras to be very successful in the presalt.

Maybe the realization that local content policy is also giving inefficiencies and constraints.

It is very, very tempting to just look at it, and say, well, surely opportunities must come from that.

Again, let me just say that they have not been factored in, to the way we have valued the BG assets there.

But if anything, and I'm -- that is just a -- nothing more than an observation, and a single data point.

Yes, I have come away from Brazil remaining optimistic in all these areas.

But again, it is not factored in.

If it comes, it will be upside.

But I do believe, and this is also why this is a shaping move for us.

We will be, if the deal indeed closes, we will be fantastically well-positioned, for whatever opportunity that will come our way in Brazil.

Okay.

Thank you very much.

I think that concludes the call today, and thanks for joining, and sharing the event with me.

Second-quarter results, scheduled to be announced on the July 30, 2015.

Ben and I, will be back to talk to you again then.

Thank you, and have a good day.

This concludes the Royal Dutch Shell quarter one results announcement call.

Thank you for participating.