殼牌 (SHEL) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, it's when a -- let me introduce myself.

My name's Trevor Mulvaney.

I'd just like to give you some important health and safety and general housekeeping for this afternoon's event here at Haberdasher's Hall in Smithfield.

There are no planned fire drills this afternoon.

So, if the alarm does go off, it's the real thing.

The two exits are here to my right and down the stairs for those of you to this end of the hall.

And for those of you at the back end, it's behind where the camera and one of my colleagues at the back.

All the entrances go down -- downstairs and follow the directions out.

And they lead out through the front door and the assembly point is in the ambulance station area at the front of the building.

And the second, equally most important thing, is the restrooms.

They are located the way we came in, back down the stairs and around to the right.

Thank you.

Okay.

Okay.

Thanks very much, Trevor.

So, ladies and gentlemen, good afternoon.

Great to see you here.

Welcome to today's presentation.

I'm struggling a little bit from a voice that is gradually deteriorating during the day, but I'm pretty sure I can last another two hours.

So, today we've announced our quarterly results and we're going to talk about it, of course, in some detail.

But, I thought, we also spend a good party for most of the time on updating where we are overall.

And, of course, there will be as always, plenty of time for your questions in the Q&A session.

Quickly, the disclaimer slides, with which you are familiar and then, let's get going.

So, our integrated business model and our performance drive that we've had for sometime now are really helping us to mitigate the effect of lower oil prices on our bottom line.

We delivered $3.8 billion from underlying CCS earnings in the quarter and $16 billion over the last 12 months.

And, our results today also showed that we are successfully reducing our cost and our spending.

So, we have to make sure that our Company is resilient in a world where oil prices remained low for some time.

And, of course, we also have to keep an eye on potential recovery.

Which we believe, will indeed eventually come.

So, the three priorities that I put in place in early 2014 remain unchanged.

So, it's financial performance.

It's capital efficiency.

And, it's delivery of projects.

All underpinned by a rigorous approach of performance unit appraisal.

There's also no change in the dividend commitments we've made.

$1.88 per share this year and at least that amount in 2016.

And, there's also no change to the buyback commitment that we made for $25 billion from 2017 following the completion of the BG transaction.

But, we're taking a very prudent approach.

We're pulling on some very powerful levers to manage through this downturn.

And Simon will give you a lot more detail in a moment.

So, capital spending is expected be $7 billion lower this year.

Reduction off of 20%.

And, operating costs are expected to be at least $4 billion lower, around 10%, as we restructure the Company and take out costs.

And, that includes a 7.5 thousand reduction of Shell staff and direct contractors in this year.

So, all of this taking place to ensure that we have the capacity to continue to pay that attractive dividend for our shareholders and cost and spending reductions we talked about will continue in 2016.

Now, at the same time, we are making good progress with the combination with BG, which should enhance our free cash flow.

It will create one of the LNG and deep water leaders in the IOCs.

And, very crucially, it will be a springboard for change in Shell into a much simpler and much more profitable company.

So, essentially, what we are doing here is grow to simplify.

Of course, they are very challenging times in the industry, but I also feel they are very exciting times in my Company.

The health and safety of our people and neighbors, and of course, the environmental performance, they remained a top priorities at Shell.

And, I believe, we have the right safety culture in place and our track record is improving and I think very competitive.

But, we will continue with the safety drive.

Which we call Goal Zero, to further improve wherever we can.

The oil price downturn that began in late 2014 is triggering some very significant changes in our industry.

And, today's oil price downturn could last for several years.

Of course, we also don't have a crystal ball here.

But, our planning assumptions reflect today's market reality.

So, we're planning on a prolonged downturn.

Although, we continue to believe that the fundamentals will reassert themselves in a medium term.

So, we are responding with urgency and with determination.

We're pulling, as I said, some very powerful levers to manage through this downturn.

And, it is all about making sure, again, that we can continue to pay attractive dividends for shareholders and maintain at the same time, a sensible investment program for the medium term.

And, of course, we are using it as an opportunity to further reduce cost structure in Shell and making some fundamental changes in the way we are working in areas in the supply chain.

Now, of course our results are lower -- but, the lower oil price.

But, our integrated business model is offsetting that, at least some of it.

And, [eventually] was delivering a strong and much improved performance.

Supported, of course, by industry margins but also by self-help programs.

Including, non-core asset sales, cost reductions, improved commerciality, and also, significant improved uptime.

In upstream, the margins are under pressure from oil prices.

Unit operating costs were around $19 a barrel in the quarter, and BG's portfolio has the potential to sustain, or even further reduce these overall production costs.

So, the performance drive that we launched in 2014 is helping at the bottom line and there's more to come there.

And the balance sheet gearing remains low despite the downturn.

Now, let me recap the priorities for the use of cash as we've communicated in -- back in April.

First, debt service, then dividends and balance between buybacks and capital investments.

So, we intend to prioritize debt payment initially following the completion of the combination with BG using surplus cash from operations and proceeds from asset sales to drive debt down in our target range.

And, as a cash flow, and free cash flow increases, we are expecting to restart a share buyback program with the program -- with a program of at least $25 billion.

And, again, intended to start in 2017.

There's no change to these priorities.

We have a very, very firm intention to deliver on these promises that we set out.

Now there, let me turn to the portfolio and update you on some of the choices for new projects earlier in this year.

The complex but important slide for you to pay attention to because, it is all about the tough choices on capital investments.

But, they are driving the right sort of outcomes now.

So, only the most competitive projects are going to go ahead.

And, just for this year.

So far, two major financial investment decisions in 2015.

Many potential projects have been purposely delayed; have been idle or rephased, and a few cases, canceled.

And, this is to manage affordability.

But also, at the same time to get better value from the supply chain in the downturn.

All leading to a pretty healthy tension within the Company and of course, within the supply chain around capital allocation.

We are looking now for low NPV breakeven projects, certainly less than $70 a barrel and we see opportunities, typically, nearer $50 a barrel.

And, managing the pace of FIDs is a powerful tool to drive lower cost, plan our capital spending, and to make sure that only the most attractive and affordable investments can go ahead.

We launched a new improvement program in our projects and technology division.

Remember P&T, Projects and Technologies, was responsible for all major project delivery and for technology development, but also for -- it also looks after our supply chain spend and has some 15,000 people globally.

Safety and environment, of course, remain top priorities also for P&T.

But, we want to drive better value for our capital projects and design and execution and from the associated supply chain.

And we expect this year $1.5 billion of capital efficiency gains, but there's more to come here.

Now, there's another story of tearing up last year's contracts and starting all over again that will produce results, but it will be short term.

It's not going to be enough and not going to be a long lasting improvement in cost structures.

This is much more about design standards and better upfront planning, contracting structures with the best suppliers, et cetera.

And the recent investment decision that we took on Appomattox in the Gulf of Mexico is a good example where we took out some 20% from the cost, went ahead for the project with around a $55 break -- or, price breakeven on a go forward basis.

And, I -- as I expect, there will be much more to come out of the projects and technology organization to update you on later in the year.

Now, at this point in time, I'd like to hand over it to Simon.

So, Simon is going to talk a lot bit more about the levers that we are putting at the downturn, then I will come back and give you a further update on where we are with BG.

So, Simon.

Thanks, Ben.

Good to be here today.

Great turnout.

Thanks.

A lot to catch up on.

So, I'll update you briefly on the results.

Just the one slide, and you'll see some of the usual slides towards the end of the presentation if you have further questions.

So, the results, excluding identified items, the underlying CCS, Current Cost of Supply earnings, $3.8 billion for the quarter, that's a 37% decrease in the earnings per share from a year ago.

Upstream, obviously impacted by the significant decline in the oil and gas price.

The actual crude prices were $48 a barrel, below they were -- where they were a year ago, at $62 average in the quarter.

Our earnings in the upstream, obviously also impacted by lower volumes.

But, a lot of that was due to the planned maintenance in oil sands Canada, in Pearl GTL in Qatar, and the deep water in the Gulf of Mexico.

We also saw some reductions in the Netherlands.

A curtailment and producing into storage rather than sales and a 5% decline from the asset sales that we've being engaging in over the past couple of years.

So, the underlying volumes declined by around 3%.

Or, if you take out planned maintenance, that was 130,000 barrels a day of planned maintenance in high margin environments.

The underlying production increased by around 1% and the high margin projects, the new ones, actually more than offset the underlying decline.

Downstream, results improved substantially.

I'll come back a bit more.

But, there is some reflection of high refining margins, but, you only get access to those with good asset uptime.

And, in addition, we've taken a lot of steps to improve the underlying financial performance.

Includes the asset sales, taking out cost, and better revenues from the businesses that we're actually engaged in.

The overall group level return on capital is 7%.

Cash flow generated from operations, $6.1 billion in the quarter.

Dividend distributed, same as last year, $3 billion, or $0.47 per share.

And just as an echo, and that will remain at least at that level for another six quarters, at least.

Underwritten.

We've had a few questions on LNG, particularly since April.

So, useful, I think, to recap.

Around 10% to 15% of Shell's LNG is sold on short-term markets, which is euphemistically referred to as spot, but these are not spot markets.

They're neither deep nor liquid.

It's not the crude oil market.

So, an LNG spot actually means LNG ordered for deliver in the next quarter.

That's not associated with a long-term contract.

85% to 90% of our volume is sold on longer-term contracts, somewhere between 2 and 20 years, and is, in that sense linked either to oil price or to gas hub prices.

Now we believe the media, or maybe, the investment community is perhaps a little too focused on spot prices, extrapolating last week for the next 30 years.

Our integrated gas results currently driven by production performance and lagged oil prices, and you can see the track record here.

Our buyers, who we know well, they typically look for security of supply.

And, as producers, we need the off-take contracts to finance the new LNG project.

So, there's a lot of mutual dependency.

There are changes in the supply mix.

Got Australia and new US volumes later this year.

The fundamentals of this market look as robust to us today as they have in the past.

Existing contractual terms, price formulary, for example, they can be reopened and reviewed.

Generally, cycles are three, six years.

But, it doesn't happen for all contracts and when they do get reviewed, our experience is the outcomes, they're incremental to the existing terms and indexation.

The' re not dramatic shifts.

They preserve the intent and sanctity of the original contract and we don't expect that to change.

So, enough on results.

As Ben highlighted in his opening comments, we're pulling every lever there is for an oil price downturn, no matter how long that lasts.

Operational and financial.

We know we need to protect the ability to pay dividends, but we also need to keep a sensible high-value investment program underway for the future.

The worst thing we can do for the long-term sustainability for the dividend is stop good projects or cut, slash, and burn good investment.

Together, this is a substantial package of measures.

Flexible balance sheet, capital and operating costs coming down, continuing with asset sales, and that project delivery to drive the future growth.

So, I'll do this in a little bit more detail.

Now, you see a few slides like the one on the right.

Shell in red, major competitors, range, and individual lines in the gray.

This is the gearing.

If you're going to sail into the wind, why not start with good momentum and a stable course.

Gearing, 12.7%, we're just very close to where we started the year.

We are lower than where we were twelve months ago when the oil price started to fall.

It's good operational performance, of course, generates cash.

And, we reintroduced the scrip dividend.

We did this early.

That gives us more short-term flexibility and ultimately helps to protect the dividend.

We may actually be the lowest gearing in the peer group.

It would be interesting if that were to be the case and without the assistance of some fancy instruments.

Next lever, operating cost.

Made a lot of headway already.

At focus, bottom left graph.

Anybody who thinks we only started to take this seriously last month, just look when the costs started to move down.

But, before that, how much did our costs go up in the first place?

We're now back at the same level as 2011.

Our costs this year, and on a rolling twelve months to now, down $4 billion, 10 percentage points.

These are sustainable cost reduction programs.

They're not just deferring training and travel.

Exchange room -- rate movements have been supported, but as we go forward we expect more and they will not depend on exchange rate movements.

Just move on to a few examples of the cost program.

I'm not going to go through details here, because the point is there are many targeted, specific activities underway.

Very focused.

Very diligent.

Many, many people involved in this activity.

This isn't Ben and I and our colleagues in the executive committee using general exhortation from the C-Suite, this is the whole Company knowing what needs to be doing -- done and doing the right things.

We are targeting cost and higher breakeven plays.

We are working hard on the overheads.

There is quite a lot more to come here.

Capital investment.

Again, naturally, I think we were third or fourth on this one at the time when it's best to be fifth.

At the end of the last quarter we continued to take costs out.

We now expect this year's capital investment to be around $30, three-zero, billion.

20% lower.

$7 billion lower than last year.

35% lower than 2013.

This guidance was $3 billion less than we gave three months ago.

Because we said 33 or less, and we are working in a the dynamic decision-based process.

Every month the executive committee is reviewing all these choices and looking to where we take this without destroying value.

It's a measured pragmatic response to managing the overall financial framework and that the FID pace that they manage, just shown you, just one of the outcomes from this.

Because we're also looking very hard at the cost opportunities in the supply chain.

So, we're back to 2012 levels on the total spending and we're looking forward to the growth in cash flow that will come from completing the projects that are in for $30 billion.

Looking into 2016, because there's no accounts now, that's where we are looking, at the Shell portfolio anyway.

We can give a few more details on this.

When the BG transaction closes and we come together, we'd expect the combined pro forma spending to be lower than it is this year and also lower than we'd indicated back in April, combined around $35 billion, assuming the current macro carries on.

Now we have been clear for some time, at least 18 months, that some parts of our portfolio are not performing to their full potential.

Two of them, oil products, and there was also a shale, we talked about it last year.

Earlier this year we added some of the mature assets in the upstream -- the upstream engine.

Again, we have a very specific targets to improve the unit margins, asset production, the reliability of the performance, take out costs.

But also, to take portfolio actions.

And, this is now really showing up in the bottom line.

For example, the return of capital in the downstream was 15% over the last 10 months -- 12 months.

We've seen positive cash generation from our US shale business this year.

Even with a $2.08 gas price and $40-odd double UTI.

Yes, they can still improve further.

But, we've also, on the mature upstream assets, seen quite significantly improved reliability and production.

You'll see, in Malaysia, for example.

It's a little more -- bit more light on the downstream.

We have been busy here for quite some time.

Restructuring the portfolio and self-help.

We believe, not only they unlocked substantial new revenue opportunities, particularly in that fuels value chain.

Through the refinery, trading, and supply.

We've also taken out costs while doing that.

So, it's great to see that return on capital back to 15.6% and the cash generated from ops in downstream alone, twelve months, $13 billion.

Now, that's a good performance by any standards and certainly an improvement on recent years.

The main drivers, of course, have been self-help.

There has been a good refinery in both -- performance or margin environment in the last six months.

But, downstream is really five revenue streams and four of them are not dependent on the economic environment, retail, lubricants, trading, and supply, and the chemicals.

It's only refining that has a level of volatility linked to exogenous factors.

This performance you're seeing is all of those levers working, being pulled, and delivering.

We had the kit running well on planned downtime, 2.4%.

Availability of the refineries, 95%, which enabled us to capture a lot more of that margin that was available than we may have done a few years ago.

So, good improved position.

More to come, though, because we said this is a multi-year turnaround.

We have to be a $10 billion cash generation or a 10% return business in the downstream on a sustained business, bottom of the cycle.

Not just do this for couple of quarters.

So, looking at the shale business.

You we delivered the major portfolio cost reduction here over the last couple of years, we went from 14 plays, down to 4. So, we have $3.3 billion of asset sales behind us and we sold 110,000 barrels of oil equivalent a day of production.

This year, we've been reducing the exposure to the international shale plays scaling down for profitability.

A lot of this has been driven by sub-surface and non-technical reasons.

Whether we can make the plays work economically.

If we can't, we go.

This has left us with some 6 billion barrels of oil equivalent in those four plays, discovered resource, in North America.

We do have the series, also, of less mature positions.

Argentina, for example, in the rest of the world.

But, our spending in 2015 will be some 55% lower than the 2013 peak.

Costs continue to come down here.

We've taken 20% out of this year's investment and the production is on target.

Improved productivity.

Divestments.

Good track record.

A lot of activity in recent years.

You can see contributions downstream and upstream.

Sales from the tail end, crystallized value, that's just normal business.

This is the proof.

It's also the natural outcome of the performance unit appraisal process that Ben introduced.

But, we also sell assets to form strategic partnerships, particularly in the LNG business.

For example, with buyers of the LNG.

2015, we expect $5 billion of assets sales, including any dropdowns to the MLP.

We've done $2.8 billion already.

So, the total for 2014 and 2015 combined, we gave a target of $15 billion.

We did that in one year.

That $15 billion has now become over two years.

We would expect $20 billion for the two years and that's in a market that is now softer because of the lower oil price.

But, there are buyers out there in the downstream and in markets that are, effectively gas price driven -- regional gas price.

And, there are non-traditional routes to market.

Different buyers, such as the MLPs, private equity, and some oil and gas companies which may not be in the coverage universe of some of you in the room.

This gives us confidence for the future.

The final lever I'd like to mention is a pretty obvious one, but it is being lost in some of the headlines at the moment.

Our core business model is developing new sources of oil and gas because that drives our cash and free cash flow over time.

If we stop doing this, we may as well pack up and go home.

We've made some adjustments to the FYD pace, but we are completing the existing program with a pretty attractive growth pipeline, predominantly in the upstream in the moment.

Portfolio is geared to give the uptick in production, but most, more importantly, to the cash flow from ops and the free cash flow in 2017 and beyond.

We picked 10 projects here.

They are pretty most the largest.

4 are already onstream, ramping up and the other 6, not yet onstream.

You can see, hopefully, the graph itself explanatory.

But, the -- they move from effectively a $10 cash deficit in 2013 period per year to a potential $10 billion cash surplus by the end of the decade.

It'll be round about an $8 billion cash surplus, even if the oil price is only $70.

This is a pretty strong project flow.

Great complementary fit with our new colleagues in BG.

Where they're going through the same shift from investment through to free cash flow, but about a two-year -- two years in advance.

Brazil and Australia, for example, helping them.

These are the levers that we're pulling in the downturn to manage the framework.

To underpin the dividend commitment.

Is why we're confident about statements we make on next year's dividend.

But also, to retain the investment program for the median term, shareholder value creation.

We are delivering on restructuring.

We are delivering on the growth plans.

But, we're doing it for less money.

With that, I'll hand over to Ben.

Okay.

Thanks, Simon.

So, let me give you an update then, on the progress with BG, which of course, is an incredibly exciting opportunity for both BG and Shell shareholders.

So, back in April this year, we announced that recommended combination with BG.

That combination is expected to enhance our free cash flow.

It creates an IOC leader in energy and deep water and will be a springboard for change.

Changing Shell into a more focused and a more profitable company.

Firstly, enhanced free cash flow.

From BG's growth in 2015 and beyond, highly complementary to Shell's 2017-plus growth potential.

So, it is as expected.

Enhanced free cash flow position that enhances also the robustness of Shell's dividend.

Secondly, the IOC leader in energy and deep water innovation.

Accelerating and de-risking our strategy by combining Shell's current positions with BG's worldwide energy and deep water Brazil assets.

Shell can add significant value.

And, it's beyond the announced synergies by applying technology know-how at a much larger scale and at lower cost.

And, concentrating on areas of existing competitive advantage.

And thirdly, this is all about using it as a springboard to change Shell by restructuring, driving asset sales, and refocusing spending.

Which will result in a simpler, more focused company concentrated around three pillars: upstream and downstream engines, energy and deep water.

Let me again emphasize that I'm absolutely determined to follow through on this combination and use it at the platform for change in Shell.

Now, about the timeline, I'm sure there will be a few more questions there as well.

So, you will have seen that we have regulatory approvals granted in the US FTC.

Brazil CADE, full approval earlier this week.

Agrea, FTC, and all the other regulatory filing processes are progressing very well in all other jurisdictions.

So, that's all going well.

We're working very hard on restructuring and divestments plans and a joint team has been established with BG to plan for absolutely world-class integration of the two companies once the transaction is closed and also to hire great talent from both companies.

So overall, I'm very pleased with the progress we are making with the BG combination and I'm confident; I look forward to closing this deal as planned in early 2016.

Now, here are some examples of the way the two companies can come together.

So, by combining Shell with BG's complementary positions in Australia energy and deep water Brazil, Shell can apply its technology and know-how at really at an unprecedented scale and at a lower cost.

So, that accelerates and de-risks our strategy in Brazil where the combined production could reach 550,000 barrels per day at the end of the decade.

We've seen a very positive response from the Brazilian government and the Petrobras management on the opportunity to be the preferred partner of Petrobras and I'm convinced that Shell's technology capabilities can unlock more value for the partnership, particularly in production operations and also in reservoir management.

Now, at LNG, there are of course cost synergies and potential value uplift.

Opportunity from combining the two complementary LNG production and marketing companies.

And, this is particularly the case as both companies are expected to ramp up new energy supplies from Australia over the next few years.

BG in Queensland and Shell in Western Australia.

And, I'm sure, also, that Shell can add -- have a positive impact on BG's ongoing production operations in energy.

I've a look a little bit further into the future.

Both companies have very attractive pre-FID options in energy.

For example, across Australasia, in US Gulf Coast, Canada, East Africa, and the combination of the two portfolios here offers the opportunity to review that option set and to review the time and pace of investment.

So that we have a more efficient program, also with an eye on industry cost structure and LNG market development.

So overall, there is an opportunity to take a complete fresh look at development solutions and strategic partnering and the timing of investment decisions in this analyzed portfolio.

And, with that, of course, it's all about optimizing returns.

Now, we're also, as I said, determined to use this combination with BG to restructure Shell and asset sales will be an important part of the story.

As we would step up and refocus the Company to areas and themes with scale, profitability, and growth potential.

So, as we have announced in April, we are expecting asset sales of $30 billion from the combined portfolio from 2016 to 2018.

So, that's average, $10 billion a year.

But, likely a little bit more lumpy than that and asset sales would come both from legacy, BG and Shell portfolios.

And, we're undertaking quite a fundamental review here, with the opportunity to really drive a different portfolio and priorities in that enlarged group.

So, divestments will include high-grading of the tail portfolio, and we look at value in the combined upstream, some 80% of the NPV is in approximately 30% of the countries.

So, you can already see how we will go about this.

We also expect to monetize the more mature assets and infrastructure like plays and over time reduce also our long-term option sets.

Putting more focus on the areas where Shell has established positions today.

We've continued to work on asset sales plans in the last few months and have identified a range of options that are more than sufficient cover for the $30 billion target that we have set to ourselves.

An important part of the strategy is refocusing the Company, particularly in the longer-term opportunity set.

So, we are reducing exploration activity and exploration spend after taking a hard look at a longer-term development funnel.

And, you can see, already, some of the actions we have taken recently such as reductions in Nigeria, and resources plays in Iraq, and a slow down in Canada in the oil sands.

I know loss count, I'm sure there will be some questions and there's well we are planning to drill the Burger Prospect in the Chukchi Sea in 2015 and 2016, to test in what could be a multi-billion barrel oil field for Shell.

With further exploration potential in the more general acreage we hold there.

Overall, more of work to be done in all of these longer-term place to ensure that we capture value.

But, I hope the attention to reduce the scale down is very clear.

Now, the chart on the left here, shows Shell's track record on dividends.

It's unbroken for decades and a key part of our returns to shareholders.

And, you can also see that the commitments that we have made in 2015 and 2016, reflecting the confidence the Board has in the performance and the outlook for the Company, including the impact of the significant actions that we are taking today.

So, our gearing, as Simon says, is low in our sector.

Perhaps, the lowest.

And, we have $27 billion of cash on the balance sheet as we speak.

And, our cash flow breakeven is set to fall further with the outcome of our portfolio and performance drive that we have just been talking about.

Let me assure you also, for your comfort, that we have additional levers to pull if macro conditions deteriorate further from here.

Such as, further reductions in capital investment.

So, the proposed combination with BG is attractive for both set of shareholders in a range of oil prices.

And, it's robust at the lower end of our planning ranges.

So, BG would be accretive to cash flow from operations per share at $67 oil in 2016 and accretive to 2017 earnings per share in the mid-$70s world.

This is a combination that enhances our free cash flow and enhances our dividend potential in any expected oil price environment.

And overall, I want to make it crystal clear to you.

Again, how determined the board is to get this right and we are firm in repeating our commitments to shareholders here on dividends.

This chart here shows the potential future shape of the Company around the end of the decade.

I think what you can see here is really a different, more focused, and profitable Shell coming through.

Strategically, in my mind, this is what this deal is about.

So, it's three pillars.

It's engines.

It's energy.

It's deep water.

And, could each deliver some $15 billion to $20 billion of CFFO around 2020.

And then, of course, a longer-term themes that could deliver a further additional $10 billion or so, also by the end of the decade.

So, I see this deal also as an opportunity to accelerate the creation of a much simpler and much more focused company and therefore, we call this strategy, essentially, Grow to Simplify.

It means that we can really capitalize on our core strengths, but also at a much larger scale.

It also means that we have a much more predictable Company, but a lot smarter sequencing of the project opportunities and the funnels of each theme.

And overall, that should result in a company that is more resilient to changes in the external environment, such as oil prices and downstream margins, and become more competitive than we are today.

Competitive that counts in the bottom line.

So overall, this is a new shape for the Company and we are laying a platform for a fundamentally better Company in the future in any expected oil price environment.

Now, before we close, as Simon told this already, let me update you on our competitive position.

And, as you know, we take a dashboard approach here, looking for more competitive performance on a range of metrics over time.

Not, single point outcomes.

And, the trends are, of course, downward here, tracking oil prices.

However, our CFFO development has become more competitive in the sector.

And, this has been a major strategic objective for Shell in the last few years.

But, it's also good to see our return average capital employed and free cash flow trending higher in the competitive range.

But, we know we need to do more to drive these and other metrics higher and our aim is to be competitive across the entire price cycle.

And, we know there's a lot more work to be done here.

So, let me then sum up what are the key messages for today.

First of all, Shell's integrated business model and our performance drive are helping to mitigate the impact of lower oil prices on our bottom line.

As our results today show, we are successfully reducing our capital spending and operating costs and we're delivering a competitive performance in today's oil market downturn.

We're pulling on powerful levers to manage through this downturn.

Making sure that we have the capacity to pay attractive dividends for shareholders.

We're well placed to take additional steps to underpin shareholder dividends should conditions warrant that.

BG rejuvenates Shell's upstream.

It adds more gas to our mix.

Gas is the cleanest possible fuel, further positioning the Company for a lower carbon future.

It's a step change in LNG and deep water scale and competitive position, accelerating our strategy there by several years.

We will reshape the Company once this transaction is complete and this should concentrate our portfolio into fewer higher value positions where we can apply our know-how with better economies of scale.

So, in essence, we grow to simplify.

Creating a more resilient and more competitive Company, able to deliver better return to shareholders.

So, while these are very challenging times for the industry, we are responding with urgency and with determination and also with a lot of excitement for what the future holds for Shell.

So, with that, let me now invite Simon back and we'll take your questions.

I'm sure there will be plenty.

We have a good full room.

Can I ask that you just ask one or two each so that everybody'll have a chance.

Jon, you were first.

Is there a mic, actually?

It -- thanks, right now.

This is mine up here.

Thank you.

Jon Rigby.

I've already been told today, actually, I speak too quietly.

So, it's a good job you got the microphone.

Can I ask two questions?

First is on the CapEx and the changes to CapEx.

With the new plan, are you still investing at an activity rate that sustains the business?

So, are we talking about gradations on growth in terms of outlook?

Are you actually shrinking the business because of liquidity issues around what you spend?

So, if you can give some granularity around that?

The second is, I take your point about the LNG market, but I think it's fair to conclude that we are moving into position in the market for the next three to four years where supply will start to increase and the market dynamics will change.

So, could you just talk about whether you see, I guess, challenges but also opportunities?

Because, of course, you are large marketers, traders, if you want to use that phrase.

And, can you talk about both the challenges, but also, the opportunities around the LNG market over the next three to four years?

Thanks.

I'll make a start on both of them and then I'm sure that Simon will have quite a few points to add as well.

Jon, this is the key thing that we have to get right.

When it comes to capital, we have to make sure that we hit two objectives at the same time.

That we invest at a pace that we can afford.

But, at the same time, that we invest to keep the Company long term healthy.

I think we're getting that right, but we cannot get that right but just making a one-off decision on how to do this.

This is why we talked at the beginning of the year about a dynamic decision-making process.

That we want to, of course, preserve our very, very rich funnel of opportunities as much as possible.

But, at the same time we know that we can only invest at a certain pace in order to make the balance of payments go round.

So, it's a dynamic process and as Simon says every month when we get together as an EC, we just take a view on where we think cash balances will be over the next three years.

How much we can afford to invest where we invest in?

What are the best opportunities?

Where can we respond?

Where can we do it differently?

And, of course, at the same time we take out as much cost as we can.

So, for each and every project the comes up for its decision moment, it is first of all a question.

Do we have to do it now?

And, is this project at its most competitive point where it can be, given the macro environment we are seeing?

Now, we do not make decisions on a 12-month basis.

We make decisions on multiple years.

So, with that, also we take into account what it is that we need to invest on and to keep the free cash flow going up in the next few years?

Now, a lot of that, of course, is done against the backdrop of uncertainty in terms of price.

We don't have that crystal ball either, so we work with ranges and scenarios.

But, it's absolutely the key challenge that you mentioned.

It is making sure that we keep the Company strong and healthy.

Ready, and continued in terms of growth.

With the ability to ramp up if we have to, but at the same time, staying within the affordability ranges that we have.

Anything you want to add on that, Simon, or?

No.

Not on that one.

He wants to talk about LNG.

(laughter) LNG, yes, I think, maybe, another point that is sometimes not quite appreciated as much as it should, is there is no open market for LNG really.

Simon talked about the so-called spot market.

There is no spot market.

There is no exchange where you can buy LNG and where people try to sell their cargos.

These are all bilateral deals that you do, either long term or short term.

And, the short-term deals are called spot deals.

There is a so-called market price that is being set up, but that's not really a spot price mechanism either.

And again, there's no exchange behind it.

So, if you talk about supply going up, usually that is locked in with demand going up.

Because supply will only go up when demand is there to go up.

So, there is no large unfulfilled demand that is waiting for supply to come, or the other way around.

So, now -- not entirely locked in.

There is, of course, opportunity.

And, sometimes you have a little bit more unplaced cargos in the market because not every project completely sells out by the time it takes FID.

But, it's a slightly different dynamic than another commodity where you basically build your facility in the expectation that you will place the product.

So, now, will there be opportunities in that?

Yes, I'm sure there will be because the business model that we have, that BG has as well, and that we can now combine with a larger portfolio, is very, very much an optimization game where we want to continuously see whether our longs and shorts are optimally configured at the lowest possible cost and also in the best possible market.

And, the larger your portfolio is to work with, the higher the opportunity to try for better returns in it.

And, if everything was locked in, in this, you wouldn't be able to optimize an awful lot either.

So, a certain degree of liquidity in that portfolio is definitely helpful.

So, I see more opportunity in that dynamic going forward than perhaps threat.

Also, if you want to talk about the market growing quite considerably, it's supply and it's grown quite considerably.

Anything you want to add to that, Simon?

I just to -- step back on why we come from the way of the gas market.

It's grown 2% to 3% globally, for a few decades, per year.

And, we expect that to continue for a few more yet.

Within that, LNG, 4% to 6% growth a year for the last twenty years and most likely the next ten to fifteen.

So, the current LNG market, 240, 250 million tons per annum.

That's only 9% of the total gas market.

New markets are opening up all the time.

I would give a prize to anybody who could name the last two countries in which we had gas contracts.

Jordan and Malta.

So, not many people would have them on the radar screen.

We're currently looking at supplies into Singapore; into Philippines; into Brazil.

There is a long list of new markets out there that will help drive.

And, we can access those markets.

Some of these markets are not big enough to build a new greenfield LNG around.

But, they are very attractive markets if you have a source of LNG that has that flexibility.

And, we can really compete as Shell, Shell and BG together.

We can be very competitive in developing new markets and gas is a fuel of the future.

It's affordable.

There are secure supplies available and it is a low carbon source.

That is driving the growth.

Maybe, there's a wobble one or two years.

But, that's not what we're investing for.

These are 30, 40 year projects.

We've not that much ongoing investment beyond.

Thank you.

Thomas.

Hi, Thomas Adolff from Credit Suisse.

I want to stay with the LNG theme, really.

If we think about future projects.

To really kick them off you need $10 to $12 per MBTU.

Unless, liquefaction costs come down materially.

(inaudible)

I think the industry has talked about upstream cost deflation, but, I wondered what you are seeing on the liquefaction cost side?

Which might be a little bit more sticky.

The second question -- as I -- if I look at your LNG portfolio.

You've got Browse of LNG.

You've got Sakhalin expansion.

You've got LNG Canada.

You've got Tanzania, amongst the -- I guess the better projects in your portfolio, in my view.

What is the order of preference you see right now?

But also, as you sign offtake con -- agreements or contracts.

Are you willing to give, or, are you willing to remove the destination restriction to the customers, as well as, willing to give higher DQTs?

Thank you.

Let me start with the liquefaction because you're absolutely.

It -- liquefaction costs have gone up quite a bit.

As a matter of fact, a lot of planned costs have gone up quite a bit over the last years.

I'm not sure about our -- I've said it in audience like this before.

But, if you look back for the last 10 years, what we have seen in the industry is that, typically, not only productivity has fallen, but the amount of man hours required, engineering hours required per piece of equipment have come up at a factor five.

That is to do with complexity and regulation and higher standards.

It probably also has to do with competence and other efficiency measures.

And, I think that is actually a very, very significant driver of costs as well.

So, when we talk about, let's take costs out of the supply chain, and this is where we talked about earlier.

It's not just a matter of, let's try to really push our suppliers when it comes to price, but, let us sit down with our suppliers in a much more transformational process to figure out how on earth are we're going to improve these productivity challenges that we have?

So, this is all about, I need better planning, better standards.

Maybe, working more with what the opportunities -- the opportunity set that our suppliers see.

It is better execution in the field as well.

Maybe, more competence and maybe working with a more select strategic set of suppliers.

That is going to be required as well.

I think you're absolutely right.

It is key to get it right.

If you want gas to succeed as the fuel to the future.

It is just not good enough to say, hey, it's cleaner, and call, et cetera, et cetera.

It also has to be affordable.

And, indeed, if LNG is going to be the fastest growing component in the gas mix, you better make sure that LNG is also competitive and lower price levels.

I think we have a lot of efforts going on.

And, I talked about P&T in the -- also, in that engineering space.

How we can improve design and engineering productivity and construction productivity.

There's a lot of fundamental rethinking and a lot of engagement with our suppliers, going on to see whether we can tackle the challenge.

On the portfolio, and I'm sure Simon will have a few adds there as well.

I wish I could give you an answer on that at this point in time.

To say, well, this and -- these are all the opportunities between the two companies.

This is how we will go about it.

We cannot do it.

It -- the takeover code will not allow us to do it.

And, I think it's also better for us to really get a good handle on what sits in the BG portfolio, for which we have a fairly good understanding on the basis of the work we've done to make the bid for them.

But, I think it's always better to really understand once we are integrated and complete.

To understand how the sequence of opportunities are best met.

But, the fundamental point is, behind it, there is the opportunity to streamline this.

To do it better.

To approach it in a more logical way.

And, to make sure that therefore, our growth funnel is just more capital efficient and more predictable as a result of it.

Any else?

Maybe, just to highlight the priorities at the moment.

Gorgon and Prelude, you've got them onstream.

Elba, we just sold down the equity.

It's not only helped us reset the totalling, remove the capital, but, also gave us access to the 2.5 million tons.

We've retained that.

So, there's just different way of accessing the so -- the different part of the value chain.

Brownfields are always more economic so we have said -- I said, before train three, settle in, and train seven, Nigeria, would likely be top of our list if we could do them.

But, tomorrow, we can't anyway.

You'd need to get a lot of ducks in a row to be able to do those.

While, at the same time, we have three potential large greenfield in Canada and Browse and Abadi LNG floating in Indonesia.

They're all in progress, but, they're not going to happen tomorrow until we've got the right balance between the cost and the market.

Some of these we don't operate as well, of course.

So, that's what we are looking at the moment.

But, to an extent, we have the luxury of choice.

But, we have to get the cost down.

When Gorgon and Prelude come on, they'll drill -- deliver great returns because they're low-cost assets.

Particularly, Gorgon.

We know what can happen to the balance sheet.

In fact, if you don't, not only get the cost down, but, deliver to budget.

That's the priority.

Yes.

Thank you.

Thank you.

Theepan Jothilingam from Nomura.

I'd just like to come back to capital investment.

And, I know that process is dynamic.

But, I was interested in looking at that 2016 estimate that you provided for the pro forma entity.

And, the comments around pulling levers if they're required.

So, my question there, is what oil price assumption have you made for next year?

What type of cost inflation have you assumed from current levels?

And, what are the levers?

Is it pre-FID?

Is it short cycle exploration?

And just, my -- the second question is just on exploration and the reduction in CapEx's today, for 2015.

How much of that $3 billion was a reduction in exploration?

Thank you.

Yes.

You want to take it?

I'll try and go backwards.

Exploration reduction this year, relative to what we're looking at in January is pretty minimal.

A few hundred million.

Because we weren't planning that much in the first place and most of the wells were already committed.

This year, the 35 through 30 that we've seen over the last six months.

30% has been improvements in the supply chain.

That's not just deflation.

There's a -- there are a bit more subtleties and sophistication, but $1.5 billion of the $5 billion.

As we go forward, expect that to apply to a bigger proportion of the total CapEx.

Apo's a good indicator.

If we can take 20% over the 15 to 18 months of the detailed design phase, that should be seen as, pretty much as a minimum going forward because the market will deflate and deflate further.

So, that's one of the key levers.

The primary levers for next year are the phasing of any new decisions.

And, you'd -- on the slide you see what we pushed back.

As you see, there's some quite significant decisions.

Some of which you just mentioned in LNG.

But, there are deep water and veto, Gulf of Mexico and Brazil.

Our exploration spend is being absent Alaska, taken down towards the $2 billion level anyway.

Towards the $2 billion; probably won't drop below it.

And, the primary levers will still, in the short term, be choice of when to take new project decisions.

And, back to cost deflation.

Simon, I mean, how much cost deflation do you assume in that 35?

Or, can we see some benefits come through at mark to market, when we revisit in February next year?

Well, the 35 is based on today's environment.

If we were planning at a higher price, the 35 will be higher because (laughter) you would be then seeing prices come back up.

So, could we go below?

Don't know.

Because, remember 35 includes the about finger in the wind type guess at what BG will be doing based on their public statements.

But, they're probably under no more obligation or hurry to invest in big new projects than we are at the moment.

And, that's an underlying assumption.

Can we take more out?

We will take more out depending on what the environment we see.

But, it's not just about price or deflation.

Of the total cost of any supply chain third-party contract for investment, 40% is design and scope-driven, 40% is logistics and demand management, and 20% is price.

And, we're working pretty hard on the first 80%.

Because then, quite often, you don't have to worry too much about the last 20 because you're both winning.

Us and the supplier.

Yes.

As far as the shatter.

It's all v-8s.

It's CapEx and v-8s, divestments included in your 35 there.

Yes.

To the best of our ability to estimate, of course, you can never predict with great -- the greater certainty when a divestment will occur.

But yes, that is factored in as well.

Lydia.

Thanks.

And, if I could come back to the BG deal.

And, you do seem to be talking more cautiously now, than you might have been in either January or April about prices.

Would that have changed your view on -- what you would have paid for BG?

And, since the valuation of the structure of the deal?

And then, secondly, and I suspect partly related to the other -- that question is, I realize you can't give synergies over and above what the 2.5 billion that you've given.

But, are you able to talk about, in order of magnitude or give examples of where those synergies would come from?

Why don't you talk about synergies?

I think, no, the -- indeed, we talk perhaps, differently.

But, fundamentally, it -- the ingredients of the communication are still pretty much the same.

It's going back to the response to Jon's point.

We have to balance two things at the same time.

You have to make sure that we have an investment program that will continue the Company and its cash flows for a prolonged period of time.

We are in an industry where cash flows fall off all the time in the upstream.

So, you have to reinvest to keep the Company strong and healthy.

And, we'd have, or, take a view on what we believe for long-term oil prices.

Because, typically, they are projects.

Therefore, 30, 40, 50 years, sometimes.

And, we do believe still, that in the mid- to longer-term.

So, typically in the range where we plan the life of our projects, the oil price will come back in the $70 to $90 range.

Which, is where we normally plan for our large projects anyway.

But, what perhaps, is different, or, what I think I want to correct as a misunderstanding, is that we are not waiting for the $90 cavalry to arrive when we deal with today's challenges.

But, we didn't get our message across very well in January.

But, I want to be really clear that the planning of today's financial framework, the affordability by which we manage things on a quarter-to-quarter, year-to-year basis is driven by today's realities.

Not by, well, at some point in time, we'll come right again.

Yes.

And, that is what we intended to say in January.

I think that got interpreted as well, the calvary story.

And, the same is true for operating costs.

After much coaching and a lot of pleas from your side, we decided not to have a target out there because we said, you have to judge us on what we do.

Not on what we promise or what we talk about.

That only works to a degree.

And, you also have to then, at some point in time, show what you have done.

Yes.

And, that is also what today's communication is about.

So, is it a change?

Yes, it is a change.

But, a change in demonstrating what we have done.

It's not that we woke up a few weeks ago and said, we better do something about our capital and operating costs.

Because, everybody else seems to be doing it, no?

We have been working on this, as Simon says, for many, many quarters.

Of course, we've been working on it, more or less forever.

Bear in mind, half of our cost base is in the downstream.

If you do not manage your costs well in the downstream, you don't have a business.

Yes.

Synergies?

Yes.

Just briefly on synergies.

Remember, we're putting a company with a $40 billion cost base together with a Company that has lower than $10 billion.

This is not a synergy-driven deal.

We can do as much on our own base as we can on the combined.

So, the $2.5 billion that was signed off in the deal, only $1 billion was cost, $1.5 billion was less expiration.

Which, we clearly won't need as much of in the combination.

The value uplift was always the driver of the deal.

Synergies are not.

The cost synergies are nice, but the value uplift is why we're doing the deal.

For the gas and the deep water positions.

Simple example is we work in Brazil with Petrobras.

They're already a good partner.

I think they may take a positive view on having a partner like Shell for technology, for our operational experience.

Together, to drive value out of that portfolio.

The LNG market, we and BG have the first best and the second best LNG portfolio for trading and marketing in the industry.

It's a matter of opinion which is best, but they are clearly, the two strongest in terms of supply source, market access and the ability to optimize within that.

The value, we bought rental's marketing -- LNG marketing business.

We are 25% of the cash up front back in the first year from optimizing that portfolio with several 100 million in the first year, from optimizing it better than it had been.

Together with BG, it's a well-managed portfolio, anyway.

BG's of course.

But, the -- bringing that together.

There's a lot of scope there.

We just can't put a number on it today.

Okay.

Anish.

No, sorry, Anish and then Irene, yes.

Good afternoon.

I had a question on disposals.

And, then, another question on your North American portfolio.

On the disposal side of things, if you assume that oil prices will stay around this kind of level, maybe slightly higher out to the end of 2018.

I was just wondering about your confidence on the target and how the splits would look between, say, upstream, infrastructure, and downstream.

As, I think the MLP will be quite important in there.

And then, the second question relates to the Permian assets, and looking at those in the context of your capital reductions.

Essentially, you didn't have that in your turnkey projects.

But, it seems like an asset that could grow substantially over the next five years or so.

Could throw off potential cash flow, but then, at the same time it requires some substantial investment at the moment.

I think if you were going to sell it today, you'd get, probably a several multiples times what you spend for it.

And, you could bring somebody in to accelerate that asset.

Just wondering in terms of the asset, how are you thinking about it in this environment?

Where there are people still willing to pay very high multiples for that type of asset?

Thank you.

Yes.

The Permian is a good asset.

I'm sure that Simon will have some more to say about it.

In general, about disposals, you're right.

It is a little bit more difficult to sell in a very, very weak oil price environment, an upstream asset.

We have no intention to sell assets for below that value.

We have to make sure that we get full value for it as we see it over the fullness of the asset's life cycle.

So, yes, as long as the oil price does not support selling, typically, oil denominated assets, if you like.

We'll focus a little bit more on those assets that will not have that.

For those of you following the news today, we just announced selling off our oil products business in Japan today.

An asset that is a good asset, but not strategic anymore to the point that we need to have it in our oil product network.

And, we can harvest the value and some more, by selling it to an investor who will do something else with it.

That will combine it with their portfolio in Japan, restructure, and consolidate in line with what METI believes needs doing.

And therefore, it's a clear win-win.

There will be more of those.

There will be infrastructure plays, and there will be alternative ways of monetizing.

You don't necessarily have to sell.

You talked about the MLP yourself.

We will have quite a bit of runway to follow that trend.

And then, yes, there will be -- I guess, if the oil price stays a bit lower at the beginning, there will be more of the upstream assets sold towards the end of that period.

I said it will be a bit lumpy.

And, we will, also in some cases, have to find, maybe, alternative ways of disposing that preserve the value.

But for now, based on the modeling that we have done and looking at the entire universe of assets that we have.

We've done quite a bit of work on our own portfolio.

I have no hesitation to say that we have ample coverage and multiple, actually of the $30 billion that we have.

And, that's not even looking at the BG portfolio.

Just a couple of words on the Permian.

You're right, it's a great asset.

More than a billion barrels of oil.

It's mostly 50/50 with Anadarko.

And, we're seeing recent breakeven rates, at or below today's oil price.

And, could we sell it?

Yes, I'm sure we could.

Would we sell it?

I'm not sure why we would.

And, there's a danger of it becoming a de facto exit from unconventional activity.

And, there's still, we believe, longer term, potential strategic and competitive advantage for Shell.

Having that capability in the back pocket.

We're drilling wells in [Backawata] in Argentina at the moment.

That would be more difficult if we were not in the Permian.

I can tell you, we've just drilled a couple of the best that, that country's ever seen.

We also, still drilling in the gas.

Need to.

Basically, it's explore and appraise.

Know what you've got, hold if it's low cost, and see when is the best time to monetize.

And, what's the best way to monetize.

It might be develop.

It might be divest.

Because, these are still relatively immature, we're not in the market -- while it may be there, it's not good at the moment.

We don't have to sell, so there's no reason to do so unless somebody put so much money on the table that we wouldn't - we'd be a fool to walk away.

Just on the gas, that's really being held in principle to support integrated value chains.

So, two of the basins are gas.

We have the Permian.

We have the Duvernay play in Canada as well.

Both of the liquids plays look pretty good.

So, it's just a question of when and how they get -- they are turned into money.

The gas, we've been drilling wells recently, $25 million scuffs IP rates.

There's some good assets out there.

They just don't make a lot of sense investing at $2.80.

All right.

Thank you.

Irene?

Thank you.

Irene Himona.

Societe Generale.

I had two questions, please.

Firstly, on BG.

In terms of the regulatory approval processing in China and Australia, in particular.

Is there anything at all you can share with us in terms of how that is going, timetable, et cetera?

Because, it has been of concern to the equity market.

My second question is the following.

Ben, you mentioned that in the event of further oil price weak -- weakness, you would look to reduce capital spending further.

And, I think this is the first time I'm hearing this in a while.

In the past, it used to be the case that Shell was talking about we invest through the cycle, because the last time you didn't.

In the late 90s.

It took about a decade to fix it.

So, my question is, is this is a change?

And if it is, is it because of BG?

Yes.

Good questions, Irene.

Let me take the first and start with the second.

I'm sure Simon will have to say something about the second one as well.

Yes, there's not a lot to be said on the two countries that you mentioned.

We are in the middle of the process.

I think it is going very well.

We've -- I've personally spoken with the MOFCOM Minister.

We are very, very close to the anti-monopoly bureau.

We -- our filing has been accepted on July 7, if I'm not mistaken.

We're in a process that is very well-defined.

We have been given assurances that it will be dealt with the appropriate sense of priority and urgency.

And, all indications are that, that is happening.

Our partners in China are very supportive of this deal completing and have been on the record saying so.

So, we'll just have to see how this works through.

I note, that this is a very, very attractive area to speculate in media about anything that can happen.

But, I have no reason to believe that this is going to be a -- anything else but just a normal very variable structured, fill run process that the Chinese authorities will do.

I think, of the 576 approvals that the anti-monopoly bureau had to process in the last years, only two have been turned down.

We don't intend to be number three.

Australia is also a -- just a well-defined process.

We need to have a number of clearances there, the ACCC and the FERC.

There's a few other entities in Australia that will be involved.

The tax office will take a view on it, et cetera.

Again, it's a very well-defined process that we are right in the middle of.

I have no reason to believe that this is giving us challenges.

And believe me, I'm really on top of this.

I've been visiting and phoning and engaging with key stakeholders in all the key countries.

And again, there's no reason for me to believe that we have any issue.

And, you will have seen that in places where there was also a lot of concern, like Brazil, that things have gone very, very well.

No, I cannot say, that's a proxy for everything else.

But, it's - as I said, based on everything I see at the moment, I'm very confident that this process will just run its course and that we will be able to close at the beginning of the new year.

Now, on the ability to pull further levers.

Yes, we have that ability.

And, we will not be shy to use that ability if we have to.

Is it related to BG?

Well, to some extent, yes.

And, we always said, listen, we have a very, very strong balance sheet.

We run at a very strong balance sheet precisely for this.

To deal with this sort of environments that we are in the middle of today, so we can invest through that cycle.

But, of course, you'd want to reserve the strength of the balance sheet as much as you can as well.

Which is exactly why we have been pulling these levers so vigorously over the last 12 months.

And, it is basically, taking costs out, deferring capital, indeed, introducing the scrip, restructuring assets, selling assets.

That, altogether has meant, that our gearing has actually gone down.

Rather than go up.

So, we haven't used up any of that strength ahead.

But, we know that we have to use that balance sheet, as well, to do part of the consideration for the BG deal.

So, indeed, you have -- we have to get that entire balance right.

Now, at the same time, I'm sure that, again, Jon's question will come out.

At the time we have to look at further deterioration of the oil price environment.

Fine, we can further defer.

We can cancel.

We can manage the affordability of our investment program with that lever.

But, what does it mean for long-term growth?

And, we'll have to take a view at that point in time.

So, it's -- I cannot at this point in time stand here and say this is the algorithm that we will follow.

Or, I can already say now, that we will cancel this debt and the other thing.

It will be a dynamic decision-making process that will be governed by all these factors that we will have to throw into the mix.

And, that is why it is a major agenda item every time we meet as an executive team.

To understand what choices are ahead of us and what is the most prudent way to deal with these choices.

And, I would expect that to stay with us for the next several quarters.

I'll stay in this area.

Yes.

And then, I'll move over to the other side.

Yes, Ben, Iain Reid from Macquarie.

Just talking about Brazil.

You mentioned earlier that you can bring to bear Shell's operational and reservoir management experience, et cetera.

But the reality is, it's all operated by Petrobras.

And now, Petrobras is in somewhat of a crisis.

I wonder whether this is now the opportunity for you to start to make some approaches to actually operate things or acquire things you can operate in Brazil.

Has that process started between yourselves and the Brazilians?

Hmmm.

And the second question is, again, back to LNG on Browse.

You've talked about affordability and breakeven prices, et cetera.

But, Browse seems to be going ahead, or at least looks I think it is.

Can you say what oil price breakeven you have on that?

And, what the status of the -- that project is right now?

Well, you take Browse.

I'll talk about Brazil.

Yes.

Yes.

Well, operator-ship in Brazil, it would be very interesting component of our proposition and our position in Brazil.

Actually, we do operate things in Brazil, of course, not in the pre-sold polygon.

That is legally privileged for Petrobras.

So, we will have to see a change in legislation first before operator-ship can be granted to others.

Will that happen?

Well, we can speculate about that.

I'm sure it -- if it was to happen, it will take some time and some political development for it to materialize.

But, one thing I know for sure, that if it does happen and if we feel that, indeed, it would be beneficial for us to take on operator-ship role; being the preferred and lead partner of Petrobras, will put us in the best possible position to have that dialogue.

A -- secondly, being a non-operator in some of these ventures doesn't mean that we are just a financial investor that receives checks in the mail or cash calls.

We are, actually, intake Libra.

And, take some of the other projects.

And, if you talk to BG, you will hear something similar as well.

We are very, very much in there, working together with Petrobras, to understand how we deliver these projects together.

Yes, of course, Petrobras is the operator.

But, they very, very much like our input.

We very, very much see that some of the concepts that we have on deep water well design for Libra are actually Shell concepts.

That some of the management tools that we have are very much the methods that we have and that we bring in.

And, they welcome that.

I mean, Petrobras is a very, very competent leading player in the field and so are we.

And, we are two very professional organizations.

Of course, with a suitable amount of professional pride.

But, we're also pragmatic enough to understand how we can benefit from each other.

And, that is exactly what is happening at the moment.

That's -- I cannot tell you enough how warm the reception has been in Brazil and with Petrobras, when we were there with the entire board last month, and had a dinner with the entire Petrobras executive team.

It was very, very clear that yes, our partnership, which has been there for many years, is going to go to new heights.

And, we are both looking forward with a lot of anticipation and confidence, and I'm sure there are other opportunities will come from it.

Browse?

Browse.

Just need to recall, there are four partners, Woodside Operate, Shell, BP, PetroChina.

We have entered feed.

This is a potential free floated development over a quite significant period of time.

Going into feed is targeted to say what will the cost level be?

Wind back the conversation to 20 minutes ago, and what markets will the gas go to?

Now, Shell may have a broader and more optimistic expectation of markets, because we're in so many markets anyway.

But, all the partners will have to come behind.

Yes, we are prepared to put this amount of money into the project against those markets before we go ahead.

As Ben's point earlier, you don't get new supply if the demand is already locked up.

It'll take some time to go through feed.

The exciting thing is there's 70%, 80% replication against, probably, it's not quite the same type of a flood surface.

But it's wet, IE, liquids as well as gases.

Not dry gas.

So, there's a lot of value there.

There's quite a lot of TCF, well into double-digits.

And, some way we should be able to make value.

But, if it's not there -- then it'll be up to the partnership and the operator to ultimately make the call.

But, we're not committing a lot more new money, by going into the feed phase.

Yes.

A question in the middle.

Martijn?

Yes.

Hi.

Hello.

It's Martijn Rats from Morgan Stanley.

And, so, I wanted to ask you two things.

First of all, when you announced the initial offer for BG, there was a slide in there, which said reduction in the number of strategic themes.

And, I appreciate you said it already a few times.

So, you can't say, oh, we know this stays and that goes.

But, that was a higher level comment.

And, I was wondering, you didn't use that terminology this time around.

But, I wanted to ask you if you were thinking how that has progressed since then.

And secondly, I wanted to ask about breakeven oil prices.

Because, we quite often we don't see the economics of individual assets.

But, over the last few years, when oil was $100, we saw a lot of capital employed being added to the Company and the earnings not to grow all that much.

So, it naturally lend itself to the conclusion that, well, perhaps, the new projects at $100 oil have lower returns.

And now, from you, and but also from others, we're hearing comments about -- oh but, we see projects at $70, at $60, that work at $50.

And, I understand there's a lot of cost reduction now, right, a lot of efficiencies are all of a sudden being realized.

But, can we really go from $100 to $50?

I mean, like, how do I mentally bridge that gap?

Look, let me talk about the strategic themes and see whether Simon can sort of replay some of the discussion we have on break-even pricing in the last few weeks.

No, I think, Martijn, there's no change there.

Yes.

So we talked about making the company more focused, simpler, more concentrated on areas where we have established strength; therefore, also improving the resilience of all the opportunities that we are focusing on in the longer-term, and that will manifest itself at some stage also and a reduction in the number and the scope of the strategic themes.

There is no change there.

I hope you would understand that I cannot go any further at this point in time for some sensible commercial reasons to say what it means, but there is no change of intention there, absolutely.

The breakeven, I'm glad you asked the question, Martijn, and restricted it to breakeven for projects.

It's a lot easier to talk about the breakeven for the aggregate portfolio.

Individual projects, we've never taken decisions where the breakeven net present value at the point we took an investment decision was $100, period.

We've always used three values.

We use what we call the low-level screening value, then the ranking value, then a high value.

Those values have been for some time $70, $90, $110.

Screening means should be positive NPV.

Ranking means compare it against other projects for which are the best.

And the high is just to say on what level of upside are we retaining access.

So don't give away all the upside in the negotiation just so you get your project over the line at a lower price.

So, we never really taken big decisions at anything that's breakeven above $70.

Occasionally, there's been one or two, but usually with a strategic reason, with value embedded potential beyond the individual project.

So coming down to $55 from there is good, but it's not a massive step.

The problem has been, that was at the time we took the investment decision.

And there has been a track record over the past, well, at least five years, but certainly with some high-profile examples in that period of you took the investment decision on this level of cost, but the actual was this.

That's what causes some of the problems in terms of declining returns.

Plus the fact that actually, as the whole industry has been effectively, I won't say catching up with the increase in investment that we ourselves started nearly 10 years ago now, for different reasons.

The whole industry has seen that blow up.

And you can see it in the charts that Ben showed in capital employed terms.

Our capital employed at the end of the quarter $230 billion.

Capital not yet employed $100 billion.

That's $55 billion on assets in progress and $17 billion or so on exploration assets, $27 billion of cash that is going to go somewhere.

So $100 billion out of $230 billion is not yet making any money.

The projects I just showed you are a big chunk of the $55 that's work in progress.

When they are delivering, there's another reason why we're a bit more sanguine about not having to invest through cycles.

The projects we're doing, they're pretty good.

Now, that includes Gorgon and Kashagan.

You all know the stories there, non-operated, both of them.

When they come online, they throw off cash.

They're both low cash cost assets, but they will act as a bit of drag on return on capital for some time, but having them working is a hell of a lot better than having them work in progress.

Just a short clarification.

The $100 billion figure you mentioned, is that comparable to what it was two years ago?

The $60 billion?

The $100 billion includes the cash.

We have got $27 billion of cash on the balance sheet at the moment, included in the capital employed.

So other than that, yes.

In definition terms, yes.

Waiting to go away, yes.

The cash has a home to go to.

Exactly.

It's called BG.

Okay, another one in the middle and then we will move to you.

Alastair Syme for Citigroup.

Can I just clarify on that last point, in the planning process that you go through every year, you're still using $70, $90, $110 for this year's planning process?

Didn't quite say, that's of projects?

The planning process, long-term tends to tend to those projects screening values, but in the short-term reflects current reality.

That is actually quite an important clarification.

So sometimes the words planning and screening are easily interchanged and maybe give the wrong impression.

If you look at a project, and if you look how the project is going to do over its life, being 30 to 40 years, we use screening values.

Sometimes we also use the word planning values, and that's the $70 to $90.

So indeed, we compare portfolios of projects at the $90 level, we have been doing it for some time, and we just make sure that it is an NPV positive project at $70.

Quite often, it's of course NPV positive still at the lower level.

Now, when we make the business plan for next year, and we plan for cash for next year, we don't use $70 or $90 or whatever, we use what we think the oil price is going to be next year.

We make sure financially the Company is resilient and robust and attractive and can pay its dividends, et cetera, et cetera, et cetera, at whatever we think the oil price is.

But whatever we think the oil price is for next year, we're not going to use for the next 30 years for the investment decisions that we take next year.

That would be nonsensical.

So we have indeed multiple ways of looking at oil price for financial planning purposes, as well as for screening projects.

Sometimes these things get interchanged and have produced funny results on how people think we are behaving, but I hope this clarifies it.

Can I just come back to, in the January presentation, I think you extolled the virtues of your macro team.

And I appreciate, I don't mean this to be a facetious question, but what has changed in their view, in the market, in the last six months?

I'm sorry, in whose view?

In the macro.

Your internal macro.

The economics team.

I think fundamentally not an awful lot.

It is also that we don't know ultimately how the oil price is going to develop, with all the factors that are weighing into it.

The fundamentals -- this is the point that I made at the time, and of course, by reiterating it, I'm at risk of again falling in the same trap perhaps that I fell in January, but fundamentals are that there is a bit of a floor at $70, if you take the longer-term view at it.

There is a demand growth, that, you can argue how big it is, is it 1%, 1.5% or 2%?

It depends a little bit on how China and general developing countries grow, but if you assume a modest GDP growth that correlates to a 1% oil demand growth, then that is one factor.

The other factor is that supply shrinks all the time.

Don't know quite how fast it's shrinking at the moment.

Typically it shrinks at about 3% to 4% but the more we hold back as an industry and as countries and investing in existing fields, the faster the drop of end supply goes.

At some point in time, the market will balance.

The market is not going to balance with all the investments that are just going ahead at today's oil prices.

Of course it will ultimately balance if we would see a continued deflation in costs.

It could, of course balance at today's oil prices as well, and then, of course, the whole thing will right itself and we will make money at lower price levels.

But as we see it at the moment, assuming a very significant reduction in price levels and cost deflation we see the oil markets requiring a $70 a barrel price to balance in the long run.

How we get there, when we get there, what sort of events will happen down the road or in the interim, geopolitically, sentiment or whatever else, I don't know.

But what I do know is that I have to survive at today's oil prices as well.

I cannot just say it is all going to be all right because somehow, somewhere is going to be $70 to $90.

So if it today is $55, you better plan for $55 today, and that is what we have been doing.

Maybe not making that explicitly clear, but I hope it's clearer now, and I hope you will have seen, that's what we have been doing for the last quarters.

It's [Rob West] from Rathburn.

Thanks for taking my questions.

Believe it or not, I've got four burning questions, but I'm going to make a Shell-esque tough decision and cherry pick the best two.

Going back to that comment you made earlier about that five times increase in the amount of man-hours that go into building a part of one of your liquefaction assets, and the general increase in complexity of businesses like yours over the last cycle.

Does that say that -- I'm just trying to get a sense of how deep this cost deflation theme goes.

Is there a change that's being made in the functional standards of a Shell, the way you design projects, and the standards you use when you're building things?

And more broadly, is there a change in the functional model, the functional organization.

Can you give any specifics around that as part of this plan you've announced today.

And I've got a follow-up.

That was one of the four.

I'll pause, thanks.

Shall I answer that one first?

Let me first of all say, maybe a point of clarification, as well.

The increase that we are seeing in the number of hours per piece of equipment for typical plant design, is indeed to design and engineering hours, but piece of equipment.

It is not a Shell number, this is an industry number.

As an industry, we have to tackle this.

Now why is this happening?

That's indeed the killer question.

Part of it is because indeed, the standards have become complex.

Part of it is because of regulatory requirements, technical requirements.

Part of it is we are dealing with more challenging or sophisticated projects to run load value, et cetera, et cetera.

There's good reasons for this sort of inflation of design and engineering man-hours to occur.

But there's also less good reasons.

Part of it has to do with confidence in the sector.

Part of it has to do with our sector and many other construction sectors not being able to use modern productivity tools to really drive productivity.

Let me just give you a simple anecdotal example.

I started in this Company 32 years ago as an LNG design engineer.

I did my LNG design computer runs overnight, which meant I submitted a computer run in the evening, and when if I picked it up in the morning it had crashed after 0.2 milliseconds because I had a bug in the code, then I would really be frustrated and have lost the day.

A lot of the thinking went in up front when we had to design a piece of equipment, usually took the old design from the previous plant.

You made a few changes with Typex and you made a photocopy, and that's the way we did it.

Today, we have fantastic productivity tools, which means I don't have to think.

I'll just do the computer run, I'll have it back in two minutes, and I'll see whether it has worked or not, and if I have a better idea overnight, I just submit it again.

Whether I will trigger a whole wave of rework and engineering contractors and everybody else, maybe I don't care about it too much.

And if I can make really bespoke neat designs to every possible eventuality, maybe if I'm a proud engineer, I would do that.

What we are talking about today, about standardization and replication et cetera is the stuff we had to do out of necessity 30 years ago.

Now we think of it as an innovation.

So we have to actually trace back a little bit our steps and say, what has been going on in our sector, and why have all these productivity tools that have been thrown at us to gather complexity and standards and everything else, the way to communicate more readily, I can send an e-mail off to anybody in the world and say, listen, I have updated my design.

Please deal with the consequences.

We have to go back and say, how do we improve this?

That requires a fundamental rethink that we can't do on our own.

We have to do it with our supply chain partners, we have to do it with the engineering contractors, we have to do it with our equipment vendors, and we have to have a tremendous amount of discipline in doing this right.

That's how we take our start.

That's where cost deflation comes from.

Just tipping in that question a bit more.

Is there an incremental step up in the change in your functional standards, functional model, as part of today's CapEx reduction plans?

Is that something that you're stepping up?

Really, of course, you have to go back and you have to challenge yourself all the time.

My standards, the things that I circle to legitimately put on there, because I want to be better, I want to be more optimal, or I more robust or more reliable, et cetera, et cetera, is that all justified?

A lot of things continuously creep into our standards, because they're a lesson learned from the past.

You start a plant, you have an issue with a piece of equipment, and say, well, that will never happen to us again, we'll have a standard for that.

And before you know you will have a multiplication or a replication of standards that you have to continuously maintain and prune, and just say, hold on, why did we do this again?

Does it still make sense?

To have that done in the past, when communications are a lot more difficult, it was just harder to put all these requirements, and today it is very easy.

You just update documents placed on the web, click, and it's there, and everybody has to follow it.

In the past we had to rewrite books, print them, go to typing pools and print them off and send them off to locations around the world, and this was the new standard from this year onward.

There was a natural inhibition to some of these changes, so we have to be more disciplined, more careful, and more self-critical on our standards.

Now that's not a Shell problem, that is an industry problem.

I think as a matter of fact, that we are leading in that field, as well, because we have been working on it for longer, and we have created with our P&T organization, an organizational infrastructure to tackle that.

A lot of the things that we're doing today, looking at our discipline standards and our functional standards, technical standards is precisely that.

In my communication to staff for this quarter I just came out with a simplification on standards that will actually remove 40% of the requirements we have for a lot of our technical operations.

And these are things we can and should do all the time.

So that was one of your four questions?

I'll let somebody else have a go, but one more for Simon.

You gave us a really useful attribution last quarter of the integrated gas moving parts Q-on-Q in the FX, outage at [pole].

Is there any chance we could have a repeat of that this quarter?

What were the moving parts?

In simple terms, sorry, no.

I've been a bit busy, so my preparation was maybe a little less detailed than normal.

Okay, thanks.

Thank you, very much, two quick questions.

First, really back on the divestments and given the comments about LNG deepwater as a focus, gas being the fuel of the future, lower CO2 world, I want to get your thoughts on oil sands.

Where should Shell be in oil sands, or is that, I'm not sure if that is part of the divestment plan, but could it be, could we see something more radical just related to oil sands going forward?

The second question, I guess I'm noticing a couple of the other CEOs being able to get some tax concessions or lower content in certain countries, or have been able to tweak pricing or taxes, so re you having any success or should we expect to see any Shell success in pushing back with some of the rising fiscal tick?

Thank you.

Simon's going to say a few words on tax and fiscal tick in a moment.

I'm not sure whether you wanted to ask Martijn's question in a slightly different way, but what we need to do with oil sands, oil sands, of course, is a relatively high cost operation.

I think in the first quartile when it comes the cost per barrel, but there is in my mind also a further potential to take costs down, and the necessity to do that of course.

Maybe at oil price levels if you look at North America and if you look at the discounts that we see in Alberta, even versus WTI, we are approaching of course oil prices that are very close to the cost of production.

We have to have a focus even more than perhaps in other areas, on efficiency, cost take-out, reliability is very important there as well.

There's a few helps.

The change in regulation in Alberta will really help us, that have allowed us to optimize the mine plans to a point where we do not have to process more dirt than we necessarily have.

We can optimize the grading of the mine in a more economically rational sense, rather than a regulatory formula.

And therefore, I think the main priority for oil sands is what else can we do to improve margin?

What we'll do with that business in the slightly longer run, I'm not going to comment at this point in time.

Tax?

Thanks, it's a bit broader than tax, usually, it's a fiscal structure and/or local content, and the two are often linked.

There are countries where it can be a barrier to investment because of the costs that are added and yes, you can have sensible discussions.

It took a while but the UK got there.

Have they gone far enough?

Time will tell.

There are specific countries, Brazil and Nigeria, where local content requirements are high, understandably, but they do have a significant impact going forward.

So less so on the projects already underway, but as we go forward, to unlock some of the projects that we've seen, maybe we need to see changes there.

And a couple of countries in the Middle East.

I think it's known in Iraq, one of the reasons we are looking at the pace of development in Majnoon is because the actual terms today.

They don't really rank in an investment comparison and has made quite good progress in that, but you don't go bang on the door, and say, cut the tax rate.

That's not a very productive way to go into such negotiations, and there is always a bit of give-and-take.

You can get some headlines, but there has to be an outcome which is good for both parties, not just one.

Chris.

Grabbed the microphone.

Thanks, it's Chris Kuplent from Merrill Lynch.

Two questions.

I heard you mention the Permian break even seems to be even below current numbers.

Now the Permian is a very special region, but considering what you've learned there, and as you say, you can apply in other regions around the world, whether that's Argentina or elsewhere.

Just over the last six months has that experience changed your internal thinking about potentially there being more cost efficiencies still down the road, not necessarily in the next three months but over the next three to five years, possibly denting your longer-term oil price outlook?

The second question, now we've been through quite a few quarterly results presentations this week, and I think this seems to be a bit of a dichotomy between, hey, I can cut CapEx but my decline rate does not get impacted, and I also don't need any M&A.

Thank you, very much.

I think Shell seems to be in a bit of different position, where obviously with BG, a lot of growth is coming your way.

Does that mean you can afford to be a little more relaxed about decline rates when you are now guiding down CapEx to $30 billion this year, and possibly lower next year?

Let me say something on both points, and Simon, I'm sure, will have a few very useful adds to that as well.

Efficiency, I'm not sure whether you're talking about what we see or what we see the industry can do when it comes to efficiency.

It is probably both.

If I look at the Permian and I think for that matter, also the Duvernay, that both areas where we have seen a continuous luring on our part on how we can improve productivity, how we can optimize development plans, how we actually should look at where sweet spots are, or how we have what we call common value areas and come up with the most optimal way of developing and planning infrastructure, et cetera, et cetera.

It is an area where innovation very much happens in the field.

There's a little bit of innovation that we also try to do in the lab around completion techniques, et cetera.

But a lot of it you learn by trying things out and applying knowledge elsewhere.

What we have seen is there is a continuous learning curve.

What we have seen, and certainly when it comes to drilling and completions is that we can be absolutely top quartile.

I think in the Permian, it's the great thing about the Permian and many of these other plays, you have daily benchmarking because you are working together with partners.

I can say unequivocally that we are top quartile when it comes to drilling in the Permian.

And the same is probably also true for the Duvernay, although we are so far ahead of everybody else that it's harder to get good comparisons.

What does that mean for the entire industry?

Can the entire industry see this same trend?

I'm sure they are.

As a matter of fact, they have to.

Otherwise, they won't survive.

Will that mean that basically there is such a big new reservoir of new oil opening up that we can see the oil price going down for another triple dip and for years to come?

I don't know.

I don't think so, actually, because at the same time, if you look at how many of the independents are doing from an overall financial perspective doesn't look good.

The individual well economics may be interesting, but the overall integrated economics including the whole infrastructure to evacuate doesn't look very good.

That is one, the second indicator, look at what is happening this week for, I think now, three weeks in a row, we are seeing production fall.

This whole idea that this can go on and you can actually continuously bring rigs down, and somehow miraculously production will keep on going up, that I think is finally coming to an end, as well.

The second question?

Is really around decline rates.

The decline rates.

Need for growth and views on capital investments, I think, whether we need M&A, et cetera, and whether BG has made a difference.

Do you want me to?

Yes.

The decline rate, actually, our underlying decline rate this quarter and this year to date has been around 3 percentage points.

That's less than it was, partly because we are investing in different types of activity, and we don't recognize any decline rates in our shale production, on which, remember, even if the production ever were to get to 10 million barrels a day or whatever some of your peers are putting out there, it declines by 40% in the first year, and 20% per year thereafter.

So even if you get to 10, if you stop investing, it's pretty soon 5 or 4 or 3. And you have to keep investing at a pretty high level, which really underpins Ben's point.

Will that ever be the marginal price setter?

Maybe for a few years, yes, but how long can you keep finding 5 million, 6 million barrels a day of new production to be the price setter?

That would outstrip the Saudis' ability to do it by a very long way, and whether the rocks work is less of a point as to whether the capital markets are prepared to keep providing that kind of capital to keep that scheme running.

Yes, I've heard various comments from others who are in decline rates versus growth M&A.

Our growth potential is in completing the BG deal, plus the assets in our portfolio that were on the slide Ben showed earlier.

I'm not really worried about growth personally at the moment.

The aim is about getting the right balance between growth and competitive returns.

We made our play on should we acquire, we think we did it at the right time, in terms of the valuation of the assets and for the right company, because of the great fit, about which we have spoken.

So it's not a big issue for us at the moment.

Our priorities are clear.

I see there is a bit of self-selection going on.

Whoever has the mike has the next question.

There certainly is.

Gordon Gray, HSBC.

You've talked a lot about capital flexibility and adapting the spend to the current environment, and saying potentially if the price was higher, you could spend more.

If you look at the other side of this equation, for those out there in the market who are less confident than say, yourselves, and many of us, in the recovery of oil prices, can you give us a feel for your cash flow sensitivity long-term?

I'm thinking slide 32, I think it is, in your presentation you talk about the $15 billion to $20 billion of cash generation and the three pillars, et cetera et cetera.

How would that look at what you see as the floor for oil prices?

That sort of $70 level?

Secondly, very briefly and I think quite easily, what are the key milestones you have to get through to be drilling in Alaska this summer season?

Let me take the second question and give Simon some time to think about the first one.

The key milestones, we have to get through, actually we've gotten through most of the milestones already, and they have been very well commented on over the last months and quarters, of course.

Where we are in Alaska at the moment, we have the true drillships and rigs in place.

We have most of the fleet in place.

We are making initial preparations and we are planning to drill the wells.

We have one well planned for this season over the next weeks, months.

So expect results somewhere in September or so.

We have, it's also very well advertised, we have one of the finished icebreakers in Portland that is being repaired.

It hit an underwater object in charted waters, so we discovered something that was uncharted, after all.

But we expect that ship to be on location well in time, before we have to apply for the modified permit, which is to drill into the hydrocarbon-bearing zone.

Everything is basically going on schedule as planned.

There are of course hiccups, the icebreaker is one of them.

But boy, we have been preparing for this so well and so thoroughly, and the way the team has been responding to this is incredibly professional.

The key priority we always set is to operate exceptionally well, and all the evidence that we are seeing at this point is that indeed is paying off.

That's all I have to say at this point in time.

Updates will come over the course of the summer.

Price sensitivity, today, around $3 billion of cash flow oil earnings per $10 movement in the oil price, give or take what happens with gas.

Going forward, that will increase.

The projects -- the 10 projects that we showed, they're all pretty price-sensitive, because that was a deliberate strategic choice that got more oil price sensitivity, including to the upside.

So it will trends toward 4 over the next three to four years.

With BG, maybe 5. It depends on how we then reset the portfolio, which assets we keep, which we sell.

So increased sensitivity over time to the oil price.

The 15 to 20 ranges, those ranges were not just where it might connect in oil price, it was also about how much of the portfolio we choose to keep or develop.

I think this slide showed where we are today versus where we could be.

The mature businesses, they're there already.

They're pretty much close to 20, so likelihood is we will sell some down, develop some.

On the gas, that's going to be at the top end because it's already in double digits, and then you add in strong BG business, and all the investment opportunities we spoke about earlier.

So that's likely to be the top end.

If anything, we need to sell that down a bit, just to make sure we're not overexposed in that area.

And then the deepwater is the growth.

That comes from significant growth on the Brazilian side, particularly BG and in the Gulf of Mexico, and long-term on exploration.

And that is quite price-sensitive, but the order in which, and the pace at which we develop remains a bit in our hands.

We also have a few other assets that maybe you don't need in the portfolio, if you're focusing around big core hub developments.

So still quite a lot of choices, so the 15 to 20 should be seen as, that is what we should target to get the shape of the portfolio, the three pillars.

And if there is another one, such as the Arctic, then let's see where we go there.

But it won't take a lot of capital, the longer term, in the next three or four or five years.

The capital priority will be on the three pillars.

You've taken back control of the mike, thanks, Trevor.

Thanks.

Rob did very well in restricting himself.

I'll try and do the same.

Two questions.

One, I'm tickled by the LNG comments and complexity, and I'll come back to in a moment, but analysts exact the same term spreadsheets, Simon, and you've made our lives slightly more complicated in ways, deferred tax, Brazil, Australia.

Why does it go to the P&L?

Why not just through the comprehensive statement of income?

Why can't we lose it as a complication each quarter?

And more seriously, two others of mine.

Very simply, first one, organization Ben, how has it responded to the changes you are indicating you wish to drive through it, and how much resistance, how much push back?

To what extent you're embracing?

And going back to the discussion on LNG, if I might, I guess the difference between gas and growth this time relative to gas and growth historically is, it is another fuel source.

Coal obviously plays a large role in terms of switching and choice.

Do you need a carbon price?

Do you need a real push away from carbon for demand for LNG to continue to deliver at the kind of rates that it has over the last two or three decades, because even at $9 or so in MMBTU, relative to coal, and relative to falling renewable costs, LNG, gas is just not as competitive as it was.

I'm not sure of the question, now.

The question, sorry, Ben, do you need carbon pricing to be reduced?

Do you need a real shift away from the use, or away from carbon intensity?

Everything that you've been talking around working towards in December?

Politicians been working towards in December, to take place, to really underpin?

I think a number of things need to happen, if I take the last question first, and I'll bit about our organization.

I'm sure Simon will want to talk about the deferred tax assets on the balance sheet.

I do think you need a carbon price, in order to, shall we say level the playing field against coal, because at the moment, look at what is happening in Germany and it's happening in other places as well, you see the same also happen potentially in places like Japan.

It is the combination of low or no variable cost renewables coming in.

At the moment you install a solar panel, the moment you install a wind farm, it has no operating cost, has no fuel cost, and if you replace these assets in electricity markets, they basically dispatch.

Basically what I do is I push out typically gas, and the next one in the merit order is low variable cost coal.

What typically happens unless you correct something, either the way you price capacity, or either the way you put a price on carbon, you basically see strong pushes for renewables coinciding with a resurgence in coal.

It is happening in Germany, and it's starting to happen in Japan.

So you have to something about it.

One way to do, to work with it is to put a price on carbon, and that will then disadvantage coal, because it is a higher carbon-intensive fuel, and therefore, it will relevel that playing field.

It prices everything in, but at the same time, I'm also convinced, and that is why we are working so hard on cost take-out in general, that you have to reduce the cost of delivery of gas in general.

It's a great story to tell in affluent places like the UK and Germany, et cetera, that we need to have an economic stimulus, which basically means higher energy prices, let's be honest.

This story is not going to work in Africa, it's not going to work in India, it's not going to work in South Asia in general, where basically unabated coal will still go in, and the only way you really are going to tackle that is by making gas competitive.

Competitive without putting a price on carbon.

So you have to do both in my mind.

But to just push for renewables in the hope that will somehow solve the climate change problem, I think, is not a good solution, either.

Organizational change, I talked specifically about BG, and the springboard for change over the last 18 months that I've been in the role and pushing for a stronger focus on the bottom line, and performance units, et cetera.

I was talking about the changes that you're suggesting you'll get to make to delay decision.

I think there is an interesting dynamic in the organization on that.

I think there is a lot of excitement, of course, as you can imagine, around the BG deal.

People will see this also as a huge opportunity.

It is of course a sign-off of financial vigor that we are able to do this.

People see a huge opportunity, particularly if you are in integrated gas, and if you are in deepwater.

And other parts of the organization see this also a little bit more as a threat and as you are all figuring out what the springboard for change really means.

That will play out in the fullness of time, but everybody I think is also clear that this is a healthy and a good tension to have, that we are indeed going to create a better, simpler and a more competitive company, and it's not just going to be a matter of hey, we have more choices.

So boy, are we going to have an investment program in the next few years.

I think that message is very, very clearly understood.

That, I think, is a message that follows on, in my mind, very well, from the drive that we have had on focus, on returns, and the bottom line in general for the last quite a few quarters, but clearly one that I have wanted to accelerate and intensify since I'm in the role.

I think it is playing off.

I think we do have a lot more connectivity between people throughout the organization and the bottom line that they are serving.

There is much more clarity also in where we need to get to.

There's much more understanding that if you are not getting there in an orderly fashion or fast enough, then there is always restructuring of portfolio to take.

So yes I think we have a different dynamic emerging in the organization.

FX?

I've got to say something on the organization.

Not all change for the good is the demotivating for the organization.

Actually, there's a huge wave of positive momentum at the moment behind, about time we did something on the acquisition, now let's make it a platform for something different.

I'm very stoked by Ben's comment on the 40% reduction in activity.

You guys work in financial services.

You know what the compliance department is like, okay?

Traffic wardens.

What that 40% reduction is asking our engineers to stop being traffic wardens and become urban planners, and get the system right in the first place so either you don't need any cars, or everybody just gets to where they need to be considerably cheaper, and that is a change in mindset that we have given to people.

And you know what?

The traffic wardens say, thank God for that.

So actually, there really could be some really positive in this, and some of it is just the way the industry has gone.

For a whole bunch of reasons, and I have to quote them, because some of it started with us 12 years ago, but the compliance mindset has gone over here when in fact, you really need to be here, and actually, that is part of what we can do.

I think that is a really great opportunity.

That plus the fact that the cost -- prices are low and we never have to tell anybody why we need to improve, they just want to get on with it.

I agree with you on FX to OCI.

Unfortunately, the auditors don't.

What I can say, though, is in the core second quarter, the FX in Brazil and Australia didn't move end of the quarter, the same place it started.

So there's no effect in the second quarter, but since then, Brazil in particular has weakened, so right now we look like we're getting whacked in the third quarter in Brazil, and possibly Australia as well, on that number, which cost us $800 million in clean earnings in the first quarter.

We need to find a better way of helping you and us understand and smooth that one out, because it has nothing to do with the underlying performance of the Company, I agree.

For others, those standards don't seem to apply, because you're not in a different place in terms of the allocation of capital, and such.

You're in different markets, and therefore the indications (inaudible - microphone inaccessible).

You need to be in Brazil and Australia in particular.

Those are the two that have impacted us most, and have a certain tax position, whether you're in a tax asset or other.

So they may not have the same scale of exposure.

Remember, the Americans don't use dollars for everything, so they don't tend to see DIE changes.

Who wants to ask the last question?

There you go.

Aneek Haq from Exane BNP.

Two questions, if you don't mind.

One is hopefully quite straightforward.

The second one, less so.

I wanted to ask your thoughts on scale and replication, where you are in a basin where you have longer-term relationships with your partners, you are doing a lot more brownfield activity.

What do those project break evens look like, Simon, as opposed to greenfield one-off, say?

And then just on downstream where the focus today is more of the upstream stuff, but downstream, that is a pretty big number today.

I wondered if we could just try and understand some of the structural growth areas within downstream, as opposed to the cyclical elements that have driven that number today?

You want to go on the replication, and I would do the downstream?

Sure.

The brownfield is nearly always more attractive at the margin than greenfield, until you get into more mature assets, when it comes a stay in business type capital.

So the trick for us is partly a portfolio one of choosing and spotting the sweet spot, of when we may be better off divesting, diluting, or thinking about abandonment.

It's difficult to give a number but it does vary.

Our strategy is a combination of big plays to open up new hubs, smaller projects to maximize the value of the existing hubs, and even smaller asset integrity, energy efficiency type projects.

Typically, the latter category on aggregate doesn't have that high of return, because some of it you just stay in business.

You protect, you don't add value.

Those small projects are usually the highest return and the quickest return, and then the big projects, you know those much better than any others, so the deepwater LNG.

And yes, they all should have good returns.

Some of them don't in the execution.

The actual capital allocation is not far off a third, a third, a third.

And the downstream is primarily in the first two, and the upstream gets all the headlines in the third category.

But if you can do more of the smaller, 50 to 150 type projects, they are usually pretty lucrative, relative to say a $5 billion project, but you can't do the 100 to 150s if you haven't got a few $5 billions around which to do the smaller.

On the downstream end, some of the growth areas we have seen today and that we are focusing on it's a great question to end on, because I do think that downstream is one of the highlights in our results today as well.

It's one of the best quarters that we have seen.

What I also like about the downstream results that we are seeing today is that is, as Simon already said earlier, that it's strength in all main pillars.

The downstream we have, of course, quite often the downstream gets interchanged with refining, but refining is only one of the core businesses that we have downstream, and refining is a structurally challenged.

It's structural overcapacity, and we are in the refining business only in places where we think we can make great integrated value, or where we have to be in refining, because it serves a broader envelope that altogether creates the value that we need.

Now, the refining business is a cyclical business as well.

We are seeing today healthy refining margins.

Of course we have tremendously reduced our footprint in refining over the last year, so we are down to a much more profitable core, and our refining business today is doing very well.

It is, as a matter of fact, it's doing almost better than our upstream business together.

That says more about our upstream business than our refining business, by the way, at the moment.

But at the same time we also have very strong other ratable businesses.

So our retail business, so this is retailing fuels and Shell full quarts, is a very ratable business.

It doesn't go through a lot of cyclicality.

Of course, when oil prices rise or fall, you get parachute effects, et cetera, but by and large this is the business that goes through a lot of surplus cash and needs limited reinvestment to keep it strong and healthy.

And it is a business where we can grow, because there are tremendous growth markets out there.

Think of China, where we are growing very rapidly.

Think also of potential markets like India and Indonesia and Vietnam, which are a little more difficult because they have regulatory hurdles pricing wise.

And sometimes we have also constraints in terms of supply chains that we need to overcome, but this is a business with a lot of potential.

We have lubricants where I think I can say without too much hesitation, we have the best lubricants in the industry which again, is a very ratable business with very high margins because it is a value-add business, it is not a molecule business.

It is a performance product business.

And then we have chemicals, which is a business that we have been working to restructure tremendously over the last few years, which is also cyclical, but where we, I think, have managed to get to a position that most of the cycles offset each other, and we are in a altogether very high returning and high cash surplus business as well.

The last one is trading.

Trading is a business that needs little capital employing all on our working capital.

Again, it's ratable, but it's more ratable and more dependent on volatility in the market, and we see a lot of price volatility.

We enjoy better trading results.

This quarter all of it is working very well and there's no reason why many of these businesses shouldn't continue to work very well.

Refining margins may come off, and therefore you will see our refining business of course coming down at some point in time, and we'll continue to high-grade the business all the time.

Getting out of Japan is getting out of a very large refining footprint, by the way.

But altogether, I think there is tremendous potential to continue to high-grade, and then also to continue to grow this business.

When we talk about oil products, we see growth opportunity is much more from the customer back, so retail and lubricants.

And in petrochemicals, where the demand is going to grow above GDP, but typically the margins are determined by reinvestment economics, you see great opportunities to invest as well in our footprint.

So I think there is both today, but also in the near-term future, a greater potential to not only make the downstream business more robust, but also make it a bigger impact on business.

Thank you, so thanks again.

A great turnout, great set of questions and a great opportunity for us to address some of the points that needed addressing.

We will have drinks outside, but before we go outside, can I remind you that there is also a third quarter coming on October 29, and Simon will be talking to you about our results then.

Thank you very much.