殼牌 (SHEL) 2018 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell 2018 Quarterly Results Announcement.

(Operator Instructions)

I would like to introduce the first speaker, Mr. Ben van Beurden.

Thank you very much.

Ladies and gentlemen, welcome to the Shell Second Quarter 2018 Results Call.

Of course, let's start with the disclaimer, with which, I'm sure, you are familiar.

And then today, we are taking another important step towards the delivery of our world-class investment case, with the launch of a $25 billion share buyback program.

This move complements the progress that we have made since the completion of the BG acquisition back in 2016; to reshape our portfolio through a $30 billion divestment program; new projects to reduce net debt; and to turn off the scrip dividend.

This quarter, our cash flow from operations, excluding working capital movements, is the strongest since the first quarter of 2014 when the oil price, as I'm sure you all remember, was above $100 per barrel.

Our financial framework remains unchanged.

Our free cash flow outlook and the progress we have made to strengthen our financial framework gives us the confidence now to start a buyback program, and our intention remains to buy back, at least, $25 billion of our shares over the period 2018 to 2020.

That's, of course, subject to further progress with debt reduction and oil price conditions.

Now in today's call, I will first take you through Shell's performance across a range of critical areas with updates on HSSE, portfolio, project delivery and more.

And then Jessica will cover in more detail our financial performance, the financial framework and some highlights from our business.

So before anything else, let me talk about our health, safety, security and environmental performance.

Nothing is more important in Shell.

It is the bedrock on which everything else is built.

Goal Zero is our goal, so 0 harm to people or the environment, and this is critical for the responsible delivery of energy and it is what society expects of us.

We have to be known as a company that performs and behaves in the right way and that does no harm to achieve any of our strategic objectives.

And this is true if you want to be a world-class investment case, but thrive through the energy transition, and it is true if you want to maintain a strong societal license to operate.

The industry had a powerful reminder of the importance to have a relentless quest for improvement on HSSE earlier this month.

It is now 30 years since the Piper Alpha disaster in the North Sea took 167 lives and turned many more lives upside down.

Shell and the industry as a whole have improved in many ways since then, but it would be a betrayal of the lives lost in July 1988 if we thought the work was now done.

It's never done.

And if anybody is tempted to look backwards, admire the view and say, "Hey, look how far we have come," I will always point forwards and reply, "And look how much further we have to go."

Now you can see from this slide here that progress continues to be made in many areas in Shell.

In 2017, for example, we had our lowest injury rate ever at 0.8 injuries per million working hours.

And we continue to make progress on the environmental front.

But I'm not at all happy that we saw an increase in personal safety incidents in the first part of this year as well.

We have to keep working to improve our HSSE performance, even if much good work has already been done.

I would like now to cover some of Shell's financial highlights from the first half of 2018.

Our CCS earnings, excluding identified items, for the first half of the year were around $10 billion.

Cash flow from operations was some $19 billion, and free cash flow was around $15 billion.

And all of this at an average Brent price for the first half of the year of $71 per barrel.

Since the beginning of the year, we reduced net debt by some $4 billion and gearing was 23.6% at the end of the second quarter.

Return on average capital employed reached 6.5%.

This performance builds on the strong financial results we delivered in 2017.

We came into '18 with momentum, and we have maintained it with sustained performance and higher oil prices in the first half of the year.

Now let's move on and look at some of Shell's recent portfolio highlights.

Our recent portfolio announcements show the progress that we have made.

So in exploration, we announced 2 major discoveries in the Gulf of Mexico, Whale and Dover.

We have also been successful in recent bidding rounds in Brazil and Mexico, and in July in accessing acreage in Mauritania.

In our deepwater portfolio, we took the final investment decision for Vito, one of our most competitive developments in the Gulf of Mexico, and for Gumusut-Kakap Phase 2 in Malaysia at the end of the year.

We also announced final investment decisions in our conventional oil and gas portfolio in the U.K. North Sea.

It's a redevelopment of the Penguins field and the development of the Fram field.

Both of these are examples of how we are unlocking opportunities with lower cost.

In the Netherlands, a Heads of Agreement have been signed for the Dutch states to provide clarity on commitments and obligations with respect to the Groningen situation.

During the quarter, we also started up 2 important projects.

In Chemicals, we announced the start-up of our second cracker in Nanhai, strengthening our position in China.

And in deepwater, we announced start-up of Kaikias, a full year ahead of schedule.

And we're also making good progress in New Energies.

We announced the final investment decision for the 630-megawatt Borssele wind farm in the Netherlands.

And we completed the acquisition of a 43.8 interest -- 43.8% interest in Silicon Ranch, a solar energy developer with an existing portfolio of approximately 880 megawatts.

Beyond generation capacity, we have also strengthened our position at the customer-facing end of the New Energies business, with the acquisition of NewMotion, one of Europe's largest providers of charging stations, which we did at the end of the last year; and the acquisition of First Utility, a leading independent U.K. household energy and broadband provider.

These developments are consistent with our strategy to develop a differentiated position in power.

We are building a low carbon offering that stretches end to end from customer all the way back to generation, and we are doing so by using the advantages we already have because of our existing power trading position, retail and gas businesses.

Finally, I should update you on how divestments continue to materially contribute to reshaping and simplifying our portfolio.

For this year, we announced the sale of our Downstream business in Argentina; of Integrated Gas positions in Thailand, New Zealand, Malaysia LNG; and Upstream positions in Norway and Iraq.

In Iraq, we announced and completed the sale of our stake at West Qurna in March.

And in June, we handed over operations of the Majnoon field to the Iraqi government.

So since 2016, on a headline basis, we have completed $27 billion of divestments.

We've announced another $3 billion, and $4 billion are well advanced.

When we acquired BG, we announced our intention to deliver $30 billion in divestments before the end of 2018, and we will achieve that.

In the Gulf of Mexico, we continue to strengthen our leading position.

Today, we produce around 240,000 barrels of oil equivalent per day in the Gulf, and we expect to reach 400,000 by 2020.

Our growth in this area is built upon our continued success in exploration, drilling improvement, project development and operational excellence.

In exploration, we announced 2 material discoveries, one in the Perdido area, Whale; and one in the Appomattox area, Dover.

But we also won 9 blocks on the Mexican side of the Gulf.

This acreage is nearly 3x larger than our existing position in the U.S. part of the Gulf.

So these blocks are the equivalent of starting a whole new heartland in a single day.

The proximity and the technical similarity of these new blocks to our leading position in the U.S. Gulf of Mexico will allow us to benefit from and build upon 40 years of experience in the region.

And these developments are entirely aligned with our exploration strategy.

The strategy is focused on near field exploration, filling our hubs and seeking not only material volumes but also short lead times between discovery and first production.

Our most recent investment, Vito, will enter the construction phase with a forward-looking breakeven price below $35 a barrel after we brought costs down by 70% from the original concept.

And Kaikias is another good illustration of our strategy.

So approximately 4 years from discovery to first production, a 30% cost reduction post-FID.

And as I already mentioned, first oil about 1 year ahead of schedule.

The Appomattox has seen similar 30% cost reduction post-FID.

And following the completion of the predrill campaign and the sale of a -- of the facility for offshore installation in June 2018, the project is on track for first oil delivery in 2019.

But we're also making progress with operational excellence.

Over the past 2 years, we have reduced unit operating costs in the Gulf of Mexico by more than 20%, and we are looking to improve this further.

This year, we unlocked or restored more than 30,000 barrels a day of production by optimizing the performance of our existing wells, reservoirs and facilities.

Disciplined project delivery of the sort that I outlined in the Gulf of Mexico is an important part of our growth strategy.

There are 2 important milestones, which show our progress in this area.

The first is our Nanhai joint venture with CNOOC in the Guangdong province, which I mentioned briefly earlier.

There, we have completed the start-up of a new ethylene cracker and ethylene derivative units.

So these new facilities increase the ethylene production capacity of the joint venture by more than 1 million tonnes per year.

So it's roughly doubling the previous capacity.

And the project also includes a styrene monomer and propylene oxide plant, which is the largest of its kind ever built in China.

And for the second milestone, I would point to Prelude, our floating LNG facility in Australia.

We successfully imported LNG to Prelude in June, followed by a successful import of LPG into the facility.

So this means that the facility is now live.

And with LNG and LPG on board, the Prelude team can now start testing processes and systems before the subsea wells are opened.

And the offshore team is preparing for that moment, getting the 7 wells tied to the facility and ready to flow.

So based on our current commissioning schedule, we are on track to start production this year.

You can see from this slide how our progress with reducing our expected unit development cost and project breakeven prices is feeding through into a portfolio of competitive options in Upstream.

Our discovered resources represent more than 20 years of production.

And importantly, we are continuously improving the competitiveness of these opportunities.

Upstream forward-looking breakeven prices for most new projects are now around $40 per barrel or below.

We are embedding these lower development costs to make sure that they are a structural feature of our portfolio.

So this means, lower costs that go far deeper than the attractive market foundations we have seen in recent years with contractors.

This is Shell driving long-term improvements to the bottom line through a program of deliberate self-help and discipline.

But of course, project delivery is nothing without cash delivery, and we have a powerful story to tell here as well.

As you know, we expect new projects, delivered since 2014, to generate $10 billion additional cash flow from operations by the end of 2018 and $15 billion by the end of 2020 at $60 per barrel real terms 2016.

Now the first half of 2018, we have delivered an estimated $5 billion, and I'm confident that we will deliver $10 billion by the end of this year.

And we remain on track to deliver our 2020 organic free cash flow outlook of $25 billion to $30 billion or $50 billion to $60 billion cash from operations, and that's excluding working capital.

All of that at $60 per barrel real terms 2016.

Jessica will cover our financial framework in more detail shortly, but I would like to introduce this topic by repeating again our commitment to capital discipline.

We remain firmly committed to our $25 billion to $30 billion capital investment range, and I can confirm that we continue to expect investment to be in the lower part of this range in this year 2018.

And also for the avoidance of doubt, this range includes all capital investments, organic and inorganic.

Now discipline makes sense not only from a financial point of view, where you can see that we have made real progress with strengthening the balance sheet of the company, but also from a strategic and portfolio point of view.

In fact, consistency in our investment program through the cycle is critical, if we are to deliver competitive returns.

It enables disciplined capital allocation, greater capital efficiency and countercyclical investment.

As you know, we completed the BG acquisition when the oil price was in the $30s, and we have continued to invest steadily since then.

Since 2015, we have maintained capital investment around $25 billion, which is an industry-leading level.

And our clear and consistent investment and capital allocation strategy has positioned us well for growth.

That is why we do not feel the need to catch up by accelerating capital investment beyond the $25 billion to $30 billion range.

As I said earlier, today, we announced the launch of our share buyback program.

I'm sure that you are as pleased to hear it as I am to announce it.

And there could be no better time for me to reemphasize the importance of shareholder distributions in our financial framework.

Since 2016, we have distributed more than $38 billion in dividend, of which more than $28 billion has been in cash.

Over the same period, we have delivered more than 85% total shareholder return.

That's an industry-leading performance.

An attractive dividend is, obviously, a critical part of our world-class investment case and achieving competitive total shareholder returns.

But the share buyback program will not only add to our total shareholder distributions, but also reduce our share count to provide additional growth in our financial metrics on a per share basis.

And of course, over time, a lower share count also means a lower dividend payment and, therefore, more flexibility in our financial framework to respond to the prevailing oil price environment.

Now let me hand over to Jessica.

She will cover the financial framework and the Q2 results in more detail.

Thank you very much, Ben.

The pillars of our financial framework remain unchanged.

Firstly, a strong balance sheet.

We aim to achieve AA equivalent credit metrics through the cycle for which gearing is a proxy.

At this point in the cycle, we think that 20% is adequate, though we expect to go lower than 20% as we continue to reduce net debt over the coming years.

Secondly, maintaining an attractive U.S. dollar dividend per share.

And thirdly, distributing surplus free cash flow to shareholders in the form of share buybacks.

The announcement of the share buyback program today shows that we are confident that 20% gearing is within reach based on expected organic cash flow and divestment proceeds, that we are firmly committed to capital discipline through the cycle, and that we have confidence in our 2020 free cash flow outlook.

Our financial framework has not changed, and our cash flow priorities have not changed either.

We're progressing to 20% gearing.

We removed the scrip in Q4 2017, and we generate enough cash to cover the dividend.

We're confident that our cash generation and continued divestment proceeds in the coming years will be sufficient to allow us to reduce debt and deliver AA equivalent rating metrics, while using additional free cash flow to buy back shares.

We want to deliver on our financial commitment in a disciplined and predictable manner, even though the actual pace of delivery might vary from one quarter to another as a result of performance or external factors.

Now let us have a closer look at our financial performance at the end of Q2 2018 on a full quarter rolling basis.

At an average oil price of $64 per barrel, CCS earnings, excluding identified items, amounted to $18.5 billion.

ROACE on a CCS basis, excluding identified items, was 6.5%.

ROACE is expected to continue to improve towards our outlook of 10% in 2020, as we continue to reshape our portfolio, start up new projects and improve performance in capital efficiency.

Cash flow from operations, excluding working capital, amounted to $40 billion.

And organic free cash flow was close to $13 billion.

Over this period, we distributed almost $16 billion in dividends to our shareholders of which $13 billion has been in cash.

Since 2016, we've received close to $26 billion of cash proceeds from divestments in our MLP.

It was close to $6 billion this quarter alone.

The successful delivery of our divestment program has allowed us to reduce gearing from almost 30% in 2016 to less than 24% this quarter, and it gives us line of sight to further gearing reduction.

Let us move to the results of the second quarter.

Our Q2 2018 CCS earnings, excluding identified items, were $4.7 billion, which is $1.1 billion or 30% more than in Q2 2017.

Earnings, excluding identified items, in Upstream, were more than 4x or $1.1 billion higher than in Q2 2017, driven primarily by higher oil prices.

Production was 7% lower than in Q2 2017 largely as a result of divestments.

Excluding divestments, production was up 2% over the same period.

In our Integrated Gas business, earnings, excluding identified items, increased by $1.1 billion or 97% compared to Q2 2017 as a result of higher prices, a particularly strong contribution from trading and higher LNG sales volumes.

Production was 16% higher than in Q2 2017.

In Downstream, CCS earnings, excluding identified items, were $0.9 billion or 34% lower than in Q2 2017, driven by lower trading results, higher operating expenses and adverse exchange rate effects.

Growth in marketing was partially offset by lower retail margins as a result of higher crude prices and price caps in some markets.

Overall, we saw a 5% increase in operating expenses since Q2 2017.

A large part of this increase is driven by foreign exchange and portfolio effects.

Our focus on cost reduction and efficiency gains remains unchanged, and we see further potential to reduce our operating expenses.

Another point to highlight is the particularly notable impact of differences in exchange rates this quarter.

The appreciation of the dollar reduced earnings, excluding identified items, by close to $300 million, with an additional associated tax impact of close to $200 million.

Cash flow from operations in the quarter was $9.5 billion, and excluding working capital movements, this was $11.6 billion.

As Ben mentioned, this is our strongest level of cash generation, excluding working capital, since Q1 2014 when oil prices were above $100 per barrel.

Cash flow from operations was reduced by $800 million in relation to cash margining on our hedging program in Integrated Gas.

The working capital movement of $2.1 billion was largely driven by the price impact on inventory.

In addition, cash tax payments were impacted by an agreement with Shell that Shell signed with the government of Oman this quarter.

This agreement results in a changed phasing of tax payments.

Upstream cash flow from operations is expected to be impacted by higher tax payments of approximately $500 million for the full year 2018, of which more than $100 million were paid in the second quarter, and a further $500 million for the first quarter in 2019.

This will be followed by reduced payments in the subsequent 4 years.

Let's move to a few highlights from our businesses.

In our Downstream business, it has now been over 1 year since the completion of the Motiva separation.

We're seeing some real tangible benefits from that separation.

We're identifying and capturing additional value through the integrated approach we are now able to take across our Downstream assets in the U.S. Gulf Coast.

For example, we decided to continue operating the Convent cat cracking unit quickly after the dissolution of Motiva.

This decision was based on an integrated value analysis of the Louisiana and U.S. Gulf Coast markets.

Value is generated through additional refinery margins, but also through integration with Norco Chemicals' operations and with trading.

We expect to have a payback of approximately 1 year on the costs associated with this decision.

At Deer Park, we decided to improve the crude flexibility of the refinery.

This will allow us to take full advantage of Shell Trading's global reach and access to a wide range of crude and feedstocks to deliver additional value.

Other examples include the better integration of trading and supply with retail and distribution in the Northeast of the U.S.

Now we can also better integrate our plant in Mobile with our marketing activities in this area, which was previously a Motiva marketing territory.

We expect around $50 million per year additional gross margin from the stronger integration.

In Integrated Gas, we're expected to take a go/no-go decision on LNG Canada this year.

As you know, we expect a supply gap in the LNG market in the early 2020s.

We have an attractive portfolio of new supply options, including new projects, expansion of existing projects and third-party supply opportunities.

We want to select the most competitive source of supply.

LNG Canada is the most mature of these options.

The strategic benefits of the project are well established.

LNG Canada has access to abundant and low-cost gas and a short shipping distance to North Asia.

It also has lower greenhouse gas emission intensity than any comparable operating LNG plant.

We now have a clear view on construction costs as the joint venture has awarded a conditional lump-sum contract for the engineering, procurement and construction of the project.

In short, LNG Canada looks very promising.

And together with our partners, we need to finalize consideration of a few key items before we can take a positive final investment decision.

Firstly, affordability.

We know that the funding of our share of the project fits within our existing capital ceiling.

Secondly, competitiveness.

Can the project deliver LNG to North Asia at a cost that is competitive with LNG projects in the Gulf of Mexico?

Thirdly, resilience.

Will this project generate positive free cash flow across a range of commercial and energy transition scenarios?

And lastly, attractiveness.

How does this project compare against other investment opportunities over a similar time span?

As you can see, we are taking a very disciplined approach and are being thorough in our evaluation of LNG Canada as we are with all of our major investment decisions.

We see great opportunities, but we also have clear expectations when it comes to competitiveness, affordability and returns.

In Upstream, I would like to highlight how we have significantly improved our shales business in the Permian.

After significant restructuring between 2013 and 2015, we have adjusted the delivery model of this business, with a strong focus on competitiveness and value.

Our Permian asset has delivered significant growth to date, achieving some 85% production growth since 2016.

We expect production to grow more than 30% annually through 2020, with similar levels of capital investment.

We are actively developing our 260,000 net acre position in the Delaware basin, and have been enhancing our position with swaps, allowing us to consolidate our blocks and further optimize our development plans.

Delivering this potential will yield strong free cash flow growth well into the next decade.

As I've already touched on, we're developing the Permian following an improvement in cost competitiveness.

For example, we have reduced drilling and completion costs for new wells.

We've realized an overall 40% cycle time reduction in our well delivery process since 2017, and we expect we can still do more and reduce costs further despite supply chain pressures.

We are confident that we can deliver strong organic growth from our shales business.

In addition, the integration with our trading business allows us to maximize the value from our barrels.

Before I hand back to Ben, let me return to where I started.

We remain committed to our financial framework and further debt reduction remains a clear priority.

Our 2020 cash flow outlook is strong.

We have excellent growth opportunities in the 2020s.

Shell's future is bright, and we remain prudent and disciplined.

With the launch of our share buyback program, we're taking another firm step towards transforming the company into a world-class investment case.

Thanks, Jessica.

So today, we announced the launch of our share buyback program and the decision is founded on our strong performance track record, our cash generating outlook and strengthened financial framework, our unchanged commitment to capital discipline and our rigorous capital allocation, and of course our strong confidence in the longevity and the competitiveness of our portfolio.

So we are delivering on our commitments.

Now with that, let's go to questions.

Please, could I have just 1 or 2 questions from you each so that everyone has the opportunity to ask a question in the remaining time.

Operator, can I have the first question, please?

(Operator Instructions) We'll go first to Oswald Clint with Bernstein.

My first question was really on the Integrated Gas earnings, which, I guess, in the first half of 2018 are almost double what they were the same time last year.

Obviously, oil prices explain a little bit of that, plus-plus Gorgon, but I wanted to know was there any information or color you can give us on where you're selling the bulk of these LNG cargoes these days?

Has there been any noticeable shift or mix change in the countries?

Is this more and more of Shell's cargoes going into China?

Kind of relying on that strength in Chinese LNG import demand continuing?

And does it pose a particular risk if that was to end some point in the future or is it across most of the Asian countries?

And I guess, if it is more and more balanced, and you spoke about BC Canada, but shouldn't you be really telling us about more LNG projects coming through the development queue?

That's the first question.

And then secondly, I just -- I mean, Jessica, you mentioned North America and shale restructuring.

If I look at the second quarter and North American Upstream earnings, it looks like one of the highest earnings you've done in at least the 5 years.

The -- I guess, your blended realizations are pretty flat year-over-year.

So I guess, it's hopefully evidence that you have really taken on some of the cost base of that particular onshore U.S. business.

I really just want you to confirm that if I interpret it that way, it's evidence to show that the costs have lowered within that North American shales business.

Okay, thanks very much, Oswald.

Two very good questions, I think, both for Jessica.

Right.

So indeed, IG had another, dare I say, fabulous quarter, very strong first quarter and followed by a very strong second quarter.

It reflects a number of things.

First of all, the overall production for the business, gas production is up 16%.

So the business is growing with Gorgon coming onstream, but importantly also bringing more feedstock into MLNG and into Trinidad as well.

So our utilization rates across the portfolio have been increasing over the year as well.

Indeed, the market conditions have been good, the trading conditions have been good.

We saw some very high prices in Mexico that we're able to secure cargoes going into.

So across the portfolio, good performance, good trading conditions.

Indeed, China demand continues to be strong, and we continue to provide supply as you see with our underlying liquefaction volumes going up, but also our LNG overall volumes going up as we also pick up spot cargoes to take advantage of good market conditions.

And indeed, I think as well said in terms of what you're seeing happening in our North America business, of course, that is both our shales business and our deepwater business performing very well and coming through in those earnings numbers that you're seeing.

Both of those businesses have done an exceptional job of driving capital efficiency.

And you hear the stories of Vito, of Kaikias and the piece that I gave on the unconventionals business in terms of wells and completion costs.

So it's a great capital efficiency story, but as you said also a very strong operational expense story, where our operating cost in both of those businesses has declined over the last couple of years.

All of that contributing to what you're seeing in terms of positive earnings in our North America business.

Okay, thanks Jessica, thanks Oswald.

Can I have the next question, please?

We'll go next to Jon Rigby with UBS.

Just a couple.

The first is on operating cash flow.

Am I right if I do a quick bit of sort of mathematics is that, if we were to take the bottom end of your free cash -- implied free cash flow range and then work that through to operating cash flow, at $75, you probably should be generating $13 billion or $14 billion of operating cash flow against the 11.6x working capital movements.

And I sort of look at that in the context of I think the comments that you made about additional $5 billion of performance improvement -- cash flow performance improvement coming through in the second half of the year.

So I wonder whether you could go into a bit more detail about what are the things that have to happen over the next 18 months or so -- 12 to 18 months or so to get us into the range of implied operating cash flow that you've talked about, if my arithmetic is correct.

The second is, I think, Ben, you talked about one of the main issues on creating the world-class investment case was to create predictability and visibility around earnings.

And I just wonder whether there's been a pause for thought around that, given Jessica had to do a lot of work at 1Q explaining some one-off items in reference to the fact that you'd had to do the same at 4Q.

And it feels again in 2Q that you're having to do the same thing to explain earnings.

And I think if I look at expectations are somewhat disappointing.

So I just wonder whether there's more work to do on the predictability of the performance of the business.

Yes, thanks for that, Jon.

It -- I'm sure that Jessica will want to talk to both questions, but let me have a first go at the second one as well.

Yes, of course, you're absolutely right, predictability really helps, we know that very clearly.

And it -- and I think we have been doing quite a bit to also have better disclosure that will help, and indicating a little bit better how things flow through our earnings statement, getting a number of things out of clean, so that you have a better understanding how -- what is after all a very elaborate and complete portfolio.

But a wide range of businesses in a wide range of countries subject to lots of macro effects, hopefully gives a little bit more insight.

Having said that, we -- much though I would love to have completely flat earnings or at least linearly going up, it's -- we don't manage for earnings, we don't manage for results.

We manage for value.

So some things will fall in a certain way, and there is not much we can or want to do about it.

And therefore, there is a certain amount you will have to take, and we will have to take as well.

Bear in mind also that, of course, we've been in the middle of a very significant portfolio restructuring and upgrading program.

This, of course, also throws a number of changes off, both on balance sheet but also flowing through to P&L.

So there's another thing to consider.

But Jon, I'm well aware that sometimes, our results in some quarters can be hard to get right because there are things that are invisible to you.

And I am very mindful that, that is uncomfortable, and that we have to do whatever we can to give you more insight, and where we can where it actually makes value sense avoid that.

I'm sure that Jessica has more to say on this particular quarter where some of the, perhaps, unexpected earning effect came from, but then also give you a bridge to the free cash flow and operating cash flow for the end of the decade.

Jon, thank you for the questions.

And building on what Ben said, indeed, the preference is to deliver consistent reasonably predictable earnings and for those earnings to be growing over time.

And that's certainly what we're trying to drive in terms of underlying performance of the business.

Accounting is not always kind of easy to deal with, and macro effects, such as FX, can also bring noise into the numbers.

I wish that weren't the case.

We're certainly trying to drive as much transparency in terms of what's causing these effects as we can.

We had one of the most rapid appreciations of the dollar against most currencies around the world in the last quarter.

It was up some 16% against the Brazilian real.

That's kind of one of the fastest ramp-ups there has been.

And with the nature of our business, that is going to flow through our financial statements.

And so what we can do is provide transparency on that.

We can't predict where FX will go, at what pace it will change, but we can certainly explain what's happening to our business because of those -- because of FX effects.

And that's certainly important for the quarter.

That was some $600 million, $700 million of the impact on earnings for the quarter.

That impacted our corporate segments, it impacted our Downstream business as well as our Upstream earnings as well.

As Ben mentioned, divestments is another piece.

As you remove $30 billion of assets in entities from your financial statements, there's all kinds of accounting implications around that.

Again, we try and bring the right level of transparency.

Some of that should smooth out as we kind of close out that program over the coming months.

There'll be some amount going on in the future, but certainly not at that pace.

I think another -- a couple other elements to talk to you for the quarter that also speak to the cash, another piece of the puzzle from an earnings as well as a cash perspective is what was happening in terms of realizations, and importantly differentials in North America.

So while Brent was up 50% year-on-year, WTI was up only 40%.

So there was a widening between WTI and Brent, and that certainly had an impact on our business in North America.

And importantly, Henry Hub was down 70% and ATO down 53%, and we're selling gas into both of those markets.

So if you just use the rule of thumb in those considerations and some of the potential differential effects weren't taken into consideration, that's another some $200 million that was impacting those earnings in cash for the quarter.

In terms of the bridge of where we are today and what the business is generating and our confidence in getting to the $25 billion, couple of things there.

So rolling 12 quarter -- 4-quarter basis, last 12 months, our organic free cash flow was some $13 billion.

Working capital effects over that period was some $6 billion.

Margining effect was some $2 billion.

And then we're having significant ramp-up of projects that are already on stream that will start continuing to happen through the fourth quarter, but importantly new projects will be coming on stream over the next couple of years.

That will bring another further $5 billion to $10 billion between now and 2020.

So all of -- in combination, that gives you from where we are today and why we have confidence in terms of our ability to deliver on the $25 billion to $30 billion organic free cash flow ambition for 2020.

Okay.

Thanks Jessica, thanks Jon.

Good questions.

Can I have the next question, please, operator?

Yes, we'll go next to Thomas Adolff with Crédit Suisse.

Just want to start with the mid-year report, I had mine earlier this week, and just wanted to focus on 2 areas, namely working capital management and Refining & Trading.

How can one do a better job managing the working capital?

It's been a big drag for the past 4 quarters, about $6 billion or more than that, that's $10 to your breakeven.

Your competitors are not seeing such a drag from working capital.

So I wanted to get a bit more insight into how you can do a better job here.

Secondly, just on Refining & Trading.

Again, the past 3 quarters, either I'm just modeling it incorrectly or something is happening here.

It's -- what happened to the magic of capturing the margin whereby it rises, which also in turn reduces the earnings volatility?

Is the machine working according to plan?

And then I guess, just a quick question on LNG.

You've highlighted there's a supply gap potential in the early 2020s, which kind of means for greenfields it could be too late and that brownfields will have to fill the gap.

And I'm just wondering if you're looking at any brownfields within your portfolio or backing some other brownfield projects funded by other companies?

Thanks, Thomas.

Let me take the last one, say something about Refining & Trading, and then I'm sure Jessica will add to it and also talk about working capital.

Yes, I think large greenfield projects now will come into the window when we expect there to be a significant shortfall between actual supply and implied demand.

But and we will, I'm sure, if we were to go ahead with some of these greenfield projects, we will enjoy them.

But you're absolutely right, we need to do other things as well to capture as much of it as possible.

Brownfield projects are great opportunities to do so.

And as Jessica already mentioned earlier on, we have had a lot of focus in the last few years, particularly after the BG assets came in, to really understand how we can improve utilization of existing LNG supply chain.

That is working out, and we're now also at a point that we're looking at a number of debottlenecking opportunities in LNG plants around the world, one of which I think has been in the news recently, which is Nigeria LNG, where we just entered into the sort of defined phase.

And hopefully, if not late this year, probably more likely next year, we will be in a position to consider sanctioning that expansion.

So yes, absolutely, we are intent on capturing whatever we can by making sure that our assets and supply chains are full and that we sweat or expand assets where we can.

I think Refining & Trading, it -- I think the -- if you look at the performance and you compare the performance that we have seen in our refining and associated trading business against the margin that is available, we have actually outperformed the market.

So -- but granted the refining margins have been weak, but breaking it down, what was available we have captured and did better than that.

While we are on Downstream, can I also add that we had a very strong performance in our marketing business where we -- in a rising market, where we always have, of course, the effect of margin compression.

And bearing in mind that we had quite significant curtailments on margins in places around the world, in Indonesia, in Turkey, in Argentina, disruptions in Brazil.

We have managed to find offsets for that.

So our marketing business has performed very well in a different set of circumstances.

But let me hand over to Jessica to perhaps give a bit more color on that, but certainly also to cover the working capital element.

Thank you.

We have a large profitable trading business that allows us to create more value across our integrated value chains, whether it's Downstream or Integrated Gas, and frankly our Upstream business as well.

That's not to say that every quarter we're hitting it out of the ballpark but through the cycle and through time, it has proven to be, I think, key to our strategy and key to our delivery is that trading capability that we have in the organization and maximizing value across those value chains.

With that, particularly for our Downstream business, we have a large inventory of barrels that we use.

It is a key element of getting value from our trading operations.

In the last year, the volume of our barrels have come down some 10%, 20%.

So it's not that we've been increasing our volume exposure.

It's entirely a price story.

So the price that we've used to value the inventory on our balance sheet has gone up by some 50%, and that's really driven most -- approximately 90% of the increase in working capital that you're seeing for the quarter.

So it is a function of our strategy in terms of using inventory, trading around it.

What I can say is that we have a very intense and effective management system in place in terms of choosing what our working capital level should be.

It's driven by a view on risk and return.

It gets a lot of attention by management to ensure that we are making the right choices around inventory levels and working capital.

There's specific return requirements that the business needs to deliver on.

So our -- the outcome of our working capital is by deliberate choice.

We can't always identify the price that the quarter end will land at, and what you're seeing is really a price effect.

But underlying that, it is based on our strategy and specific management choices in terms of the working capital that we're carrying.

We'll go next to Martijn Rats with Morgan Stanley.

It's Martijn here.

I wanted to ask you 2 things.

First of all, reading your outlook statement with regarding to production for the third quarter, it looks relatively weak with both a Q-on-Q and year-on-year decline.

And if you sort of relate that to the amount of net debt in the firm, I think it's fair to say that the balance sheet is degearing, but over the last year or so, the degearing has been somewhat slower than we, for example, would've modeled a year ago.

So if you look at the ratio sort of net debt to production, sure the balance sheet is degearing, but net debt per barrel produced, and I know this is a somewhat esoteric metric, but it is somewhat interesting nonetheless, net debt per barrel produced is actually hardly falling.

And I know you're sort of saying, well, we remain on track for sort of free cash flow guidance that you've sort of given.

But I was wondering, is this really sort of on track with the plan as you sort of had it maybe 1 year, 1.5 years ago?

And somewhat related to that, the second thing I wanted to ask you is that the buyback program is, of course, very welcome.

We were all sort of waiting on that.

But the figure of $2 billion over the next quarter, it's a somewhat intriguing one in the sense that if you simply divide $25 billion over the remaining 10 quarters between now and the end of 2020, you would get to an implied run rate of $2.5 billion a quarter.

So I don't want to read too much into what might simply be a rounding error but nevertheless, it sort of suggested sort of the buyback is starting but not quite at the rate that is implied by the overall program.

So it's still starting in a fairly sort of cautious manner.

And I was wondering how that relates to the statement around sort of confidence in free cash flow, the disposals, the balance sheet that you also talked about.

Okay, thanks, Martijn.

I think Jessica is rearing to answer these questions and I'm sure I will have an add to it as well.

Yes, thank you, Martijn and for introducing yet a new metric in terms of how we think about our businesses, a gearing to production ratio is not one that I've considered before.

I think that the main message from this quarter and from the share buyback program is one around confidence in the underlying performance of our business and the cash flow generation over the next 2.5 years.

And it's a challenge to kind of run the business and have all the metrics work quarter-on-quarter every quarter and predict exactly what it's going to look like.

It's a big dynamic business.

So I think focusing on the trajectory and the very clear numbers we've provided around our organic free cash flow getting to $25 billion to $30 billion by 2020, achieving the buybacks by -- of $25 billion by 2020 and bringing gearing down to 20%.

Those are -- all 3 of those things we're looking to make true through the next 2.5 years.

But it's dynamic in terms of how cash flow moves, how working capital moves, et cetera.

But I think you should be reading in what we're announcing today and the amount we're announcing and recommitting to the $25 billion -- that is the trajectory we're on.

And it's I think, looking through the quarters and not focusing on any given one quarter is the right thing to do.

We're comfortable with the cash flow, we're comfortable with where our production is, we knew there'd be a change in the production profile with the divestment program.

That's happening.

But we're also growing.

And the underlying business of Upstream increased by some 2% if you take the divestments out.

And there's a number of new projects that are coming onstream that will add another 700,000 barrels of oil equivalent over the coming years.

And so that ramp up with Appomattox coming onstream, with Prelude coming onstream, et cetera, there will be new growth in the portfolio that's going to support cash flow generation and underpin the numbers we've provided.

Thanks, Jessica.

Martijn, I think Jessica said it all but I think it's also important that I underline this myself as well.

So of course, we look at every quarter and understand what's happening, but we also look, of course, multiple quarters ahead to really understand what is going to happen given a certain amount of macro scenarios that we can envisage.

We've been very clear.

I have been very clear personally that we want to have a track record that is credible, that we deliver on our promises, that we do the things that we talk about with discipline and with it, of course, a certain degree of prudence because we do not want to get ahead of ourselves.

You have to hopefully also give us some credit for the fact that we have delivered on all our promises and have every intention to deliver on this promise as well.

And with that will come a fair degree of scrutiny of what we think the future has in store for us when we commit or launch a buyback program that of course, will be scrutinized quite considerably over the quarters to come.

So again, I completely underscore the points that Jessica made, that we are at a point where we think we can and need to do this, and we have the confidence that we can see it through.

Can I have the next question please, operator?

We'll go next to Christyan Malek with JPMorgan.

Just first question, underlying cash flow evolution.

Sorry to harp back on this; and second question is on the buybacks again.

So first, on cash.

I come back to the question I've asked in the previous quarters hoping to see improvement in the cash flow capture at higher oil.

Yet underlying cash breakevens have moved sideways around the mid-60s.

Meanwhile, compared to a year ago and I think the point was made by Jon, is Shell's cash flow from operations is down 16% despite oil being up 50%.

So understanding the impact of divestments, quarterly variance in taxes, working capital and derivatives of higher oil, but what I don't understand or want to understand better is within the Upstream business specifically, why cash efficacy so to speak is deteriorating at higher oil?

And if you could deliver a cash breakeven of $50 this year, this would imply free cash flow in the second half of around $14 billion compared to $11 billion in the first half.

So all else being equal, and I don't want to put you on the spot but are you comfortable you can deliver what is a 30% uplift in the second half?

The second question on buyback, how should we think about the run rate per quarter in the context of the prevailing oil price?

If oil falls below $70 in the next 12 to 18 months, and I understand it's not a fair question but can we still be guaranteed that $2 billion?

Thanks, Christyan.

Jessica?

Thank you, Christyan, and good questions.

I think in terms of looking at our cash and underpinning breakeven, it is important to kind of cancel out working capital.

That it is a timing effect.

So that's a significant impact.

I think, you were quoting some of the CFFO with working capital.

It does bring you down closer to the $60.

I think what you'll see happening over the coming quarters is increased cash generation coming from the portfolio we're still continuing to ramp up.

We still expect dividends coming in stronger in the second half of the year and the new projects coming onstream.

All of that will contribute to higher cash generation and I think moving our breakeven price into the range where we'd like it to be.

I think on the share buyback program, I've spoken to it.

I think I've tried to convey confidence in terms of the amount of cash we expect to be generating in the second half of the year but importantly through the next 2.5 years.

It really is a multi-quarter, multi-year decision, and we're starting it with confidence.

And that's what the $2 billion represents, that's what the restatement of the $25 billion represents, is our belief that the underlying performance of the company is strong, that growth is strong.

And in combination, we'll have more than -- we'll have sufficient cash to deliver on this commitment.

The working capital piece I think is important to kind of isolate.

It is a timing effect.

It's had an impact this year.

It's had an impact in the last 4 quarters.

But again, that will right itself through time.

Okay, thanks Jessica.

Indeed, the curse of rising oil prices.

Can we have the next question, please, operator?

Yes, we'll go next to Theepan Jothilingam with Exane BNP.

It's Theepan here.

I had a couple of questions actually.

Firstly, could you talk about how important the disposal program is now to the buybacks going forward?

Does Shell need to be more aggressive than the sort of $5 billion, I believe, indicated per annum beyond 2018?

And the second question, I appreciate your comments around LNG Canada and fitting that in the terms of affordability, but how do you prioritize debt reduction buyback and where you sit in the range for capital investment?

Would you prefer to be at the lower end of the capital investment program, vis-a-vis meeting your buyback and debt commitments?

Okay, good questions, Theepan.

Let me take the first one and have Jessica talk to affordability and capital discipline and how that sort of ranks in the priority of use of cash after that.

I think in terms of the disposals, it's -- of course, the disposals have played a very important role in delivering additional cash that we could use to pay down debt.

And I think so far, we have done this quite successfully.

And we are essentially through the program that we announced at the time we did the BG deal.

We talked about a $30 billion sort of portfolio high-grading program, which indeed had that benefit of delivering the cash but from a strategic perspective was as much also an upgrading program or rejuvenation program of our portfolio.

I think that is largely done.

The numbers that I quoted earlier, $27 billion, done; 3 announced, 4 pretty close.

Means that, of course, we will deliver against that expectation.

We will have to continue that program, Theepan.

And of course, it will help if we get some cash from divestments.

It will help strengthen the overall financial framework or it will help with the buybacks, whatever way you want to look at it.

But we will be driven in terms of our divestment program by the need to keep the portfolio rejuvenated rather than free up cash.

So we think that we need to do about $5 billion a year to just do that.

That's not a target for cash delivery.

That is the expectation we have if we want to have a strongly rejuvenated portfolio where we do not invest any more in assets or in markets that are very mature and where we frankly are better off freeing up that capital employed and recycling it into younger and more vigorous positions.

So I do not think we're going to need the disposals for our financial framework, but are going to much more look at it as a sort of natural portfolio maintenance process.

Now how to prioritize cash and particularly how new investment decisions fit in.

Can you take that question, Jessica?

Absolutely.

We believe in order to deliver the world-class investment case, we need to grow the company, grow value of the company.

We need to ensure a resilient financial framework, a robust balance sheet, and we need to increase shareholder distributions.

We're going to manage all 3 of those things through the cycle, and prove all of them to be true.

So we're going to invest some $25 billion to $30 billion.

That's going to allow us to achieve our strategy, to achieve our ambitions for each of our strategic themes and to grow value of the company.

We're going to continue to de-leverage over the coming years.

We're going to use the proceeds -- the remaining proceeds from our disposal program going forward to continue to pay down debt as we've done in the last year and that will continue as we seek to achieve a gearing of no more than 20% over the next couple of years.

And then finally, to meet our commitments with respect to the BG acquisition and importantly, to increase shareholder distributions.

We believe all of those things are important, that we need to manage all of those things.

We have been stepping through this process over the last couple of years and demonstrating an unwavering commitment in terms of deleverage on the debt side, maintaining unwavering commitment to our dividends, removal of the scrip program.

And we're now in the next phase of the world-class investment case, which is increasing shareholder distributions.

All of it is important.

We believe we'll generate enough cash over the next couple of years for all of that to be true, to allow us to invest in projects like LNG Canada within the $25 billion to $30 billion program and grow value for the company through time.

Yes, we'll go next to Alastair Syme with Citi.

A couple of questions from me.

Your debt metrics are still -- so your debt rating, rather, is still 2 to 3 notches below the AA metrics you talk about.

So I wonder where you stand with conversations with the rating agencies as you now formalize this buyback with a view to getting that debt upgraded.

And secondly, the messages, Jessica, you made about the Permian growth.

You're clearly big believers in the Permian.

Can I ask your view on appetite to take on more acreage in the Permian if opportunities arose and where you think current market values are to enable you to do accretive deals?

Okay, thanks, Alastair.

Let me take the second question, and Jessica can talk about our credit rating metrics.

Yes, we look at our Permian position with satisfaction.

I think it is not only sort of past the inflection point where we see a very fast pickup of growth, but also we expect this position to be a good cash generator in the near term.

And it will be a very important component in our overall shale story where we expect to be cash positive in 2019.

And then hopefully, very quickly, get into this business being a contributor to our overall dividend cover.

Of course, we made it very clear in the past, we are interested in extending our position because I think relative to our other building blocks of our Upstream portfolio, you could argue we are underweight in shales.

So we have a positive disposition to looking at bolt-on opportunities, and that's what we have been doing, or growing in places like Argentina where there is an established system that works for us and where we can bring a difference in terms of scale.

But we've also been very clear that we do not want to participate in a gold rush, and that we need to be like also here extremely disciplined in how we approach it.

Moreover, we've also been very clear that whatever we do, we won't go above $30 billion of capital investment in any given year.

So from that, you can derive how we are going to be looking at opportunities.

So we will look at them, but don't expect any big splashes.

Jessica?

With respect to the credit metrics and the AA rating, I reference AA equivalent metrics a lot when describing our cash flow priorities, our financial framework priorities.

That's remained unchanged for the last few years, and I think we've demonstrated that commitment.

Why is that?

I think it's important to note, this is -- reflects the view of the financial framework and the balance sheet that we think is most appropriate for our company.

So given the size of the company, given the size of our capital profile, given the nature of the industry that we're in, we believe a robust balance sheet is an important piece of our financial framework, an important piece of our world-class investment case.

It just so happens that translates into a AA credit rating.

And so the metrics associated with that, the amount of cash we should be generating relative to our debt, the amount of debt relative to our equity we believe is important, and we're continuing to manage the company to move it to the place where we think it needs to be.

And that happens to coordinate -- correlate with the AA credit rating outcome.

As I said before, by making this choice and starting the buyback program and committing to the $25 billion, we're going to -- we're seeking to generate cash over the coming years that makes all of this true; that we continue to have debt reduction in the company and generate sufficient cash such that we have AA equivalent credit outcomes in terms of our financial metrics while also continuing to grow the company and do these buybacks.

All 3 of those things we're looking to achieve over the next couple of years.

Yes, we'll go next to Biraj Borkhataria with Royal Bank of Canada.

It's Biraj obviously.

Two, please.

The first one was on Integrated Gas.

You've had a few quarters of successive quarters of these margin calls and headwinds.

I was wondering if you could give a bit more color on the key drivers behind that.

Is that just structural as part of the LNG business or I'm assuming it's a function of the oil price?

So in a scenario where the oil price was to stay flat, would that go from a headwind to a neutral factor?

Just some color on that would be helpful.

And then a second question is on Refining & Trading and specifically focusing on the trading contribution.

It looks like year-to-date has been quite difficult.

I was wondering if you could comment on how big a factor moving into backwardation is to the trading business.

Okay.

Thanks, Biraj.

Can you have a first go at it, Jessica?

Okay.

So on the first question, in terms of the margin calls and headwinds, the margins do represent the cash required depending on where the curves are moving at any point in time.

So it's not really a signal of performance of the business.

As you can see, IG has had very strong performance in the last couple of quarters.

A function of that has to do with our hedging program and with the hedging program, a portion of that is subject to margin calls.

So I wouldn't overread into kind of whatever the margin balances is at a moment in time, I would look at the underlying performance of the business and the strength of the cash generation that you continue to see in IG.

Indeed, all things being equal, if the -- if prices were not to change, then you would see no change in the amount of cash margining that's required for the business.

But again, I -- that is an indication of potentially where the position is but in terms of what that position means and the value we are creating, you really need to look at the performance of the IG business to see that overall, the trading business is making a material contribution and the margin is a part of having that business in play.

In terms of the second piece of your question on trading, indeed, trading has been a bit soft for us for the first half.

It has been a difficult trading environment.

On the product side, it's been a bit of a mixed bag going from somewhat weak in the first quarter to stronger in the second quarter.

On the crude side, the business has not been as strong as we would've liked, and it's a focus for the business.

We don't think there's any structural issues.

Some of this just happens to be what happens in a given quarter.

So there's no fundamental concern.

But clearly, recognition, trading conditions has been a bit harder for us and we look to get more from the business in the coming quarters.

Yes, we'll go next to Christopher Kuplent with Bank of America.

I've got 2 questions left.

First one, probably for Ben.

Ben, I'm -- I think you are, amongst your peer groups, the only ones without a top line guidance for E&P.

And I just wanted to once again ask you, reiterating the buyback as a strategic element, cutting your annual dividend distributions.

That's what I understood and that's one thing, but can you also perhaps give us a little more color about where you see the profile of the company evolve towards 2025 and how much you care about a top line measure versus an overall absolute cash flow generation engine that is the entire group.

And then secondly, I know many have tried, I'm going to try again perhaps, Jessica, for you, to come at it from a different angle, $2 billion of buyback in that quarter.

Am I correct in assuming that, that $2 billion is funded from excess free cash flow left over after working capital changes or before or is there no such definition we should even focus on?

As I understand it, this quarter, if you stripped out working capital, you would have been left with about $1.6 billion of free cash flow even after deducting the $700 million or so of net interest payments.

So is that the number that gives you confidence to now announce $2 billion for the next quarter or am I reading too much into it?

Thanks, Christopher.

Let me have a go at your first question and tell me if I read your question perhaps incorrectly, if that's the case.

So in terms of top line, of course, giving guidance on revenues we don't do.

That is -- for that, being in the commodity business, I think would be too meaningless to do.

If you were referring to production and production growth, then yes, we have been abandoning that practice some time ago, as we thought and saw it was sort of increasingly irrelevant.

And actually in some cases, quite unhelpful because we felt that not only us but perhaps others would be tempted to chase barrels for barrel's sake, which we believe is not the right way to manage the company.

So ultimately, we give and we have given guidance, of course, on the amount of cash we expect to produce, particularly free cash flow, which I think is a much more meaningful measure for you to go by.

Of course, we reference that at a certain oil price outlook, otherwise, that would be relatively meaningless as well.

So it's $25 billion to $30 billion of free cash flow at $60 Brent real term '16.

And everything that actually is ultimately what it is all about.

Can we deliver a very significant corporate transformation from going from a relatively modest free cash flow to a much higher free cash flow in a relatively short period of time?

I think that is how I would like to be judged on our ability to deliver shareholder value.

And with it, of course, also a significant improvement in returns so that you have an indication as to how disciplined and wise we have been in allocating capital.

So I have no inclination or intention to somehow go back to giving production forecasts.

Again, because I think they are increasingly irrelevant in a business that is also, of course, very much driven by other emerging strategic themes like petrochemicals, like oil products, integrated gas, which doesn't always come with barrels associated with it.

And over time, perhaps also power.

So I'm not sure whether that was what you were after, maybe talked about a top line measure, but this would be my response if you meant with it production growth.

Good, and I'll pick up the question on the buybacks and what's driving our confidence.

What's driving our confidence is the $11.6 billion of cash flow from operations, excluding working capital, for the quarter.

If you add back the margining, you get to $12.4 billion for the quarter.

But importantly, it's not only confidence in today's performance, it's expected -- expectation and confidence in the second half cash flow generation.

And importantly, as I mentioned before, really looking at this decision, our financial framework, our delivery of the world-class investment case over a multi-quarter, multi-year perspective.

And it's having confidence in the free cash flow growth that I've spoken to earlier today.

I do think it's important to see through the working capital.

That really is a timing effect and that shouldn't really influence kind of a decision at any moment in time.

It's really looking at the underlying cash flow generation of the business and our capacity on an organic free cash flow basis to support the share buyback program; and again, that's what our announcement today signals is confidence in today as well as the future.

Yes, we'll go next to Lydia Rainforth with Barclays.

Two questions from me as well, please.

In terms of the operating expenses, I take your point around the FX issues.

Are they developing as you would've expected at this point coming through?

I mean, they just look a little bit higher given the -- where the volume numbers have moved.

And then the second one, if I just come back to the buyback as well.

In the statement, it does say that it will be subject to further progress with debt reduction and oil price conditions.

Can you talk about how the oil price plays into the pace of buybacks or probably a different way to say it, if the oil price is $65 rather than $75, would you have actually taken the decision to start the buyback with this quarter?

Okay, thanks, Lydia.

Let me, for a change, take away a buyback question from Jessica, and I'm sure Jessica will have a few things to say about OpEx as well.

No, I think, Lydia, let's go back in history a little bit, when we came out with the statement that we would do a $25 billion buyback program at the time of the BG prospectus.

We very clearly said subject to oil price recovery.

That reflects specifically we mentioned getting back to our sort of traditional range of $70 to $90.

Now of course, the business is dynamic.

The macro has proven to be dynamic, lots of things have moved.

So we -- you can see that we are much more resilient probably even than we communicated and expected in those days.

But I think an important condition largely remains, which is that if we see a very significant downturn again in oil price, then of course, the pressure on the financial framework will change commensurate with that.

Now we don't have mechanics in it, but it's important to have a disclaimer in there that I'm sure you will understand.

We cannot continue doing buybacks irrespective of where the oil price will go.

Where we are at the moment, we are very confident that it's where we believe oil prices go or may stay and where we believe are forward-looking operating performance, ramp up of projects, et cetera, is going to be, we can execute that entire buyback program.

And that's why we have not only signaled the start of it but again, want to reiterate that our intent very clearly remains to do the $25 billion by no later than end of 2020.

Jessica?

Good.

On the OpEx question in terms of expectations, maybe start with a larger frame.

Of course, we've taken $10 billion of OpEx out over the last couple of years and have been very pleased with the performance of the business and the way we've responded to the circumstance and are running the company much more efficiently and effectively than we have been in the past.

And we're going to continue to drive that in the organization.

That being said, what you see in the numbers, there is an FX effect.

That's a bit of a circumstance.

It's not something we necessarily worry about.

It's not helpful in terms of the OpEx, and that's certainly playing into the view and the sentiment on OpEx.

There's another piece of it which is growth and there is growth happening in the business, of course, in our marketing business, which Ben spoke about earlier, growing in places like Mexico, India, China, et cetera.

So as we bring in costs a bit ahead of when the margin starts hitting the bottom line, some of that's happening.

Bringing in some of the New Energies businesses, that's also some of the growth that we're seeing.

And of course, the transformation of our assets with respect to the divestment program, bringing the Motiva assets in, all of those have an impact on the OpEx, which isn't necessarily a problem but it can be a reason for an increase.

That all being said, there's parts of our OpEx performance that I'm not satisfied with, that I don't think the EC or Executive Committee are satisfied with as well.

We remain fully committed to driving the right costs in the organization, driving simpler ways of working, delayering the organization.

Those efforts are still continuing.

Some of them are not necessarily moving at the pace that I would like.

A lot of them are.

And what I would say is there is some soft spots here.

We're completely happy with our OpEx performance, but it remains a key priority for the group and we're going to continue to drive simplification of our business where it makes sense.

And pursuing the right cost outcomes across the organization.

Thanks, Jessica.

Let me also indeed make sure you understand, it's not just Executive Committee, it's also the CEO who wants to make sure that we keep completely on top of our cost performance and do not tolerate any looseness in areas where we can be much tighter.

Okay, Jennifer, can I have the next question, please?

Yes, we'll go next to Irene Himona with SG.

I had 2 questions, please.

Firstly, Integrated Gas in Q2 had a 1 billion credit, a special credit.

I wonder what that relates to.

My second question on dividends received in Q2.

We saw a 17% lower figure.

Last year, dividends received accounted or contributed something like 14% of your group cash flow from operations.

I think, Jessica, you did indicate you expect a step-up in the second half this year, but I wasn't clear.

My question is, can you clarify, can you guide whether you're looking to make more than the $5 billion in the full year '18 that you made last year in terms of dividend received?

Thanks for the question, Irene.

Jessica, can you shine some light on that?

So on the first question, Irene, I think we'll need to get back to you and so we'll pick that up with IR.

That number is not obvious to me at this moment in time.

So I just wanted to make sure that we understand the question and we get you the right answer.

Indeed, on the dividend side, we would -- we're expecting dividends to come in stronger in the second half.

That, of course, is always subject to partners and other circumstances.

But given the underlying performance of our various ventures and the expectations we would expect in the second half that number to be higher than in the first.

Okay, thank you.

Jennifer, can I have the next question, please?

Yes, we'll go next to Lucas Herrmann with Deutsche Bank.

A couple, if I might.

The first one, Ben, can you just put Silicone Ranch in context for me?

Maybe this a little abstract given where we are in transition and everything else.

But just the thinking behind positioning in that asset.

And secondly, I just wanted to come back to your comment on competitive with North America or with Gulf coast LNG, where you understand -- in essence, where you understand net backs to be or profitable net backs to be or prices to be for Gulf Coast LNG, i.e.

what the absolute MMBtu price that you think LNG Canada has to deliver if it's going to be competitive and economic.

Okay, very good questions.

Thanks, Lucas.

Silicone Ranch, so Silicone Ranch is a solar project developer that we bought into with a minority share.

But at the same time gave us access to their IP and sort of trade secrets and capabilities that we could use also outside North America.

What we see as part of our New Energies strategy going forward is that solar is going to be most probably the single largest growth component in the power system of the future.

So having a capability to develop solar projects is going to be key.

Now we have looked at can we grow that capability organically and we've come to the conclusion that perhaps we could.

But it would just take too long.

And therefore, we have been looking around which are the sort of relatively modest, small scale solar developers out there that have a very successful track record, that have a good funnel of projects to work on and that ultimately we can integrate into Shell as an integral capability of developing solar projects around the world.

We've screened quite a few companies.

We've been in dialogue with quite a few companies and eventually we settled on Silicone Ranch because we thought it ticked most of the boxes.

So where we are at the moment, we, indeed, we have completed the transaction.

That came indeed with an interesting funnel of opportunities, predominately in North America.

Actually, exclusively in North America.

We have seen them deliver on that funnel, actually grow that funnel so they're ahead of their own plan and the plan on which we valued that company.

But at the same time, we have been able to basically lift capability out of it through staff that we have seconded into it and use it for solar developments in other parts of the world where we know we will have to grow our position going forward.

So opportunities that we are looking at in the Netherlands, in Australia but also opportunities we may have in places like India, et cetera, are all on the back of the capability that we have picked up with Silicone Ranch.

So it is not just an investment that brings sort of value here and now.

It's also very much acquiring a strategic capability.

Gulf Coast LNG, we see, of course, the share of Gulf Coast LNG grow in the overall energy business -- or markets, I should say, to about 20%.

So increasingly, Gulf Coast LNG will be an element in the price setting mechanism.

And therefore, if we were to consider the economics of LNG Canada, it would be prudent as it is also, of course, in a way sort of Henry Hub-correlated, although not entirely tightly, to see how that would compare with the Gulf Coast supplier project.

We need to make sure that as we consider a final investment decision on LNG Canada, that it is competitive against Gulf Coast LNG on a landed cost.

Because ultimately, without that competitiveness, both in terms of financial competitiveness as well as for the longer term carbon competitiveness, this project would not be suitably advantaged, and we want to invest in projects that are structurally and fundamentally advantaged, but also structurally and fundamentally resilient.

As Jessica said, come what may or what you could reasonably expect to be the price environment in ACO and the price environment in, say, Tokyo Bay, these projects need to deliver a consistently strong positive free cash flow for decades to come.

So these are some of the considerations we're currently looking at.

We believe, indeed, the project, because of its access to very large quantities of low-cost gas, its proximity to market, and its very high quality design that we have produced, has indeed the potential to be competitive, resilient and is indeed going to be affordable if we decide to go ahead with it.

Next question, please, Jennifer.

We move next to Jason Gammel with Jefferies.

Since the Permian Basin has graduated to having its own slide in your overall deck, just wanted to ask a couple of questions on strategy there.

First of all, I'd like to understand what Shell intends to do from an operating perspective because if my understanding is correctly, your JV partner has been operating about 2x the number of rigs that you have been in the basin, and I believe operates about 70% of the acreage.

So how much of your growth targets are based upon your ramp up and operator activity and how much is based upon your understanding of your partner's intended activity levels?

And then second to that, clearly, takeaway capacity is a potential restraining factor on production growth in the Permian Basin, at least in the near term.

Can you talk about what you've done to secure firm transportation capacity out of the basin for these growing volumes and also ancillary to that what you've done in terms of natural gas processing?

Okay, very good questions, Jason.

Indeed, the Permian has a growing prominence in our way forward.

Let me have a first stab at answering the questions.

I know Jessica has been looking at it in considerable detail as well for a number of reasons.

So first of all, we believe we have a very strong track record of delivering sort of competitive drilling and completion cost.

It's relatively easy to benchmark it, and I believe that we're ahead of industry in the Permian and you can draw your conclusions what it actually means for some of our competitors.

We, at the moment, are pretty much at a 50/50 position in terms of rigs.

That is not important as such.

I think we will make our decisions on the basis what we believe makes sense for us in terms of growth.

Of course, there is a little bit of sort of tactics in there where we want to make sure that we have the ability to dedicate certain developments to certain infrastructure.

But that's not necessarily driving the investment base that we have.

The investment base predominantly is driven by our ability to generate free cash flow and the returns that such an investment would have.

Takeaway capacity, indeed, it's an issue in the industry.

It's a very well-advertised, of course.

We have been looking at a more integrated picture for Upstream piece, Midstream piece and trading ever since I know, and Jessica is very familiar with that.

And I'm sure she can comment on it in much more detail.

So we take a holistic view, not so much how much can we produce on the [bat,] but also how do we get it to market, and how do we make sure that the integrated value is truly optimized.

That means that we have taken some positions, but perhaps Jessica, you can explain that in a bit more detail.

Good.

So just picking up on the takeaway capacity, a piece of your question.

Indeed, this has been on our mind for years.

I happened to be in the unconventionals business in 2013, 2014.

And we were looking for growth in our portfolio and the growth in the industry and anticipated to some extent what we're seeing today and back then we secured firm commitments across pipelines to ensure we had flow assurance for our growth, which we're experiencing today.

So I think it speaks a bit to our trading -- the strength of our trading business, the strength of integration and working across the organization to manage these risks effectively and doing so today.

I think on the first piece on the operator perspective, just a couple of points to add there.

We, of course, look to drive value to our partners, whoever is operating.

So in all of our NOVs, we continue to actively engage and bring insight and support where it's needed to drive value.

So it's really kind of passive engagement.

We've got a good relationship with Anadarko.

We're continuing to drive value for both of the companies, and I think we're frankly getting better at that.

We're continuing to see a lot of innovation within our own business, looking at developing multiple horizons with our wells versus kind of one horizon at a time.

I think it's part of the next generation of improvements we'll be seen coming out of the Permian and why people, I think, continue to see a lot of upside with the Permian acreage.

And as I also mentioned we're doing swaps.

Again, we're continuing to kind of maximize or optimize our portfolio which also has operator implications as well.

So I think there's a number of levers we're pulling, whether it be how we manage our Midstream exposure, how we work with Anadarko or how we continue to kind of expand our position even if modestly but wisely with the swaps and pushing the next generation of technology and innovation with respect to our shales business.

Yes, we'll go next to Gordon Gray with HSBC.

It's another question on cash flow, I'm afraid, but at least it's a quick one.

What I wanted to ask is you've had these big headwinds in the few recent quarters from these tax settlements.

Can you just confirm that apart from what you mentioned on Oman, the 2Q numbers are effectively clean of any other tax issues, tax settlements?

And I guess more importantly, are there any others in the pipeline which I'm sure you can't give us details on but that you're talking about that could come through and affect cash flows in the next few quarters?

Okay, thanks, Gordon.

Very clear questions.

Jessica would you like to take it?

I think that's entirely in my realm.

Yes.

Thank you for the question.

And indeed, a lot happens in our portfolio from a tax perspective, both in earnings and in cash.

From a cash perspective, what you've identified -- what we mentioned in the call today, the Oman payment was the most material.

There was nothing else kind of unusual happening from a cash tax payments.

For the quarter, they've increased as the mix of our businesses has changed and we're seeing more profits in Upstream and IG and there's a natural impact on cash tax payments, which we're seeing, which I think is relatively straightforward.

We also provided some guidance in terms of what to expect to further tax changes associated with the item that came through in Q2.

Trying to help provide a bit more transparency in that space.

It is dynamic and something we talk about in terms of how to provide the right level, the appropriate level of transparency.

It is a dynamic portfolio and also as I said with the divestment program, that can have particular impacts on both earnings and cash taxes that we'll continue to see, I think, to some extent for the coming quarters.

It's difficult for us to provide that until those transactions actually take place.

We're trying to provide more transparency as appropriate, but other than the ones that I identified already, I don't think there's anything really for us to signal at this point in time.

Okay, thanks very much, Gordon, thanks very much, Jessica.

Thank you very much all for staying with us until the full length of the call scheduled was sort of completed.

Thanks for great questions and for me rest to say that the third quarter results are scheduled to be announced on the 1st of November, and Jessica will talk to you then.

Thank you very much, and enjoy the summer.

This does conclude today's conference.

Thank you for your participation.