Shell plc (SHEL) Q2 2007 Earnings Report, Transcript and Summary

Thank you, Operator. Good afternoon, good morning, whatever. This is the voice of Jeroen van der Veer. I’ll do the first part of the presentation. Peter is doing the second part. Then after that we go to Q&A. We have first the disclaimer. Thank you very much. The objective of Shell is to make competitive returns. Competitive returns for our operations and competitive returns for our shareholders. I think we have delivered on that in the second quarter. Peter will give you an update about that. Before that, let me say how I look at the industry. I think fundamental changes are going on in the industry. What do I mean? The month is up, a quite significant up, the amounts for energy in the world. It is not only the Far East, China, India. It is also because we have economic growth in the West. It’s not a surprise that the amount is up. We have the amount up while the prices are now on a much higher level then we have seen some years ago. The amount of price, new competitors, NOC’s, other companies, while at the same time the access to easy producible oil, or easy producible gas, is running out. That means that new oil or gas or the gas of tomorrow will come out of projects with much higher complexity, much higher investments and units and much higher risks. That is parallel with the older concerns about CO2 and climate change. So if you add up the amount, prices, competitors, project complexity and climate change concerns; that together we called energy challenge. Now, how are we seeing that in Shell? I think this energy challenge means basically business opportunities, good business opportunities for Shell, but then we have to position our company well. So that means that we should have the technologies where we can differentiate ourselves for to develop complex projects. That we have the people for it and that we can all do that in a sustainable way which is accepted by the public. So taking CO2 into account, what that means, or biodiversity, or the local people living nearby operation, whatever that means. That is the general philosophy. Of course this energy challenge is not a surprise for us. Many of those aspects of how to position this company, we started, really, years ago with that. More specific, we rejuvenate our portfolio in light of that energy challenge. So we like to build more long life growth projects or new legacy assets; that are those assets which come out of those huge projects. We prefer them, if you have built them that you can work very long with them. Easy examples are oil sands in Canada; GTL, Gas to Liquids, in Qatar; or our (inaudible) which we still have recycling project. Those kinds of projects, they will form the foundations for the first and the first half of this century for our company. It is not only about portfolio and rejuvenation of it. It is of, course, also what do we do, what we have to operate today. What we do there is to simplify it, to extend the (inaudible) and to have very clear accountabilities. Why do we do that? We do that to drive that on a global basis, I will give you some examples in a moment, because I’m convinced that having a more simplified and standardized organization is that we have lower costs, you get higher reliabilities. Basically it enables us to make better and more quickly decisions. I go now to the second quarter highlights. What were they? I think we had a good set of competitive results. Peter goes deeper into that. We continue to refocus our portfolio. That means diverse divesting non-core and have the free capital, or the (inaudible) of capital that you have to invest in the non-core. That freed up capital we can put into the growth areas. Now in this whole process to go from A to B with our portfolio, we may have some volatility in the near upstream and the downstream capacities. That’s how it is. But if I look at the total picture of the portfolio I think that our strategy is on track and we can deliver competitive cash. We do that all, this rejuvenation of the portfolio, with a strong capital discipline. We don’t do wild things. We work in an organized and systematic way on that. At this moment all our key projects are on track for starting as planned. I’m really pleased with that. I can give you some examples; (inaudible) in Brazil offshore area. This is to (inaudible) four fields at water depths of more than, about two kilometers. Singapore, we are building a large petrochemical complex next to our refinery which gives continued and sustained competitive advantages by integrating the two. At this moment in LNG, and you know we are from the IOCs, we are the leaders in liquefied natural gas. We have five trains under construction. One of those trains is Qatargas 4. We only started a few years ago with that and it’s now 50% complete. In Qatar we are building gas to liquids, as well. This is a huge project. So far, so good. In Russia, the Sakhalin project where Gazprom is now the majority shareholder, but we are still 27.5% of the project. Gas development drilling has started. We expect that in its first LNG plant in Russia, that’s under construction now, that commissioning starts in the second half of this year. I will now give you examples of simplification and standardization. My first example is what we do at Shell Canada and how we have approached it after we have taken the minority shareholders out. Basically we bring the operations of Shell Canada into the standard organization of Shell, including our standard systems. We will complete it before the end of this year. So we made a very clear program on high speed. We are determined to deliver on that and that we’ll win cost savings. What we do, as well, not only in Canada is that to make very clear what you have to do global and what you have to do by country. What we do global is how we integrate our portfolio. So, we take, example again from Canada, we have mining of oil sands in Alberta and then we look for what is the best way to upgrade them. What we do global is technology, how we drive that. What we do global is capital allocation. Going back to Canada specifically, in Alberta we have now oil in place. Some 60 billion barrels, there’s oil in place in the oil sands and the C2 activities. Of course, through the (inaudible) technology development, we will see how many barrels we can recover from that, but this is really quite a resource. The mining part differs from our other businesses. Whilst the (inaudible) has been mined, the upgrading of heavy oil is basically a refining activity. So, we have decided that oil sands mining activities will report to Rob Routs in the Downstream. Peter will come back (inaudible) future accounting. If I look at the Downstream, we see that we have built a competitive Downstream. This is not only a story about margins. That we are competitive is because already for years we have a focus on operational excellence, focus on costs, and focus on capital discipline. We have, of course, made the disposals and we are making disposals of non-core assets. This has freed up money, we invest mainly in the East in growth investments. Two examples; we have bought a lubricants company for 75% share in Beijing. It’s called Tongyi Company. Our bridge to (inaudible) as our existing lubricant sales. The Chinese market is now for Shell the second lubricants market after the U.S. In chemicals, the Nanhai complex, $4.3 billion in a joint venture, a 50/50 joint venture, is running well. As I just said, we built a new cracker in Singapore. I will hand over to Peter now in a second, but before that let me update on exploration. As you know, we have been following a Big Cat strategy. So where we rank our prospects on a worldwide basis and, basically, try to find large new processes. 2007 has started well. We have made four material discoveries this year and we are assessing the potential. So they are material, but we don’t know as yet whether they are a Big Cat. One of them is in Australia. It’s in its early days, but the prelude gas recovery is in the (inaudible) area. It could be an important new gas resource for us. So I think overall we are making good progress with our strategy. With that, over to Peter for the results in the second quarter.

Thanks, Jeroen and good afternoon, everybody. We had another set of competitive results in the second quarter of 2007. We delivered $7.6 billion of CCS earnings in the second quarter 2007. These competitive results come through a combination of strong industry margins and competitive operating performance from Shell. They come despite continuous cost challenges industry wide. Our Q2 earnings included one time gains totaling almost $0.7 billion. These reflect the ongoing restructuring of the portfolio. When you exclude the one time items, our CCS earnings per share increase by 9% compared to last years quarter. Cash flow was also strong at $10 billion for the quarter. We are confirming the dividend for Q2-07 at $0.36 per share, an increase of 14% versus a year ago levels. Gearing including off balance sheet items was 12% at the end of the quarter. On the share buy backs for Q2, they were almost $1 billion. The pace of buy backs has increased from the first quarter of the year. Oil prices decreased slightly versus levels a year ago. Global gas prices also declined slightly, but U.S. gas prices did increase. Oil prices increased at the end of the quarter and they remain at relatively high levels. The industry defining margins were higher in all the regions compared to a year ago levels, except in Asia where margins declined. The U.S. Gulf Coast and Europe also notably strong headline margins in the middle of the quarter. However, the light/heavy spreads narrowed, which is a disadvantage for Shell. So far in the third quarter margins in the U.S. Gulf Coast have declined. Both (inaudible) and U.S. West Coast margins have fallen considerably while Singapore is essentially unchanged. On the retail side, the marketing margins were up in all regions in the second quarter. In chemicals, U.S. industry East and cracker margins declined. Whereas EEU, so European Industry and after cracker margins slightly improved from those a year ago. Overall, cracker margins are weaker going into the third quarter. Finally, the U.S. dollar has weakened significantly into Q2 and again in Q3. As I highlighted in the first quarter, that does impact our earnings through an increase in the non-U.S. dollar cost space. So let me talk a little bit about the details in the business performance. Excluding one time items, upstream earnings declined. The numbers included increased costs for feasibility studies, $200 million higher exploration write-offs, higher taxes and increased industry operating costs. However, overall (inaudible) and profitability remains at relatively high levels. Oil and gas production declined by 2%. Oil production increased by 1%, driven by recovery in North America. Whereas gas production declined by 6% driven primarily by lower European off take. LNG equity sales volumes were 14% higher than the same quarter a year ago. Driven in particular by increased feed gas supplies in Nigeria and stronger volumes in Malaysia and Australia. (inaudible) volumes in recent quarters from new startups. The next chance of growth should come in ’08 with startups in Russia, Australia, and Nigeria. Earnings in European gas and power marketing were down versus a year ago levels as a result of poor market conditions. So far in Q3 for production we continue to see the impact of downtime in Nigeria. We also expect to see the impact of offshore maintenance and the deconsolidation of Sakhalin where production is concentrated in the summer months. So this is phase one of Sakhalin II. Jeroen has told you the new reporting line for oil sands. We will be reporting earnings from oil sands as a separate segment from Q4 ’07 rather than as part of EP earnings. Let me turn to downstream, downstream earnings increased significantly with firm refining margins and the strong impact from marketing. Refining availability increased to 92.4% compared to 90.7% a year ago. So around 85% of the 2007 plan downtime shutdowns has come during the first half of this year. The planned downtime for Q3 ’07 is expected to be at slightly higher levels than the quarter a year ago when you might recall that our refining availability was 94%. In chemicals, results continue to be strong, some 42% higher than Q2 ’06, benefiting from high cracker margins, especially outside the U.S. Chemicals availability remains firm at 92.6, but down slightly from 94.5 in Q2 ’06. This was really due to the (inaudible) downtime at the Norco complex in Louisiana. This turnaround is the largest for chemicals this year. Chemicals availability for Q3 ’07 is expected to be around the same level as Q2 ’07, notably higher than Q3 ’06, which was impacted by heavy turnaround. On the portfolio side, we continue to restructure our portfolio while focusing on capital discipline and capital efficiency. We have completed the exit from the Wilmington Refinery and (inaudible) refinery in the United States. We have sold certain assets in our midstream gas businesses in the United States and propose to further save in the thousand chord, which is (inaudible) Brazil. We have launched new projects in upstream. For example, in enhanced oil recovery in Numang and in downstream (inaudible). From the next chart you can see that we have a high proportion of capital on the construction compared to what we can see in our peer group. This is because of our ambitious program to rejuvenate the portfolio with new legacy assets, so long life assets as we also call them. These positions will generate cash flow for decades to come, or to require significant upfront investments. Our capital allocation discipline is a key component of our strategy. We must make sure that the company retains the right balance between risk and profitable growth, which you can see on the right hand side of the chart. You will see how I expect the risk weighting in our capital to evolve between ’07 and the period 2012 and 2014 when we go through our investment phase. I think this is a satisfactory trend. We continue to review our portfolio and investment choices on a global basis. We are setting assets with limited future growth potential, or assets with high future capital spending requirements where we would prefer to invest elsewhere. Now we have sold over $23 billion of assets since the beginning of 2004. Just over 50% from upstream. Our organic spending program is making good progress. In ’07 we had completed over $7 billion of asset sales at the end of Q2, and we have several other disposals outstanding. So our plans for $22 billion to $23 billion of net spending for 2007 are on track. This also applies for organic operates of $24 billion to $25 billion, and the net on the acquisitions on disposals as outlined on the chart. With that, let me pass back to Jeroen.

Let me just summarize. I think it’s a little sad of competitive results driven by operating performance. Investment plans are on track. I’m pleased with the progress in the downstream and on expiration. We are rejuvenating our portfolio with succinct investments in new legacy assets, as well as the disposals, both upstream and downstream. We continue to see competitive growth opportunities for our company, and those are based on our technological strengths and by making disciplined capital choices. We do that in an industry where we’ve seen our high energy prices but higher costs as well. I open it now for your questions.

(Operator Instructions) Neil McMahon from Sanford Bernstein is now on line with a question. Neil McMahon – Sanford Bernstein: I’ve got a few questions. Maybe the first one for Peter, and then another for Jeroen. Just on your dividend growth strategy, I think there’s a clear difference between a number of the large oil companies that are focusing on dividends, and some that are focusing on buybacks. Can you give us an update given the cash that’s on your balance sheet at the minute that you’re carrying what your dividend growth strategy is going forward and how much excess you expect to beat inflation trends by over the next year or so?

Just ask your second one as well, and then we’ll take both. Neil McMahon – Sanford Bernstein: The second one is really around exploration. What are terming as material exploration success, and does your increased exploration expense mean that the Orphan Basin well offshore Canada was not successful?

I’ll take the first one on the dividends. As you know we have a policy, a) to pay the dividends in U.S. dollars, and we let it grow at least by inflation. Over the last two years we had an increase of 9% and this year we have a 14%. So that’s our policy and we are not changing that policy at this stage. But we always take the full financial frame working to account when we look at our balance sheet, which is clearly the same, as told to all of you before. First, it’s dividends, competitive, second, it is organic growth, third, maintain a balance sheet, which is throughout the cycle around the maximum of 25% of gearing, if there is cash left over we either invest in long term further organic growth. We have done some small niche acquisition in the past, and we have also done some buybacks. So that’s how we are optimizing. We have increased a buyback slight in the second quarter, and as I’ve said we have increased dividends by 14. But I will not give you over the next two or three years growth rate, I think the policy is clear, it is at least inflation. Over to Jeroen for the second question.

A material success, there’s the four exploration successes, as I’ve mentioned, being two Australia, one Malaysia, and one Nigeria. Then we start drilling, you have hopes to be at the big cap. In those four cases we have found the good stuff. Then it takes a bit of time and evaluation to make up your mind how big it is, on whether it fulfills the definition of a big cap. So that’s why we have set material that we can only update later while they make the criteria over found big cap. Orphan, as you probably know, Orphan is a joint venture Chevron the operator and Exxon in it as well. So it is for Chevron to command what is going on there. Neil McMahon – Sanford Bernstein: Maybe just one other thing on Canada then, you mentioned 60 billion barrels of end place reserves in the oil sands. If you presume over the next 20 years your technology strategy comes off, what do you think your average recovery factor is going to be if we sort of presume around low 20’s at the minute. Do you think you’re going to get very much higher than that to access that significant resource in place?

If I think about oil sells I split my thinking immediately the part where you can scoop it up, and that out of those 60 billion barrels in place, (inaudible) don’t be precise, but to get a rough feel we have said about six billion is for the scooping up part, for the mining part, and there you have pretty high recovery rates due to the nature. Think about 70% maybe 80%. But then you have still the larger part oil in place where you have to in C2 technologies. You have coal technologies, steam technologies, (inaudible) new technologies that will all be much lower than the 70% or 80% as I mentioned a moment ago. I’m convinced that over time we get those recovery percentages up. You can say roughly that this is a wild guess in my view to think about technologies where you can think about 10% to 40%. Whatever way you deal with it you can see that we have very low life assets. So that’s not the first problem for us at this moment. But it is to make sure that you get good competitive technology, which works fairly reliable, and that is exactly what we have been developing over the past years and will continue to develop. Neil McMahon – Sanford Bernstein: Thank you.

Our next question comes from Mark Linossi of Merrill Lynch. Mark Linossi – Merrill Lynch: Hi, gentlemen. I just had a quick question. I’d like you to maybe talk about your recent agreement with Rosneft and what types of opportunities you think could emerge from that agreement?

Rosneft is something we signed nearly two weeks ago now. It is upstream and downstream. It is (inaudible) and outside (inaudible) But what does that mean? It is a bit how Russian companies work. You have first ideas, and then it needs a high level or a chief executive blessing before you start to work very seriously how you can develop it, how you can (inaudible) or whatever. So we have identified upstream, downstream, (inaudible). So basically this is the first step on a journey, an encouraging step that I have to say a first step as well. But as we have said with the Chief Executive of Rosneft, we will review the progress made in those specific studies in the fourth quarter of this year. Mark Linossi – Merrill Lynch: Thanks.

Our next question comes from Edward Westlake of Credit Suisse. Edward Westlake – Credit Suisse: Good afternoon. Two questions. Obviously costs are still inflating and the service environment is still difficult. The very helpful slide on page 19 with an update of projects. But against that service environment, which of those projects in the choices category, such as OKLNG, Gorgan, (inaudible) etc. are you most hopeful to FID over the next 18 months and which do you perhaps feel look a bit more at risk in terms of having to review concepts to reduce costs? Then the second question is really around further rationalization, you’ve given us some guidance on disposals for this year, but it does feel as if there’s potentially more that you can do. Can you give us some idea of potential for ’08?

I’ll tackle both of them. Thanks, Edward. On the first one, let me just look from a general point of view and then get into the more specifics. You have external information, you have also internal information. What we have shared with you is between ’05 and ’06 we saw a 10% increase on costs. What we are seeing in the market is that ramping up of costs have somewhat slowed down, but it is still ramping up in that sense. There are some pockets, either geographically or in certain areas, where you see some slowing down. But we could not say at this stage where we are in the curve, I think that’s too early. There is another interesting statistic which has come out from Syria which actually predicts that 2000 to 2007 costs increased to be around 80%. So that gives you another kind of statistical information. On the FID project of the one still to come, that’s typically what we don’t do and comment on them. What I can tell you is that we changed our process of taking FID and we have talked about that in the past as well. If needed, we take longer in order to get the right tender. We even may do some re-tendering in order to get the right costs and see if the projects are economic. Then we go actually forward and take FID, and that’s when we will tell you. On the projects which are running, as Jeroen said, they’re on track. I can also reconfirm that the bigger projects, like we have in GTL and Pearl, in Sakhalin and some others, they are really on track, and we are pleased with the progress there also from a cost point of view. On the portfolio rationalization, I’ve given you all of the numbers. I think for us it is key that portfolio management stays actually as part of our strategy where we have non-core assets or non-(inaudible) assets or assets where someone else can actually manage it in a better way, what comes to mind here is late life assets in the North Sea. For example, we have done an announcement, or we have some stranded assets, where our marketing assets are no longer linking into our refinery assets like in France. We are looking at portfolio actions in those areas. We will continue to do that. We gave also at one stage a kind of number, where we said 2% to 3% on capital employees on an annual basis is a typical thing you can expect out of a portfolio rationalization. I think I’ll leave it at that rather than to speculate more in what areas we are going to do it. It will be upstream and downstream for both businesses. Edward Westlake – Credit Suisse: Thank you.

Our next question comes from Neil Perry of Morgan Stanley. Neil Perry – Morgan Stanley: Good afternoon. I’ve got two. One is you’re moving the tar sands and (inaudible) and you’re going to disclose what you make there directly, which is very welcome. But if you’re going to do that, why don’t you move GTL into the same thing? In fact, why not go one step further and create some sort of unconventional division so that we can actually see what’s going on in the growth part of your businesses? Secondly, on your disposal program and your cap ex, your disposal programs seem to be, given what you still got to sell, and could well go later this year, you could well exceed what you talked about at the beginning of the year in terms of disposal proceeds. What does that do to this net cap ex thing that you used at the beginning of the year, the $22 billion to $23 billion? Do you compensate for that or does it take it out of the disposals that you would have gotten there for next year, in other words your net cap ex next year will go up because you’ll get more disposals this year and less disposals next year? I just wonder how this profile is going to look?

Thanks, Neil. I think on the first one I think we are, as you have seen, we are very transparent in the way we actually communicate to all of you. We have said that on the tar sands, we also have said it quite clearly, or we have given the example this time of giving you further insight into the cash flows like we have done in the fourth quarter so we have done it now again in the half year. So I think we are therefore coming there. There are routes oil sands, it’s clearly driven by our integrated model. So it is quite clear, and we have stressed that, if you do oil sands, you do the upstream and you do also the downstream. The downstream with the upgrade and then also the marketing side to the markets including pipelines optimized in North America is very important. In order not to actually have some parts in upstream and some parts in downstream, we have decided to actually show that differently. On all of the rest of GTL or other unconventionals, there is no decision on that at this stage. These are firmly embedded in the main businesses where we have them. Now, let’s see over the next five to ten years how they grow, and what they do, and then we can talk about that later on. On the next cap ex figure, in this speech itself, I have been very clear that the $22 billion to $23 billion stays, and still operating with the four to five and to seven, so four Sakhalin, five further divestments, and seven the Shell Canada one and the 24 and the 25 for this year. So we will see how that evolves during the second half and then in 2008. You may remember in the first quarter update we said we are expecting this next cap ex to be in the order of (inaudible) in the years to come as well. So I think we will manage the various parts of that, but more important is the gross cap ex number for ’07 stays at the same level. Neil Perry – Morgan Stanley: Can I just come by one thing, just in terms of disclosure, the one place where no oil company is particularly forthcoming is the downstream. Can you give us the split between the refining and non-refining part of the downstream for the quarter because I know you have provided that in the past?

We have provided that for the full year always in Q4, that is our policy at this stage. (Inaudible) will show that in the strategy or in the first quarter update. We’ll certainly do that again. Otherwise, I have heard your suggestion. Neil Perry – Morgan Stanley: Thank you.

Gordon Grey from JP Morgan is now on line with a question. Gordon Grey – JP Morgan: Just a couple of quick questions. Firstly, whether you could give us a little bit more clarity on that $200 million increase in expiration write-off, whether it’s purely activity related or whether there’s something else? The second one was just a point of clarity, I may have missed it. Do your comments on Q3 in P volumes affect your full year 3.3 million to 3.5 million barrel is a target?

I’ll take both of these questions. The answer to the second one is very simple, it’s no. So we are in the 3.3 to 3.5, and we have said we are at the lower end of that. On the expiration one it’s activity based. We said $200 million and it’s mainly driven by Australia, Canada, and Malaysia. Gordon Grey – JP Morgan: Great. Thanks.

Nikki Decker from Bear Stearns is on line with a question. Nikki Decker – Bear Stearns: Good afternoon. As far as the projects that you will consider for FID, is there any significance in the order of the projects that you’ve listed in this table? It looks like they could be listed in terms of likelihood to be sanctioned this year.

That’s not the case. Nikki Decker – Bear Stearns: I’m interested in Gorgan in particular, maybe you could talk about how you see that project moving forward?

Gorgan, again, is a joint venture, which is operated – this is merely the same answer as previous times – by Chevron, Exxon is a shareholder. So this was Chevron that I had simply the rules now an industry, Chevron has to inform the market about (inaudible) or whatever the problems are. We are a shareholder. We think it is a long term important strategic project. Nikki Decker – Bear Stearns: Thank you. And if I could just ask one more quick follow-on. In the downstream you talked about increased downtime in the third quarter relative to a year ago. Could you just give some clarity on where that downtime will occur, U.S. outside U.S.?

We know we don’t break that down, Nikki. It’s Peter here. But it’s rather small, so I wouldn’t put too much emphasis on that. So we are not talking the bigger stuff. And we don’t break it down refinery by refinery. Nikki Decker – Bear Stearns: Okay, Peter. Thank you.

Stephen Sucoe from Societe Generale is now on line with a question. Stephen Sucoe – Societe Generale: Good afternoon. (Inaudible) Coming back to the exploration charge and the (inaudible) for exploration looked fairly high this quarter with those $200 million for wells written off. Would you say this level of increased costs in exploration as an ongoing features for next quarter, or do you think this is a one-off? My second question is around Canada. Would you now be in a position to perhaps quantify with more precisely the amount of savings that could be generated by the ongoing structure certification? Thank you.

I’ll take the first one on exploration. You know we are running a $2 billion plus budget there on an annual basis. These write-off’s come and go, so you can’t actually take them forward as something which will happen again next quarter. So you can not take that as a charge which will stay. On the cost savings in Canada, Jeroen said we’re making good progress to integrate Shell Canada into our global processes. We intend to finalize that towards the end of the year and I think we will quite clearly put some emphasis on that in the first quarter one. We have given you, earlier in the year in Q4, when we did the strategy update, we gave you a pre-tax $500 million cost savings across the group. So I think that’s the way we are managing cost savings with you investors and analysts in the market rather than actually specifying each little cost saving initiative, which we have in the group. So it’s the $500 million which drives it. Stephen Sucoe – Societe Generale: Thank you.

John Robey of UBS is on line with a question. John Robey – UBS : Two questions actually. One is can you give a little bit more color around the separate contributions of the LNG business and gas trading and gas and power. I think you do indicate that gas trading was rather lighter this quarter, maybe some censures, maybe some indications of where you’re falling down a little bit in this quarter would be useful. The second is just on North America. Once Canada has folded in, will you be operating your business across the continent? For instance, say your gas business you’ll think of it as a North American business rather that’s in shore Canada, one sat in the U.S. and is that one of the benefits you see from the consolidation of Shell Canada?

Peter starts, and then I’ll take the second.

On the first one, John. We give that normally, as you have seen over the last two years also on an annual basis. I think what I can say on the LNG side, LNG performed very well, we had 14% more volume; prices were roughly 2% down if you compare Q on Q. Typically, you can think about 70% plus a little bit off the GP results is actually LNG driven. The rest is then driven by marketing, trading, and to a certain extent GTL. Now the European one is very important to remember. It was really the marketing trading environment was not very positive, which had a weather impact on the one side. For example, and it’s also a pricing impact in certain areas. I’ll give you an example. In Spain, for example, there was less gas consumption because there was much more rain and hydro was much more dominant. That is quite difficult for you to forecast going forward. So I think the best I can really do is about 70% to 75% LNG and the rest is the others, whether we have some volatility in it. John Robey – UBS: Okay.

A good question about how we organize that. Indeed we organize on the North American basis. That means that you take an integrated look for account of that. Say the U.S. and as you know we have LNG import terminals in Mexico as well. So later that will imported aspects to take that into account. It is a solar case, it will not be all in from Houston. You’ll retain in Calgary because (inaudible) loves to wear gloves to the oil sands, so to say, and maybe close to new unconventional technologies. So we will keep there and a good basis of people as well who will work in a very integrated way in Houston. These are the main lines, basically we haven’t had to define and announce that organization. So far we get good reactions from that. John Robey – UBS: Thank you.

(Inaudible) from HSBC is on the line with a question.

Good afternoon, gentlemen. A couple of questions. Firstly on oil sands, in the past Shell Canada has given an indication about cash costs maybe two or three years ago. I wondered if you could give us a broad brush operating costs per barrel number for those mining and (inaudible)? The second question was just a bit of whether you could give us perhaps an update on any discussions you’ve had with Canadian government about the possible removal of some of the tax incentives that currently do go towards tar sands?

I’ll take both of them. On the oil sands, I think you have to distinguish between what we’re operating today and in terms of production, which is our 155,000 barrels. There what we said is actually cash costs is roughly $20.00. But you have to take into account that one-third of that is energy costs, which will go up or down depending on what prices you use. So take that into account. For the expansions to come, we are working on 100,000 barrels expansion. What we have said is, and this applies to most of the other unconventionals as well, we need $30.00 plus as an oil price in order to actually meet our return criteria. So I think that’s the best I can describe to you at this stage where we are from a cost point of view. On the government side, I think (inaudible) Canada, the general remark is we are interested as a Shell, but also as an industry in stable fiscal regimes in the longer run. And, specifically, if we start big projects, we expect them to be actually in line with the assumptions at the beginning. Now I would put Canada into that category. So far they have been very forthcoming in terms of taxation. With the latest changes we have seen, I think you have to distinguish where you are in your project development because the tax law, or the changes, does highlight if you are actually implementing your projects, you will still be treated under that tax ruling, if you have new projects then it is different. So we are, obviously, in discussions with the Canadian government, but that’s for us to discuss with them. But I think we are slightly different in the different way positions as we are already operating there, and have already been approved at expansion ongoing there.

Irene Himona from Exxon B&P is now on line with a question. Irene Himona – Exxon B&P : Good afternoon. I was wondering if you could perhaps give us some guidance on your tax rate in the second half of the year? I think the first half was a little bit below. Secondly, going back to the process of simplification and standardization you gave us the example of Shell Canada, which is obviously newly acquired. Just thinking about the existing Royal Dutch organization, would you say that this process of simplification has now spread from top to bottom since the unification? If not, how long would you expect it to go on until completion? Thank you.

I’ll take the first one. Our tax guidance in that sense has not changed, which is 41% to 43% on an ongoing short, medium, long term basis. I think it is important that you take into account how downstream and upstream are contributing to the earnings, because quite clearly downstream normally has lower tax rates, and significantly lower tax rates than upstream. So in a quarter like the second quarter and to a certain extent the first quarter where downstream actually has a higher proportion of the earnings, and then normally you get some movements in tax rate. So when you can tell me how the refinery margins and all of that works in the second half, I can give you a better insight there. But I think you need to look at the downstream and the upstream proportion of the earnings and then you can be more precise there. On the simplification standardization, I pass on to Jeroen. Or should I take it?

You take it because I missed the first half (inaudible)

I’ll take that. When we came in as a new management team, and when we unified we had said quite clearly that we want to embark on an enterprise first culture which has leadership accountability and some key elements in it. At the same time we also started in all of the businesses, but also in the functions, some rather larger programs to simplify, standardize, or first eliminate some processes, standardize some processes, and simplify some processes, and then actually automate them, so all have their targets to become first quartile performers through these standardization simplifications one. So these things are embedded in the annual operational plans, and they have been working now for quite a considerable time. So you see major progress in downstream. You see major progress in some of the functions. And you also see progress on the EMP side where we have globalized our business model. So I think, yes, we have reached the front line. We have reached all of the hierarchal levels, but we are implementing that, and that’s not a program that you can do in one or two years, that you do over time. So there’s another two or three years at least to come on this one, and that’s where we have also said out of that we expect on an annual basis some $500 million of pre-tax cost synergies to come out.

Next question.

David Kline from ABN Amro is on line with a question. David Kline – ABN Amro : I have two questions. First, on your list of key projects in the presentation, the pre-FID options are significantly shorter lists than you’ve shown in recent presentations. Although, you’ve added Pluto, I think there are five projects that have disappeared from the listing. Is that just a presentational matter? Or is anything changed at any of those five projects that are no longer listed? Second, just on your decision to ring fence oil sands for accounting purposes, I wondering whether that might change the concepts of reserves and resources that you use in presenting your results and ambitions in reserves replacement to the financial community?

I’ll take the first one, this is a pure definition change. We have tightened the definition for our project going on this list. So from that point you should not read anything more into that. Some projects have fallen off because they are more what I call infrastructure maintenance projects of ongoing fees and (inaudible) and gross projects in the sense of enhancing our production. So I think we have tightened that quite a bit and that’s the new list which you have in front of you. Also, these are the bigger projects which we are showing here, which are really sizable from a capital need as well. On the second one, I think going back what we have done is we have been very open in showing what comes out of proved reserves, additions from oil and gas reserves, and what comes out of oil sands, because they’re following two different standards in accounting. One is the mining, and the other one is the oil and gas one. So we will just continue to do that. So you will get full transparency on where we are at in the reserves and the resources. Let me also remind you that the trip log is for us not a target, it’s not an objective in itself. It is an outcome of our investment policy. We’re typically measuring the trip (inaudible) not an annual basis. We actually measure it on a three, four, five tiers average basis because that’s what you do when you are investing in large infrastructure projects because they come on stream in more lumpy kind of manner. So don’t put too much emphasis on the annual one.

Next question, operator.

Dan Barcelo from Bank of America is on line with a question. Dan Barcelo – Bank of America : Good morning, it’s Dan Barcelo from Bank of America. Two questions if I may. Firstly, just some few details on the quarter. Is there anything further you can give on crude oil production?

Start again, because you got a voice in the middle of it. You had two questions, start it again. Dan Barcelo – Bank of America : Sure. The first one is regarding crude oil production in Africa, both Q on Q and year on year, I fully understand the comments around Nigeria, I didn’t know if there was anything beyond that such as PSC effects or shifts from profitable to cost, specifically from Q to Q? The second question, just at a bit of a higher level on slide 14 you do highlight that Shell has more capital employed under construction relative to peers. Is there any sort of assertion in this that perhaps now you’re spending a little bit more in a phasing mode, or does that level of cap ex have to be sustained to keep the growth, or should we think that that capital spending or overspending would then drop down to a normalized level? Thank you.

Thanks. I think the first question, if I understood it correctly, and I’m looking at the numbers, in Q2 we had 404 ending Q2 ’06 and Q2 ’07 we had 409. So there was a one percent change. So from that point of view I can’t see any big swings there. What we have is, just to repeat the business model, you have got shoddings on the onshore quite clearly, now that number hasn’t moved that much between the two years just a little bit. But we still obviously take some of the ramp up on the (inaudible) which is the offshore one. So from that point of view I think that would be my explanation. On the capital employees, I think from a strategy point of view what we have said is we are aiming at one percent to two percent growth before the end of the decade in two to three later on. Now we are quite keen to actually progress our investment portfolio, which we have on an ongoing basis. Not to (inaudible) depending on the oil and the gas price. Our project pipeline currently is quite significantly filled and full. So we have got good visibility for many years to come that we can actually develop significant projects. Now this will always depend on the economics of these projects because we are not shy actually to kill them or to stop them if they are not managing to not actually come to a certain profitability level. So I think it’s difficult to say and I don’t want to do a forecast on cap ex for how many years we want to actually keep spending there. It depends on the opportunities which we have and what returns we can expect. The second thing I would say is the big infrastructure projects we do where you put a lot of cap ex into the ground upfront, in order then actually in the areas where the production will then stay at relatively high level without a lot of follow-up investments in order to offset the decline because these fields will not have high or more or less no decline rate. We are de-risking somewhat the cap ex needs in future years. But we may decide we want to grow more, and hence keep cap ex levels actually high up. So I think that we will decide from a strategy point of view during the next few years to come. Dan Barcelo – Bank of America : Thanks very much.

Lucas Klemman from Deutsche Bank is on line with a question. Lucas Klemman – Deutsche Bank : Good afternoon, gentlemen. Two questions. The first for you, Peter, very simply, I’m often asked what your transactional currency exposure is. So if I say the dollar moves by about 10%, what does it actually impact your reported dollar profits by, if you could give me some idea that would be much appreciated? The second in a way goes back to Dan’s question, and it’s on Nigeria. One of the things that perhaps is more intriguing this quarter was to see the Nigerians operate OPEC constraints and shut down production at (inaudible) or ask you to shut down production at (inaudible) for a period. On the basis that at some point the onshore production is going to come back, and that the returns the government sees for an onshore are far higher than those for offshore. I just wonder where it leaves you in terms of thinking about planning for the future given the weight of your growth is in offshore production, and given the extent to which Nigeria is going to potentially be beyond quotas in the future?

I’ll take the first one. I think what I can give you, and then you can calculate a percentage etc. In the second quarter across the group, the weakening of the dollar has cost us some $150 million to $200 million. I think you can more or less take half downstream, half upstream on that one. Lucas Klemman – Deutsche Bank : Thank you.

Nigeria, the way we look at it is basically we see the three companies, which have all very different characteristics. You have the offshore, sometimes hundreds of kilometers offshore. They have a very different tax regime, recent developments usually from a platform SPO type, etc. sail it straight away. Then you have the LNG company, the NLNG company, a joint venture, fairly large now. So far despite all of the difficulties that company keeps on producing gas. Then we have onshore where we have all the troubles at this moment, the onshore companies Shell petroleum development, still a very large company. We have to realize that. If the joint venture can produce a million barrels per day, or more, (inaudible) companies, on a world scale that’s quite important. With SPTC as well, and not as the only one, but they produce a lot of gas, and that gas can go either to the LNG plans, or what we don’t like that is flare and that’s all the projects we finished at. And, over time, if you stop this flaring, that gas will be used basically for electricity production. Despite all of the troubles in Nigeria, the economy is making progress. They have, in fact, quite economic growth. And you see a lot of electricity growth in Nigeria. That will all be basically based by gas fire production. So that is the scene there. We take an integrated view. We work for decades in that country. We realized our three separate companies. We realize that our profit and risk profiles are very different. But we are committed to all of those three companies. Now, of course, we don’t sit back and we explain actively to the government that they forego quite some government take, as long as the delta production is (Inaudible) and the new president is fairly aware of that. He is, in fact, giving the very right statements how to approach that. The art is, of course, that those statements are now translated into deeds. And probably we’ll see a lot more of that because the administers are now being appointment and then we hope that step-by-step we can return to the areas to get basically your own part where we have real troubles onshore production and then we start to get that back. I can’t put a date to it. Lucas Klemman – Deutsche Bank : It wasn’t so much that the production coming back, in some respects it’s great that it does. It was more that if it comes back and you’re in a quieter environment, the temptation for the government must be far more profitable. And whether you have any comments you’d care to make on that observation.

You are right, you mentioned that. We were a bit surprised that a certain moment there was the idea of whilst we had production holded from the (inaudible) delta, that at the same time they have ideas to curtail offshore production. We felt that we’ll just alert you here because basically we had a lot of production already out of action. The only way I can say that is it’s sometimes very difficult to understand all the Nigeria policies. What we expect to see, well, what you see in most OPEC countries that around the SA curtailment it is kind of an equal misery basis. Now that still leaves a lot of scope for (inaudible), but that’s in general our experience. It’s too early to say and let’s realize that over the past years there haven’t been many curtailments of OPEC production at all. So that, as we say, is not tested in recent times. These are government decisions and we have to realize that, so we can advocate as an industry what we prefer. But the governments, they are the deciders in the end. Lucas Klemman – Deutsche Bank : Thanks very much.

Hans Smith from Dresdner Kleinwort is on line with a question. Hans Smith – Dresdner Kleinwort: Really, for you, Peter, you’re gearing in your definition is at 12% now, which is obviously quite a long way short of your sort of state target range, and I just wondered if you had any view about a sort of time frame you’d be willing to live with it then at that level and what happens to maybe bring it up to something closer to your target range?

A few comments here. I think the first one is, despite the fact that we had it together with the divestment proceeds a very significant inflow of cash during the first half year, we managed to actually use that cash and distribute it into organic growth and also to the shareholders. So I have not further (inaudible) the balance sheet. And there are some others in the industry which are much slower. So that’s the first one. The second point is, I think when you have high oil prices and high gas prices, and the costs are maybe not yet caught up with you, so you are still running around with high returns, etc., that is where you would expect to be at the lower end of your gearing range. As soon as you either go up in terms or down in terms of oil and gas prices, that’s where your gearing will naturally come up. So that’s the way we look at our balance sheet, so we are optimizing that going forward. We are doing the planning on various prices and I think that will stay with us. The commitment I have during the full cycle period is to get to 25 and what we have so far achieved is clearly not to go further down in the (inaudible) side and use the capital wisely in terms of organic growth, but also on niche acquisitions like Shell Canada, etc,. but at the same time also increase the dividend of paper and use buyback. And I will continue with that with the clear aim to get throughout the cycle to what we have as a framework, which is 25% gearing. So working on it.

Bert von Hogenhusa from DeVries & Company is on line with a question. Bert von Hogenhusa – DeVries & Co. : Most questions have been answered. There’s one remaining. In a few of the former conference calls, you hinted to talks going on with Venezuela on technology to extract super heavy oil. In view of what happened in this country also with the actual IOC’s working in that sector, are these talks all but dead or are you still seeing yourselves as a technology provider? And is there a chance that this comes to something?

Yes, basically we have many processes in Venezuela, but we continue to operate what is basically (inaudible) mixed up. And of course we are developing, not specifically for Venezuela, technologies for super heavy oil. This is not a technology for application today or tomorrow. So it makes sense basically on let’s say on technical civil servant level I assume that the contact simply continues, so that they are aware of this (inaudible), that there’s a bottle in the stem not only on the political level with all the technical civil servant level what made it mean for Venezuela. So all the time I can see good combinations between Venezuela and our technology. And like all oil projects, we ask them to take political considerations into account. But that is basically too early to speculate on that today. Bert von Hogenhusa – DeVries & Co. : My second question was the ramping up schedule of the current oil sands projects. Can you give us some idea of what sort of prediction you will end up the year with from now?

The Phase One project is 155,000 barrels per day. That is the (inaudible) part, so to say, in the joint venture of which we have 60%. At this moment, we are building the first large extension, which is about 100,000 barrels per day, but that part will not be up and running this year. And it was never scheduled to be. Bert von Hogenhusa – DeVries & Co. : Thanks.

Mark Gilman from Benchmark is now on line with a question. Mark Gilman – Benchmark : I had a couple things. First, one of your competitors has gone to great lengths recently to try to provide some clarity with respect to IFRS and derivative-related accounting impacts on inventories, which have played havoc a little bit with downstream earnings. Are there any IFRS related affects per inventories and derivatives in your downstream results that we should be aware of?

Peter is already smiling, Mark.

Ask all the questions and then we take all of them in one go, Mark. Mark Gilman – Benchmark : Second one, wanted to see if you could give us any kind of an update on your carbonate recovery technology that you’ve been working with vis-à-vis the oil sands. Third question relates to exploration. You cited Onyx (inaudible) as an appraisal success, yet I hear something quite to the contrary. And in fact, that the appraisal well on Onyx was somewhat disappointing. I was also struck by the fact that in your choices slide in the project list there is no listing whatsoever of several of the other seemingly significant deep water Malaysian discoveries that you’ve made. Could you clarify and comment on that, please?

Okay, I take the IFRS one and then carbon technologies I leave to the technology man, Jeroen. On the IFRS side, yes, indeed, obviously, I’m following the same accounting procedures like that particular competitor. We have most probably a slightly different approach to trading in the sense this is part of your business. We run a global trading business, but it is really the results are shown in the various businesses and it’s an integrated business. It has physical, it has paper, etc. So all this EITF adjustments, mark-to-market adjustments at the quarter end, they are part of our results and we will just leave them there. So if they’re positive or negative, we will deal with that as part of our quarterly announcement to give you ideas on if it has a positive or a negative impact. But we have a slightly different approach to this one and I can also not say what that competitor actually said, that they are measuring it internally in a different way. I don’t know how they do that internally. We run our results in a certain way and that’s how we are communicating to the market.

CO2 and oil sands, if you look at oil sands and we take a trajectory for the oil sands in the ground until it is a usable product, and then you measure the CO2 per unit, we are determined to be a first quartile operator. How do you do that? That is technology, energy conversation, how you operate it and how you integrate it. So the basic philosophy is that we realize that oil sands operation can be really CO2 intensive. But if the government’s decide that oil sands can be exploited, that is a good thing if people know that if Shell is involved in it, they do relatively the best job or the best-in-class job. That is the philosophy there. So in the operations, this is design and technology. What else can you do? You can try to catch the CO2, whether it is from electricity or whether from other operations (inaudible) in the production of the oil sands. And then you have to do something with the CO2. We may have (inaudible) a relatively nearby possibilities to inject it into the ground or further away you have to construct (inaudible). At this month studies are going on for that. And then the third, while a classic one, are offsets. I think offsets are longer-term, probably not that satisfactory. Your third question about exploration, Onyx, I’m not so sure, Mike, whether you have the correct information. We are not so sure. Maybe you have to work offline with our investor relations people, but we think that this as we sat. On Malaysia, I don’t have additional data here compared to what I have presented in our analyst call and our press conference this morning. Mark Gilman – Benchmark : Jeroen, what I had asked about was your carbonate reservoir oil sands recovery technology that you’ve been working with.

In C2 conversion of that, yeah? This is the new technology that we developed for in C2 conversion, the sure technology. That’s (inaudible). No, we have this well which we concentrate basically on two countries, on Canada and on the U.S., we have different tests going on that we have not getting further inside to the markets or to the competition about that. Mark Gilman – Benchmark : And the Malaysian discovery I referred to was Malachi as well as several others.

I’m afraid I can’t help you. Mark Gilman – Benchmark : Okay, thank you.

(Inaudible) or our other people you know, but somewhere in the public we can share with you, but there’s not to my knowledge at this moment.

Jason Kenny from ING is now on line with a question. Jason Kenny – ING: Three short questions, if I may. Firstly, could you give us some outlook for DDNA progression? I know it’s a function of your capital intensity, but certainly on year-on-year I was quite surprised at the increase. Secondly, could you show us a view on progress in Iran and any concerns you may have about the questions from some U.S. firms about your involvement there? Finally, going back to Mark’s question earlier in the call, have you got a probability of the JV with Rosneft actually bearing fruit given your experiences in Russia? And I’m thinking here about a defunct JV with Gazprom back in ’97 and you pulling out of the IPO for Rosneft back in 1998 and not necessarily recent Russian troubles.

I’ll work them in the reverse order. The only (inaudible) in the agreement with Rosneft, of course, is that we have more than hopes to bring it something to success. Now if you go back and we just published our 100 year history, not everything we brought to success. But the fact is, we published a book of 100 year history, we are a pretty big company, we brought many things to success. But you don’t know which one before you start. Of course, we have a lot of know-how and we have even more know-how in (inaudible). And I always say, in Shell we are long distance runners. So we don’t give up easily. Your second question about Iran, indeed, we received from four American pension funds a letter. The letter is dated on the 19th of July, came in on Friday, and in that letter they ask to describe our policies and safeguards, what we do or attempt to do in Iran. What we understand from the newspapers as well that that letter has gone to more companies. We will answer them basically in line with my earlier Iran remarks I made today. DDA is for Peter.

I’ll take that. First of all, the opening sentence I have to say is where’s the (inaudible) obviously next year we give the update, so we can expect that in March. I think from a general description point of view, it is driven and it is indeed higher and it is driven by new feeds on the one side and on the other side low ACC reserves, bookings over the last three to four years, specifically when we restated the reserves back in ’04. That quite clearly has an effect on the DDNA. So I think these are the two major trends I can give you and the rest we will update in March of next year. Jason Kenny – ING: So do you see the trend continuing through the rest of this year and into next as well?

I think we’ll talk about that in March next year when we see the rest of the year.

There are no more questions at this time.

That’s why I like to finish this analyst call. Thank you for your questions. Let me finish this to say that we were pleased with our second quarter. I know there’s always work to do. And as I’ve said before, what we go for, the short one line in our company is it is all about delivery and growth. We concentrate on the delivery, because if we don’t deliver, we will never come to good growth. Thank you very much. I end this call now.