Shell plc (SHEL) Q2 2010 Earnings Report, Transcript and Summary

Thank you, operator, and welcome to the Royal Dutch Shell second quarter 2010 results presentation. First, we please take a moment to read the cautionary statement. Simon and I will take you through the results and update you on where we are with strategy, and there will be plenty of time for questions at the end. CCS earnings excluding identified items were $4.2 billion in the second quarter in earnings per share increase of some 33% from the second quarter of '09. Our performance in the quarter underlines that we're delivering on our strategy. Upstream volumes are up by 5.5% and we have delivered underlying cost savings of over $3.5 billion. We have finished the corporate restructuring phase that I announced a year ago, and exceeded our cost and head counts reduction targets. With corporate construction now completed, we're moving into a mode of continuous improvement and this includes a relentless focus on performance and more asset sales as we trim the portfolio and improve capitalizations. Today, we are in gross window with new projects ramping up well. And we continue to make good progress on medium-term options with new tight gas streams announced in the second quarter. Let me give you some details. Back in March when we had our strategy meeting, we outlined Shell's strategy for the next several years. We're improving our near-term performance, delivering a new wave of growth into 2012 and maturing the next generation of projects for growth for 2013 and beyond. It's a portfolio that can support growth to at least 2020. We have made progress on all of these items and themes so far this year. Let me give you an update. First on the performance focus. The corporate restructuring program we announced a year ago, which was called Transition '09 is now complete. The three new businesses upstream America, upstream International and P+&T are great platform for faster delivery of strategy, clearer accountabilities and a more competitive focus. These reorganization plus our programs in downstream and support functions have taken out over $3.5 billion of underlying costs. This is about 15% ahead of the target we set and 6 months ahead of schedule. We have safety and asset integrity from these cost programs and we continue to invest properly in those areas. These savings included the target head count reduction of some 7,000 for 2009 to 2011 mostly from non-technical errors. This head count adoption is about 18 months ahead of the target we have set. We have closed a chapter on corporate restructuring, which was really a top-down approach and now, we move into what I call a continuous improvement mode. This is all about smaller, incremental initiatives to enhance our performance and a more commercial mindset in Shell. It thinks like simpler structures, standardisationing contracting, processing and procurement and lean processes. In support areas like IT and science, for example, we're moving standardized functions to shared service centers in low-cost countries. We now have 8,000 staff and six shared service centers with more to come. I also want to put more focus on fine tuning the petroleum. Working on capital efficiency and concentrating on the most attractive growth positions. We're increasing the pace of asset sales here with some 7 billion to $8 billion of disposals expected for 2010 and ‘011 in both upstream and downstream. Downstream we are aiming to make quite significant shifts, for example, in Europe and Africa. Upstream, I think of this as trimming the edges of the portfolio, rather than deep changes in ratings and exposures. So those are some comments on performance focus. Now, turning to the second leg of the strategy, which is growth delivery. We are in a delivery window with a sequence of 13 new projects to come on stream in 2010 and ‘011. These projects underpin our cash flow and production growth targets and 11% increase in 2009 to 2012, production to 3.5 million barrels of oil equivalents per day. The 50% increase in 2009 to 2012 cash flow at $60 oil price. Last year startups are ramping up well. BC-10, for example, in deepwater Brazil is producing 90,000 barrels of oil equivalent per day and initially expected 60,000 from this complex reservoir in the first phase. By the end of the second quarter, we had the startup up to 250,000-barrel of oil equivalents per day in Gbaran-Ubie project onshore Nigeria. This will be an important supplier for Nigeria LNG and also domestic gas costs. Now, we have a series of further startups to the end of 2011. The next project to come online will be in Canada, where commissioning of the new mine at AOSP is well underway and startup is expected soon. With the Scotford upgrader expansion in 2011 major construction at Pearl in Canada 4 [ph] will be finished by the end of this year and with ramp up for both projects in 2011. These are exciting times on the growth side and we are firmly in the delivery mode window here. Now, let me turn to the third strategic theme, generating new options for future growth, and this is really about 2013 and beyond. Shell Explorers have made five new discoveries this year in the United States and in Australia. We have also worked on a series of acquisitions and joint ventures this year both upstream and downstream. These ideas like North American tight gas acreage with potential for 16 TCF of new resources, the Australia coal bed methane potential for a 7 to 8 million ton per annum LNG project And Brazil downstream proposed JV producing 17 billion-liters per year of oil products and 2 billion-liters per year of ethanol for biofuels with growth potential. Now these transactions are all about getting in early into relatively underdeveloped asset bases and markets where we can apply Shell technology know-how to create value. I would also like to highlight the good relationships we are forming with oil and gas companies from China. Shell is one of the largest direct foreign investors in China, with fast-growing businesses in both upstream and downstream. This year, we have developed joint activities with China's oil companies in upstream, both within China itself for the gas and overseas in Australia, Syria and Qatar. I think there is more to come from these relationships. Now, before I hand over to Simon on the results, let me make a short comment on the situation in the Gulf. The BP Macondo blowout is a tragedy for everyone affected. There will be far-reaching implications for our industry. Shell has a good track record in deepwater and in safety management overall. Worldwide deepwater production has an important role to play in the global energy supply equation with about 6 million barrels per day of production today, growth potential and supply diversity and sustained investment in technology, jobs, and services. The recent announcement of Shell's participation in the new $1 billion Gulf of Mexico oil spill containment system is an example of where we're working with governments and partners to improve the industry's capabilities in deepwater. Now let me hand over to Simon to talk about the Q2 results and update you on the financial side. Over to Simon.

Thank you, Peter. I will start with the macro environment. When we look at the macro trends, we look year-on-year, of course, because our business is quite seasonal particularly the upstream gas and so the year-over-year approach is intended to reflect those trends. If you look at the macro-environment picture compared to the second quarter of 2009, the oil and gas market prices refining and chemicals margins have all increased year ago levels. The spread between oil and natural gas realizations has widened considerably, compared with year-ago levels and against the first quarter of this year. And that is mainly being driven by a more rapid increase in oil prices compared to North American natural gas prices. And an observed decline in the Q2 to Q2 gas realizations in Europe. European gas is important to Shell. It accounts for some 40% of our worldwide gas production. The slowdown in European realizations is a result of the supply bubble into the EU but that is combined with a weak demand. The results and an increasing proportion of lower-priced spot sales. Medium-term outlook for gas markets in Europe and globally is robust. However, we have seen the impact of the softer European gas pricing in our results this quarter and this could continue for a while yet. Turning to earnings. Earnings for the quarter included identified items of $321 million. Excluding those identified items, the current cost of supply earnings were $4.2 billion, and earnings per share increased by 33%, up compared with the second quarter of 2009. The quarter saw higher earnings in both upstream and downstream driven by the higher industry energy prices I just mentioned by our own organic growth and by our own cost savings. Cash flow from operations for the quarter was $8.1 billion, and the dividend for the quarter is unchanged at $0.42 per share. We expect to begin the script dividend program in the third quarter of 2010 and you'll see the new time table for that on the website today. Now let me talk about the businesses performance in a bit more detail. First on the upstream. Upstream earnings increased by 48% to $3.3 billion in the second quarter. Higher oil, gas, and LNG prices. Higher volumes and cost productions from our own programs contributed to these results. Those benefits were partly offset by the higher production taxes, the weaker European gas realizations and maintenance down time in high margin production areas. The upstream production overall increased by more than 5% Q2 to Q2, reaching some 3.1 million barrels of oil equivalent per day. Production from new field and failed ramp-up was some 160,000 barrels of oil equivalent today and that more than offset the natural field declines. Our LNG sales volume grew by 34% in the second quarter and that compares with the same period in 2009. And as the ramp up and cycle into in Russia and in Nigeria LNG where the gas supply picture has improved in the quarter that is really driving the growth. Maintenance downtime in the quarter mostly in oil sands in Canada and the Mars Corridor in the Gulf of Mexico and this was planned maintenance. That impacted production by some 100,000 barrels of oil equivalent per day and, of course, that is high-margin production. Let me just update you on Shell's activities in the offshore US. First, to say that the Perdido [ph] Platform, the new platform in the Gulf, it was shut down in April for maintenance on the facilities and at the tie-ins to the third party gas pipelines. We expect Perdido to be restarted back online in October. More broadly, as a result of the industry wide drilling moratorium in the deepwater Gulf and in Alaska, Shell has idled five floating rigs and two platform rigs. We're working with the rig suppliers on the financial impact here and in some cases we've negotiated a 60% to 70% reduction in the day rates for the rigs and the services. For now, we prefer to keep these rigs idled rather than standing them down. So, that we retain the work and the investment that is already being done on the logistics and safety side for the planned wells. We have taken a $56 million charge from the impact of this action in the second quarter results. It is an identified item and there will likely be further charges in the third quarter of 2010. Our development drilling has been impacted by the moratorium, for example, of Perdido, and we expect a production impact of around 8,000 barrels of oil equivalent per day for the full year of 2010. Turning now to the downstream. Downstream earnings increased substantially from the second quarter of 2009 to some $1.2 billion on a clean CCS basis. The chemicals earnings increased substantially from year ago-levels. There was a relative improvement in refining, but refining conditions do remain difficult, especially in Europe and Asia, which are, of course, the main refining centers for Shell. Losses in refining were around $100 million in the quarter and that compares to losses of around $500 million a year ago. Marketing earnings in aggregate were broadly similar to year-ago levels, this reflects higher retail earnings and also a generally weak environment for trading activities due to relative lack of volatility. So, those are the earnings. Now turning to the cash flow. The cash flow position continues to improve with cash from operations exceeding capital investment both upstream and downstream. At the group level we are moving into a more cash-balanced position and after several quarters of cash deficit, we were essentially cash neutral after capital spending and divestments. We continue to watch the cash position and the balance sheet very closely and putting particular emphasis on costs and capital efficiency. We made good progress on asset sales, some $1.6 billion of proceeds booked in the first half of this year. The main divestments we completed so far were from the downstream and represent exits from New Zealand, Greece, and El Salvador. On the acquisition side, we completed the Eagle Ford deal in Texas, that's shale gas in the second quarter. We expect the East Resources and the Arrow acquisition to close in the second half of this year. The proposed Cosan joint venture in Brazil, there sugar and ethanol in downstream is likely to impact our accounts in 2011 rather than 2010. As Peter outlined, we've increased the guidance for asset sales to 7 to $8 billion over a two-year period, 2010, 2011. We're expecting over $2 billion of this to come this year. It does depend on the deal timing across the year-end with the rest to be delivered in 2011. We set our targets for cash flow and production growth specifically for 2012 in our strategy presentation in March. There is no change to these targets here. We are aiming to hit the targets despite the step-up in the asset sales, and we will provide a reconciliation of the impacts if necessary. Turning to our gearing. Balance sheet gearing 16.9% of the end of the second quarter, that's a slight decrease from the first quarter, reflecting the cash generation. The gearing outlook for the second half of this year, it does depend to some extent on the macro outlook. However, all else being equal, I would expect an increase in the gearing in Iran to around 20% as the impact of the acquisitions comes through and this remains well within the gearing guidance range. Peter, over to you to conclude.

Thanks, Simon let me summarize before we go to your questions. This year's earnings per share increased by some 33% from the second quarter of '09, and our performance in the quarter on the lines that we're delivering on our strategy. Upstream volumes are up and costs across the Company are down. We're making good progress with our three strategic themes. That is, performance focus, growth delivery, and creating new growth options. We have completed a corporate structuring phase that I announced a year ago and delivered on our cost and head count reduction targets right on schedule. With corporate restructuring now completed, we're moving into a mold of continuous improvement, and these will include the higher-pace and faster pace $7 billion to $8 billion in 2010 and '011. As part of our capital efficiency drive, and as we focus our portfolio onto mature growth positions. The priorities remain for a sharper delivery of strategy, aiming for profitable growth and competitive performance. I will call this we are on track for growth. With that, let's take your questions. Please could we have just one or two each so everyone has the opportunity to ask questions? With that, back to the operator. Please poll for questions.

Thank you, we will now begin the question-and-answer session. (Operator instructions) Thank you, our first question comes from Alejandro Demichelis from Merrill Lynch. Please go ahead with your question. Alejandro Demichelis – Merrill Lynch: Yes, good afternoon gentlemen. Two questions, if I may. The first is one is, you have been talking about the impact of the Gulf of Mexico in terms of the rigs and in terms of the development and so on. But you're keeping your CapEx flat this year. Maybe you can indicate what is that you're accelerating in order to compensate for this? And the second question is about these gross opportunities that you are talking about. How much of those growth opportunities will be organic versus inorganic and which are they that you think you may still be looking to add to the portfolio?

Thanks, Alejandro. I'll give the first question to Simon, and then I'll take the second one.

Thanks, Peter. The actual Gulf of Mexico impact on CapEx is not that significant this year. We finished the deed there. We haven't started the next big development. The primary offset for those in on-shore gas in North America where we have significant programs in six basins now, and that is something we can ramp up and down according to the relatively the short-term attractiveness. Plus, there is an ongoing program to hold the leases through production. If there is overflow anywhere that is where the money is going.

And on your second question regarding the gross, we're quite clearly a drought lining – strategy presentations. We're focusing on Australia, North American Gas; we have full contacts down with various projects. We have quite significant exploration success, over the last 15 to 18 months and we have entered Iraq and, obviously, we have also the Gulf of Mexico where we expect to go – we will get back into the deepwater where we have got exploration finds but we also have, obviously, FIDs, which are queued to come up pretty soon like Mars B, et cetera. So I think we have a portfolio and after we have delivered the 13 projects which are coming on stream the next two, three years which can give us significant growth to the end of the decade and I think that is good growth pipeline where we have flexibility. Alejandro Demichelis – Merrill Lynch: And in terms of having inorganic assets into this?

We have got an organic strategy, we have always said that we have got some acquisition we can do like we have done in North American gas, but at the same time, we also have – there for, let's say, the lower-grade portfolio again. So, I think we played it as it comes. We have a great organic oil strategy. Alejandro Demichelis – Merrill Lynch: Okay, thank you very much.

Yes. Next question.

Thank you, our next question comes from Lucy Haskins with Barclays Capital. Go ahead with your question. Lucy Haskins – Barclays Capital: Good afternoon, Peter and Simon, can I ask why you aren't actually lifting your production guidance this year. Because I understand you're still keeping it in the flat for 2009 environment given such a strong start to the year we have seen. And–?

Go ahead if you have more than one. Lucy Haskins – Barclays Capital: And the second one, I guess is also possibly whether there is potential for you to list your 2012 cash flow targets as well? Because we had something approaching an $80 environment in the first half of the year, and if we're to extrapolate that, what you manage in terms of cash flow ex working capital movements. You seem to be moving about $0.12 or so of the implied targets of the 80% up there for 2009 and the $80 world by 2012. So, if there is a case on both of those targets, sort of under promising to over deliver?

Thanks, Lucy, I'll give the production short-term to Simon, and I take the target one on cash.

Thank you, Lucy. Good question. We said that we would expect to be flat this year against last year and that we expect to grow from '09 to 2012 by 11%. There is no change in the 2012 expectation, 3.5 million-barrels of oil equivalent per day and this year, it's good to be 5% ahead halfway through the year. And we would hope to do better to be honest and remaining flat and there is little point in giving a specific target. We're in an industry where, as I think it's fairly clear, stuff happens. There is still hurricane season to get through. We have done okay in Nigeria this year so far. We have done very well operationally in Nigeria but there is still potential security issues, et cetera. So, we're very pleased with what we have been able to do, most of it is through our own efforts and we will see where it comes out. Some upside.

The second question, I think, the delivery machine is rolling well at the moment, Lucy, that we had a good operational performance and good cash performance. We have given targets for 2012 and we stick with them and the $80 target there was actually more than 80% which gives you a significant increase and, I think, the more than an 80% also highlights that we see an $80 world quite a strong cash flow performance. So, we're kind of full month into the target so let us work a little bit more. Lucy Haskins – Barclays Capital: Thank you.

Thanks. Lucy Haskins – Barclays Capital: Keep up the good work.

Thank you. Next question, please.

Thank you, our next question comes from Robert Kessler with Simmons & Company. Please, go ahead with your question. Robert Kessler – Simmons & Company: Two quick questions. One, Simon, you referenced the likely third quarter charge for the moratorium effect and I am sure there is still some uncertainty around it. Can you bracket a range of expectations for the order of magnitude third quarter moratorium charge, and then second question with respect to the weak trading environment in the second quarter, can you quantify more specifically the sequential trading detriment in the upstream and the downstream? Thank you.

They're both for Simon thanks for the questions.

Thanks, Robert. We're not sure which quarter it will fall in, but our estimate for the full-year impact of the moratorium is around $200 million after tax. And that is the best we can do at the moment. Obviously, we don't know quite how the moratorium will unwind so reasonable to assume I guess, between third and fourth quarters evenly. On trading in general, we don't typically get a specific breakdown either upstream or downstream. I will say it's been – or I should say, it's not been a volatile environment in the second quarter. Volatility creates trading opportunity; therefore trading had a relatively quiet quarter. Upstream was down on year-on-year and very much still on profit, though. The downstream year-on-year is about flat. Thank you for the question.

Next question.

Thank you, our next question comes from Irene Himona of Exane with BNP Paribas. Please go ahead with your question. Irene Himona – Exane at BNP Paribas: Thank you, good afternoon, I had two questions, please. First, you had a good quarter on LNG. I wonder if you could, perhaps, comment on the key trends you are seeing in the LNG markets around the world in terms of volumes and pricing. And then, secondly, thinking about net capital spending. In 2010-2011 you're moving out the 2010 number I think from 28 to perhaps 31 Can you say what we can expect given the amounts disposals, what we can expect for net spending into 2011? Thank you.

Okay, thanks, Irene. I take the second one. The net spending we still keep at 25 to 27 as indicated in March. We have closed CapEx of 25 to 30; I think you can take it into your calculations that there will be most going into the upper end of that range. Probably keep for the time being, the met. On the LNG side, trends and pricing, I'll give that to Simon.

Thanks, Peter. Just one point on next year's CapEx. It's likely that Cosan deal with its $1.5 billion of CapEx will be reflected in next year's 2011 CapEx. And that will only – around $0.5 billion will be cash impact. And so, need to reflect that in projections as well. LNG current trends. We are seeing, we have diversion volumes up in Q2 relative to last year. But, overall, on those diverted volumes, the margins were down because the marginal cargo is typically moving into Europe and typically into the UK. So, demand was reasonably strong. And overall between Q1 this year and Q2, the volumes were flat on the diversions but, again, the margins were down. Underlying, we need to remember though over 80% of our volume is sold on the oiling contracts and over 90%, about 95% is typically sold on the long-term contracts. Demand was actually fairly strong in the quarter, overall, and we're continuing to see strong medium-term to long-term demand for the longer contracts. They are currently under negotiation with our long-term customers for projects, particularly in Australia, and we still see a very attractive market there. So, I wouldn't read too much into any one quarter in terms of the LNG pricing that we see, and also, we're highlighting that although gas remains roughly half our production that the majority of gas is still around 60% is overall in total is all price-linked, which means that of our total production around 80% is all price-linked and 20% is exposed to spot gas prices whether in the US or in Europe.

Thanks, Irene. Next question.

Thank you, our next question comes from Mark Gilman with Benchmark. Please go ahead with your question.

Gentlemen, good afternoon. I had a couple of things. I was struck a little bit by your comments on Perdido – the rather prolonged downtime. Could you talk a little bit about the performance prior to the shutdown and whether that prolonged downtime is associated with the moratorium or whether there are other factors? The second question relates primarily to the Eagle Ford acreage. Could you put a cost number on that? And if I can sneak in a third, where do you stand on the SR refining deal?

Okay, thanks, Mark. The Perdido legal form goes to Simon and I will take the rest of them.

Thanks, Peter. Perdido came up early this year, we took it down in April, a couple of issues we need to address. We're doing some work on the rider. We're doing some work on facilities on the platform, and we have some work to do on the connection into the third party evacuation line and that part of the Gulf, which is relatively new for development. Nothing too much to worry about. We would have been doing new production drilling associated with Perdido. Obviously, we currently now cannot do that while the moratorium is in place. So, when we bring the platform back up again, we will not be ramping up as quickly as we'd originally expected and we have another five wells to drill for the first phase of the Perdido production and that is the main driver of the 8,000 barrels a day shortfall this year that I mentioned in the speech. The Eagle Ford acreage there is two purchases about a quarter of a million acres. Some with liquids potential. It's around $1 billion in total that we've invested that. All of the acreage is undeveloped. We are now drilling it. So, there's no production or reserves associated with it but that is the basis of the deal that we have, $1 billion, quarter of a million acres.

On the SR side, which is really around standards, as you may have seen in the announcements we have actually stopped the exclusive negotiations by I have to say we're still negotiating. But because of that, we have now started to talk to other potential buyers for the possible sale and purchase of the three-year refineries. The talks are progressing, all the 3D3 assets, but there are different stages in the process of this stage and it will be to early actually to comment or to give the guarantee that they are actually going to be sold this year or early next year. So, I think that we will have to come back to that later on and give you some updates. We are moving forward and they are part of our divestment numbers to $7 billion to $8 billion but we're not depending on it. It's just that we may end up at the higher end of that number if the fee goes through. If not, then you might be a little bit at the lower end of that range.

So, Peter, SR is no longer is exclusive on those?

That's correct. They are no longer exclusive, we're still talking to them, but we have caught at least of other buyers for the same assets and we're now in multi-talks.

Thank you, gentlemen.

Thank you, Mark. Next question, please.

Thank you, our next question comes from Theepan Jothilingam from Morgan Stanley. Please, go ahead with your question. Theepan Jothilingam – Morgan Stanley: Yes, thanks. Afternoon, Peter, Simon, thank you for taking my questions. Two, please. Firstly, just on divestments. Can you talk about perhaps the criteria for assets you're selling, and why the change now compared to what you provided in March? What processes in turn have you gone through, and is there a risk that the disposal target actually rises? And then just secondly, come back to sort of the financial framework. Are you sort of indicating in spite of the increase in divestments you're not expecting a sort of higher free cash flow for the group over the next couple of years? I am sort of thinking about it in the context of the dividend. Should we expect the disposal proceeds to come back to shareholders or not?

Yes, Theepan. Thanks for the two questions; I will take the first one. The way we're actually dealing with the portfolio is a constant drive to high-grade. Therefore, the more options we have in the portfolio allows us all to do more reserving on our asset safe side. If I go back to the announcement for example North American gas, the two deals which you have done, you will have seen in our press release that we said that part of the acquisitions which we're doing there will quite clearly be kind of financed and mutualized by actually further divestments. So, this is the strategy and obviously as we're moving along from the March one, we are clearly increasing those things to more we actually do in terms of option generation and high-grading of the portfolio. So, I think you need to see this is a very dynamic process and through that, actually, increasing long-term shareholder value by doing so. This is not something which is new so this is not a thing of the last two, three months. If you go back the last five years, we sold already $31 billion of assets and, therefore, this is a continuation, but as we are moving into more options, we will accelerate from time to time because we have more freedom. Instead of the $4 billion what we said before around $2 billion and $2 billion in each year, we're now saying $7 billion to $8 billion which reflects that policy. The second one, back to Simon.

Thanks, Peter. Just a reminder, it's a good question, but a reminder of what we said earlier in March. We aim as a statement to strategic intent not as a mechanical bottom up calc aggregation or addition that in 2012 the $60 a barrel, we need to finance the investment program and the dividends from own cash flow. That was predicated on the $25 billion to $30 billion organic CapEx program with a level of divestments so that the net was $25 billion to $27 billion. All of that stays in place. Our aim being, of course, to have an investment level that sustains growth through cycle and the cash generation that enables us both to finance the investments and to grow the dividend steadily. We are on our way to that delivery in 2012. We don't change the target. How we get there depends on some of the choices we actually will be taking. We have bought new acreage. We have explored and found maybe more than we might have expected a year ago. We actually have probably more options as Peter noted, we're likely to be at the top-end of the $25 billion to $30 billion organic spend. Therefore, we need to be at the top-end of the divestment activity to deliver on that overall financial framework. So it is not a question of not going back to the shareholder ultimately, it always goes back to the shareholders, but we're delivering against the strategic intent, not against the bottom-up arithmetic process. I hope that helps give you some of the thinking as well.

Let me also give you maybe one additional one. Over the last few years there was a lot of talk about access to resources and I think we're demonstrating or reacting demonstrating that we can get access to resources and options into our fund, so beyond our doing is actually managing the financial outcomes of that, and that is actually I think easier to manage than the first one. I think the progress which we have seen is a very positive one.

Thanks and next question.

Thank you, our next question comes from Gordon Gray of Collins Stewart. Please, go ahead with your question. Gordon Gray – Collins Stewart: Thanks, good afternoon. Question is on refining. You have obviously had this huge improvement and reduction in losses but you're still losing about $100 million on a quarterly basis. Given that your corporate restructuring is now broadly done, given that we have already had quite an improvement in margins and they may not improve much more, can you just talk us through a little bit more what more you can do beyond the, hopefully the sale of the refineries in Europe to bring the returns and refining back up to an acceptable level?

Yes, thanks for the question, Gordon. I am looking at Simon on this one.

Thanks, Peter. A lot of tough questions today. Thank you. The refining performance, yes, it has improved, but still below water. And what I would agree was a relatively good quarter for the overall environment, particularly in North America. This strategy has been and will remain to reduce our refining capacity. We have taken 1 million barrels or so since 2000. We expect to take another 15% out over the next year or two. We will do that through divestment or conversion to terminal or closure, depending on ability to divest. That will take us to the position that we've laid out strategically. On average, larger refineries, more complex, and more integrated with petrochemicals and the overall supply chain. That overall strategy does need to play out. We are taking cost out in the refineries as well and we're improving our ability to optimize the flow of products around the refineries within a given supply envelope. That way, the costs and the supply envelope optimization are having an impact and together with the structural strategic delivery will make a difference. Such that through-cycle we expect a reasonable return out of refining. It's not a quick fix; it cannot be a quick fix. But we're pulling all the levers, and I must put one proviso in here, the whole industry has seen an uptick in the costs, and as we have gone through the last five-year cycle since the Texas City incident. That has meant that we have given high priority to all asset integrity activity, and we will continue to do so. The last comment I would make is on the trading interface. We made money in trading overall throughout the supply chain. We don't include that in refining, but we need the refineries in the supply chain to be able to generate that value. So, while the headline may be $100 million loss, the refinery infrastructure provides us with quite a lot more revenue generation capacity. Gordon Gray – Collins Stewart: Understood, thanks.

Thanks, Simon, next question, please.

Thank you, our next question comes from Jon Rigby of UBS. Please, go ahead with your question. Jon Rigby – UBS: Two questions, the first is on your European gas volumes, technically it's a better year than last year, but I think you acknowledge it's still weak for demand. But, if I have been in putting my gas sales volumes right over the last 10 years is – 2010 is turning out to be a very good year for your gas volumes. I just wondered whether something's happened in terms of your overall capacity and availability to supply gas to Europe or you have changed your strategy in terms of pushing gas and maybe spot gas into Europe and therefore, running your assets a bit harder? That's the first question. The second, question is just on Nigeria and perhaps, just take the opportunity to get an update on your feelings on Nigeria obviously security a little better, a new government settling in. What are your thoughts about new investments into Niger and the outlook for that country? Thanks.

Thanks, Jon. I take the second one, and Simon can think about the first one. Well, Nigeria, I think as you say, we have seen a more stable situation which really has allowed us also to ramp up the production again and also deliver actually slightly ahead of time and in a very safe way so that is positive. I think the PID is being discussed and consulted with the stakeholders, but I have no further things to comment there like that around the process and we'll see when we get there. I've said before, we clearly support the overall objective of restructuring the industry but there are certain conditions, which are of some concern and that is being discussed. I think from a funding point of view, this is a much better situation than two years ago actually that it allows us actually to look forward. For example, taking some investment decisions on further fruit layering out projects which you have also passed on. And this – and have the press release actually issued. I don't think, all in all, positive development, but there is a "but" to all of this and the normal kind of criminal activities have quite clearly increased so this is around kidnappings, this is about double cross, this is about stealing or bunkering, as we call it so there is still certain let's say unease or a shaky situation on the security side, which you have to watch. The amnesty is still ongoing as we know, but it's the normal criminal activities, which have actually caused some upsets for us in the production and we have seen that during this quarter and the earlier quarter. The divestment which we have announced is progressing, it's moving through the approval side and that is also a positive. I would say that I'm carefully positive, we see the impact, but quite clearly the PIB across the overall security situation is still of a concern. Depending on all of this, we will think about growth and for the project in Niger over the months and quarters to come. With that, over to Simon on the gas volume.

Thanks and yes, it's true the Ukraine gas volume is certainly well up and doing well. Several drivers, really, first of all, difficult to remember now, but April was very cold, so that actually gave quite a boost of volumes at the margin. We are seeing switching from coal to gas for economic reasons, the price has gone down on a spot basis, and there are good reasons to switch into gas with power generators. We are seeing some recovery on the industrial side, particularly in Germany. And where there aren't new gas power stations online across the industry. We are supplying, of course, the margin from over-liner from the gas assets in the NAM in the Netherlands and our additional Nigerian LNG exports are typically headed to Europe as well so we're very well placed to capture the extra demand. Worth mentioning just on pricing as well, typically our portfolio has been 60% or bridling 40% spot, or spot indexed. As a result of some of the issues we have discussed previously in the second quarter and probably running through the third quarter, with more of a 50/50 level between oil linkage and spot or spot indexation. There were some renegotiation of contracts that enabled us to extend the longer-term security of supply of oil and prices – with the trade-off against shorter-term spot indexation. So, you are seeing some of those effects in the earnings.

Thanks Jon, next question.

Thank you, our next question comes from Joseph Tovey of Tovey & Company. Please go ahead with your question. Joseph Tovey – Tovey & Company: Good afternoon, given the results of the circumstances and the relatively small amount of write-offs indicate that something is being done rather right. Longer-run, does this mean in your views that there is going to be a lesser production and therefore more use of the fleet and more long-term transportation of crude oil, and also more long-term transportation of LNG and how does that position your Company relative to others?

Okay, Tovey, thanks for that question. I think If I understand you correctly on the LNG side, I think there is, from a destination point of view, for that, which I think is behind your question, we have clearly planned that some Qatar volumes will go into the US, which as much as we can, it will not so we are sending this to Asia Pacific under long-term contracts or even in the Middle East. But if there is surplus volume and it's not going to Europe, then most will find its way into the US as we have got internal capacity there, but so far, we have been very good in finding different actually contractual structures and customs across the world so as far as I remember, I think in Q2 we had actually no LNG going into the US. So, we could place this in a different way. So, can I just check the reason [ph] behind your question? Joseph Tovey – Tovey & Company: There was part of a thought in terms of the quarter, I was also rather wondering as to considering what the probable results of the ongoing shutdowns in United States offshore production that you're going to follow from what is going on whether that is again something that impacts upon you, part of your operations rather favorably with your competitors?

Okay, yes, I understand that. I think, first of all, I would like to start by saying we have a very global portfolio and most of our projects which are coming on-stream the next two to three years are actually outside the United States and the Gulf of Mexico, so this gives you obviously the comfort. Having said that, we have got obviously potential filing positions coming up like Mars B, for example, which could deliver some of our growth in the kind of 14, 15, 16 era so we'll see how we go forward with that final investment position. I think if I summarize in the short-term 8,000-barrels we see and over the next two, three years, we don't see a lot of impact, it could impact post 2015 from a production point of view. From – and then from the outside of the Americas into the Americas – because we have less production in the Gulf of Mexico, I think we will see how this goes. I personally would still think actually we will be capable of going on and drilling in the deepwater and produce what we can produce and you will have less, or not less, but you will have not a tremendous number more coming into the US over the years to come. But we will see this overload in the next 6 to 12 to 18 months, much better than we see it now.

The next question? Joseph Tovey – Tovey & Company: Thank you very much.

Thank you, our next question comes from Paul Spedding. Please go ahead with your question. Paul Spedding – HSBC: Hi, it's a question on chemicals. Obviously, the Asian market is proving quite strong. I was curious as to whether the recovery you're seeing is broad-based across the product slate and also, secondly, whether there are any signs of that beginning to tail off towards the end of the quarter given the measures the Chinese authorities have taken in particular?

Yes, thanks. I think we had a good quarter in chemicals as 18% volume up and this was quite across the earliest product in the area of which we have seen, Joe, that's for the second quarter. As you have heard me saying, a little bit more negative from the pace of the recovery for the second half. I would say that some of that is actually linked to chemicals. I wouldn't link it entirely to China but I received some of the designs that the pace is really slower than what it used to be in Q2. So that makes us a little bit more carefully – looking forward into Q3 and Q4. In general in the macro environment, the chemicals are certainly part of that. Paul Spedding – HSBC: Thank you.

Thank you. Next question.

Thank you, our next question comes from Jason Kenney from ING; please go ahead with your question. Jason Kenney – ING: Thanks for taking the questions. I just want to go back to the $56 million charge for the moratorium. I think you said potentially $200 million post-tax four year this year. Is it Shell's aim to try and recover from third parties this one-off charge? I mean, ultimately, you've got licenses in Alaska that you paid for and you are not allowed to drill at this time. I want to know the opportunity for you to write back these costs in time?

Thanks, Jason, for the question. I think I have to be rather short on this one. I think I don't comment on this – we took a look at the situation and we will think about it. No further comments at this stage. Jason Kenney – ING: Okay. Many thanks.

Next question, please, operator.

Thank you. Our next question comes from Mark Fletcher of Citigroup. Please, go ahead with your question. Mark Fletcher – Citigroup: Hi there, Peter and Simon, thanks for taking my question. I was just curious about the slide showing the next generation of projects and particularly on the tight gas opportunity in China. I've covered pieces to it, but how close do you think we are to actually progressing that particular part of the portfolio, and how big of an opportunity do you think it is? And how cost competitive I think is probably the more important question. Is it with your LNG portfolio on the northwest shelf? Is there any cannibalization of those two sets?

Mark, thanks for the questions. You're raising a few points in one question; let me take you through with this various points. We have got 8,000 square kilometers of tight gas and shale gas. This is primarily now going to be an exploration kind of price. So, some of your questions regarding how big it is and how fast it comes will depend on the exploration. From a geological point of view, this has a lot of similarities to North America. So we're quite hopeful there and we will see after drilling now how – what the pace is and what the potential is. I think from a cost point of view, again, you will see this but I would also like to say that we are, obviously, in China, we reduced the China sourcing quite significantly in order to be cost competitive. On the third one, which is your cannibalization of LNG. I think we should all remember that China at the moment has roughly 4% gas in their energy mix. Over the next 10 years, we see this going up to 8% or 10% but this is compared to Europe and to other countries across the world, these are all the low percentage, they are typically between 20% and 25%. So, there's an enormous potential for gas to actually meet the demand close in China. We play some of the coal, even if it's CO2 behavior, so I think China will need a sufficient and a lot of gas so that you can actually deliver LNG growth into China, but at the same time have some Tai Chai gas domestic production as well. Mark Fletcher – Citigroup: When will we hear on the exploration side?

We have one 4,000 square kilometer we have to finalize to PFC agreement so that is where we're starting, the second one we're just about finalizing so I think you have to give us a few quarters before we can report back on that. Mark Fletcher – Citigroup: Thank you.

Next question, operator.

Thank you, our next question comes from Simon Hawkins with Ambrian. Please, go ahead. Simon Hawkins – Ambrian: Thanks, good afternoon, Peter and Simon, two questions. One on Nigerian gas. I wondered if you could just give a little bit of guidance on the impact on the timing of future LNG volumes from the Nigerian investment, 2 billion investment, to gather gas in the delta, and secondly, on disposals, you have given on slide seven a split so sort of upstream, downstream, I just wondered whether you could give us the guidance on the numbers rather than just using my out-rooted read of the graph. Thank you.

Okay, thanks, Simon. I take the second one and give the first one on LNG and Niger to Simon. I think you were fading out, but your second question was about displays on the disposal side we said it's both upstream and downstream and we said actually if you take the total amount, it's roughly a third each for upstream international, upstream Americas, and into downstream. Simon Hawkins – Ambrian: Thank you.

And in Nigeria, too, Simon?

Thanks, Simon. Nigerian gas, the $2 billion for the flat-out, that gas is primarily targeted domestic gas as opposed to LNG. What we do expect though is that relief is some of the – gas currently being used for domestic purposes. The bar and EVA project, once it reaches full speed by the end of the year where it is 1.2 BCF total production and that all six trains of Nigeria LNG is 22.5 million tons, I think, in total, are potentially full. Barring EVA – plus their supply from our other partners should effectively almost double the Nigerian LNG output and it's not driven by or dependent on the success of the $2 billion flyers out program, which will still face the challenge, of course, of the Nigerian government financing its share so it ought be absolutely explicit on the timing and delivery of that piece. Simon Hawkins – Ambrian: Great, thank you very much.

Next question.

Thank you, the next question comes from David Cline of Royal Bank of Scotland, please go ahead. David Cline – Royal Bank of Scotland: Good afternoon. Two things. Firstly, you mentioned that the restructuring of the business is essentially complete. Obviously, a large number of staff reductions associated with that restructuring. Can you say whether at the half year stage all of those staff reductions had flowed through the system or were there still some left to work through and can you give us some, if they hadn't have worked through, can you give us some details and the second thing, can you just give us an update, what you're doing and what your immediate plans for the future are? Thank you.

Thanks David, on the first one, the restructuring, like I said, we have worked through this to restructuring side, but also the cost side, so we have done the $3.5 billion cost reduction. That has been delivered six months ahead of target. On the staff side, we have the two tranches, 5,000 and 2,000, which gets you to 7,000 and we said we'll get there by the end of 2011. So I would say all the staff has been informed, those who are part of the 7,000, I think there is roughly some 800 still to lead the Company in the second half but they have been announced and from an accounting point of view, we have taken those provisions. For the financial issues nothing comes anymore; there is some 800 still to go out. Demand, yes, I think we're in full mode of preparation there. We're in the – preparation phase and changing phase and allocating to the various contractors. We have done more free visits, we are doing the details and design and I think we're really well-progressed in that – in terms of starting and getting involved. It's a clear target to get to the first commercial production as you know which is on the 35,000 barrels by 2012. So, that's – all that we're doing at the moment is aimed at that in order to get to that cost recovery kind of moment when you reach those 175,000 barrels and you know their feed is already producing 45 at this stage. So corporation is in Iraq, with the South (inaudible) company is also very good so we're very positive on the way they're moving forward here and I see no problems, no issues at this stage. David Cline – Royal Bank of Scotland: Thank you.

Thank you. The last two questions.

Thank you, our next question comes from Paul Andriessen from ABM Amro. Paul Andriessen – ABM Amro: A question about your exploration program. Could you perhaps elaborate a bit about the organic resource editions you made in the first half and could you shed a bit more light on your focus areas of the exploration program in the second half? Thank you.

Yes, Simon will take this. Thanks, Andriessen. We don't give results for an update until the middle of the year. We target over a billion barrels a year out of the overall program from the $3 billion that we spend and we're still assessing some of the actual exploration discoveries, particularly Australian gas that we found in the second quarter, and typically the Gulf of Mexico as well. We're on track for the target is about the best I can say. The other, unknown North American, the tight gas activity, a lot of that is still exploration nature and contributes to the target. The second half of the year we'll have to be a bit more Gulf of Mexico, but Brazil will be a key area, we have another nine wells to drill in the next 18 months in the exploration program there in particular, should be spudding within a month or so, the BMS 54 well and the subsalt in the Santos Basin. We continue to explore in Australia and we will continue the tight gas. As Pete mentioned earlier we are starting up the activity in China on the tight gas. So, exciting potential there and we're continuing in Saudi. We're also in the middle of an appraisal well on the crow prospect in Norway and that was originally discovered 18 months or so ago. So those are the big ones we're looking out for in the second half of the year. Paul Andriessen – ABM Amro: Okay, thank you.

Thank you. Next question.

Thank you, our next question comes from Bertrand Hodée from Kepler. Please go ahead with the question. Bertrand Hodée – Kepler: Hello, gentlemen. I have one question concerning the initiative jointly with Chevron/Conoco Exxon to accelerate and develop capabilities to contain the future potential in the weather blowout in the Gulf of Mexico and was wondering why BP was not involved? Was it a choice of your part or can you give us some clues on that?

Thank you very much for the question. I think this is very simple. We started with four companies and this is really a kind of a small number of companies in order to actually accelerate fast and find a common solution and then develop it but it is open to whoever wants to join and, so therefore, it's not a restricted group, it is a very open group. The four companies just felt that BP had enough on its plate and they can join later, they can – whenever they're ready in that sense. There is no exclusion of anybody in all of this. This is about delivering as an industry a solution as fast as possible and it was felt it is easier with a smaller number of companies and then open it up afterwards. Bertrand Hodée – Kepler: Okay, perfect.

Thank you very much. The last question. One question left, operator?

Thank you, our last question is a follow-up question from Mark Gilman of Benchmark. Please go ahead with your question. Mark Gilman – Benchmark: Thank you, Peter and Simon, just two quick ones. The Asia Pacific gas volumes in the second quarter were pretty weak. I wonder if, Simon, you might be able to give me some color as to why? Secondly, Gbaran-Ubie, is that subject to the MOU fiscal terms in Nigeria? Or is there another fiscal arrangement that's applicable?

Simon knows the second one. So I'll give it over to him.

What was the first question, Mark? Didn't quite catch that. The Asia Pacific gas? Mark Gilman – Benchmark: Yes, Asia Pacific gas volumes, Simon, in the second quarter were down in the first quarter as well as a year ago. Is there a particular reason that you might site?

The primary reason there is fundamentally the PFC effect in Malaysia, the higher-price, lower volume and that is the main driver there. The Gbaran-Ubie under the MOU, yes, it's under the MOU. We actually financed it though through, you may remember, we announced some modified carrier agreements a year or two ago and most of the Gbaran-Ubie development was actually financed through a modified carrier, which means we're getting additional return effectively that the government did not finance its share. So, we get some return there. The gas price has gone up as well, and was agreed to about a year ago so you get slightly better returns there, but primarily, the main attractiveness is the LNG that opens up effectively capacity that was unused. So it's actually quite a good revenue generator for us overall and in that sense, better than you might expect. And the last thing I was going to say there was actually quite a lot of liquids in Gbaran-Ubie gas, quite a lot of condensate and so, overall quite a good prospect for us. Very little contribution in the second quarter. The main impact is from the Q3 results onwards. Mark Gilman – Benchmark: Thank you, Simon.

Okay.

Thanks, Mark, and that was the last question. So thank you for all of your questions and for joining us today here in the call. The third quarter results will be released on the October 28. And Simon will talk to you all by then. Thank you very much again and have a good day.

Ladies and gentlemen, that concludes the Royal Dutch Shell Q2 results announcement conference call. Thank you for participating. You may now disconnect.