Trevor Mulvaney - Asset Protection Coordinator, Royal Dutch Shell Plc Ben van Beurden - Chief Executive Officer & Executive Director Simon P. Henry - Chief Financial Officer & Executive Director.

Jon Rigby - UBS Ltd. (Broker) Thomas Y. Adolff - Credit Suisse Securities (Europe) Ltd. Theepan Jothilingam - Nomura International Plc Irene Himona - Société Générale SA (Broker) Iain S. Reid - Macquarie Group Martijn P. Rats - Morgan Stanley & Co. International Plc Rob West - Redburn (Europe) Ltd.

Christopher Kuplent - Merrill Lynch International Gordon M. Gray - HSBC Bank Plc (Broker) Aneek Haq - Exane Ltd..

Welcome to the Royal Dutch Shell Q2 Results Announcement Call. There will be a presentation followed by a Q&A session. I would like to introduce your host, Mr. Ben van Beurden. Please go ahead sir..

Good afternoon, ladies and gentlemen. Let me introduce myself. My name's Trevor Mulvaney. I'd just like to give you some important health and safety and general housekeeping for this afternoon's event here at Haberdasher's Hall in Smithfield. There are no planned fire drills this afternoon. So, if the alarm does go off, it's the real thing.

The two exits are here to my right and down the stairs for those of you to this end of the hall. And for those of you at the back end, it's behind where the camera in and one of my colleagues at the back. All the entrances go down – downstairs and follow the directions out, so they lead out through the front door.

And the assembly point is in the ambulance station area at the front of the building. And the second equally most important thing is the restrooms. They're located the way we came in, back down the stairs and around to the right. Thank you..

Okay. Thanks very much, Trevor. So, ladies and gentlemen, good afternoon. Great to see you here. Welcome to today's presentation. I'm struggling a little bit from a voice that is gradually deteriorating during the day, but I'm pretty sure I can last another two hours.

So, today, we've announced our quarterly results and we're going to talk about that, of course, in some detail. But I thought we also spend a good party most of the time on updating where we are overall. And of course, there will be, as always, plenty of time for your questions in the Q&A session.

Quickly, the disclaimer slide, which you are familiar and then let's get going. So, our integrated business model and our performance drive that we've had for some time now are really helping us to mitigate the effect of lower oil prices on our bottom line.

We delivered $3.8 billion of underlying CCS earnings in the quarter and $16 billion over the last 12 months. And our results today also showed that we are successfully reducing our cost and our spending. So, we have to make sure that our company is resilient in a world where oil prices remained low for some time.

And of course, we have to also keep an eye on potential recovery which, we believe, will indeed eventually come. So, the three priorities that I put in place in early 2014 remain unchanged. So, it's financial performance, it's capital efficiency and it's delivery of projects, all underpinned by a rigorous approach of performance unit appraisal.

There's also no change in the dividend commitments that we've made $1.88 per share this year and at least that amount in 2016. There's also no change to the buyback commitment that we made for $25 billion from 2017, following the completion of the BG transaction, but we're taking a very prudent approach.

We're pulling on some very powerful levers to manage through this downturn, and Simon will give you a lot more detail in a moment. So, capital spending is expected be $7 billion lower this year, a reduction of some 20%. And operating costs are expected to be at least $4 billion lower, or around 10% as we restructure the company and take out cost.

And that includes a 7,500 (sic) [6,500] (03:45) reduction of Shell staff and direct contractors in this year. So, all of this, taking place to ensure that we have the capacity to continue to pay that attractive dividend for our shareholders, and cost and spending reductions we talked about will continue in 2016.

Now, at the same time, we are making good progress with the combination with BG which should enhance our free cash flow. It will create one of the LNG and deep water leaders in the IOCs. And very crucially, it will be a springboard for change in Shell into a much simpler and much more profitable company.

So essentially, what we are doing here is grow to simplify. Of course, they are very challenging times in the industry, but I also feel they're very exciting times in my company. The health and safety of our people and neighbors and, of course, the environmental performance, they remain the top priorities in Shell.

And I believe, we have the right safety culture in place, and our track record is improving and I think very competitive. But we will continue with the safety drive, which we call Goal Zero to further improve wherever we can.

The oil price downturn that began in late 2014 is triggering some very significant changes in our industry, and today's oil price downturn could last for several years. Of course, we also don't have a crystal ball here, but our planning assumptions reflect today's market reality.

So, we're planning on a prolonged downturn, although we continue to believe that the fundamentals will reassert themselves in the medium term. So, we are responding with urgency and with determination. We're pulling, as I said, some very powerful levers to manage through this downturn.

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

And of course, we are using this as an opportunity to further reduce cost structure in Shell and making some fundamental changes in the way we are working in areas in the supply chain. Now of course, our results are lower with the lower oil price. But our integrated business model is offsetting that, at least some of it.

And Downstream is delivering a strong and much improved performance, supported, of course, by industry margins but also by self-help programs, including non-core asset sales, cost reductions, improved commerciality, and also significantly improved uptime.

In Upstream, where margins are under pressure from oil prices, our unit operating costs were around $19 a barrel in the quarter, and BG's portfolio has the potential to sustain or even further reduce this overall production cost.

So, the performance drive that we launched in 2014 is helping at the bottom line and there's more to come there, and the balance sheet gearing remains low despite the downturn. Now, let me recap the priorities for the use of cash as we've communicated back in April.

First, debt service, then dividends and then a balance between buybacks and capital investment. So, we intend to prioritize debt payment initially following completion of the combination with BG using surplus cash from operations and proceeds from asset sales to drive debt down in our target range.

And as our cash flow, our free cash flow increases, we are expecting to restart a share buyback program, with a program of at least $25 billion, and again intended to start in 2017. There's no change to these priorities. We have a very, very firm intention to deliver on these promises that we set out.

Now, let me turn to the portfolio and update you on some of the choices for new projects earlier in this year, a complex but important slide for you to pay attention to because this is all about the tough choices on capital investments, but they are driving the right sort of outcomes now. So, only the most competitive projects are going to go ahead.

And just for this year, so far, two major financial investment decisions in 2015. Many potential projects have been purposely delayed, have been – or rephased and a few cases, canceled.

And this is to manage affordability but also, at the same time, to get better value from the supply chain in the downturn, all leading to a pretty healthy tension within the company and, of course, within the supply chain around capital allocation.

We're looking now for low NPV breakeven projects, certainly less than $70 a barrel, and we see opportunities typically nearer $50 a barrel. And managing the pace of FIDs is a powerful tool to drive lower cost, plan our capital spending and to make sure that only the most attractive and affordable investments can go ahead.

We launched a new improvement program in our Projects and Technology division. Remember P&T, Projects and Technologies, was responsible for all major project delivery and for technology development but also for – it also looks after our supply chain spend. It has some 15,000 people globally.

Safety and environment, of course, remain top priorities also for P&T, but we want to drive better value for our capital project design and execution and from the associated supply chain. And we expect this year $1.5 billion of capital efficiency gains, but there's more to come here.

Now, there's another story of tearing up last year's contract and starting all over again that will produce results, but it will be short-term. It's not going to be enough and not going to be a long-lasting improvement in cost structures.

This is much more about design standards, better up-front planning, contracting structures with the best suppliers, et cetera.

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

And as I expect, there will be much more to come out of the projects and technology organization to update you on later in the year. Now, at this point in time, I'd like to hand over to Simon.

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

retail, lubricant, trading, and supply, and the chemicals. It's only refining that has a level of volatility linked to exogenous factors. This performance you're seeing is all of those levers working, being pulled and delivering.

We had the kit running well; unplanned downtime, 2.4%; availability of the refineries, 95%, which enabled us to capture a lot more of that margin that was available than we may have done a few years ago. So, good improved position, more to come though because we said this is a multiyear turnaround.

We have to be a $10 billion cash generation or a 10% return business in the Downstream on a sustained business, bottom of the cycle, not just do this for a couple of quarters. So, looking at the shale business. Now, you know we delivered a major portfolio cost reduction here. Over the last couple of years, we went from 14 plays, down to 4 plays.

So, we have $3.3 billion of asset sales behind us, and we sold 110,000 barrels of oil equivalent per day of production. This year, we've been reducing the exposure to the international shale plays, scaling down for profitability. A lot of this has been driven by sub-surface and non-technical reasons whether we can make the plays work economically.

If we can't, we go. This has left us with some 6 billion barrels of oil equivalent in those four plays, discovered resource in North America. We do have series also of less mature positions, Argentina, for example, and the rest of the world. And our spending in 2015 will be some 55% lower than the 2013 peak. Costs continue to come down here.

We've taken 20% out of this year's investment, and the production is on target, improved productivity. Divestments. Good track record. A lot of activity in recent years. You can see contributions Downstream and Upstream. Sales from the tail end, crystallized value, that's just normal business. This is the proof.

It's also the natural outcome of the performance unit appraisal process that Ben introduced. But we also sell assets to form strategic partnerships, particularly in the LNG business, for example, with buyers of the LNG. 2015, we expect $5 billion of assets sales, including any dropdowns to the MLP. We've done $2.8 billion already.

So the total for 2014 and 2015 combined, we gave a target of $15 billion. We did that in one year. That $15 billion has now become over two years. We would expect $20 billion for the two years, and that's in a market that is now softer because of the lower oil price.

But there are buyers out there in the Downstream and in markets that are effectively gas price-driven, regional gas price. And there are non-traditional routes to market, different buyers, such as the MLPs, private equity and some oil and gas companies which may not be in the coverage universe of some of you in the room.

This gives us confidence for the future. So, final lever I'd like to mention is a pretty obvious one, but it is being lost in some of the headlines at the moment. Our core business model is developing new sources of oil and gas because that drives our cash flow and free cash flow over time.

If we stop doing this, then we may as well pack up and go home. We've made some adjustments to the FID pace, but we are completing the existing program with a pretty attractive growth pipeline, predominantly in the Upstream in the moment.

Portfolio is geared to give that uptick in production but more importantly, to the cash flow from ops and the free cash flow in 2017 and beyond. We picked 10 projects here. They are pretty much the largest. Four are already on stream, ramping up and the other six, not yet on stream.

You can see – hopefully, the graph itself explanatory, but they move from effectively a $10 cash deficit in 2013 period per year to a potential $10 billion cash surplus by the end of the decade. It will be round about an $8 billion cash surplus, even if the oil price is only $70. This is a pretty strong project flow.

Great complementary fit with our new colleagues in BG, where they're going through the same shift from investment through to free cash flow but about two years in advance, Brazil and Australia, for example, helping them.

These are the levers that we're pulling in the downturn to manage the framework, to underpin the dividend commitment, that's why we're confident about statements we make on next year's dividend, but also to retain the investment program for the medium-term shareholder value creation. We are delivering on restructuring.

We are delivering on the growth plans, but we're doing it for less money. With that, I hand over to Ben..

BG in Queensland and Shell in Western Australia. And I'm sure also that Shell can have a positive impact on BG's ongoing production operations in LNG. Looking a little bit further into the future, both companies have very attractive pre-FID options in LNG, for example across Australasia, in U.S. Gulf Coast, Canada, East Africa.

And the combination of the two portfolios here offers the opportunity to review that option set and to review the time and pace of investments so that we have a more efficient program also with an eye on industry cost structure and LNG market development.

So overall, there is an opportunity to take a complete fresh look at development solutions, at strategic partnering and the timing of investment decisions in this enlarged portfolio. And with that of course, it's all about optimizing returns. Now, we're also, as I said, determined to use this combination with BG to restructure Shell.

And asset sales will be an important part of the story, as we would step up and refocus the company to areas and themes with scale, profitability and growth potential.

So, as we have announced in April, we are expecting asset sales of $30 billion from the combined portfolio from 2016 to 2018, so that's average $10 billion a year but likely a little bit more lumpy than that. And asset sales would come from both legacy BG and Shell portfolios.

And we're undertaking quite a fundamental review here with the opportunity to really drive a different portfolio and priorities in that enlarged group. The divestments will include high-grading of the tail portfolio. And we look at value in the combined Upstream, some 80% of the NPV is in approximately 30% of the countries.

So you can already see how we will go about this. We also expect to monetize the more mature assets and infrastructure-like plays, and over time reduce also our long-term option set, putting more focus on the areas where Shell has established positions today.

We've continued to work on the asset sales plans in the last few months and have identified a range of options that are more than sufficient cover for the $30 billion target that we have set to ourselves. An important part of the strategy is refocusing the company, particularly in the longer-term opportunity set.

So we are reducing exploration activity and exploration spend, taking a hard look at our longer-term development funnel, and you can see already some of the actions we have taken here recently, such as reductions in Nigeria, resources plays in Iraq, and a slow-down in Canada, in oil sands.

In Alaska, I'm sure there will be some questions on that as well. We are planning to drill the Burger prospect in the Chukchi Sea in 2015 and 2016 to test what could be a multi-billion barrel oil field for Shell, with further exploration potential in the more general acreage that we hold there.

Overall, a lot of work to be done in all of these longer-term plays to ensure that we capture value, but I hope the intention to reduce and scale down is very clear. Now, the chart on the left here shows Shell's track record on dividends. It's unbroken for decades and a key part of our returns to shareholders.

And you can also see that the commitments that we have made in 2015 and 2016, reflecting the confidence that the board has in the performance and the outlook for the company, including the impact of the significant actions that we are taking today. So, our gearing, as Simon says, is low in our sector, perhaps the lowest.

And we have $27 billion of cash on the balance sheet as we speak. And our cash flow breakeven is set to fall further with the outcome of our portfolio and performance drive that we have just been talking about.

Let me assure you also for your comfort that we have additional levers to pull, if macro conditions deteriorate further from here, such as further reductions in capital investment. So the proposed combination with BG is attractive for both set of shareholders in a range of oil prices and is robust at the lower end of our planning ranges.

So, BG would be accretive to cash flow from operations per share at $67 oil in 2016, and accretive to 2017 earnings per share in the mid-$70s world. This is a combination that enhances our free cash flow and enhances our dividend potential in any expected oil price environment.

And overall, I want to make it crystal clear to you, again, how determined the board is to get this right, and we are firm and repeating our commitments to shareholders here on dividends. This chart here shows the potential future shape of the company, around the end of the decade.

I think what you can see here is really a different, more focused and profitable Shell coming through. Strategically, in my mind, this is what this deal is also about. So its three pillars, its engines, its LNG, its deep water that could each deliver from $15 billion to $20 billion of CFFO around 2020.

And then of course, a longer-term themes that could deliver a further additional $10 billion or so, also by the end of the decade. So, I see this deal also as an opportunity to accelerate the creation of a much simpler, much more focused company; and therefore we call this strategy, essentially, grow to simplify.

Means that we can really capitalize on our core strengths, but also at a much larger scale. It also means that we have a much more predictable company with a lot smarter sequencing of the project opportunities and the funnels of each theme.

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

So overall, this is a new shape for the company, and we are laying a platform for a fundamentally better company in the future in any expected oil price environment. Now, before we close to (38:08) Simon trailed (38:09) this already, let me update you on our competitive position.

And as you know, we take a dashboard approach here, looking for more competitive performance on a range of metrics over time, not single-point outcomes. And the trends are, of course, downward here, tracking oil prices. However, our CFFO development has become more competitive in the sector.

And, this has been a major strategic objective for Shell in the last few years. But it's also good to see our return average capital employed and free cash flow trending higher in the competitive range. But we know we need to do more to drive these and other metrics higher, and our aim is to be competitive across the entire price cycle.

And we know there's a lot more work to be done here. So, let me then sum up what are the key messages for today. First of all, Shell's integrated business model and our performance drive are helping to mitigate the impact of low oil prices on our bottom line.

As our results today show, we're successfully reducing our capital spending and our operating costs, and we're delivering a competitive performance in today's oil market downturn. We're pulling on powerful levers to manage through this downturn, making sure that we have the capacity to pay attractive dividends for shareholders.

We're well-placed to take additional steps to underpin shareholder dividends should conditions warrant that. BG rejuvenates Shell's Upstream. It adds more gas to our mix. Gas is the cleanest fossil fuel, further positioning the company for a lower carbon future.

It's a step change in LNG and deep water scale and competitive position, accelerating our strategy there by several years. We will reshape the company once this transaction is complete, and this should concentrate our portfolio into fewer higher-value positions, where we can apply our know-how with better economies of scale.

So, in essence, we grow to simplify, creating a more resilient and a more competitive company, able to deliver better returns to shareholders. So, while these are very challenging times for the industry, we are responding with urgency and with determination and also with a lot of excitement for what the future holds for Shell.

So with that, let me now invite Simon back, and we'll take your questions. I'm sure there will be plenty. We have a good full room. Can I ask that you just ask one or two each so that everybody will have a chance? Jon, you were first..

Is there a mic actually? Thanks..

Thank you. Jon Rigby. I've already been told today actually I speak too quietly, so it's good job you've got the microphone. Can I ask two questions? First is on the CapEx and changes to CapEx.

With the new plan, are you still investing at an activity rate that sustains the business, so are we talking about gradations on growth in terms of outlook, or are you actually shrinking the business because of liquidity issues around what you spend? So, if you can sort of give some granularity around that? The second is I take your point about the LNG market, but I think it's fair to conclude that we are moving into a position in the market for the next three years or four years where supply will start to increase and the market dynamics will change.

So could you just talk about whether you see, I guess, challenges, but also opportunities because, of course, you are large marketers, traders, if you want to use that phrase? And can you sort of talk about the challenges, but also the opportunities around the LNG market over the next three years to four years? Thanks..

Yeah. I'll make a start on both of them and then I'm sure that Simon will have quite a few points to add as well. Jon, this is the key thing that we have to get by.

When it comes to capital, we have to make sure that we hit two objectives at the same time, that we invest at a pace that we can afford, but at the same time that we invest to keep the company long term healthy. I think we're getting that right, but we cannot get it right by just making a one-off decision on how to do this.

This is why we talked at the beginning of the year about a dynamic decision-making process, where we want to, of course, preserve our very, very rich funnel of opportunities as much as possible. But at the same time, we know that we can only invest at a certain pace in order to make the balance of payments go around. So, it's a dynamic process.

And as Simon says, every month when we get together as an EC, we just take a view on where we think cash balances will be over the next three years, how much we can afford to invest, where we invest in, what are the best opportunities, where can we postpone, where can we do it differently.

And of course, at the same time, we take out as much cost as we can. So, each and every project that comes up for its decision moment is first of all a question, do we have to do it now, and is this project at its most competitive point where it can be given the macro environment that we are seeing. Now, we do not make decisions on a 12-month basis.

We make decisions on multiple years. So, with that also we take into account what it is that we need to invest on and to keep the free cash flow going up in the next few years. Now, a lot of that, of course, is done against the backdrop of uncertainty.

In terms of price, we don't have that crystal ball either, so we work with ranges and scenarios, but it's absolutely the key challenge that you mentioned.

It is making sure that we keep the company strong and healthy, ready and continued in terms of growth, with the ability to ramp up if we have to, but at the same time staying within the affordability ranges that we have. Anything you want to add on that, Simon or....

No. Not on that one..

He wants to talk about LNG. LNG, yeah, I think maybe another point and sometimes not quite appreciated as much as it should is there is no sort of open market for LNG really. Simon talked about the so-called spot market. There is no spot market. These is no exchange, where you can buy LNG and where people try to sell their cargoes.

These are all bilateral deals that you do either long term or short term. And the short-term deals are called spot deals. There is a so-called market price that is being set, but that's not really a spot price mechanism either, and again, there's no exchange behind it.

So if you talk about supply going up, usually that is locked in with demand going up because supply will only go up when demand is there is to go up. So there is no large unfulfilled demand that is waiting for supply to come or the other way around. So not entirely locked in.

There is, of course, opportunity and sometimes you have a little bit more sort of unplaced cargoes in the market, because not every project completely sells out by the time it takes FID. But it's a slightly different dynamic than another commodity, where you basically build your facility in the expectation that you will place the product.

So now, will there be opportunities in that? Yeah, I'm sure there will be because the business model that we have that BG has as well and that we can now combine with a larger portfolio is very, very much an optimization game, where we want to continue to see whether our (46:03) longs and shorts are ultimately configured at the lowest possible cost and also in the best possible markets and a larger your portfolio is to work with, the higher the opportunity to try for better returns in it.

And if everything was locked in in this you wouldn't be able to optimize an awful lot either. So with certain degree of liquidity in the portfolio is definitely helpful. So I see more opportunity in that dynamic going forward than perhaps threat.

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

Anything you want to add to that, Simon?.

And just to step back on why we're confident in the gas market, it's grown 2% to 3% globally for a few decades per year, and we expect that to continue for a few more years. Within that, LNG 4% to 6% growth a year for the last 20 years and mostly likely in the 10 years to 15 years.

So the current LNG market, 240 million, 250 million tons per annum, that's only 9% of the total gas market. New markets are opening up all the time. I would give a price to anybody who could name the last two countries in which we had gas contracts, Jordon and Malta. So not many people would have them on the radar screen.

We're currently looking at supplies into Singapore, into Philippines, into Brazil. There is a long list of new markets out there that will help drive, and we can access those markets. So of these markets are not big enough to build a new greenfield LNG around, but they are very attractive market.

If you have a source of LNG, you have that flexibility and we can really compete with Shell, Shell and BG together. We're very competitive in developing new markets and gas is the fuel of the future. It's affordable. There are secure supplies available and it is a low carbon source, that is driving the growth.

Maybe there's a wobble one years or two years, but that's not what we're investing for. Here's a 30-year, 40-year projects with not that much ongoing investment beyond..

Thank you.

Thomas?.

Hi. Thomas Adolff from Credit Suisse. I want to stay with the LNG theme really. If we think about future projects to really kick them off, you need $10 to $12 per MMBtu unless liquefaction costs come down materially.

I think the industry has talked about upstream cost deflation, but I wondered what you are seeing on the liquefaction cost side, which might be a little bit more sticky. The second question is – if I look at your LNG portfolio, it's got (48:48) LNG.

You've got (48:51) expansion, you've got LNG Canada, they've got Tanzania amongst the -- I guess the better projects in the portfolio in my view.

What is the kind of order of preference you see right now, but also as you sign off-take agreements or contracts, are you willing to give or are you willing to remove the destination restriction to the customers as well as willing to give higher DQTs (49:23)? Thank you..

Let me start with the liquefaction because you're absolutely right. Liquefaction costs have come up quite a bit. As a matter of fact a lot of planned costs have gone up quite a bit over the last years.

Not sure whether I've said it in an audience like this before, but if you look back for the last 10 years what we have seen in the industry is that typically – well, not only productivity has fallen, but the amount of man-hours required, engineering hours required per piece of equipment have gone up by a factor of five.

That has to do with complexity in regulation, higher standards, probably also has to do with competence, and other efficiency measures. And I think that is actually a very, very significant driver of costs as well.

So when we talk about, let's take cost out of the supply chain and this is where we have talked about earlier, it's not just a matter of let's try to really push our suppliers when it comes to price, but let us sit down with our suppliers in a much more transformational process to figure out how on Earth are we going to improve these productivity challenges that we have.

So this is all about we need better planning, better standards maybe working more with what the opportunity set that our suppliers see, it is better execution in the field as well maybe more competence, and they'll be working with a more select strategic set of suppliers. That is going to be required as well.

I think you're absolutely right; it is key to get it right. If you want gas to succeed as the fuel to the future, it is just not good enough to say, hey, it's cleaner than coal, et cetera, et cetera. It also has to be affordable.

And indeed, if LNG is going to be the fastest growing component in the gas mix, you better make sure that LNG is also competitive at lower price levels. Yeah. I think we have a lot of efforts going on. I talked about P&T and also in the engineering space, how we can improve design and engineering productivity and construction productivity.

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

On the portfolio, and I'm sure Simon will have a few adds there as well, I wish I could give you an answer on that at this point in time to say, well, listen, these are all the opportunities between the two companies. This is how we will go about it. We cannot do it. The takeover court will not allow us to do it.

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

But I think it's always better to really understand once we are integrated and complete to understand how the sequence of opportunities is best met.

But fundamental point is behind it there is the opportunity to streamline this, to do it better, to approach in a more logical way and to make sure that therefore our growth funnel is just more capital efficient and more predictable as a result of it.

Any adds?.

Maybe just to highlight the priorities at the moment, Gorgon and Prelude, getting them on stream. Elba, we just sold them the equity, which not only helped us reset the tolling (53:02), remove the capital, but also gave us access to the 2.5 million tons we've retained that.

So it's just a different way of accessing the different part of the value chain. Brownfields are always more economic, so we have said, I said before, 23 Sakhalin and 27 Nigeria would likely be top of our list if we could do them. But tomorrow we can't anyway.

So you need to get a lot of ducks in a row to be able to do those, while at the same time we have three potential large greenfield in Canada and Browse and Abadi LNG floating in Indonesia.

They're all in progress but they're not going to happen tomorrow until we've got the right balance between the cost and the market and some of these we don't operate as well, of course. So that's what we are looking at at the moment. But to an extent we have the luxury of choice, but we have to get the cost down.

When Gorgon and Prelude come on, they will deliver great returns because our low-cost assets, particularly Gorgon. We know what can happen to the balance sheet in fact, if you don't – not only get the cost down, but deliver to budget. That's the priority..

Yeah. Okay..

Thank you. Theepan Jothilingam from Nomura. I'd just like to come back to capital investment. And I know that process is dynamic. But I was interested in looking at that 2016 estimate that you provided for the pro forma entity and the comments around pulling levers if they're required.

So my question there is sort of what oil price assumption have you made the next year? What type of cost deflation have you assumed from current levels? And what are the levers, is it pre-FID, is it short cycle exploration? And just – the second question is just on exploration and the reduction in CapEx is today for 2015.

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

Yeah.

You want to take it?.

I'll try and go backwards. Exploration reduction this year relative to what we're looking at in January. It's pretty minimal, a few hundred million because we weren't planning that much. In the first place most of the wells were already committed.

This year the 35 through 30 that we've seen over the last six months, 30% has been improvements in the supply chain, that's not just deflation. There are a bit more subtleties and sophistication, about $1.5 billion of the $5 billion. As we go forward, expect that to apply to a bigger proportion of the total CapEx, Appos (55:46) are good indicator.

If we can take 20% out over the 15-month to 18-month of the detailed design phase, that should be seen as pretty much as a minimum going forward because the market will deflate and deflate further. So that's one of the key levers. The primary levers for next year are the phasing of any new decisions. And on the slide you see what we pushed back.

You can also see some quite significant decisions, some of which we just mentioned in LNG, but there are deep water and Vito (56:19), Gulf of Mexico, and Brazil. Our exploration spend is being absent Alaska, taken down towards the $2 billion level anyway, towards the $2 billion. Probably we won't drop below it.

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

Getting back to cost deflation, Simon, how much cost deflation do you assume in that 35%, or can we see some benefits come through in that mark-to-market when we revisit (56:56)?.

The 35% is based on today's environment. If we were planning at a higher price, the 35% will be higher because you would be then seeing prices come back up. So could we go below? Don't know because remember 35% includes about finger in the wind type guess, and what BG will be doing based on their public statement.

But they're probably under no more obligation or hurry to invest in big new projects than we are at the moment, and that's an underlying assumption. Can we take more out? We will take more out depending on what the environment we see, but it's not just about price or deflation.

Of the total cost of any supply chain third-party contract or investment, 40% is design and scope driven, 40% is logistics and demand management and 20% is price. And we're working pretty hard on the first 80% because then quite often, you don't have to worry too much about the last 20% because you're both winning, us and the supplier..

(58:01-58:06).

Yeah. Do the best of our ability to estimate, of course, You can never predict with greater certainty when a divestment will occur. But yeah, that is factored in as well.

Lydia (58:20)?.

Thanks. If I could come back to the BG deal and you do think we're talking more cautiously now than you might been in January or April about prices.

Would that have changed your view on what you would have paid for BG in terms of the valuation of the structure of the deal? And then secondly, and I suspect partly related to that question is, I realize you can't give synergies over and above, what, the 2.5 billion that you've given, but are you able to talk about an order of magnitude or give an example of where those synergies would come from?.

Why don't you talk about synergies? I think, no, the – we talk perhaps differently, but fundamentally it – the ingredients of the communication are still pretty much the same. Going back to the response to Jon's point, we have to balance two things at the same time.

We have to make sure that we have an investment program that will continue the company and its cash flows for a prolonged period of time. The iron industry where cash flows fall off all the time in the Upstream.

So you have to reinvest to keep the company strong and healthy, and we therefore take a view on what we believe the long-term oil price is, because typically our projects, therefore, 30 years, 40 years, 50 years sometimes, and we do believe still that in the mid to longer term, so typically in the range where we planned the life of our projects, the oil price will come back in the $70 to $90 range, which is where we normally plan for our life projects anyway.

But what perhaps is different or what I think I want to correct as a misunderstanding is that we are not waiting for the $90 cavalry (01:00:13) to arrive, and we deal with today's challenges.

We didn't get the message across very well in January, but I want to be really clear that the planning of today's financial framework, the affordability by which we manage things on a quarter-to-quarter, year-to-year basis is created by today's realities, not by where some point in time will come right again.

And that is what we intended to say in January. I think that sort of got interpreted as well, the the cavalry (01:00:43) story.

And the same is true for operating costs, after much coaching and a lot of pleas from your side, we decided not to have a target out there, because we said you have to judge us on what we do, not on what we promise or what we talk about.

Now, that only works to a degree, and you also have to then at some point in time show what you have done, and that is also what today's communication is about. So, is it a change? Yes, it is a change, but a change in demonstrating what we have done.

It's not that we woke up a few weeks ago, and we better do something about our capital and operating costs, because everybody else seems to be doing it. We have been working on it as Simon says for many, many quarters. Of course, we've been working on it more or less forever.

Bear in mind, half of our cost base is in the downstream, if you do not manage your cost well in the downstream, you don't have a business..

Synergies?.

Yeah..

Just briefly on synergies, remember we putting a company with a $40 billion cost base together with a company that has lower than $10 billion. This is not a synergy driven deal. We can do as much on our own base as we can on the combined. So the $2.5 billion that was signed off in the deal only $1 billion was cost.

$1.5 was less exploration, which we clearly won't need as much of in the combination. The value uplift was always the driver of the deal, synergies are not – the cost synergies are nice, but the value uplift is why we're doing the deal for the gas and the deep water positions. Simple example, we work in Brazil with Petrobras.

They're already a good partner. I think they may take a positive view on having a partner like Shell for technology, for our operational experience together to drive value out of that portfolio. The LNG market, we and BG have the first best and the second best LNG portfolio for trading and marketing in the industry.

It's a matter of opinion, which is best, but they are clearly the two strongest in terms of the supply source, market access and the ability to optimize within that. The value, we bought Repsol's LNG marketing business.

We have 25% of the cash upfront back in the first year from optimizing that portfolio and several hundred million in the first year from optimizing it better than it had been. Together with BG -- it's well-managed portfolio anyway, BG's of course, bringing that together, there's a lot of scope there. We just can't put a number on it today..

Okay, (01:03:27). No, sorry, (01:03:33).

Good afternoon. I had a question on disposals and another question on your North American portfolio.

On the disposal side of things, if you assume that oil prices will stay kind of around this kind of level – maybe slightly higher out to the end of 2018, I was just wondering about your confidence on the target and how the split would look between, say, Upstream infrastructure and Downstream, as I think the MLP will be quite important in there? And then, the second question kind of relates to the Permian assets and then kind of looking at those in the context of your capital reductions.

Essentially, you didn't have that in your kind of turnkey projects. But it seems like an asset that could grow substantially over the next five years or so, could throw off substantial cash flow. But then, at the same time, it requires some substantial investment at the moment.

I think, if you were going to sell it today, you'd get probably several multiples times what you spent for it, and you could bring somebody into to accelerate that asset. Just wondering in terms of the asset, how you're thinking about it in this environment where there are people still willing to pay very high multiples for that type of asset.

Thank you..

Yeah. The Permian is a good asset. I'm sure that Simon will have some more to say about it. In general, about disposals, yeah, you're right. It is a little more difficult to sell in a very, very week oil price environment, an upstream asset. We have no intention to sell assets for below their value.

We have to make sure that we get full value for it, as we see it over the fullness of the asset's lifecycle. So, yeah, as long as the oil price does not support selling typically oil-denominated assets, if you like, we'll focus a little bit more on those assets that will not have that.

For those of you following the news today, we just announced selling off our oil products business in Japan today, an asset that is a good asset but not strategic anymore to the point that we need to have it in our oil product network. And we can harvest the value and some more by selling it to an investor who will do something else with it.

That will combine it with their portfolio in Japan, restructure and consolidate in line with what Meti (01:06:10) believes needs doing. And therefore, it's a clear win-win. There will be more of those. There will be infrastructure plays, and there will be alternative ways of monetizing. You don't necessarily have to sell it.

You talked about the MLP yourself. We will have quite a bit of runway to follow that trend. And then, yeah, there will be – I guess, if the oil price sort of stays a bit lower at the beginning, there will be more of the upstream assets sold towards the end of that period.

And so it will be a little bit lumpy, and we will also in some cases have to find maybe alternative ways of disposing that preserve the value.

But for now, based on the modeling that we have done and looking at the entire universe of assets that we have, we've done quite a bit of work on our own portfolio, I have no hesitation to say that we have ample coverage and multiple actually of the 30 billion that we have. That's not even looking at the BG portfolio..

Just a couple of words on the Permian. You're right, it's a great asset, more than 1 billion barrels oil. It's mostly 50/50 with Anadarko. And we're seeing recent break-even rate at or below today's oil price. Could we sell it? Yeah, I'm sure we could. Would we sell it? I'm not sure why we would.

And there's a danger of it becoming a de facto exit from unconventional activity. And there is still, we believe, longer term potential strategic and competitive advantage for Shell having that capability in the back pocket. We're drilling wells in (01:07:42) in Argentina at the moment. That would be more difficult if we were not in the Permian.

I can tell you we've just drilled a couple of the best that that country has ever seen. We also are still drilling in the gas (01:07:56). Basically it's explore and appraise. Know what you've got, hold if it's low cost and see when is the best time to monetize and what's the best way to monetize. It might be developed. It might be divest.

Because these are still relatively immature, we're not in the market, while it may be there, it's not good at the moment. We don't have to sell, so there's no reason to do so unless somebody put so much money on the table that we wouldn't – we'd be a fool to walk away.

Just on the gas, that's really being held in principle to support integrated value chains. So two of the basins of gas. We have the Permian. We have the Duvernay play in Canada as well. Both of the liquids plays look pretty good. So it's just a question of when and how they are turned into money.

The gas, we've been drilling wells recently, 25 million scuffs (01:08:49) IP rates. There are some good assets out there. They just don't make a lot of sense investing at $2.80..

Thank you, Irene?.

Ben, you mentioned that in the event of further oil price weakness, you would look to reduce capital spending further. And I think this is the first time I'm sort of hearing this in a while.

In the past it used to be the case that Shell was talking about -- we invest through this cycle, because the last time you didn't in the late 1990s, it took about a decade to fix it.

So my question is, is this is a change? And if it is, is it because of BG?.

Yeah. Good questions, Irene. Let me take the first and start with the second. I'm sure, Simon will have to say something about the second one as well. Yeah, there is not a lot to be said on the two countries that you mentioned. We're in the middle of the process. I think it is going very well. I have personally spoken with the MOFCOM Minister.

He is very, very close to the Anti-Monopoly Bureau. Our filing has been accepted on the 7th of July, if I'm not mistaken. We're in the process that is very well-defined. We have been giving assurances that it will be dealt with with the appropriate sense of priority and urgency and all indications are that that is happening.

Our partners in China are very supportive of this deal completing and have been on the record saying so. So we'll just have to see how this works through. I know that this is a very, very attractive area to speculate in media about anything that can happen.

But I have no reason to believe that this is going to be anything else but just a normal very well structured, well run process that the Chinese authorities will do. I think of the 576 approvals that the Anti-Monopoly Bureau had to process in the last years, only two have been turned down. We don't intend to be number three.

Australia is also a -- just a well-defined process. We need to have a number of clearances there, the ACCC and the FERC. There's a few other entities in Australia that will be involved. The tax office will take a view on it, et cetera. Again, it's a very well-defined process that we are right in the middle of.

I have no reason to believe that this is giving us challenges and believe me, I'm really on top of this. I've been visiting and phoning and engaging with key stakeholders in all the key countries. And again, there's no reason for me to believe that we have any issue.

And you will have seen that in places where there was also a lot of concern like Brazil the things have gone very, very well. No I cannot say, that's a proxy for everything else.

But it's – as I said, based on everything I see at the moment, I'm very confident that this process will just run its course and that we will be able to close at the beginning of the new year. Now on the ability to pull further levers, yes, we have that ability, and we will not be shy to use that ability if we have to.

Is it related to BG? Well, to some extent, yes, we always said, listen, we have a very, very strong balance sheet. We run at a very strong balance sheet precisely for this – to deal with the sort of environments that we are in the middle of today. So we can invest through that cycle.

But, of course, you'd want to reserve the strength of the balance sheet as much as you can as well, which is exactly why we have been pulling these levers so vigorously over the last 12 months.

And it is basically taking costs out, deferring capital, introducing the script, restructuring assets, selling assets that altogether has meant that our gearing has actually gone down rather than go up. So we haven't used up any of its strength ahead.

But we know that we have to use that balance sheet as well to be part of the consideration for the BG deal. And we have to get that entire balance right. Now, at the same time I'm sure that, again, Jon's question will come out, at the time we have to look at further deterioration of the oil price environment. Fine, we can further defer. We can cancel.

We can manage the affordability of our investment program with that lever, but what does it mean for long-term growth? And we'll have to take a view at that point in time. So it's – I cannot at this point in time stand here and say this is the algorithm that we will follow, or I can already say now that we will cancel this, that or the other thing.

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

And that is why it is a major agenda item every time we meet as an executive team, to understand what choices are ahead of us and what is the most prudent way to deal with these choices, and I would expect that to stay with us for the next several quarters. I'll stay in this area. Yeah. And then I'll move over to the other side..

you talked about affordability and break-even prices, et cetera, but Browse seems to be going ahead, or at least looks like it is.

Can you say what oil price breakeven you have on that? And what the status of that project is right now?.

You take Browse; I'll talk a bit about Brazil..

Yeah..

Yeah. Well, operatorship in Brazil, it would be very interesting component of our proposition and our position in Brazil. Actually, we do operate things in Brazil, of course, not in the presale Polygon (01:16:11) that is legally privileged for Petrobras. So we will have to see a change in legislation first before operatorship can be granted to others.

Will that happen? We can speculate about that. I'm sure if it was to happen, it will take some time and some political development for it to materialize.

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

Secondly, being a non-operator in some of these ventures doesn't mean that we are just a financial investor that receives checks in the mail or cash calls. We are actually -- and take Libra and take some of the other projects -- and if you talk to BG, you will hear something similar as well.

We are very, very much in there working together with Petrobras to understand how we deliver these projects together. Yes, of course, Petrobras is the operator, but they very, very much like our input, very, very much seed at some of the concepts we have on deep water well design for Libra are actually Shell concepts.

Some of the management tools that we have are very much the methods that we have and that we bring in, and they welcome that. I mean, Petrobras is a very, very competent leading player in the field and so are we.

And we are two very professional organizations, of course, with a suitable amount of professional pride, but we're also pragmatic enough to understand how we can benefit from each other. And that exactly what is happening at the moment.

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

It was very, very clear that yes, our partnership, which has been there for many years, is going to go to new heights, and we are both looking forward with a lot of anticipation and confidence, and I'm sure other opportunities will come from it.

Browse?.

yes, we are prepared for this amount of money into the project against those markets before we go ahead. Ben's point earlier, you don't get new supply if the demand is already locked up. It will take some time to go through feed. The exciting thing is there's 70%, 80% replication against -- it's not quite the same type of subsurface.

But it's wet, i.e., liquids as well as gases, not dry gas. There's a lot of value there. There's quite a lot of TCF, well into double-digits. And some way we should be able to make value. But if it's not there then, then that will be up to the partnership and the operator to ultimately make the call.

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

Yeah. A question in the middle, okay..

Yeah. Hi. Hello. It's Martijn Rats from Morgan Stanley. I wanted to ask you two things. First of all, when you announced the initial offer for BG, there was a slide in there which said reduction in the number of strategic themes. And I appreciate you said it already a few times that you can't say we know this stays and that goes.

But that was a higher level comment. And I was wondering you didn't use that terminology this time around, but I wanted to ask you if your sort of thinking on that has sort of progressed since then. And secondly, I wanted to ask about sort of break-even oil prices, because quite often we don't see the economics of individual assets.

But over the last few years when oil was $100, we saw a lot of capital employed being added to the company and the earnings not grow all that much. So it naturally lend itself to the conclusion that, well, perhaps, the new projects at $100 oil have lower returns.

And now, from you but also from others, we're hearing comments about – we see projects at $70, at $60, that work at $50. And I understand there's a lot of cost reduction now, right, a lot of efficiencies are all of a sudden being realized.

But can it really go from $100 to $50? I mean, like how do I mentally sort of bridge that gap?.

Look, let me talk about the strategic themes and see whether Simon can sort of replay some of the discussion we have on break-even pricing in the last few weeks. No, I think, Martijn, there's no change there. Yeah.

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

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

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

Just a short verification, the $100 billion figure as you mentioned, is that comparable to what it was sort of two years ago, the $60 billion figure?.

Yeah. The $100 billion includes the cash. We have got $27 billion of cash on the balance sheet at the moment included in the capital employed. So other than that yes, in definition terms, yes..

Waiting to go away, yeah..

The cash has a home to go to....

Exactly, yeah. It's going to BG, yeah. Okay. Another one in the middle and then we move to you there..

(01:25:14).

Can I just clarify on that last point? So in the planning process that you go through every year, you're still using $70, $90, $110 for the (01:25:23) planning process?.

I didn't quite say that, the projects. The planning process long term tends to tend those projects screening values, but in the short term reflects current reality..

Yeah. And that is actually quite an important clarification. So sometimes the words planning and screening are sort of easily interchanged and may give their wrong impression. If you look at a project and if you look at how this project is going to do over its life being 30 years to 40 years, we use screening value.

Sometimes we also use the word planning values, and that's the $70 to $90. So indeed, we compare portfolios of projects at the $90 level. We have been doing it for some time and we just make sure that it is an NPV positive project at $70, quite often it's of course NPV positive still at the lower level.

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

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

But whatever we think the oil price is for next year, we're not going to use for the next 30 years for the investment decisions that we take next year, that will be nonsensical. So we have indeed multiple ways of looking at oil price for financial planning purposes, as well as for screening projects.

And sometimes these things get interchanged and they produce funny results on how people think we are behaving, but I hope this clarifies it. Yeah..

(01:26:55) come back to – in the January presentation..

Yeah..

I think you extolled the virtues of your macro theme.

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

And sorry, and who's view...?.

In the macro, your internal macro team?.

The economics team..

Yeah..

Yeah. I think fundamentally not an awful lot. It is just that also we don't know ultimately how the oil price is going to develop with all the factors that are weighing into it.

The fundamentals – where this is the point that I made at a time, and I'm of course – by reiterating it, I'm at risk of again falling in the same trap perhaps that I fell in in January. The fundamentals are that there is a bit of a floor at $70 if you take the longer term view at it. There is a demand growth that – well, you can argue how big it is.

Is it 1%, 1.5% or 2%, it depends a little bit on how China and general developing countries grow. But if you assume a modest GDP growth that correlates to a 1% oil demand growth, then that is one factor. The other factor is that supply shrinks all the time. Don't know quite how fast this is shrinking at the moment.

Typically it shrinks at about 3% to 4%, but the more we hold back as an industry and as countries in investing in existing fields, the faster their drop off in supply goes. At some point in time the market will balance. The market is not going to balance with all the investments that are just going ahead at today's oil prices.

Well, of course, it will ultimately balance if we would see a continued deflation in cost. It could, of course, balance at today's oil prices as well, and then, of course, the whole thing will right itself and we will make money at lower price levels.

But as we see it at the moment assuming a significant reduction in price levels and cost deflation, we see the oil markets requiring a $70 per barrel price to balance in the long run. How we get that, when we get that, what sort of events will happen down the road or in the interim, geopolitically, sentiment or whatever else, I don't know.

But what I do know is that I have to survive at today's oil prices as well. I cannot just say, it's all going to be all right, because somehow, somewhere it's going to be $70 to $90. So if today it's $55, you better plan for $55 today and that's what we have been doing.

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

Hi, there. Rob West from Redburn. Thanks for taking my questions. Believe it or not, I've got four burning questions, but I'm going to make a Shell-esque tough decision and cherry-pick the best two.

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

Does that say that -- I'm just trying to get a sense of how deep this cost deflation theme goes, is there a change that's been made in the functional stand at Shell, the way you design project and the standards you use in building things? And more broadly, you have changed the functional model, the functional organization, can you give any specifics around that as part of this plan you've announced today? And I've got a follow-up.

That was one of the four. I'll pause there. Thanks..

Okay.

Shall I answer that one first?.

Yeah, that would be great. Thanks..

Okay. Well, let me first of all say that the -- maybe a point of clarification as well. The increase that we are seeing in the number of hours per piece of equipment for typical plant design is indeed the design and engineering hours per piece of equipment. This is not a Shell number. This is an industry number. So as an industry, we have to tackle this.

Now, why is this happening? That's indeed the killer question. Now part of it is because the standards had become more complex. Part of it is because of regulatory requirements, technical requirements, and part of it is because we are dealing with more challenging or sophisticated projects to run more value, et cetera, et cetera.

So there's good reasons for this sort of inflation of design and engineering man-hours to occur, but also less good reasons. Part of it has to do with competence in the sector, part of it has to do with our sector and many other construction sectors not being able to use modern productivity tools to really try productivity.

And let me just give you a simple anecdotal example. I started in this company 32 years ago as an LNG design engineer.

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

So a lot of the thinking went in upfront, maybe you had to design a piece of equipment, you usually took the old design from the previous plant. You made a few changes with Tipp-Ex and you made a photocopy, and that's the way we did it. Today, we have fantastic productivity tools, which means that I don't have to think, I'll just do the computer run.

I had it back in two minutes and I see whether it has worked or not. And if I have a better idea overnight, I just submit it again. Whether I will figure a whole wave of rework and engineering contractors and everybody else, maybe I don't care about it too much.

And if I can make really bespoke neat designs to every possible eventuality, maybe if I'm a proud engineer I will do that. Now, what we are talking about today about standardization of replication, et cetera, is the stuff that we had to do out of necessity 30 years ago. Now we think of it as an innovation.

So we have to actually trace back a little bit our steps and say, what has been going on in our sector, and why have all these productivity tools that had been thrown at us together creating complexity, standards, and everything else.

The way to communicate more readily, I can send an email off to anybody in the world and say, listen, I've updated my design. Please deal with the consequences. We have to go back and say, how do we improve this. That requires a fundamental rethink that we can't do on our own. We have to do it with our supply chain partners.

We have to do it with engineering contractors. We have to do it with our equipment vendors. And we have to have a tremendous amount of discipline in doing this right. That's how we take cost out. That's where cost deflation comes from..

Just to dig in that question a bit more.

Is there an incremental step up in the change in your functional standards, functional model as part of today's CapEx reduction plans, is that something that you're stepping up?.

No, I think really, of course, you have to go back and you have to challenge yourself all the time.

My standards, the things that I so-called legitimately put on there because I want to be better, I want to be more optimal, or I want to be more robust or more reliable, et cetera, et cetera, is that all justified? A lot of things continually creep into our standards because there were lessons learned from the past. You start a plant.

You have an issue with the PC equipment. Say that will not happen to us again. We'll have a standard for that. And before you know, you will have a multiplication or replication of standards that you have to continuously maintain and prune. And just say, well, hold on, why do we do this again? Does it still make sense.

And to have that done in a – again, in the past, when communications were a whole lot more difficult, it was just harder to put all these requirements. Today it's very easy. You just update the documents, place it on the Web, click and it's there, and everybody has to follow it.

In the past we had to rewrite books, print them, go to typing pools and print them off and send them off to locations around the globe and this was the new standard from this year onward. So there was a national – a natural inhibition to some of these changes. So we have to be more disciplined, more careful and more self-critical on our standards.

Now, that's not a Shell problem, that is an industry problem. I think as a matter of fact that we are leading in that field as well because we have been working on it for longer, and we have created with our P&T organization, an organizational infrastructure to tackle that.

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

In my communication to staff for this quarter, I just came out today with a simplification on standards that will actually remove 40% of the requirements that we have for a lot of our technical operations, and these are things that we can and should do all the time..

Great. Okay..

So that was one of your four questions...?.

I promise to let somebody else have a go. I've just got one more. But, Simon, you gave us a really useful attribution last quarter..

Sorry?.

You gave us a really useful attribution last quarter of the integrated gas moving parts Q-on-Q and the FX, outage at Pearl (01:36:26).

Is there any chance we could have a repeat of that this quarter? Just what are the moving parts?.

In simple terms, sorry, no, I've been a bit busy. So, my own preparation is maybe a little less detailed than normal..

Okay..

Okay. Sorry, yeah, over there. Sorry, you, in the mic already, yeah. We'll go back to you..

Yes. Thank you very much. Just two, I guess, quick questions.

First, really back on the divestments and given the comments about LNG deep water as a focus, gas being the fuel of the future, lower CO2 world, I just want to get your thoughts on the oil sands, where should Shell be in oil sands, or is that – I'm not sure if that's part of the divestment plan, but could we see something more radical just related to oil sands going forward? The second question, really I guess I'm noticing a couple of the other CEOs been able to get some tax concessions or lower content in certain countries or have been able to tweak pricing or taxes.

So, are you having any success or should we expect to see any Shell success in pushing back with some of the rising fiscal tick? Thank you..

Yeah. Okay. Simon to say a few words on tax and fiscal tick (01:37:45) in a moment. I'm not sure whether you wanted to ask Martijn's question slightly different way, but what we need to do with oil sands, oil sands, of course is a relatively high cost operation. I think in the first quartile when it comes to cost per barrel.

But there is, in my mind, also a further potential to take costs out and a necessity to do it, of course. We are at oil price levels.

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

So, we have to therefore focus even more than in perhaps other areas, on efficiency, cost takeout, reliability, very, very important there as well. Now, a few helps.

The change in regulation in Alberta really help us that have allowed us to optimize the mine plans to a point where we do not have to sort of process more (01:38:57) than we necessarily have. We can optimize the grading of the mine in a more economically rational sense rather than a regulatory sort of formula.

And therefore, I think the main priority for oil sand is what else can we do to just improve margin. What we will do with that business in the slightly longer run, I'm not going to comment in this point in time.

Tax?.

Yeah, thanks. It's a bit broad and tax usually is a fiscal structure and/or local content, and the two are often linked. There are countries where it can be a barrier to investment because of the costs that are added. And yes, you can have sensible discussions. They took a while, but the U.K. got there. Have they gone far enough? Time will tell.

There are specific companies, Brazil and Nigeria, where local content requirements are high understandably, but they do have a significant impact going forward. So, less so on the projects already under way. But as we go forward to unlock some of the projects that we've seen, maybe we need to see changes there.

And couple of countries in the Middle East, I think is now Iraq. One of the reasons we are looking at the pace of development in Majnoon is because of the actual terms today. They don't really rank an investment comparison. And it was basically quite so good progress in that. But you don't go and bang on the door and say cut the tax rate.

That's not a very productive way to go in such negotiations, and there's always a bit of give-and-take. So you can get some headlines, but there has to be an outcome which is good for both parties, not just one..

Yeah..

I managed to grab the microphone, thanks. It's Chris Kuplent from Merrill Lynch. Two questions. I heard you mention that the Permian breakeven seems to be even below current numbers, and the Permian is a very special region.

But considering what you've learned there and as you say, you can apply in other regions around the world, whether that's Argentina or possibly elsewhere, just over the last six months, has that experience changed your internal thinking about potentially there being more cost efficiency still down the road, not necessarily the next three months but over the next three years to five years possibly denting your longer-term oil price outlook? And the second question, now we've been through quite a few quarterly result presentations this week, and I think there seems to be a bit of a dichotomy between, hey, I can cut CapEx but my decline rate does not get impacted, and I also don't need any M&A, thank you very much.

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

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

Let me say something on both points and Simon, I'm sure, will have a few very useful adds to that as well. Efficiency, I'm not sure whether you're talking about what we see or what we see the industry can do when it comes to efficiency. It's probably both, yeah.

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

It is an area where sort of innovation very much happens in the field. There's a little bit of innovation that we also try to do in the lab around completion techniques, et cetera. But a lot of it you learn by trying things out and applying knowledge elsewhere. What we have seen is that, yes, there is a continuous learning curve.

And what we have seen certainly when it comes to drilling and completion is that we can be absolutely top-quartile. I think in the Permian, just the great thing about Permian and many of these other plays, you have daily benchmarking because you are working together with partners.

I can say unequivocally that we are top-quartile when it comes to drilling in the Permian. And the same is probably also true for the Duvernay, although we are so far ahead of everybody else that it's kind of harder to get up to commit with good comparisons.

Now, what does that mean for the entire industry? Can the entire industry see the same trend? I'm sure they are. As a matter of fact, they have to; otherwise, they won't survive. Well, that mean that basically there is such a big new reservoir of new oil opening up that we can sort of see the oil price going down for another triple bp.

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

The individual well economics may be interesting, but the overall integrated economics, including the whole infrastructure to evacuate, doesn't look very good. That is one. And the second indicator, look at what is happening this week for I think now three weeks in a row, we are seeing production fall.

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

The second question?.

It's really around decline rate....

Decline rates, yeah..

...need for growth and views of capital investment whether we need M&A, et cetera and whether BG has made a difference. Do you want me to....

Yeah, Simon..

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

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

So, even if you get to 10 million barrels a day, if you stop investing, it's pretty doing 5 million or 4 million or 3 million. And you have to keep investing in that pretty high level which really underpins Ben's point. Will that ever be the marginal price setter? Well, maybe for a few years, yeah.

But how long can you keep finding 5 million barrels a day, 6 million barrels a day of new production to be the price setter? That would outstrip the Saudis' ability to do it by a very long way and whether the ROCs work is less of a point as to whether the capital markets are prepared to keep providing that kind of capital to keep that scheme running.

Yes, I've heard various comments from others that we're in decline rates versus growth versus M&A. Our growth potential is in completing the BG deal, plus the assets in our portfolio that were on the slide that Ben showed earlier. I'm not really worried about growth personally at the moment.

The aim is about getting the right balance between growth and competitive returns. We've made our play on should we acquire. We think we did it at the right time in terms of the valuation of the asset and for the right company because of the great fit about which we've spoken. So, it's not a big issue for us at the moment. Our priorities are clear..

Yeah. I see there is a bit of self-selection going on. Whoever has the mic has the next question..

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

If you look at the other side of this equation, for those out there in the market who are less confident than, say, yourselves and many of us in the recovery of oil prices, can you give us a feel for your cash flow sensitivity long-term? I'm thinking – slide 32, I think it is in your presentation, you talked about the $15 billion to $20 billion of cash generation in the three pillars, et cetera, et cetera.

How would that look at what you see as a floor for oil prices, that sort of 70 level? And secondly, very briefly and I think quite easily, what are the key milestones you have to get through to be drilling in Alaska of this summer season?.

Let me take the second question and give Simon some time to think about the first one. The key milestones we have to go through, actually we've gotten through most of the milestones already and they have been very well commented on over the last months and quarters of course.

So, where we are in Alaska at the moment, we have the true drillships and rig in place. We have most of the fleet in place. We are making initial preparations and we are planning to drill the well. We have one well plan for this season over the next weeks, months. So expect the results somewhere in September or so.

As it's also very well advertised, we have one of the Finnish icebreakers in Portland being repaired. It hit a underwater object in charted waters. So we discovered something that was uncharted after all.

But we expect that ship to be on location well in time before we have to apply for the modified permit which is to drill into the hydrocarbon bearing zone. So everything is basically going on schedule as planned. There are of course hiccups. Fennica, the icebreaker, is one of them.

But boy, we have been preparing for this so well and so thoroughly, and the way the team has been responding to this is incredibly professional. The key priority we always had is to operate exceptionally well. And all the evidence that we are seeing at this point in time is that, indeed, it's paying off.

So, that's all I have to say at this point in time. Update will come of course in the summer..

Price sensitivity, today, around $3 billion of cash flow or earnings per $10 movement in the oil price, give-or- take what happens with gas. Going forward, that will increase. The 10 projects that we showed are they're all pretty price sensitive because that was a deliberate strategic choice to get more oil price sensitivity including to the upside.

So, it will trend towards four over the next three years to four years; with BG, maybe five. It depends on how we then reset the portfolio, which assets we keep, which we sell. So, increased sensitivity over time to the oil price. The $15 billion to $20 billion ranges, those ranges were not just where it might come out in oil price.

It was also about how much of the portfolio we choose to keep or develop. So, I think the slide showed where we are today versus where we could be. The mature businesses, they're there already. They're pretty much close to $20 billion, so likelihood is we'll sell some down, develop some.

On the gas, that's going to be at the top end because it's already in double digits and you add in a strong BG business and all of the investment opportunities we spoke about earlier. So that's likely to be at the top end. If anything, we need to sell that down a bit just to make sure we're not over exposed in that area.

And then the deepwater is the growth. That comes from significant growth on the Brazilian side, particularly BG and in the Gulf of Mexico and longer term on exploration, and that is quite price-sensitive. But the order in which and the pace at which we develop remains a bit in our hands.

And we also have a few other assets that maybe you don't need in the portfolio if you're focusing around big core hub development. So, still quite a lot of choices. So, the $15 billion to $20 billion should be seen as that's what we should target to get the shape of the portfolio, the three pillars.

And if there is another one such as Arctic, then let's see where we go there. But it won't take a lot of capital the longer term in the next three years, four years, five years. The capital priority will be on the three pillars..

Yeah. Yeah, a question here. Take a bit control over the mic. Thanks, Trevor..

Thanks. Rob did very well and restricting himself. I'll try and do the same. Two questions. One, I'm tickled by the LNG complex comments and complexity, and I'll come back to a moment. But analysts, exactly the same in terms of spread sheet, Simon, and you kind of made our life slightly more complicated in ways deferred tax Brazil, Australia.

Why does it go through the P&L, why not just through the comprehensive income or statement of income? Why can't we lose it as complication into quarter? And more seriously, two others very simply, the first one organization then.

How has it responded to the changes that you're indicating you wish to drive through it? How much resistance, how much pushback, how much – to what extent embracing? I'm just going back to the discussion on that LNG if I might, I guess the difference between gas and growth this time relative to gas and growth historically is it's another fuel source.

Coal plays a lot – or coal obviously plays a large role in terms of switching and choice.

Do you need a carbon price, do you need a real push away from carbon? The demand for LNG to continue to deliver at the kind of rates that it has over the last two decades, three decades because even at $9 in MMBtu, relative to coal and relative to falling renewable costs, gas is just not as competitive as it was..

(01:53:57) your question....

Sorry, the question is do you need carbon pricing to be reduced? Do you need a real shift away from the use or away from carbon intensity, everything that you've been talking on working towards in December or politicians have been working towards in December to take place to underpin?.

Well, I think a number of things need to happen. If I take the last question first and I'll talk a bit about our organization. I'm sure Simon will want to talk about the deferred tax assets on the balance sheet.

Yeah, well, I do think you need a carbon price in order to sort of, shall we say, level the playing field against carbon because at the moment, look at what's happening in Germany and it's happening in other places as well. You see the same also happened potentially in places like Japan.

It is the combination of low or no variable costs renewables coming in. At the moment you've installed a solar panel, at the moment you install a wind farm, it has no operating cost. It has no fuel cost. And if you place these assets in electricity markets, they're basically always dispatched. Basically, what I do is they push out typically gas.

And the next one in the merit order is low variable cost coal. So what typically happens if you – unless you correct something, either the way you price capacity or either the way you put a price on carbon, you basically see strong pushes for renewables coinciding with a resurgence in coal.

That is happening in Germany, and it's starting to happen in Japan. So, we have to do something about it. Now one way to work with it is to put a price on carbon and that will then disadvantage coal because it is a higher carbon intensive fuel, and therefore it will relevel that playing field. It sort of prices everything in.

But at the same time, I'm also convinced and that's why we are working so hard on cost takeout in general that you have to reduce the cost of delivery of gas in general.

You cannot – I mean there's a great story to tell in, affluent places like the UK and Germany, et cetera that we need to have an economic stimulus which basically means higher energy prices, let's be honest. But this story is not going to work in Africa. It's not going to work in India.

It's not going to work in South Asia in general where basically, unabated coal will still go in. And the only way you really are going to tackle that if I'm making gas competitive without putting a price on carbon. So, you have to do both, in my mind, yeah.

But to just push for renewables in the hope that that will somehow solve the climate change problem, I think is not a good solution, either. Now, organizational change, I've talked specifically about BG and the springboard for change over the last 18 months that I've been in the role.

I'm pushing for a stronger focus on the bottom line and performance, et cetera, et cetera..

I'm talking about the changes that you're or about the changes that you're suggesting you're going to make (01:57:07)..

Yeah. I think there's an interesting dynamic in the organization on that. I think there's a lot of excitement, of course, as you can imagine, around the BG deal. People will see this also as a huge opportunity. It is, of course, a sign of financial vigor that we are able to do this.

People see a huge opportunity, particularly if you are in integrated gas and if you are in deepwater. And other parts of the organization see this also a little bit more as a threat, and they are, as you are, all figuring out what does springboard for change really mean.

That will play out in the fullness of time, but everybody I think is also clear that this is a healthy and a good tension to have that we are indeed going to create a better, a simpler, and a more competitive company. And it's not just going to be a matter of, hey, we have more choices.

So, boy, are we going to have an investment program in the next few years? I think that message is very, very clearly understood.

That I think is a message that follows on, in my mind, very well from the drive that we have had, on focus, on returns and the bottom line in general for the last quite a few quarters but very clearly, one that I have wanted to accelerate and intensify since I'm in the role. And I think it is playing out.

I think you do have a lot more sort of connectivity between people throughout the organization and the bottom line that they are serving. There is much more clarity also where we need to get to.

There's much more understanding that if you're not getting there in an orderly fashion or fast enough, then there is always restructuring or portfolio action to take care of it. So yes, I do think that we have a different dynamic emerging in the organization..

FX?.

Tax..

I'm going to say something on organization..

Sure..

Not all change for the good is demotivating for the organization. Actually, there's a huge wave of positive momentum at the moment behind "about the time we did something on the acquisition. Now, let's make it a platform for something different." I'm very struck by Ben's comment on the 40% reduction in activity. You guys work in financial services.

You know what the compliance department is like, okay; traffic wardens. What that 40% reduction is asking our engineers to stop being traffic wardens and become urban planners and get the system right in the first place. So either you don't need any cars or everybody just gets to where they need to be considerably cheaper.

And that is a change in mindset that we've given to people. And you know what? The traffic wardens say, "thank god for that." So actually, there could be some really positive outcomes in this. And some of this is just the way the industry has gone for a whole bunch of reasons. That's (02:00:07) because some of it started with us 12 years ago.

But the compliance mindset has gone over here, when in fact, you all need to be here. And actually, that's part of what we can do. And I think that is a really great opportunity. That plus the cost prices are low when we don't have to tell anybody why we need to improve. They just want to get on with it. That's good. I agree with you on FX to OCI.

Unfortunately, the auditors don't. What I can say though is in the second quarter, the FX in Brazil and Australia didn't move end of the quarter the same place it started, so there is nil effect in the second quarter. But since then, Brazil in particular has weakened.

So right now, we look like getting whacked in the third quarter in Brazil and possibly Australia as well on that number which cost us $800 million in clean earnings in the first quarter.

We need to find a better way of helping you and us understand and smooth that one out because it has nothing to do with the underlying performance of the company, I agree entirely..

(02:01:11-02:01:23)..

You need to be in Brazil and Australia in particular. Those are the two that have impacted us most and have a certain tax position, whether you're in tax assets or other. So they may not have the same scale of exposure. Remember, the Americans don't use dollars for everything, so they don't tend to see DIE (02:01:46) changes..

Okay. Who wants to ask the last question? There you go..

Thank you. Aneek Haq from Exane BNP. Two questions maybe if you don't mind. One is hopefully quite straightforward; the second one less so.

But I wanted to ask your thoughts on scale and replication, so where you're in a basin where you have longer-term relationships with your partners, you are doing a lot more brownfield activity, what do those project breakevens look like, Simon, as opposed to greenfield one-off, say? And then just on downstream, I know the focus today is a lot more on the upstream stuff.

But downstream, that's a pretty big number today. I wondered if we could just try and understand some of the structural growth areas within downstream as opposed to the cyclical elements that have driven number today..

Do you want to go on the replication and I will do the downstream?.

Sure, yeah. The brownfield is nearly always more attractive at the margin than greenfield until you get into more mature assets when it becomes a stay-in business type capital. So the trick for us is partly a portfolio one in choosing and spotting the sweet spot of when we may be better off divesting, diluting or thinking about abandonment.

It's difficult to give a number, but it does vary, but our strategy is a combination of big plays to open up new hubs, smaller projects to maximize the value of the existing hubs, and even smaller asset integrity/energy efficiency type projects.

Typically, the latter category on aggregate doesn't have that higher return because some of it you just stay in business, you protect, you don't add value. Those small projects are usually the highest return and the quickest return. And then the big projects, you know those much better than any others, so the deepwater LNG.

And yes, they all should have good returns; some of them don't in the execution. The actual capital allocation is not far off a third, a third, a third. And the downstream is primarily in the first two, of course, and the upstream gets all the headlines in the third category.

But if you can do more of the smaller sort of 50 to 150 type projects, they're usually pretty lucrative relative to, say, a $5 billion project. But you can't do the 100 to 150s if you haven't got a few $5 billions around which to do the smaller..

Yeah. So, on the downstream then, some of the growth, as we've seen today and that we are focusing on, it's a great question to end on because I do think the downstream is one of the highlights in our results today as well. It's one of the best quarters that we have seen.

And what I also like about the downstream results that we are seeing today is that it is, as Simon already said earlier, that it's strength in all main pillars of the downstream. So the downstream that we have, of course, quite often, the downstream gets sort of then interchanged with refining.

But refining is only one of the core businesses that we have (02:04:58). And the refining is a structurally challenged business.

It's structural overcapacity, and we are in the refining businesses only in places where we think we can make great integrated value or where we have to be in refining because it serves a broader envelope that altogether creates the value that we need. Now, the refining business is a cyclical business as well.

We are seeing today healthy refining margins. Of course, we have tremendously reduced our footprint in refining over the last year. So we are down to a much more profitable core, and our refining business today is doing very well. As a matter of fact, it's doing almost better than our upstream business together.

Now, that says more about our upstream business than our refining business, by the way, at the moment. But at the same time, we have also very strong other ratable businesses, so our retail business. So, this is retailing fuels and (02:05:50). It's a very ratable business. It doesn't go through a lot of cyclicality.

Of course when oil prices rise or fall, you get parachute effects, et cetera. But by and large, this is a business that throws off a lot of surplus cash and needs limited reinvestment to keep it strong and healthy. And it is a business where we can grow because there are tremendous growth markets out there.

Think of China where we are growing very, very rapidly. Think also of potential markets like India and Indonesia and Vietnam. It's a little bit more difficult because they have regulatory hurdles pricing-wise.

And sometimes we have also constraints in terms of supply chains that we need to overcome, but this is a business where there are a lot of potential.

We have lubricants, where I think I can say there are too much hesitation, we have the best lubricants business in the industry, which again is a very, very ratable business with very, very high margins because it is a value-add business. It is not a molecule business. It's a performance product business.

Then we have chemicals, which is a business that we have been working to restructure tremendously over the last few years, and which is also cyclical but where we, I think, have managed to get to a position that most of the cycles offset each other and we are in a altogether very, very high returning and high cash surplus business as well.

The last one is trading. Trading is a business that needs little capital employment – working capital. Again, it's ratable but it's more ratable and more dependent on volatility in the market, and we see a lot of price volatility. We enjoy that trading result.

This quarter, all of it is working very well and there's no reason why many of these businesses should continue to work very well. Refining just may come off and therefore, you will see our refining business of course coming down at some point in time, and we'll continue to high grade that business all the time.

Getting out of Japan is getting out of a very large refining footprint, by the way. But all together, I think there is tremendous potential to continue to high grade and then also to continue to grow this business. So, when we talk about ore products, we see growth opportunities much more from the customer back, so retail and lubricants.

And in petrochemicals, where demand is going to grow above GDP, and that typically the margins are determined by reinvestment economics, we see great opportunities to invest as well in our footprint.

So, I think there is more today, but also in the near-term future a great potential to not only make the downstream business more robust but also make it bigger and better business..

Thank you. So, thanks again. A great turnout, great set of questions, great opportunity for us to address some of the points that needed addressing. We'll we have drinks outside. But before we go outside, can I remind you that the results of the third quarter are coming on the 29th of October, and Simon will be talking to you about our results then.

Thank you very much..