Shell plc (LON:SHEL)

Earnings Call: Q2 2015

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Jul 30, 2015

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 2 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 spent a good part if not 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 and 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 low oil prices on our bottom line. We delivered $3,800,000,000 of underlying CCS earnings in the quarter and $16,000,000,000 over the last 12 months. And our results today also show 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 remain 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 3 priorities that I put in place in early 2014 remain unchanged. So it's financial performance, it's capital efficiency and its 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. And there's also no change to the buyback commitment that we made for US25 $1,000,000,000 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 to be $7,000,000,000 lower this year, reduction of 20% And operating costs are expected to be at least $4,000,000,000 lower or around 10% as we restructure the company and take out costs. And that includes a $7,500,000 reduction of shelf 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 deepwater 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 there are very my company. The health and safety of our people, our 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 0 to further improve wherever we can. Now 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 reassure 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 this 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 the 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 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 communicated them back in April. 1st debt service, then dividends and balance between buybacks and capital investments. 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 and free cash flow increases, we are expecting to restart a share buyback program with a program of at least $25,000,000,000 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 2 major financial investment decisions in 15. Many potential projects have been purposely delayed, have been either already phased and in 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 and 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 as some 15,000 people globally. Safety and environment of course remain top priorities also for P and T. But we want to drive better value from our capital project design and execution and from the associated supply chain. And we expect this year $1,500,000,000 of capital efficiency gains, but there's more to come here. Now this is not a story of tearing up last year's contracts and starting off 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 upfront planning, contracting structures with the best suppliers, etcetera. And the recent investment decision that we took on Appomattox in the Gulf of Mexico is a good example where we took out some 20% from the cost went ahead for the project with around a $55 break or price breakeven on a go forward basis. And 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 pulling in a downturn. Then I will come back and give you a further update on where we are with BG. Simon? Thanks, Ben. Good to be here today. Great turnout. Thanks. A lot to catch up on. So I'll update you briefly on the results, just the one slide. And you'll see some of the usual slides towards the end of the presentation if you have further questions. So the results Excluding identified items, the underlying CTS current cost of supply earnings $3,800,000,000 for the quarter. That's a 37% decrease in the earnings per share from a year ago. Upstream obviously impacted by the significant decline in the oil and gas price. The actual crude prices were $48 a barrel below where they were a year ago at $62 average in the quarter. Our earnings in the Upstream obviously also impacted by lower volumes, but a lot of that was due to the planned maintenance in Oil Sands Canada in Pearl, GTL and Qatar and the deepwater in the Gulf of Mexico. We also saw some reductions in the Netherlands, curtailment and producing into storage rather than sales and a 5% decline from the asset sales that we've been engaging in over the past couple of years. So the underlying volumes declined by around 3%. Or if you take out the planned maintenance, that was 130,000 barrels a day of planned maintenance in high margin environment, the underlying production increased by around 1%. And the high margin projects, the new ones, actually more than offset the underlying decline. Downstream results improved substantially. I'll come back a bit more. But there is some reflection of higher refining margins, But you only get access to those with good asset uptime. And in addition, we've taken a lot of steps to improve the underlying financial performance, includes the asset sales, taking out cost and better revenues from the businesses that we're actually engaged in. The overall group level return on capital is 7%. Cash flow generated from operations $6,100,000,000 in the Dividend distributed, same as last year, dollars 3,000,000,000 or $0.47 per share. Just as an echo, and that will remain at least at that level for another 6 quarters at least underwritten. We've had a few questions on LNG, particularly since April. They're useful, I think, to recap. Around 10% to 15% of Shell's LNG is sold on short term markets, which is euphemistically referred to as spot. But these are not spot markets. They're neither deep nor liquid. It's not the crude oil market. So in LNG, spot actually means LNG ordered for delivery in the next quarter that's not associated with a long term contract. 85% to 90% of our volume is sold on longer term hub prices. We believe the hub prices. We believe the media or maybe the investment community is perhaps a little too focused on spot prices, extrapolating last week for the next 30 years. Our integrated gas results are currently driven by the production performance and lagged oil prices. And you can see the track record here. Our buyers, who we know well, they typically look for security of supply. And as producers, we need the offtake contracts to finance the new LNG projects. There's a lot of mutual dependency. There are changes in the supply mix for Australia and new U. S. Volumes later this year. The fundamentals of this market look as robust to us today as they have in the past. Existing contractual terms, price formulae, for example, nearly can be reopened and reviewed, generally cycles of 3, 6 years. But it doesn't happen for all contracts. And when they do get reviewed, our experiences, the outcomes, they're incremental to the existing terms and indexation. They're not dramatic shifts. They preserve the intent and sanctity of the original contract, and we don't expect that to change. So enough on results. As Ben highlighted in his opening comments, we're pulling every lever there is for an oil price downturn, no matter how long it lasts, operational and financial. We know we need to protect the ability to pay dividends, but we also need to keep a sensible high value investment program underway for the future. The worst thing we can do for the long term sustainability of the dividend is stop good projects or cutandburn good investment. Together, this is a substantial package of measures, flexible balance sheet, capital and operating costs coming down, continuing with asset sales and that project delivery to drive the future growth. So I'll do this in a little bit more detail. Now you see a few slides like the one on the right, shell in red, major competitors, range and individual lines in the gray. This is the gearing. If you're going to sail into the wind, why not start with good momentum and a stable course? Gearing, 12.7%. We're just very close to where we started the year. We are lower than where we were 12 months ago when the oil price started to fall. It's good operational performance, of course, generates cash. And we reintroduced a scrip dividend. We did this early. That gives us more short term flexibility and ultimately helps to protect the dividend. We may actually be the lowest gearing in the peer group. It would be interesting if that were to be the case and without the assistance of some fancy instruments. Next lever, operating cost. Made a lot of headway already. Focus bottom left graph. Anybody who thinks we only started to take this seriously last month, just look when the costs started to move down. But before that, how much did our cost go up in the 1st place? We're now back at the same level as 2011. Our cost this year and on a rolling 12 months to now down $4,000,000,000 10 percentage points. These are sustainable cost reduction programs. They're not just deferring training and travel. Exchange rate movements have been supported, but as we go forward, we expect more and they will not depend on exchange rate movements. Just move on to a few examples of the cost program. I'm not going to go through details here because the point is there are many targeted specific activities underway, very focused, very diligent, many, many people involved in this activity. This isn't Ben and I and our colleagues in the executive committee using general exhortation from the C suite. This is the whole company knowing what needs to be done and doing the right things. We are targeting costs in higher breakeven plays. We are working hard on the overheads. There is quite a lot more to come here. Capital investment. Again, actually, I think we were 3rd or 4th on this one at a time when it's best to be 5th. At the end of the last quarter, we continue to take cost out. We now expect this year's capital investment to be around $30,000,000,000 20 percent lower, dollars 7,000,000,000 lower than last year, 35% lower than 2013. This guidance $3,000,000,000 less than we gave 3 months ago, because we said $33,000,000,000 or less and we are working in a dynamic decision based process. Every month, the executive committee is reviewing all these choices and looking to where we take this without destroying value. It's a measured pragmatic response to managing the overall financial framework and that the FID pace that Ben has just shown you is just one of the outcomes from this, because we're also looking very hard at the cost opportunities in the supply chain. So we're back to 2012 levels on the total spending and we're looking forward to the growth in cash flow that will come from completing the projects that are in the $30,000,000,000 Looking into 2016, because as it occurs now, that's where we are looking at the Shell portfolio anyway. We can give a few more details on this. When the BG transaction closes and we come together, we'd expect the combined pro form a spending to be lower than it is this year and also lower than we'd indicated back in April, combined around $35,000,000,000 assuming the current macro carries on. And we have been clear for some time, at least 18 months, that some parts of our portfolio are not performing to their full potential. 2 of them, oil products and the resources of shale, we talked about last year. Earlier this year, we added some of the mature assets in the upstream, the upstream engine. Again, we have very specific targets to improve the unit margins, asset production, the reliability of the performance, take out cost, but also to take portfolio actions. And this is now really showing up in the bottom line. For example, the return on capital in the Downstream was 15% over the last 12 months. We've seen positive cash generation from our U. S. Shale business this year, even with a $2.8 gas price and $40 odd WTI. Yes, it can still improve further. We've also on the mature upstream assets seen quite significantly improved reliability and production, North Sea and Malaysia, for example. So a little bit more light on the downstream. Now we have been busy here for quite some time, restructuring the portfolio and self help. We believe not only they unlock substantial new revenue opportunities, particularly in that fuels value chain through the refinery trading and supply, we've also taken out costs while doing that. So it's great to see that return on capital back to 15.6 percent. And the cash generated from ops in downstream alone 12 months, $13,000,000,000 Now that's a good performance by any standards and certainly an improvement on recent years. The main drivers of course have been self help. There has been a good refinery performance or margin environment in the last 6 months. But Downstream is really 5 revenue streams and 4 of them are not dependent on the economic environment, retail, lubricants, trading and supply and the chemicals. It's only refining that has a level of volatility linked to exogenous factors. This performance you're seeing is all of those levers working, being pulled and delivering. We had the kit running well, unplanned downtime 2.4 percent, availability of the refinery is 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 a good improved position, more to come though, because we said this is a multi year turnaround. We have to be a $10,000,000,000 cash generation and 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 and cost reduction here over the last couple of years. We went from 14 plays down to 4. So we have $3,300,000,000 of asset sales behind us and we sold 110,000 barrels of oil equivalent a day of production. This year, we've been reducing the exposure to the international shale plays, scaling down for profitability. A lot of this has been driven by subsurface and non technical reasons, whether we can make the plays work in those four plays discovered resource in North America. We do have series also of less mature positions, Argentina, for example, in 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. Divestment, 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 the buyers of the LNG. 2015, we expect $5,000,000,000 of asset sales, including any drop downs to the MLP. We've done $2,800,000,000 already. So the total for $14,000,000,000 combined, we gave a target of $15,000,000,000 We did that in 1 year. That $15,000,000,000 has now become over 2 years. We would expect $20,000,000,000 for the 2 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 the final lever I'd like to mention is a pretty obvious one, but it is being lost in some of the headlines at the moment. Our core business model is developing new sources of oil and gas because that drives our cash flow and free cash flow over time. If we stop doing this, then we may as well pack up and go home. We made some adjustments to the FID pace, but we are completing the existing program with a pretty attractive growth pipeline predominantly in the upstream at the moment. Portfolio is geared to give that uptick in production, but much 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. 4 are already on stream ramping up and the other 6 not yet on stream. You can see hopefully the graph is self explanatory, but they move from effectively a $10 cash deficit in 20 13 period per year to a potential $10,000,000,000 cash surplus by the end of the decade. It will be round about an $8,000,000,000 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 2 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 commitments, 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. Okay. Thanks, Simon. So let me give you an update then on the progress with BG, which of course is an incredibly exciting opportunity for both BG and Shell shareholders. So back in April this year, we announced that recommended combination with BG. That combination is expected to enhance our free cash flow. It creates an IOC leader in LNG deepwater and will be a springboard for change, changing Shell into a more focused and a more profitable company. Now firstly, enhanced free cash flow. From BG's growth in 2015 and beyond, highly complementary to Shell's 2017 plus growth potential. So it is this expected enhanced free cash flow position that enhances also the robustness of Shell's dividend. Secondly, the IOC leader in LNG and Deepwater Innovation, accelerating and de risking our strategy by combining Shell's current positions with BG's worldwide LNG and Deepwater Brazil assets Shell can add significant value and that's beyond the announced synergies by applying technology know how at a much larger scale and at lower cost and concentrating on areas of existing competitive advantage. And thirdly, this is all about using it as a springboard to change Shell by restructuring, driving asset sales and refocusing spending, which will result in a simpler, more focused company concentrated around 3 pillars, upstream and downstream engines, LNG and deepwater. Let me again emphasize that I'm absolutely determined to follow through on this combination and use it as the platform for change in Shell. Now about the timeline, I'm sure there will be a few more questions there as well. So you will have seen that we have regulatory approvals granted in the U. S. FTC. Brazil, CADE full approval earlier this week, Korea FTC and all the other regulatory finding processes are progressing very well in all other jurisdictions. So that's all going well. We're working very hard on restructuring and divestments plans. And a joint team has been established with BG to plan for absolutely world class integration of the 2 companies once the transaction is closed and also to high grade talent from both companies. So overall, I'm very pleased with the progress that we are making with the BG combination and I'm confident I look forward to closing this deal as planned in early 2016. Now here are some examples of the way the 2 companies can come together. So by combining Shell with BG's complementary positions in Australia LNG and Deepwater Brazil, Shell can apply its technology and know how at really an unprecedented scale and at a lower cost. So that accelerates and de risks our strategy. In Brazil, where combined production could reach 550,000 barrels per day at the end of the decade. We've seen a very positive response from the Brazilian government and the Petrobras management on the opportunity to be that preferred partner of Petrobras. And I'm convinced that Shell's technology capabilities can unlock more value for the partnership, particularly in production operations and also in reservoir management. Now LNG, there are of course cost synergies and potential value uplift, opportunities from combining the 2 complementary LNG production and marketing companies. And this is particularly the case as both companies are expected to ramp up new LNG supplies from Australia over the next few years, 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. If I look 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 investment so that we have a more efficient program also with an eye on industry cost structure and LNG market development. So overall, there is an opportunity to take a complete fresh look at development solutions and strategic partnering and the timing of investment decisions in this 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 $30,000,000,000 from the combined portfolio from 2016 to 2018. So that's averaged $10,000,000,000 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 upstreams and 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 $30,000,000,000 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 spends, taking a hard look at the 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 slowdown in Canada in all sense. And the last kind I'm sure there will be some questions as well. We are planning to drill the burger prospect in the Cukchi Sea in 2015 2016 to test what could be a multi billion barrel oilfield 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. 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 $27,000,000,000 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 20.70 earnings per share in the mid-70s world. This is a combination that enhances our free cash flow and enhances our dividend potential in any expected oil price environment. And overall, I want to make it crystal clear to you again how determined the Board is to get this right and we are firm in repeating our commitments to shareholders here on dividends. This chart here shows the potential future shape of the company around the end of the decade. I think what you can see here is really a different more focused and profitable shell coming through. Strategically, in my mind, this is what this deal is also about. So it's 3 pillars, it's engines, it's LNG, it's deepwater. It could each deliver some $15,000,000,000 to $20,000,000,000 of CFFO around 2020. And then of course the longer term themes that could deliver a further additional $10,000,000,000 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 the strategy essentially grow to simplify. It means that we can really capitalize on our core strengths, but also at a much larger scale. It also means that we have a much more predictable company 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 at 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 and Simon drilled 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 on 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 cost 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 shells 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 deepwater scale and competitive position accelerating our strategy there by several years. We will reshape the company once this transaction is complete. Then 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 1 or 2 each so that everybody will have a chance? John, you are first. Thanks, Trevor. Thank you. It's John Rigby. I've already been told today actually I speak too quietly. So it's good job you the microphone. Can I ask 2 questions? First is on the CapEx and the changes to CapEx. With the new plan, are you still investing at an activity rate that sustains the business? So are we talking about gradations on growth in terms of outlook? Are you actually shrinking the business because of liquidity issues around what you spend? So 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 3 to 4 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 both the challenges, but also the opportunities around the LNG market over the next 3 to 4 years? Thanks. Yes. 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. John, this is the key thing that we have to get right. When it comes to capital, we have to make sure that we hit 2 objectives at the same time, that we invest at a pace that we can afford, but at the same time that we invest to keep the company long term healthy. I think we're getting that right, but we cannot get that right 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 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 3 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 for each and every project that comes up for its decision moment, it is first of all a question, do we have to do it now? And is this project at its most competitive point where it can be given the macro environment that we are seeing? 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, but 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, yes, I think maybe another point that is 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. There is no exchange where you can buy LNG and where people try to sell their cargoes. These are all bilateral deals as you do either long term or short term. And the short term deals are called spot deals. There is a so called market price that is being set up. That's not really a spot price mechanism either. And again, there's no exchange behind it. So if you talk about supply going up, usually that is locked in with demand going up because supply will only go up when demand is there to go up. So there is no large unfulfilled demand that is waiting for supply to come or the other way around. So not entirely locked in, there is of course opportunities 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? Yes, I'm sure there will be because the business model that we have that BG has as well and that we can now combine with a larger portfolio is very, very much an optimization game where we want to continuously see whether our longs and shorts are optimally configured at the lowest possible cost and also in the best possible markets. And the larger your portfolio is to work with, the higher the opportunity to drive for better returns in it. And if everything was locked in, in this, you wouldn't be able to optimize an awful lot either. So a certain degree of liquidity in that portfolio is definitely helpful. So I see more opportunity in that dynamic going forward than perhaps threat. Also if you want to talk about the market growing quite considerably and supply in it growing quite considerably. Anything you want to add to that, Simon? Just to step back on why we're confident about the gas market, it's grown 2% to 3% globally for a few decades per year. And we expect that to continue for a few more yet. Within that LNG 4% to 6% growth a year for the last 20 years and most likely the next 10 to 15. So the current LNG market, 240,000,000 to 50,000,000 tonnes per annum, that's only 9% of the total gas market. New markets are opening up all the time. I would give a prize to anybody who could name the last two countries in which we had gas contracts, Jordan and Malta. So, not many people would have them on the radar screen. We're currently looking at supplies into Singapore, into Philippines, into Brazil. There is a long list of new markets out there that will help drive and we can access those markets. Some of these markets are not big enough to build a new greenfield LNG around, but they're very attractive markets if you have a source of LNG that has that flexibility. And we can really compete at Shell, Shell and BG together, we think we're very competitive in developing new markets. And gas is a fuel of the future. It's affordable. There are secure supplies available and it is a low carbon source. That is driving the growth. Maybe there's a wobble 1 or 2 years, but that's not what we're investing for. These are 30, 40 year projects with not that much ongoing investment beyond. Thomas? Thomas Harto from Credit Suisse. I want to stay with the LNG theme really. If we think about future projects to really kick them off, you need $10 to $12 per MBtu unless liquefaction costs come down materially. I think the industry has talked about upstream cost deflation, but I wondered what you're seeing on the liquefaction cost side, which might be a little bit more sticky. The second question, as I if I look at your LNG portfolio, you've got Browse FLNG, you've got Shacklin Expansion, you've got LNG Canada, you've got Tanzania amongst the, I guess, the better projects in your portfolio in my view. What is the kind of order of preference you see right now? But also as you sign offtake agreements or contracts, are you willing to give or are you willing to remove the destination restriction to the customers as well as willing to give higher DQTs? Thank you. Let me start with the liquefaction because you're absolutely right. Liquefaction costs have gone up quite a bit. As a matter of fact, a lot of plant 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 not only productivity has fallen, but the amount of man hours required, engineering hours required per piece of equipment have gone up at a factor of 5. That is to do with complexity and regulation, higher standards. It probably also has to do with competence and other efficiency measures. And I think that is actually a very, very significant driver of cost as well. So when we talk about let's take cost out of the supply chain, this is where we talked about earlier, it's not just a matter of let's try to really push our suppliers when it comes to price, but let us sit down with our suppliers in a much more transformational process to figure out how on earth are we going to improve these productivity challenges that we have. So this is all about indeed better planning, better standards, maybe working more with what the opportunities set that our suppliers see. It is better execution in the field as well, maybe more competence 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 in the future, it is just not good enough to say, hey, it's cleaner and coal etcetera, etcetera. 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. I think we have a lot of efforts going on when I talked about P and T and also in that engineering space, how we can improve design and engineering productivity and construction productivity. There's a lot of fundamental rethinking and a lot of engagement with our suppliers going on to see whether we can tackle the challenge. On the portfolio and I'm sure Simon will have a few adds there as well. I wish I could give you an answer on that at this point in time to say well listen these are all the opportunities between the two companies. This is how we will go about it. We cannot do it. The takeover code will not allow us to do it. And I think it is probably also better for us to really get a good handle on what sits in the DG portfolio for which we have a fairly good understanding on the basis of the work we've done to make the bid for them. But I think it's always better to really understand once we are integrated and complete to understand how the sequence of opportunities 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 Any adds? Maybe just to highlight the priorities at the moment. Gorgon and Prely, you get them on stream. Elba, we just sold down the equity, which not only helped us reset the tolling, remove the capital, but also gave us access to the 2,500,000 tonnes. 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, Train 3 Sakhalin and Train 7 Nigeria would likely be top of our list if we could do them. But tomorrow, we can't anyway. So you'd need to get a lot of DUCs in a row to be able to do those, while at the same time, we have 3 potential large greenfield in Canada, in Braze and Abadi LNG floating in Indonesia. They're all in progress, but they're not going to happen tomorrow until we've got the right balance between the cost and the market. Some of these we don't operate as well, of course. So that's what we are looking at, at the moment. But to an extent, we have the luxury of choice. But we have to get the cost down. When Gorgon and Prelude come on, they'll deliver great returns because they're low cost assets, particularly Gorgon. We know what can happen to the balance sheet impact if you don't not only get the cost down, but deliver to budget. That's the priority. Thank you. Thipan Jopalingam 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 form a 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 for 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? Expiration? And just the second question is just on exploration and the reduction in CapEx today for 2015. How much of that $3,000,000,000 was a reduction in exploration? Thank you. Yes. You want to take I'll try and go backwards. Exploration reduction this year relative to what we were looking at in January is pretty minimal, a few 100,000,000 because we weren't planning that much in the 1st place and most of the wells were already committed. This year, the 35% through 30% that we've seen over the last 6 months, 30% has been improvements in the supply chain. That's not just deflation. There are a bit more subtleties and sophistication, but $1,500,000,000 over 5. As we go forward, expect that to apply to a bigger proportion of the total CapEx. Aapo is a good indicator. If we can take 20% out over the 15 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 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 push back. You'd also see there's some quite significant decisions, some of which you just mentioned in LNG, but there are deepwater and Vito, Gulf of Mexico and Brazil. Our exploration spend is being absent Alaska taken down towards the $2,000,000,000 level anyway, towards the 2,000,000,000 dollars Probably won't drop below it. And the primary levers will still in the short term be choice of when to take new project decisions. Going back to cost deflation, Simon, I mean, how much cost deflation do you assume in that 35? Or can we see some benefits come through mark to market when we revisit in February next year? 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 at what VG will be doing based on their public statements. But they're probably under no more obligation or hurry to invest in big new projects than we are at the moment. And that's an underlying assumption. Can we take more out? We will take more out depending on what the environment we see, but it's not just about price or deflation. Of the total cost of any supply chain third party contract for investment, 40% is design and scope driven, 40% is logistics and demand management, and 20% is price. And we're working pretty hard on the first 80% because then quite often you don't have to worry too much about the last 20% because you're both winning us and the supplier. Yes. To the best of our ability to estimate, of course, you can never predict with great the greater certainty when a divestment will occur. But yes, that is factored in as well. Lydia? Thanks. And if I could come back to the BG deal. And you do seem to be talking more cautiously now than you might have been in either January or April about prices. Would that have changed your view on what you would have paid for BG in terms of valuation of the structure of the deal? And then secondly, and I suspect partly related to the answer to that question is, I realize you can't give synergies over and above what the €2,500,000,000 you've given. But are you able to talk about an order of magnitude or give examples of where those synergies would come Why don't you talk about synergies? I think now the indeed we talk perhaps differently, but fundamentally the ingredients of the communication are still pretty much the same. It's going back to the response to John's point, we have to balance 2 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. We are in an industry where cash flows fall off all the time in the upstream. So you have to reinvest to keep the company strong and healthy. And we therefore take a view on what we believe the long term oil prices because typically our projects therefore 30, 40, 50 years sometimes. And we do believe still that in the mid to longer term, so typically in the range where we plan the life of our projects, the oil price will come back in the 70 to 90 range, which is where we normally plan for our large projects anyway. But what perhaps is different or what I think I want to correct as a misunderstanding is that we are not waiting for the $90 cavalry to arrive when we deal with today's challenges. We didn't get a message across very well in January, but I want to be really clear that the planning of today's financial framework, the affordability by which we manage things on a quarter to quarter year to year basis is driven by today's realities, not by well at some point in time it will come right again. And that is what we intended to say in January. I think that sort of got interpreted as well the cavalry story. And the same is true for operating costs. After much coaching and a lot of please from your side, we decided not to have a target out there because we said you have to judge us on what we do, not on what we promise or what we talk about. That only works to a degree, yes. And you also have to then at some point in time show what you have done, yes. And that is also what today's communication is about. So is it a change? Yes, it is a change, but a change in demonstrating what we have done. It's not that we woke up a few weeks ago and said we better do something about our capital and operating costs, because everybody else seems to be doing it. We have been working on this as Simon says for many, many quarters for cost. 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. Just briefly on synergies. Remember, we're putting a company with a $40,000,000,000 cost base together with a company that has lower than 10,000,000,000 dollars This is not a synergy driven deal. We can do as much on our own base as we can on the combined. So, the $2,500,000,000 that was signed off in the deal, only $1,000,000,000 was cost $1,500,000,000 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 deepwater positions. Simple examples, 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 1st best and the 2nd best LNG portfolio for trading and marketing the industry. It's a matter of opinion which is best, but they are clearly the 2 strongest in terms of supply source, market access and the ability to optimize within that. The value we bought Repsol's marketing LNG marketing business. We got 25% of the cash upfront back in the 1st year from optimizing that portfolio 100,000,000 in the 1st year from optimizing it better than it had been, together with BG. It's a well managed portfolio anyway, BG is, of course. But the bringing that together, there's a lot of scope there. We just can't put a number on it today. Okay. Anish? No, sorry, Anish and then I will. Good afternoon. A question on disposals and then another question on your North American portfolio. On the disposal side of things, if you assume that oil prices will stay around this 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. I think the MLP will be quite important in that. And then the second question kind of relates to the Permian assets and then kind looking at those in the context of your capital reductions. Essentially, you didn't have in your kind of 10 key projects, but it seems like an asset that could grow substantially over the next 5 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're going to sell it today, you'd get probably several multiples times what you spent for it and you could bring somebody in to accelerate that asset. Just wondering in terms of the asset, how are you thinking about it in this environment where there are people still willing to pay very high multiples for that type of asset? Thank you. Yes. The Permian is a good asset. I'm sure that Simon will have some more to say about it. In general about disposals, you're right. It is a little bit more difficult to sell in a very, very weak oil price environment an upstream asset. We have no intention to sell assets for below their value. We have to make sure that we get full value for it as we see it over the fullness of the assets lifecycle. So, yes, as long as the oil price does not support selling typically oil denominated assets, if you like, We'll focus a little bit more on those assets that will not have that. For those of you following the news today, we just announced selling of our oil 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 all product network. And we can harvest the value and sell more by selling it to an investor who will do something else with it. They will combine it with their portfolio in Japan, restructure and consolidate in line with what Matti believes needs doing. And therefore, it's a clear win win. There will be more of those. There will be infrastructure plays and there will be alternative ways of monetizing. You don't necessarily have to sell. You talked about the MLP yourself. We will have quite a bit of runway to follow that threat. And then, yes, 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. I said it will be a bit lumpy. And we will also in some cases have to find maybe alternative ways of disposing that preserve the value. But for now based on the modeling that we have done and looking at the entire universe of assets that we have done quite a bit of work on our own portfolio, I have no hesitation to say that we have ample coverage, multiple actually of the $30,000,000,000 that we have. That's not even looking at the BGE portfolio. Just a couple of words on the Permian. You're right, it's a great asset, more than 1,000,000,000 barrels oil. It's mostly fifty-fifty with Anadarko. And we're seeing recent breakeven rates at or below today's oil price. Could we sell it? Yes, I'm sure we could. Would we sell it? Not sure why we would. And there's a danger of it becoming a de facto exit from unconventional activity. And there's still, we believe, longer term the back pocket. We're drilling wells in Vaca Muerta in Argentina at the moment. In the back pocket. We're drilling wells in Vaca Muerta in Argentina at the moment. That will 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're also still drilling in the gas. We need to basically explore and appraise, know what you've got, hold it 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 puts so much money on the table that we wouldn't we'd be full to walk away. Just on the gas, that's really being held in principle to support integrated value chains. So 2 of the basins are gas. We have the Permian. We have the Duvernay play in Canada as well. Both of the liquids plays look pretty good. So it's just a question of when and how they get they are turned into money. The gas, we've been drilling wells recently, dollars 25,000,000 scuffs, IP rates. There's some good assets out there. They just don't make a lot of sense investing at $2.80 Irene? Thank you. Irene Himona, Societe Generale. I had two questions please. Firstly on BG, in terms of the regulatory approval process in China and Australia in particular, is there anything at all you can share with us in terms of how that is going, timetable, etcetera? Because it has been of concern to the equity market? My second question is the following. Ben, you mentioned that in the event of further oil price 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 the cycle because the last time you didn't in the late 90s it took about a decade to fix it. So my question is, is this a change? And if it is, is it because of BG? Yes. Good questions, Irene. Let me take the first and start with the second. And I'm sure Simon will have to say something about the second one as well. Yes, there's not a lot to be said on the two countries that you mentioned. We are in the Mofcom Minister. We're very, very close to the anti monopoly bureau. We our filing has been accepted on the 7th July, if I'm not mistaken. We're in a 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 note that this is a very, very attractive area to speculate in media about anything that can happen. But I have no reason to believe that this is going to be anything else but just a normal very, very well structured 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 2 have been turned down. We don't intend to be number 3. 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, etcetera. 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 would have seen that in places where there was also a lot of concern like Brazil, things have gone very, very well. And 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 want to preserve 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 cost out, deferring capital, indeed introducing the scrip, restructuring assets, selling assets that altogether has meant that our gearing has actually gone down rather than go up. So we haven't used up any of that strength ahead. But we know that we have to use that balance sheet as well to do part of the consideration for the BEG deal. So and each you have to get that entire balance right. Now at the same time, I'm sure that again John'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 and the other thing. It will be a dynamic decision making process that will be governed by all these factors that we will have to throw into the mix. And that is why it is a major agenda item every time we meet as an executive team to understand what choices are ahead of us and what is the most prudent way to deal with these choices. And I would expect that to stay with us for the next several quarters. Stay in this area, yes, and then I'll move over to the other side. Yes, Ben. Ian Reid from Macquarie. Just talking about Brazil, you mentioned earlier that you can bring to Bayer Shell's operational and reservoir management experience, etcetera. But the reality is it's all operated by Petrobras. And now Petrobras is in of a crisis. I wonder whether this is now the opportunity for you to start to make approaches to actually operate things or acquire things you can operate in Brazil? Has that process started between yourselves and the Brazilians? And the second question is, again, back to LNG on Browse. You've talked about affordability and breakeven prices, etcetera. But Browse seems to be going ahead or at least Woodside think it is. Can you say what oil price breakeven you have on that? And what the status of that project is right now? Well, you take Braunsch, I'll talk a bit about Brazil. Yes, 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 pre sold polygon 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? Well, we can speculate about that. I'm sure it if it was to happen, it will take some time and some political development for it to materialize. But one thing I know for sure that if it does happen and if we feel that indeed it would be beneficial for us to take on an operatorship role being the preferred and lead partner of Petrobrasch 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 VG, 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, Petrobrasch is the operator, but I very, very much like our input, very, very much see that some of the concepts we have on deepwater 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 2 very professional organizations, of course, with a suitable amount of professional pride, but we're also pragmatic enough to understand how we can benefit from each other. And that is exactly what is happening at the moment. That's I cannot tell you enough how warm the reception has been in Brazil and with Petrobrasch. When we were there with the entire Board last month and had a dinner with the entire Petrobrasch 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. Bras, just need to recall there are 4 partners Woodside operates Shell, BP, PetroChina. We have entered FEED. This is a potential 3 floater development over a quite significant period of time. Going into FEED is targeted to say what will the cost level be, wind back with conversation to 20 minutes ago and what markets will the gas go to. Shell may have a broader and more optimistic expectation of markets because we're in so many markets anyway. But all the partners will have to come behind. Yes, we are prepared to put this amount of money into the project against those markets before we go ahead. 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 probably not quite the same type of a subsurface, but it's wet, I. E. Liquids as well as gas, it's not dry gas. So there's a lot of value there, quite a lot of TCF, well into double digits. And some way, we should be able to make value. But if it's not there, then it'll be up to the partnership and the operator to ultimately make the call. But we're not committing a lot new money by going into the FEED phase. Question in the middle. Okay. Stanley. So I wanted to ask you 2 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, oh, we know this stays and that goes. But that was a higher level comment. And I was wondering, you didn't use that terminology this time around, but I wanted to ask you if you're sort of thinking on that has sort of progressed since then. And secondly, I wanted to ask about sort of breakeven 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 did not grow that much. So it naturally lend itself to the conclusion that, well, perhaps these the new projects at $100 oil have lower returns. And now from you and 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. We can really go from 100 to 50. I Like how do I mentally sort of bridge that gap? Let me talk about the strategic themes and see whether Simon can sort of replace some of the discussion we have on breakeven pricing in the last few weeks. No, I think my plan has no change there. Yes, 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's no change there. I hope you will understand that I cannot go any further at this point in time for sort of sensible commercial reasons to say what it means, but there is no change of intention there absolutely. Breakeven, I'm glad you asked the question, Martijn, and restricted it to breakeven for projects. It's a lot easier to talk about than breakeven for the aggregate portfolio. Individual project, we've never taken decisions where the breakeven net present value at the point we took an investment decision was 100 period. We've always used 3 values. We use what we call the low level screening value, then the ranking value, then a high value. Those values have been for some time 70, 90, 110. Screening means should be positive NPV. Ranking means compare it against other projects for which are the best. And the high is just to say on what level of upside are we retaining access to. Don't give away all the upside in the negotiation just so you get your project over the line at a lower price. We never really taken big decisions at anything that's breakeven above 70. Occasionally, there's been 1 or 2, but usually with a strategic reason with value embedded potential beyond the individual project. So coming down to 55 from there is good, but it's not a massive step. The problem has been that was at the time you took the investment decision. And there has been a track record over the past, well, at least 5 years, but certainly with some high profile examples in that period of you took the investment decision on this level of cost, but the actual was this. And that's what causes some of the problems in terms of declining returns. Plus the fact that actually, as the whole industry has been effectively, I might say, catching up with the increase in investment that we ourselves started nearly 10 years ago now for different reasons, the whole industry has seen that blow up. And you can see it in the charts that Ben showed in capital employed terms. Our capital employed, the end of the quarter, to 2 30,000,000,000 capital not yet employed, dollars 100,000,000,000 it's $55,000,000 on assets in progress. And these are things that we can and should do all the time. Great. Okay. So that was one of your 4 questions? Well, I thought I'd let somebody else have a one more for Simon. You gave us a really useful attribution last quarter. Sorry, Lee? You gave us a really useful attribution last quarter of the integrated gas moving parts Q on Q and the FX, now digit pearl. Is there any chance we can have a repeat of that this quarter? Just what were the moving parts? In simple terms, sorry, no. I've been a bit busy. So my own preparation was maybe a little less detailed than normal. Okay. Sorry. Over there. Sorry, you have the mic right now. I'll go back to you. Yes. Thank you very much. Just 2 I guess quick questions. First really back on the divestments and given the comments about LNG, deepwater as the focus, gas being the fuel of the future, lower CO2 world. I just want to get your thoughts on 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 it be could we see something more radical just related to oil sands going forward? 2nd 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 been able to tweak pricing or taxes. So are you having any success? Or should we expect to see any shelf success in pushing back with some of the rising fiscal tick? Thank you. Yeah. Okay. Simon, just say a few words on tax and fiscal tick at a moment. I'm not sure whether you wanted to ask Martijn's question in a slightly different way, but what we need to do with Oil Sands. Oil Sands of course is a relatively high cost operation. It will be, I think, in the Q1 when it comes to cost per barrel. But there is, in my mind, also a further potential to take cost out and a necessity to do that, of course. We are at oil price levels, if you look at North America and if you look at the discount 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 there's a few helps. The changes in regulation, 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 dirt 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 Sands 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? Yes, thanks. It's a bit broader than tax usually is a fiscal structure and or local content, the 2 are often linked. There are countries where it can be a barrier to investment because of the costs that are added. And yes, you can have sensible discussions. It took a while, but the U. K. Got there. Have they gone far enough? Time will tell. There are specific countries, Brazil and Nigeria, where local content requirements are high understandably, but they do have a significant impact going forward. So less so on the projects already underway, but as we go forward, to unlock some of the projects that we've seen, maybe we'd need to see changes there. And a couple of countries in the Middle East, I think is known in Iraq. One of the reasons we are looking at the pace of development in Majnim is because of the actual terms today. They don't really rank in an investment comparison. And there's quite some 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 into 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. Chris, I managed to grab the microphone. Thanks. It's Chris Cooperman from Merrill Lynch. Two questions. I heard you mention that Permian breakeven seems to be even below current numbers. 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 6 months has that experience changed your internal thinking about potentially there being more cost efficiency still down the road, not necessarily in the next 3 months, but over the next 3 to 5 years, possibly denting your longer term oil price outlook? And the second question, I've now we've been through quite a few quarterly results 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 and 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 30,000,000,000 dollars 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, yes. So if I look at the Permian, also the also the Duvernay, they're both areas where we have seen a continuous learning 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 up with the most optimal way of developing and planning infrastructure etcetera, etcetera. 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, etcetera. 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 completions, that we can be absolutely top quarter. I think in the Permian, that's the great thing about the Permian and many of these other place, 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 for Duvernay although we are so far ahead of everybody else that it's kind of harder to get up to come with good comparisons. Now what does that mean for the entire industry? Can the entire industry see the same trend? Well, I'm sure they are. As a matter of fact, they have to, otherwise they won't survive. Will that mean that basically there is such a big new reservoir of new oil opening up that we can sort of see the oil price going down for another triple dip and for years to come? I don't know. I don't think so actually, because at the same time, if you look at how many of the independents are doing from an overall financial perspective doesn't look good. The individual well economics may be interesting, but the overall integrated economics including the whole infrastructure to evacuate doesn't look very good. That is 1. And the second indicator, look at what is happening this week. For I think now 3 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. Second question? It's really around decline rate. Decline rate, yes. Need for growth and views on capital investment, I think, whether we need M and A, 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 different types of activity. And we don't recognize any decline rate in our shale production on which, remember, even if the production ever were to get to 10,000,000 barrels a day or whatever some of your peers are putting out there, it declines by 40% in the 1st year and 20% per year thereafter. So even you get to 10%, if you stop investing, it's pretty soon 5% or 4% or 3%. And you have to keep investing at that pretty high level, which really underpins Ben's point. Will that ever be the marginal price setter? Well, maybe for a few years, yes, but how long can you keep finding 5000000, 6000000 barrels a day of new production to be the price setter? That would outstrip the Saudi's ability to do it by a very long way. And whether the rocks work is less of a point as to whether the capital markets are prepared to keep providing that kind of capital to keep that scheme running. Yes, I've heard various comments from others around decline rates versus growth versus M and A. Our growth potential is in completing the BG deal, plus the assets in our portfolio that were on the slide Ben showed earlier. I'm not really worried about growth personally at the moment. The aim is about getting the right balance between growth and competitive returns. We've made our play on should we acquire. We think we did it at the right time in terms of the valuation of the moment. Our priorities are clear. Yes. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. The moment. Our priorities are clear. Yes. I see there is a bit of self selection going on. Whoever has the mic has the next question. There certainly is. Gordon Gray, HSBC. We'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 a recovery of oil prices, can you give us a feel for your cash flow sensitivity long term? I'm thinking slide 32, I think it is in your presentation, you talk about the €15,000,000,000 to €20,000,000,000 of cash generation in the 3 pillars, etcetera, etcetera. 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 this summer season? Let me take the second question and give Simon some time to think about the first one. The key milestones we have to get through actually we've gotten through most of the milestones already. And they have been very well commented on over the last months quarters of course. So where we are in Alaska at the moment, we have the true drill ships 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 planned for this season over the next weeks, months. So expect results somewhere in September or so. It we have is also very well advertised, we have one of the Finnish icebreakers in Portland being repaired. It hit an underwater object in chartered waters. So we discovered something that was uncharted after all. And 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 Fenica, 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 said is to operate exceptionally well and all the evidence that we are seeing at this point in time is that indeed this is paying off. So that's all I have to say at this point in time. Update will come over the course of the summer. Price sensitivity. Today around $3,000,000,000 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 projects the 10 projects that we showed, 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 4 over the next 3 to 4 years. With BG, maybe 5, depends on how we then reset the portfolio, which assets we keep, which we sell. So increased sensitivity over time to the oil price. The 15 to 20 ranges, those ranges were not just where it might 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. 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 overexposed in that area. And then the deepwater is the growth. That comes from significant growth on Brazilian side, pace at which 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 to 20 should be seen as that's what we should target to get the shape of the portfolio, the 3 pillars. And if there's 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 3, 4, 5 years. The capital priority will be on the 3 pillars. Yes. Question here. Just take a bit control over the mic. Thanks Trevor. Thanks. Rob did very well in restricting himself. I'll try and do the same. Two questions. 1, I'm tickled by the LNG comments and complexity and I'll come back to it in a moment. But analysts exactly the same in terms of spreadsheet, Simon, and you kind of made our life slightly more complicated in ways, deferred tax, Brazil, Australia. Why does it go through the P and L? Why not just through the comprehensive income or statement of income? Why can't we lose it as a complication each quarter? And more seriously, 2 others of mine, very simply, first one, organization, Ben, how has it responded to the changes that you are indicating you wish to drive through it? How much resistance? How much pushback? How much to what extent embracing? And just going back to the discussion on LNG, if I might. I guess the difference between gas and growth this time relative to gas and growth historically is, look, 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 for demand for LNG to continue to deliver at the kind of rates that it has over the last 2, 3 decades? Because even at $9 or so an MMBtu relative to coal and relative to falling renewable costs, Gas is just not as competitive as it was. So I'm not sure what your question now is So the question is sorry, Ben. The question was do you need carbon pricing to be introduced? Do you need a real shift away from the use or away from carbon intensity, everything that you've been talking around working towards in December or politicians been working towards in December to take place to really underpin? Well, I think a number of things need to happen. If I take the last question first and I'll talk about our organization, I'm sure Simon will want to talk about the deferred tech 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 coal because at the moment, look what's happening in Germany and it's happening in other places as well. You see the same also happening potentially in places like Japan. It is the combination of low or no variable costs renewables coming in. And the moment you install a solar panel, the moment you install a wind farm, it has no operating cost, has no fuel cost. And if you place these assets in electricity markets, they always dispatch. Basically what they 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 you have to do something about it. Now one way to do to work with it is to put a price on carbon and that will then disadvantage coal because it is a higher carbon intensive fuel and therefore it will re level 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 U. K. And Germany, etcetera, 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 is by making gas competitive, competitive without putting a price on carbon. So you have to do both in my mind. But to just push for renewables in the hope that that will somehow solve the climate change problem I think is not a good solution either. Now organizational change, I talk specifically about BG and the springboard for change or the last 18 months that I've been in a role and pushing for a stronger focus on the bottom line and performance units etcetera, etcetera? I think it there's an interesting dynamic in the organization on that. I think it 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 the springboard for change really mean. And well 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. Now 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 off. 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 on where we need to get to. There's much more understanding than if you're not getting there in an orderly fashion or fast enough, then there is always restructuring our portfolio action to take care of it. So yes, I do think that we have a different dynamic emerging in the organization. I've got to say something on organization there. 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 time we did something on the acquisition. Now let's make it a platform for something different. And 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 wouldn't 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. I have to quote them because some of it started with us 12 years ago. But the compliance mindset has gone over here when in fact you only need to be here. And actually, that's part of what we can do. And I think that's it's a really great opportunity. That plus the fact the cost prices are low and 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 Q2, the FX in Brazil and Australia didn't move end of the quarter to the same place we started. So, there was no effect in the second quarter. But since then, Brazil in particular has weakened. So right now, we look like getting whacked in the Q3 in Brazil and possibly Australia as well on that number, which cost us $800,000,000 in clean earnings in the Q1. We need to find a better way of helping you and us smooth that one out because it's nothing to do with the underlying performance of the company, I agree, and time. You need to be in Brazil and Australia in particular. Those are the 2 that have impacted us most and have a certain tax position, whether you're in a tax asset or other. So they may not have the same scale and exposure. Remember, the Americans don't use they only use dollars for everything, so they don't tend to see DIE changes. Okay. Who wants to ask the last question? There you go. Thank you. Anikak from Exane BNP. Two questions maybe if you don't mind. One's 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. Wondered if we could just try and understand some of the structural growth areas within downstream as opposed to the cyclical elements that driven that number today? Do you want to go on the replication and I will do the downstream? Sure. The Brown Street, 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 of choosing and spotting the sweet spot of when we may be better off divesting, diluting or thinking about abandonment. It's difficult to give a number, but it does vary. But our strategy is a combination of big plays to open up new hubs, smaller projects to maximize the value of the existing hubs, 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 other, so big 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 3rd 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 $5,000,000,000 project. But you can't move the $100,000,000 to $150,000,000 if you haven't got a few $5,000,000,000 around which to do the smaller. So on the downstream and some of the growth areas that we've seen today and that we are focusing on, it's a great question to end on, because I do think that downstream is one of the highlights in our results today as well. It's one of the best quarters that we have seen. 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 been interchanged with refining. But refining is only one of the core businesses that we have in our entire and the refining is a structurally challenged business, it's structural overcapacity. And we are in the refining business only in places where we think we can make great integrated value or where we have to be in refining because it serves a broader envelope that altogether creates the value that we need. Now the refining business is a cyclical business as well. We are seeing today healthy refining margins. Of course, we have tremendously reduced our footprint in refining over the last year. So we are down to a much more profitable core. And our refining business today is doing very well. It is as a matter fact it's doing almost better than our upstream business together. Now that is 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 shelf forecourts 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 etcetera. But by and large, this is a business that throws up a lot of surplus cash and needs limited reinvestment to keep it strong and healthy. And it's 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, which are a little bit more difficult because they have regulatory hurdles pricing wise. And sometimes we have also potential. We have lubricants, where I think I can say without too much hesitation, we have the best lubricants business in the industry, which again is a very, very ratable business, but it's 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 employed or not working capital. Again, it's ratable, but it's more ratable and more dependent on volatility in the market. And when we see a lot of price volatility, we enjoy better trading results. This quarter all of it is working very well and there's no reason why many of these businesses should continue to work very well. Refining margins may come off and therefore you will see our refining business of course coming down at some point in time and we'll continue to high grade that business all the time. Getting out of Japan is getting out a very large refining footprint by the way. But altogether, I think there is tremendous potential to continue to high grade and then also to continue to grow this business. So when we talk about our 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, but typically the margins are determined by reinvestment economics, you see great opportunities to invest as well in our footprint. So I think there is both today, but also in the near term future a great potential to not only make the downstream business more robust, but also make it a bigger and better business. Thank you. So thanks again. Great turnout, great set of questions, great opportunity for us to address some of the points that needed addressing. We'll have drinks outside. But before we go outside, can I remind you that there is also the Q3 coming on the 29th October and Simon will be talking to you about our results then? Thank you very much.

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