Royal Dutch Shell's Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Royal Dutch (RDS.A)

Royal Dutch Shell plc (NYSE:RDS.A)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Simon Henry – Chief Financial Officer

Analysts

Theepan Jothilingam – Nomura International Plc

Martijn P. Rats – Morgan Stanley

Jon Rigby – UBS Ltd.

Robert A. Kessler – Tudor Pickering Holt & Co. Securities, Inc.

Irene Himona – Société Générale South America

Jason D. Gammel – Macquarie Capital Ltd.

Oswald Clint – Sanford C. Bernstein & Co.

Iain Reid – Jefferies & Company, Inc.

Peter Hutton – RBC Capital Markets

Alejandro A. Demichelis – Exane Ltd.

Kim Fustier – Credit Suisse

Fred Lucas – JPMorgan Securities Plc

Guy A. Baber – Simmons & Co. International

Hootan Yazhari – Bank of America Merrill Lynch

Jason S. Kenney – Banco Santander South America

Lucas O. Herrmann – Deutsche Bank

Stephen Simko – Morningstar Equity Research

Operator

Welcome to the Royal Dutch Shell Q1 Results Announcement Call. There will be a presentation followed by a question-and-answer session. (Operator Instructions)

I’d like to introduce you to your host, Mr. Simon Henry.

Simon Henry

Thank you very much, Tim. Welcome to Royal Dutch Shell First Quarter 2013 Results Presentation. Let me give you a run through on the quarter and I am sure there will be plenty of time to take all your questions. First of all, I’d like to share the cautionary statement. And while we have this on the screen, I am sure you’ve seen the announcement this morning that our Chief Executive, Peter Voser has decided to retire in the first half of 2014 and the Board is now started to look for his successor. I just like to say here how much I’ve enjoyed working with Peter over the last 17 years as a colleague and a friend. And of course we’ll continue to do so over the rest of his time here at Shell.

Let me move to the results. Start with another cautionary statement you’ll heard before quarterly results are important whether they are good or bad. But they are only a snap shot of performance in the volatile industry, where we in Shell are implementing a long-term strategy much longer than three months.

The first quarter earnings excluding identified items was $7.5 billion and the earnings per share were up 2% against Q1 2012. We are investing for profitable growth while maintaining simultaneously strong capital discipline. We’re developing at the moment in 13 new projects and maturing the series of further opportunities for future investment. So far this year we’ve seen the growth impact of recent start-ups with underlying volumes up 2%, and we’ve taken four additional final investment decisions during the quarter with new investments enhanced in petrochemicals in Singapore and deep-water in Nigeria. And then LNG for transport capacity in the North America, they should all add new value for shareholders.

We’re managing the portfolio dynamically with that global thematic approach to capital allocation, where asset sales improve by capital efficiency, add focus to the company, they enable us to bring in strategic partners and with selective acquisitions we can add value for shareholders by refreshing the options. Over the last 12 months, we’ve done, we delivered around $5 billion of asset sales, matched by some $5 billion of acquisitions. And over three years that’s $21 billion of divestments and $17 billion of acquisitions.

And we’ve made further portfolio moves recently such a plan to fill that part of the downstream portfolio, with positions in Italy and Australia. Of course we have the agreement by Repsol Global LNG portfolio. And we have LNG supplies in Latin America in Trinidad and Peru.

Oil prices have fallen recently and this kind of volatility is a fact of life in our industry. And we are implementing a long-term consistent strategy against what is and will continue to be a volatile backdrop.

Our financial growth allows us to invest the long-term shareholder value increasing cash returns and we have distributed $11 billion of dividends over the last year. We’ve raised our dividend today, confirmed the 5% increase to $0.45 per share, per quarter. And that we announced back in February.

Now we are committed to the share buyback program to offset the deletion from the script through cycle. And we have recently stepped up the pace there. As of last night we were around $1.3 billion of share buyback so far this year in 2013.

I’ll just move on to the macro environment. You can see just from the lines on the chart the volatility we faced. If you look at the macro picture compared to the first quarter 2012 the oil prices were lower than a year ago. And there was an increase in the differential between Brent WTI to $18, and between Brent and West Canada Select or WCS $45 a barrel discount. Our global natural gas realizations increased from the first quarter a year ago. That includes higher Henry Hub price levels in North America.

On the downstream side, refining, marketing and chemicals margins they were higher for us a year-over-year, we had better conditions for trading an year ago.

Moving onto the earnings impact, and there were a number of accounting and presentation changes in the results today. And you find all the details in the results announcement in the supplemental material. IAS 19 is a change for pensions accounting and IFRS 11 move some of our equity affiliates to proportionate consolidation. There is no substantial impact on earnings and cash flow as a result of these changes or low the balance sheet will be more volatile in the future.

We’ve also refreshed how we define identified items difference between headline and adjusted for identified items clean earning. We got more clarity on definitions and we’ve removed the old $50 million threshold. And that’s because that threshold did leave to sometimes rather binary outcomes that was out of step with the peer group. We were moving to be more easily comparison.

We don’t expect this change to make a fundamental difference to clean earnings overtime, maybe some minor variance on the quarter-by-quarter basis, and to give you an example for the quarter just concluded, first quarter 2013; this is change to identified items leads to underlying earnings that are $250 million higher than they would have been on the old basis for identified items.

The CCS earnings for the quarter including the identified items were $8.0 billion, excluding the identified items, the earnings was $7.5 billion, and that in earnings per share includes 2% over last year.

On a Q1-to-Q1 basis, that was lower earnings in upstream, higher figures in the downstream. Upstream earnings excluding identified items was $5.7 billion in the first quarter, that’s a decrease of 10% against the same quarter last year. Earnings were impacted by lower liquids prices, higher operating costs, higher exploration expense and higher depreciation. The growth projects such as Pearl gas-to-liquids had a positive impact from the Q1-to-Q1 results with some uplift from gas prices.

We also had positive year-over-year impact from tax from LNG trading and from inventory effects. Our upstream Americas business returned to profit in the first quarter compared to the losses sustained in the second half of 2012, this was driven by higher volumes, higher price realizations. However, earnings were lower than one year ago levels due to lower oil prices, higher costs and higher depreciation charge.

Our downstream results excluding identified items, and on a CCS basis were $1.8 billion that’s higher than year ago levels in area, and supported by higher oil products and chemicals results.

Refining at the largest Q1-to-Q1 uplift where Shell was positioned better than the industry or better in the industry environment not despite our lack of exposure to the advantaged inland PADD 2, PADD 2, particularly U.S. refining margins. Real fast positive momentum from chemicals, oil products marketing margins and an increased contribution from trading.

So those some comment on earnings. Turning to cash flow. The cash generation from the business on a 12-month rolling basis was some $49 billion, including $5 billion of disposals, and that was with an average Brent price of $110 a barrel.

Those upstream and downstream segments generated surplus cash flow after investment. The free cash flow was $4 billion in the quarter, and $13 billion over last 12 months. We’ve paid out $10 billion of that cash, the dividend and the share buyback over last year, and that’s less the cash surplus of $3 billion. And we manage this cash cycle very closely as we face that volatile macro environment. So those are the comments on the financials, moving on to the underlying operating performance.

Headline; oil and gas production for the first quarter was 3.6 million barrels of oil equivalent per day, up 2% on an underlying basis. And volumes were supported by growth from Pearl gas-to-liquids and Pluto LNG project in Australia, and both of these are effective and are fully ramped up. And also supported from North America, liquids rich shale plays where we produced 52,000 barrels of oil equivalent per day, and that compares to only 7,000 barrels per day a year ago.

Maintenance, especially in the North Sea took around 30,000 barrels of oil equivalent to-date from production year-on-year, and the worsening security picture in Nigeria, that reduced our share of SPDC volumes onshore by 30,000 barrels of oil equivalent per day, again relative to last year.

LNG sales volumes globally were flat Q1-to-Q1, the growth from Pluto in Australia was offset by reduced loadings in Nigeria, where the feed gas supply was disrupted by attempted pests on the gas pipelines.

In the downstream, the chemicals and refinery availability that were low than a year ago, but that was largely a result of planned maintenance in U.S. Gulf Coast and Germany. The downstream sales and marketing volumes were impacted by accounting changes.

Our headline sales of volumes in oil products went up, chemical sales, product volumes went down as a result of the changes. And if you look at the underlying trend, we saw lower chemicals and oil product sales than one year ago. Europe and North America oil products volumes declined. We did see some growth led by retail in Asia.

Now looking forward to the second quarter of 2013. We are expecting relative to last year 20,000 barrels of oil equivalent per day of negative impact from the North Sea and Gulf of Mexico, maintenance activities and those of course are high mount margin barrels.

The security conditions in Nigeria remain very challenging, and we’re also expecting heavier than normal maintenance program in LNG overall for the second quarter.

In chemicals, I need to reflect that we’re expecting higher maintenance in Q2 ‘13, availability around 85%, that would compare with availability of 89%, that we produced in the second quarter 2012.

That was a busy quarter for the portfolio, so let me give you a bit of oversight there, lot of development as we refresh the company for future growth. This chart shows how all these portfolio map out against the strategic themes that we’ve talked about previously, and that we’re using in Shell to drive the strategy, and the capital allocation.

Now, we restarted production of Port Arthur’s crude expansion project, and the refinery in Texas in the downstream. In the upstream, we started up the first of the oil sands de-bottlenecking project in Canada, we started up the Amal and have still the recovery project in Oman, and we started yesterday, operations in the Basrah Gas Company in Iraq, which will capture and commercialize the gas currently being flared in southern Iraq.

We saw four new final investment decisions in the quarter. 60,000 barrel of oil equivalent per day in Nigeria deep water on a 100% basis that would be, and 0.5 million ton per annum of integrated gas in the gas-to-liquid fuels or transport fuels in North America.

We also launched new polyols and ethoxylation investments in chemicals at the Jurong Petrochemicals facility in Singapore. We added new exploration acres worldwide, we found new gas reserves in Australia, Discovery, and have continued near field drilling success in our upstream engines.

And looking at new potential final investment decisions, we’ve had real progress in two areas in last few days. We’re very pleased to be chosen by the Abu Dhabi National Oil Company to participate in a 30-year joint venture to develop Bab Sour Gas field with a 40% stake in that joint venture. And this could be up to 0.5 BCF per day of shale gas or 90,000 barrels a day oil equivalent.

And in Canada, we’ve been granted regulatory approvals for the Carmon Creek in situ heavy oil project, and that could come to final investment position in the next 12 months, and eventually be an 80,000 barrels a day project, and currently that’s a 100% Shell project.

Acquisitions and acreage purchases in the quarter totaled $0.6 billion, that includes the increased stakes of barrel in Sakhalin in the UK where we already had an equity holding. Divestments were also $0.6 billion, primarily proceeds from dilution of Prelude floating LNG project in Australia to a strategic partner.

Now, it’s been quite a bit of progress on our integrated gas portfolio. So, I’ll just give you an oversight there. Firstly, in Australia the operator of Browse LNG, the potential project, the operator is Woodside, they announced the project will not go ahead with the original onshore design that have been studied and seen, that will not proceed due to the high expected cost level. We fully support that decision and the operator will now assess alternatives including Floating LNG, which Shell believes is a viable economic alternative for this important resource, 16 TCF of gas there, so it’s a very potentially interesting resource for future development.

Elsewhere, we’ve taken FID on two new LNG for transport project in North America, brings our total capacity therefore transport LNG to 0.75 million tons per annum. We also in the U.S. formed a joint venture with Kinder Morgan for an LNG export facility at Elba Island in Georgia. This is planned to be built using the same small-scale modular liquefaction facilities that we use in the gas for transport, will build Elba Island in two faces for an expected total of 2.5 million tons per annum, with Shell off taking 100% all of the LNG gas.

We also reached an agreement in the quarter with Repsol to purchase their LNG business at 7.2 million tons per annual of sale agreement, including 4.2 million tons per annum of Latin America liquefaction capacity. And we’re already a leading LNG trader clearly, and we can add value to Repsol’s position through that trading capability. We see up to $1 billion per year of cash flow potential from these Repsol assets once the deal closes. And we expect that to be later this year or early 2014, a lot of details going through.

So pretty good progress overall on the integrated gas portfolio. And I have to point out one important factor for you, the new positions Elba, gas for transport, Repsol LNG and the Basrah Gas joint venture, they’re all in good future cash flows, growth returns to Shell, but collectively they don’t add a single barrel to our reserves or production.

And this is just symptomatic or reflects our longstanding emphasis on value creation ahead of volumes. I must reiterate, any production target is only a proxy for financial growth, and you can see in this choice of projects, precisely what that means.

And then moving on to the financial framework, the important messages of this takes shape and you can see the choices that we are making. Our business strategy require substantial levels of capital investments through the business cycle.

These are multi-year programs to maintain facilities that are on-stream to build new growth projects and to explore the new opportunities. The balance sheet, underpins the financial framework, and we manage that in the conservative basis in order to be able to finance the strategy. The business strategy itself is chosen to grow the cash generated sustainably through cycle.

Now while we see quarterly volatility, we look through this we target growing free cash flow of the red lines on this chart is declared that exist the payout to shareholders, as you can see on the top left here. The growth in our cash flow underpins both the competitive dividend for shareholders and the investment program.

Our free cash flow has grown in the last few years from negative position in 2009 to some $13 billion over the last four quarters. At the same time, the balance sheet gearing has declined to 9.1%. All of this as a result of the growth strategy and some recovery in the macro since 2009. This increase in free cash flow gives us more flexibility and financial planning and we have increased the dividend in 2013, inline with underlying growth in earnings and cash flow and aligned with the policy. And we’ve also increased the pace of the share buyback program to offset the script.

And that is no precise formula for dividends and buybacks. We have to take a long-term approach to capital allocation. But I don’t see the Company selling assets or raising debt to fund buybacks. This is something we do from our cash flow generated from operations.

And dividends are our main route for returning cash to shareholders, the script up taken the fourth quarter was 31%, and we will be offering script dividend again for the first quarter. We increase the pace on the buyback program over now just under $1.3 billion on buybacks as of the yesterday. This current environment continues I expect the share buyback to be somewhere in the range $4 billion to $5 billion a share. The upper limit is dictated by the share price and trading restrictions in the London market.

And overall of course that should more than offset the impact of script shares that we issued this year in 2013. Now we will sustain investment for long-term shareholder value that will enable much longer-term dividend growth, but this financial strength we see at the moment enables us at the same time optimize the negative cash returns to investors.

Couple of words on competitive performance; it is improving, the Shell looks at the range of financial and operating measures, and then we see improving performance in all of these metrics. I think there is more to come here. As quarterly results are important of course, but we’ve got to put these in the context of the longer-term strategy and performance, we look at it three to five years.

And just let me summarize the key messages before moving to your questions. Underlying earnings $7.5 billion for the quarter, 2% increase in earnings per share. We’re investing for profitable growth, while simultaneously maintaining the strong capital discipline, the financial growth creates flexibility in the company to invest the long-term shareholder value and to increase cash returns to the shareholders.

We raise the dividend today 5% stepping up the pace on the buybacks, Shell were making good progress against the targets to deliver a more competitive performance from Shell.

With that I’d like to move to your questions. Please could I ask you to restrict yourself just one or two each so that we give everybody the opportunity to ask questions. [Dan], please could you follow now for questions, thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Theepan Jothilingam from Nomura. Please go ahead with your question.

Theepan Jothilingam – Nomura International Plc

Simon, good afternoon, thanks for taking the question.

Simon Henry

Good afternoon.

Theepan Jothilingam – Nomura International Plc

Just comeback to Australia, could you just talk about the other options still in the Shell portfolio particularly around Arrow LNG and also the stake in Woodside on the later, how you think that sort of adds value to the Shell group.

Secondly, just on CEO succession, I know Pete is on the (inaudible) I wanted to know whether the Board of Management had good line of sight on Peter’s intentions to step down whether assuming you known to quite sometime. Secondly, whether the internal processes started and whether you have will be part of that process. Thank you.

Simon Henry

Theepan many things, Australia was other options, we’re just a reminder the building in Gorgon, we’re a small shareholder in Wheatstone and the Prelude project are taking nice shape of floater in Korea. They’re already engaged in quite significant development. The Arrow joint venture 50-50 Shell, PetroChina is developing the upstream looking potentially early sale of ramp up gas to domestic or export customers.

We’re preparing oil progressing in parallel both the green field LNG option and potential cooperation with the existing project, the three projects under construction there. We deliberately delayed our on LNG project because of cost inflation. And, three projects ongoing in a country which is basically short of well, you can say what the underlying impact is on the project. We’re not in any particular hurry to make a final decision we want to get the economic trial.

We also have other floating LNG options we’ve talked about Sunrise previously. We have other discoveries on the Exmouth or the outer Exmouth Shell. And in even shelve we still doing exploration, we’ve got big well going down Shell only 100% at the moment, very significant gas province and that is important for us that we develop at the right project, at the right economics, at the right time in terms of cost. But, Australia remains an attractive country in which to do business for LNG.

Woodside, as a result of all of the above, we said couple of years ago, the Woodside was no longer really a strategic necessity to Shell in terms of executing our LNG strategy in Australia, and we did sell lion part of our shareholding, we still own around 24% of Woodside, and basically the statements still hold. However it’s may not be a strategic asset but it is a valuable asset. It’s the company with good assets, good prospects. We’re not going to give it away, just because it doesn’t fit strategically, so we’re not in any particular hurry that either.

And on the CEO succession, Board and management this time we share with you just take this once rather than multiple questions and we have Peter describe this to the staff this morning. He decided to retire from Shell after almost 10 years on the Board as CFO and obviously the last four years as CEO, more than 25 years in the Company in total. He’s had a great career as an executive, but he is looking for a lifestyle change, more time family, the decision is a private and a personal decision. He will still be engaged in the business community through limited number of non-executive role. But not at Shell and he’ll continue with active participation in our profit organization, so that’s just some background I hope Peter post it.

The Board is in general well prepared with succession planning, the NomCo, which is chaired by Jorma Ollila and the management is head by Joe Ackermann are well prepared in this process as we go forward. And I think it’s probably inappropriate for me to say anymore, I don’t have timing or knowledge of exactly how this will play out other than that they’ve suggested that they’ll look at both internal and external candidates.

So, I’m hoping that we’ll cover of detail statement today and hopefully we can return to results and strategy. Thanks Theepan, move to the next question.

Operator

Thank you, the next question comes from Martijn Rats from Morgan Stanley. Please go ahead with your question.

Martijn P. Rats – Morgan Stanley

Yeah, Good afternoon, I have got two if I may, you mentioned that our production from liquids rich shales from U.S. reached 52,000 barrels a day already, which it’s growing at a pretty decent cliff, I was wondering if you could give us a bit of an outlook for how this will progress over the next couple of quarters. What level of growth you still foresee.

And secondly I noticed from the cash flow statement that the line dividends received from equity accounted investments, looks light compared to the last quarter and compared to the same quarter last year, and I know there can be joint ventures where sometimes the timing from certain dividends can be, so little specific I was wondering if we are looking at a sort of normalized number or whether we’re actually sort of missing while it could be as much as a $1 billion and also whether this line item given the accounting changes that you highlighted could be affected by that?

Simon Henry

Thanks Martijn the liquids rich shales in the U.S. 52,000 barrels oil equivalent per day at the moment, not basically the Permian and the Eagle Ford. We've got some 12 rigs in both, in the two in total, and we're also drilling out other liquids rich opportunities in Canada in particular, so that we're in 20 rigs at the moment on liquids rich activity.

We won’t see quite such a step up as we have recently seen because, the 52 is about half of it is in the Permian which was an acquisition in the fourth quarter. But we do expect to see some growth over the rest of the year and just as the benchmark the average onshore shale production was about 260,000 through the totality of 2012, and we are about 320 in Q1 2013, so quite some step up, not helping the turnaround of the Upstream Americas result. I can't give an absolute figure because it does depend on drilling result and overall you may recall we scaled back our absolute activity in the onshore drilling for now just to get the right balance and the right capital discipline into the system.

And dividends received on cash flow statement; well spotted, we are somewhat less in terms of receipts than actual earnings in the equity associates. There are several factors here some of the dividend reduction is timing, some of it is step down in share of production sharing contracts reach full cost recovery, and some of it is the accounting change IRFS, that one in particular, doesn’t' come back, and the cash flow is anyway shown elsewhere in the cash flow statement. The last one applied to the Aera joint venture in California, the heavy oil joint venture and that several hundred million dollars that transferred from the dividend line to elsewhere in the statement.

So there are three factors there so about half of that difference comes back, the other half doesn't. And hopefully that gives you some feel for where we are on that dividend statement, overall the cash flow progression remains generally positive but there is still some way to go, I am sure you'll have seen relative to the targets that we expect to achieve over the full year period 2012, 2015. Thanks Martijn.

Martijn P. Rats – Morgan Stanley

Okay thank you.

Simon Henry

Thanks and the next question pleases Daren.

Operator

Yes, thanks. The next question comes from Jon Rigby from UBS. Please go ahead with your question.

Jon Rigby – UBS Ltd.

Yes hi. A couple of questions, firstly you mentioned on the call that Pearl effectively reach platform on production volumes but can you just talk about over whether it's reached as sort of plateau contribution in terms of earnings and cash flow or is this still more their shake down and start-up costs to work the way out in terms of the contribution to the financials.

And secondly just on the Canadian that you referenced small expansion debottlenecking and also talk about Carbon Creek. As you look at your Canadian position, are you able to effectively run all the future potential production from the oil sands through sculpt and therefore sort of avoids some degree, some of the problems that the rest of the industry is having in terms of differentials, although clearly still affect to some degree. Thanks

Simon Henry

Thanks Jon, and GTL it’s at plateau or close to plateau production at the moment, but dollar contributions still continues to grow as they especially product market develop for example in lubricants, and clean diesel. There may be a few more dollars we can squeeze out, and overall the big three projects are being quite transparent and opened about, and in the past they've been ramping up, but given they are all pretty much where they need to be now, no need to be very specific other than to say over 440,000 barrel a day of production from the three, which is about where we would expect it to be. We always said about up to 450,000 and we have delivered over $5 billion of cash flow last year from these assets, while obviously at current conditions we should do a little bit better this year.

Canada, debottlenecking is relatively smaller. The first one, it’s 6,000 barrel a day Shell share. But remember this is a series of relatively small projects that over time should get to 60,000 Shell share and Common Creek of 80,000 Shell share at the moment. Can we run it all through (inaudible), I’m afraid the answer is no. We would need to move some to Sarnia, some potentially to Puget Sound sand and some to the Gulf Coast. That is the intent or was the intent, clearly will depend on access to appropriate pipeline capacity. And we can only really talk about that at the point at which it’s established particularly Keystone is an important indicator for the industry, although it’s not the only way of moving heavy oil down now to Canada.

Jon Rigby – UBS Ltd.

Okay. Just as a numbering test on the detailed plant, is the products like that’s now coming out of it pretty much what you have, or planned or will that develop as you develop the markets? Are you sort of selling the product you planned, but in a slightly distressed pricing or you’re actually moving the products slightly to meet what is currently in the market?

Simon Henry

I wouldn’t say we were distressed at all. The market is developing and evolving. It’s very clean, Middle East, and I asked them surprising uses of high value. I can’t say too much more, but it’s developing nicely. And the one thing I would point out is that there is an ethane stream currently, not saying too much value, because you can’t actually take it through the efficient top process and that ethane stream is being allocated in future into the chemical project that we’re now working on with Qatar Petroleum, the Al-Karaana project. So, over time additional investment helps add further value to the hydrocarbon streams in Qatar and also we hope to spot shortly the new exploration well in Block D with partners PetroChina. So Qatar remains an area of potential growth for us, looking good.

Jon Rigby – UBS Ltd.

Thank you.

Simon Henry

Thanks John.

Operator

Thank you. The next question comes from Robert Kessler from Tudor Pickering. Please go ahead with your question.

Robert A. Kessler – Tudor Pickering Holt & Co. Securities, Inc.

Your Downstream is also quite strong in the quarter, presumably with the help well as specifically the reference from the trading and marketing. I’m assuming that contribution was towards the higher end of that $800 million to $1.1 billion range. And then, also related to the Downstream, I’m assuming Port Arthur with Motiva still kind of in expansion mode in the quarter. Can you give some sense for the average throughput of that facility for 1Q and how much of an uplift we might expect for the second quarter?

Simon Henry

Thanks, Robert. Your assumption is pretty much correct. The marketing and trading, we haven’t given specific figure this quarter, but refining, manufacturing was in a small profit. So the M&T, marketing and trading was indeed at the top end. Just to make the point that trading is not a volatile and open position business. It’s adding the cents per barrel to all the molecules that flow through the system and optimizing the positions we have. So it’s not something that comes and goes. It’s a pretty substantive regular robust contribution to the bottom line. Throughput in Port Arthur, I don’t have a specific number. It’s not 100% from the 320,000 new [branching] project, but it’s close to 300,000. Not a lot of earnings impact in the first quarter as we’re still aiming out some of the product flows, but it’s actually performing pretty well. So it’s about 80%, 90% of its capacity on the distillation unit. So it’s looking good, but not making a big impact on the bottom line just yet. Hopefully that helped.

Robert A. Kessler – Tudor Pickering Holt & Co. Securities, Inc.

Yeah. Can I ask for refining overall, I mean, you said chemicals availability will be lower in the second quarter. Can I presume refining availability will be higher particularly with the multi area?

Simon Henry

It’s about the same as it was last year and our availability is high, but there’s still actual throughput somewhat below ultimate capacity because of the actual economic opportunities in the market. So it’s not a constraining factor on this at the moment. Okay.

Robert A. Kessler – Tudor Pickering Holt & Co. Securities, Inc.

Thank you, Simon.

Simon Henry

Operator, can we move on?

Operator

Yeah. Thank you. The next question comes from Irene Himona from SG. Please go ahead with your question.

Irene Himona – Société Générale South America

Hello, Simon. I had two questions please. Firstly, on gas and the Basrah Gas Company, and can you comment on whether the economics of that project would be conditional on a future LNG export project or whether you can actually deliver the return, an acceptable return selling the gas domestically to power stations? And then secondly on exploration, you’re obviously investing substantial amounts this year, up to $7 billion. What are the highest, most of the existing wells, the highest impact you have this year and importantly, do you intend to update investors and obviously you don’t do it on a well-by-well basis, but would it be on a now talk basis? Thank you.

Simon Henry

Thanks, Irene. Yeah, Basrah Gas today, the economics are certainly not condition on future LNG exports. That’s almost the other way around. The LNG economics would need to, I suspect, still require quite some work both on the cost and the value chain piece. So the up front activity is, basically we collect the gas, we strip the liquids, we put dry gas back into power for which there is fee and there is some access to the NGL revenues that we take out and that’s what underpins the returns. So that’s reasonably attractive, better than the oil.

Exploration, we’ve got $4 billion going into conventional exploration and $3 billion into unconventional. So unconventional first; the most exciting is some of the LRS, liquids-rich shales in Canada and Argentina. And on the gas side, we are the first well in Ukraine and we have 10 rigs operating in China, not all on exploration, some are in Changbei, and the China and Ukraine on the gas, Argentina and Canada on the liquids. Hopefully I think that the gas from that agreement where we’re looking at opportunities in the Bazhenov shale in Russia, which we would expect to be liquids-rich as well. So that could be of interest whether we’ll get to drill it this year or not, but do not know yet.

And on the conventional side, we had hopes to French Guiana. We still have hopes to French Guiana. Unfortunately, the most recent well was not a success. And, but I just mentioned Qatar, which is a gas prospect in the peak of that we will spud shortly. We have two wells in Binene and Gabon Deepwater new plays. We have the Australian well at the moment is (inaudible). We’re interestingly drilling in Albania on land for oil and we have attached few wells in more mature areas, but the North Sea and Malaysia in particular could be, certainly have interest. We go forward.

There are quite a few other areas such as Nova Scotia and the other Guyana and Colombia Deepwater and the Latin American trend. Greenland and New Zealand that we may get to drill in 2014. So the next two years is quite interesting in terms of the major plays. And let’s not forget the Gulf of Mexico, we have five exploration wells there this year, three of which are in progress at the moment and the (inaudible) well currently in progress and the Queen well later this year of potentially interest.

Now, we update on quarters typically and we try to avoid individual press releases unless there are large operated discoveries. We will always leave it to the operator to make an announcement. As you’ve probably seen in the industry some of smaller operators, they are more obliged because of relative materiality to make announcements sometimes, but just not always ready to keep the caps voted. But fundamentally expect to hear on a quarterly basis. It’s a big program. It’s a multi-year program and a statistical outcome. So you will drill. We will drill, drive well. It will not all be dry. And, so let’s see how it progresses. Some of the most exciting these most exciting sets of wells we’ve had in conventional exploration for a very long time I think. Thank you, Irene.

Operator

Thank you. The next question comes from Jason Gammel from Macquarie. Please go ahead with your question.

Jason D. Gammel – Macquarie Capital Ltd.

Thanks, Simon. I think I’ll restrict to one because it’s multipart, but it involves the Repsol transaction. I was hoping you could elaborate on the uplift that you could expect to achieve in cash of that business from your trading positions given that a lot of those volumes were essentially point-to-point committed. And then just within that, could you address how having incremental Pacific Basin volumes from Peru will help your trading business in light of a lot of those borrowings already being committed in demands any and I guess really what I’m getting at is would you have other solutions for getting gas in the Mexico that would allow you to re-route the proved LNG to other Pacific Basin markets?

Simon Henry

Jason, thank you. You must be doing your homework on the Repsol contract. The uplift that we would expect does depend to an extent on diversion. Let’s me be clear. There’s some fundamental value in those contracts. We are not dependent on non-trading capability for most of the value. Most of the value, it’s just embedded in the contract, so it’s based on today plus the growth potential. And, so the trading is essentially diversions and the ability to meet customer requirements from what is a broad and diverse effective portfolio options within Shell whereas Repsol may not have built an effort to meet customer requirement. The barrels may be point-to-point today, but they are not necessarily hard-wired in the contract. So customer demand can be met from different sources and that’s what we intend to do. That will drive the uplift.

I just got to reiterate. First of all, we have to close the deal. It’s something trending out contracts, major contracts, several anti-trust, many partner support required, some project financing in that. So we got a lot of lawyers and a lot of people working hard to close the deal. It’s something 20 odd contracts, major contracts, several anti-trust, many partner, support required, some project financing in that. So we’ve got a lot of lawyers and a lot of people working hard to close that deal and you remember it’s effective October 1, 2012. So we continue to accumulate cash in lock box will be released and credit is against the acquisition costs at the point of closure. Looking good, but still some way to go, don’t expect to see closure in the next quarter, that’s for sure.

Simon Henry

Thanks you Jason. Take the question please.

Operator

Thank you, the next question comes from Oswald Clint from Sanford Bernstein. Please go ahead with your question.

Oswald Clint – Sanford C. Bernstein & Co.

Yes, thank you Simon. I just wanted to ask you again about refining, because I remember you painted a pessimistic picture for refining margin at the end of January and you talked some benefit here in the first quarter, just want to know if you could, are you still seeing that pessimistic view or expect that to take place over 2013 or something exchange to make you a bit more optimistic about refining margins?

And then secondly, just looking at your kind of CapEx split here in terms of data book and year-over-year looking at the big delta I think it’s in Europe being the biggest delta despite that being quite a mature part of the business, is there anything in that European CapEx number? I know you’ve added some equity in some North Sea fields, but I don’t think the numbers were disclosed, but is there anything else in terms of European CapEx?

Simon Henry

Thanks Oswald. Refining; no real change to the general misery and pessimism on the market, particularly in Europe and actually in the short-term, in Asia. The fundamental issue is, capacity exceeds demand and nobody will close a refinery in Europe. So, we are working our bug out of the system now and we announced potential sale or closure in Australia of Geelong, there the all the new capacity coming on stream, the Middle East and Asia in general more than offset any closures plus demand growth.

So, there are good quarters, bad quarters. North America have some interesting opportunities as the whole balance of the refining system is being challenged with over light sweet crude available inland and moving it to large coastal refineries that were built to process heavy power crude has created some short of arbitrage opportunity and it goes towards one itself, you have seen from some of the competitors the shutdowns planned and unplanned because of various incidents that have sort of temporary one of support in the North American markets in particular.

I am afraid in April, margins have remained rather week. So, there was a weaker trend during March and that’s continued into April. Our uplift was partly better performance and partly the fact that refinery configuration was reasonably well mapped to the opportunities available, but it’s not a business but that is going to drive the results going forward.

The marketing and trading however performed extremely well and in chemicals and what are tough markets. So, we’re particularly pleased with the pretty robust performance there.

CapEx split in Europe, Europe is up. Yep, barrels, have an acquisition in there, I think for around $500 million but the big driver over time at the moment is that Clair and Sakhalin project. We also continue to invest in (inaudible) in Ireland but the step up is on the Clair and Sakhalin projects, which are significant and we’re over 50% shareholder in Sakhalin now and 27% in Clair. They will hopefully make nice contributions from 2016, 2017 onwards. They mature as a region, but all those projects, attractive four of them are oil projects, Clair, Sakhalin (inaudible).

Oswald Clint – Sanford C. Bernstein & Co.

That’s great Simon, thank you.

Simon Henry

Thanks.

Operator

Thanks, your next question comes from Iain Reid from Jefferies. Please go ahead with your question.

Iain Reid – Jefferies & Company, Inc.

Hi, Simon good morning. Got a couple of question about Asia-Pacific LNG, firstly on Sakhalin; it looks like your partner there is interested in building Southern LNG facility, (inaudible) talking about a facility in the region is this is effectively the mainly the expansion at Sakhalin, your Sakhalin plant is kind of off the table for the moment?

And secondly on Papua New Guinea, I think you mentioned last year that you were looking at InterOil acreage there. Can you tell about data on what the plans are there, I believe we have been running a process for selecting partners, we would like to hear something from there?

Simon Henry

Thanks Iain. In Asia-Pacific LNG, well Russia specifically they mentioned hopefully you all picked up I guess from Neft announcement on buying some of Shell Arctic opportunities together with Gazprom Neft, signed in the presence of the President and also Alexey Miller, the Chief Executive and Chairman of Gazprom.

The Train 3 option at Sakhalin continues to be worth. We have work ongoing in terms of the design and it is one of the options available to Russia Inc. and Gazprom in particular to expand and enhance the LNG market presence. (inaudible) of course, but it is both the cheapest and by far the quickest way of achieving that, but they will assume decisions ahead of us. So progress continues and there is competition within the Russian system, but on the straight economics and speed to market in an important window of opportunity as well and particularly when you look at the direct competition potentially coming out of the North American continent and if Russia wishes to capture a market window before that arrives and then tackle in and it’s certainly workable option we believe.

At PNG, the recap of what I quoted as context a year ago, so that is InterOil process. Clearly, we have taken a look from a distance and I can’t really comment any further, other than to say, I think I started on the Australian project portfolio and LNG. We are known to be working the floating LNG project. We have partners impact. We are also the operators of course in Indonesia. We are working in Canada LNG very actively at the moment and we announced the Elba Island export facility plus of course the volumes.

The whole LNG business is progressing at quite a rate at the moment for us and any new opportunities will have to look pretty attractive to displace the ones that I have just talked about. That’s all I can say really.

Iain Reid – Jefferies & Company, Inc.

You can’t comment on why they are still part of the InterOil process?

Simon Henry

No.

Iain Reid – Jefferies & Company, Inc.

All right. Fair enough. Thanks very much.

Simon Henry

Convey my regards to Peter, please.

Iain Reid – Jefferies & Company, Inc.

I will do. Thank you very much and much appreciated.

Simon Henry

Next question please.

Operator

Thank you. The next question comes from (inaudible)

Unidentified Analyst

Thanks. If I could, just ask around on the cost side. The first thing today and lots of volatility in quarter-to-quarter basis, so I am just wondering what you are seeing underlying on the cost side?

And then secondly, if I could on the U.S. data transfer section, how effectively you essentially see that and it being? Thank you.

Simon Henry

Thanks. Good questions. The cost base is one impacted the proportional consolidation the IFRS 11, but maybe not quite volatile as you might think. The underlying trends are in the downstream we are generally reducing, its par driven by divestment and par driven from just squeezing cents on the dollar everyday and everything that we do, that’s underpinning some of the robustness of the result that we see.

The upstream, international costs holding roughly flat, it’s an upward pressure from new projects coming on stream and the Americas they are going up as we execute more activity as more exploration expenses in the quarter. It’s one of the challenges in the Americas is to ensure that the cost grows more slowly than the revenue and that’s ongoing work with the management team there.

We are seeing fee exit at relatively high level. Our feasibility expenditure on new project is potential, but generally the costs over the past few years have been held at $42 billion, $43 billion total over about four years now. So the cost not a major issue in terms of results progression.

Next to transport; good question. When we started, we may have had said aspirations for this market. What we are essentially doing is, producing LNG in small scale and selling it to trucks, fleet operators and to shipping small fleet operators and shipping or large enough to justify the investment anyway. That market we saw may take some to develop because we need original equipment manufacturers for both engines and vehicles or the ship and then we needed a distribution network and most importantly what we need is customers.

We have been surprised that how quickly this is coming together. We have many manufacturers now looking at this and commenced at west port in North America, but just in China alone I think at Guangdong 17,000 trucks and buses running now on LNG; that’s growing faster. Chinese manufacturers were seeing appetite for LNG barges running down the Rhine in Europe.

We acquired Gasnor, which LNG for shipping provider in Norway last year. So potential is multimillion ton per annum. Much of this will not necessarily be provided from our own upstream gas production. It will depend basically on the logistics close buyback. We see the take up of the various parts of the value chain accelerating in an attractive way and our challenge and opportunity is to ensure that we confine an offer for the customers, right pricing, the right distribution that helps us develop leading position there.

So it could be very substantial globally over a period of time and we see North America and China in particular is growing this as a major part of the transport fuel mix.

Unidentified Analyst

That’s very helpful. Thank you.

Simon Henry

Thanks, [Letty]

Operator

Thank you. The next question comes from Peter Hutton from RBC. Please go ahead with your question.

Peter Hutton – RBC Capital Markets

Good afternoon Simon, just two quick questions. The Q1 marked a welcome return to profit in the Americas, but just Q1 last year, the profitability there was much higher than it was for the rest of the year, were there any seasonal factors in Q1 on costs; really such as BP mentioned, which also impact Shell there?

And secondly, just coming back to your helpful discussion on shareholder buyback, under what circumstances do you think this could become an option in your financial framework? I mean you mentioned, no borrowing to do this, but a lot of your peers see this as effective way, flexibility to return a surplus cash through to shareholders. I mean –if you just see specific issues on the mechanics of Shell; of shareholder buybacks or is there a view that the rates of return on your own internal projects, still most expect than buying your shares at present levels?

Simon Henry

Thanks, Peter. Couple of good hooks there, the Americas profit is down year-on-year, probably that’s in by higher exploration expenses, sorry feasibility expenses, plus some of the issues that we’ve acquired a lot. And the Permian acquisition from Chesapeake was most obvious, but quite a few other smaller players we’re buying. And as we bring in and integrate; that activity introduce sort of different standards around things like safety. Did you see some of the costs go up before they go down. So that is year-on-year, all of those things are some thing as a factor.

You referred to, I think over Mexico costs. In practice, we don’t see those going up at all really in project, and in fact we’re seeing very good progress on Mars-B, Cardamom and the BC-10 Brazilian project are very progressed towards production next year. Those contract scores were put in place back in 2010, mostly; While the market was lower, and we’re doing okay there.

We’re currently progressing stones towards FID, and which should be a floater, floating production storage unit; has a 3 billion barrel resource number as well in the lower tertiary side. It will be one of the major developments up from, because it will be more in early production system. But that will be the next one, and costs that’s not that much of an issue in the Gulf yet. It could be if other projects will take off of course.

And just back on the shale, costs actually on the drilling and the activity not too much inflation there at the moment, it’s more on the administration, and if you manage across the 14 basins that we’re in at the moment, and you may recall actually we’ve spent $28 billion on the balance sheet three month ago.

So we’re still working our way through that. We’ve rebalanced the drilling activity that I said before with most of it now on liquids rich plays, and lot of that is still exploration and appraisal.

So we need to work our way through that towards full field development, and projects that we can see and work effectively, how that $28 billion find its way to the profit and loss statement. And that’s something that will play out, we’ll talk about in quarters going forward.

Buying back dividend and free cash flow. We have a commitment to offset the scrip dividend at the moment. And that is the, that’s a three-cycle commitment. The scrip has been about $3 billion a year, with currently about 150 million shares behind offsetting that dilution.

At the current rate of buybacks, absent any other changes in the activity, but early 2015 we should have offset the cumulative dilution this year if we do the $4 billion to $5 billion, and that will more than offset this year’s dilution. It will take similar rates of progress to offset the historical dilution.

That’s the only mandate I currently have. There is not need to have the discussion about any mandate to go further to clean uses of surplus cash. Our surplus cash comes from operations, not portfolio activity, and our fundamental business strategy is targeted to keep that free cash flow growing to enable; first of all sustainable growth in the dividend; and secondly, enough capital investment to continue growing the cash flow to be in that position through cycle, whatever the macro price.

And in the short term, with high macro you might see what you might call surplus cash, and well we’re in a position where we had already offset the scrip, and that maybe a discussion the board would entertain, but that part is two years away from at this moment in time. But we are determined to offset the dilution first. Hopefully, that gives you some feel for the way we look at it, and from now it is a lever in the tool box that we will use as aggressively as we can.

Peter Hutton – RBC Capital Markets

Okay, thanks.

Operator

Thank you. The next question comes from Alejandro Demichelis from Exane. Please go ahead with your question.

Alejandro A. Demichelis – Exane Ltd.

Yes. Good afternoon, Simon. Just one clarification and follow-up from the previous question. In terms of the buyback, you mentioned in the $4 billion to $5 billion for this year, and clearly that you’re not prepared to increase debt to meet this. Should we assume that if for whatever reasons or guess what you drop in the second half of the year, that $4 billion to $5 billion may not be there?

Simon Henry

And that’s a fair question. I’m looking more at what we’ve already delivered from free cash flow than what we’re about to deliver from free cash flow. The oil price dropped to 70, we may look at the buyback program, but for now we don’t see a problem with that.

Alejandro A. Demichelis – Exane Ltd.

Great. Thank you.

Operator

Thanks. Our next question comes from Kim Fustier from Credit Suisse. Please go ahead with your question?

Kim Fustier – Credit Suisse

Yeah. Hi Simon, just two questions, please? Firstly on Alaska, I was hoping you could give us some color on the drilling program there, which was postponed I guess two months ago. Basically, what are the next steps, and any color as well on the accounting treatment of the costs of this year?

Secondly on Nigeria, I was hoping you could provide some updates there on how much of the 30,000 barrels a day lost in Q1 do you expect to see coming back in the next few quarters, in other words how much of this as a sabotage is endemic? Thank you.

Simon Henry

Thanks, Kim. On Alaska program, we did the two top holes, and we will not drill this year. We have both rigs are in the yards at the moment in Asia. One is for repair, one is for potential upgrade. We will not take a decision on when and how we drill in 2014, until we’ve been through some of the work with the repair yards, but also it’s very important, I think we get all the reduction in the row this year, and that we are not left with a critical path depending on any one piece of equipment as we were last year, which essentially was permitting, they’re in the containment barge. That containment barge just for your information is now fully permitted and ready to roll.

So it’s really the rigs, and the permitting system, so we want to see both of those progress to the reasonable level of confidence this year, we don’t leave it to April, May next year before we can say more.

We run now for a month or two really. I can’t give a date as to the engineering work that needs to be done. The accounting treatment is, pretty much as I said, still at the last quarter results, we have, now it’s back $2.8 billion on the balance sheet, just under $1.8 of that is the remaining signature bonus that we are amortizing slowly overtime; according to the probability of success, which has not changed.

We still expect to drill less or the probability of overall success, we have not changed. If we found we were not likely to drill, and that may have an accounting impact, but for now that has not changed.

The same is essentially true, the remaining balance which related $500 million, $700 million to the capitalized cost of the wells that we have drilled to-date, and the rest is basically the capital cost of the containment barge, and co-loc drilling rig, which obviously are ongoing variable assets.

So at the moment, we expect to spend up to $1 billion this year, and on both the repairs and keeping at least some of the work done that we need to do. Last year, we spent about the same, and we were capitalizing about 80%, this year it’s more likely we capitalize only about 20%, i.e., expense 80% of what we spend. I can’t give you a full figure, it could be as high as $1 billion, but we look to minimize obviously.

And Nigeria, 30,000 barrels a day was essentially comparison between Q1 last year, and Q1 this year. The absolute loss is higher; it’s more like 60,000 barrels a day. And Kim, some of the fact in the first quarter, I mentioned was attempted fact from a gas line, which unfortunately you can’t steal, and also took us down in the LNG volumes, so quite variable production loss.

Going forward, we have in April closed the Nembe creek trunkline, simply because of the fact it’s so high, and the environmental damage is potentially so high, it’s no longer sustainable, and we need to go and remove all of the fact points.

Of course the feeds just moved to the next pipeline, and (inaudible) and I have also shut down facilities in country. So it’s quite a difficult situation, it’s not getting any better. I don’t have a figure other than that if both pipelines were to be shut down, it’s quite a significant materiality in earnings terms, and maybe up to $100 million a month as both of the major pipelines were to be down. One is running at the moment, one is taken down that’s instead just for repair work. It’s an uncertain environment.

So hopefully that helps give you the framework we operate in, but unfortunately I can’t be more specific on the actual outcome.

Kim Fustier – Credit Suisse

That’s great. Thank you.

Simon Henry

Next question please, operator?

Operator

Thank you. The next question comes from Fred Lucas from JPMorgan. Please go ahead with your question?

Fred Lucas – JPMorgan Securities Plc

Thank you, operator. Simon, there’s another big diesel machine ramping up in the Middle East, it’s Aramco’s [Jeddah] refinery, 400,000 a day, of which more than half the product slate is diesel, what impact do you think that will have on the profitability of held GTL over the coming months?

Second question is, you mentioned that you do have a focus on free cash flow growth, that’s a target for the business, and that’s certainly our focus for the market. Why don’t you move your operating cash flow target to free cash flow target to help them mark even further, and to gulf the net lower rising the risk of rising CapEx, and if I could squeeze a third one in, and it’s just is a numerical answer. Can you put a number to how much of you oil sands output doesn’t make into scope for upgrade; so for every 10 barrels to say how much doesn’t?

Simon Henry

Okay. Thanks, Fred, I’ll see if I can do justice. The first one is relatively easy. Big diesel machine GTL profitability is underpinned by base oil and special products, and being purely clean diesel. So unless to say these can produce completely clean and sulfur-free diesel from crude oil, they will not be impacting the markets where we have seen premium pricing.

Free cash flow target growth. Good question about the way we think of it, and CFFO cash flow from operations is a target for the people who operate our assets, which is most people who work with Shell.

Free cash flow is the difference between that and what we choose to invest or divest, those choices are made by a very small number of people in Shell and are a completely different decision process.

Our focus on CFFO growth is to deliver maximum cash flow from the assets and the businesses that we currently operate today. It’s what we focus our people on, it’s what we deliver. If you deliver that, it gives us the choices to make on both rewarding shareholders and reinvesting. We know roughly what we need to reinvest to be able to sustain that growth and that figure can change over time as you need even more growth or individual project change, but for now we know what that figure is.

If we set a free cash flow target either for the company or for your or for our own people sorry, we would just encourage people to sell stuff. It’s just simple as that or to invest less in the wrong thing. So, it’s a question of who gets to choose, all those big decisions. And fundamentally most of the organization is focused on safely and reliably producing, selling products to customers. And we will reserve the big decisions on portfolio investment, savings and capital allocation for relatively few people.

Fred Lucas – JPMorgan Securities Plc

You say you know the level of investment that you need to get your growth target. Could you share that number with us?

Simon Henry

It’s 33 this year and it’s net 130 over the figures 2012 to 2015.

Fred Lucas – JPMorgan Securities Plc

But out to 2017 and 2018 to get to the 4 million a day?

Simon Henry

Well, the 4 million a day, those are clue in what I said earlier that we will invest in at least four projects now all the volume associated with them at all, but will lead to equivalent cash flow growth. Then the investment is going to reduce post 2015, but I certainly have no mandate to confirm that all together an alternative figure. So the 130 billion if you remember the arithmetic based on what we already sell, already invested, already acquired and sold. It doesn't actually allow for Repsol, I will say. But all other things being equal, we would expect mid-30’s growth CapEx for the next couple of years. So slightly higher than we are at this year and the numbers go round and lead to delivery of equivalent financial growth in 2017, 2018. And again, to give you any growth or cash flow I want to merely by drilling shale out in North America. We’re only going to do that when it make sense to make competitive returns. So I need to manage that red line on the graph, but when 87,000 people thinking they’re managing it, is basically the message.

Last point, oil sands production to Scott Ford, the upgrade basically will process everything into the mines. Some of the debottlenecking we’re doing at the moment will increase the upgrading capacity. We’re not able to - the upgraders because only produce syn crude, they don’t produce a lot of finished product because we brought that into the Scott Ford refinery and the refinery is smaller than the upgraders. So we are actually moving upgraded crude for example, Sarnia and the West Coast some of this coming by rail to the West Coast and ultimately to be the most likely some sympathy crude, but also some just basically diluted bitumen that will go to the Gulf Coast.

But at the moment everything can be upgraded, 10,000 barrel a day coming out of Peace River, which you know of the quality that can go through the upgrader. And in future we will not, it's highly unlikely we will build new upgraders if and when we grow the heavy oil production further. Our aim will be to take it into our own refining network.

Fred Lucas – JPMorgan Securities Plc

Okay, fine.

Simon Henry

Hopefully that covers.

Fred Lucas – JPMorgan Securities Plc

Yeah. Thanks.

Operator

The next question comes from Guy Baber from Simmons & Co. Please go ahead with your questions.

Guy A. Baber – Simmons & Co. International

Thanks for taking my question. I was just hoping you could address the environment for asset divestitures right now, but your guidance this year is I believe just 3 billion which should be the lowest total on a couple of years for you all and last year we ended up doing little bit more than twice what the original guidance was. So just wondering why the lower expectation this year. Is it reflective of broader market conditions or is it more specifically that you are just more comfortable with your existing portfolio right now? And then I have follow-up too.

Simon Henry

Okay. I’ll try and do justice. We start every year, $2 billion to $3 billion. That’s what we would expect the business always to be looking to upgrade off the bottom end. Previously we had slightly higher targets because we had a major downstream program in progress for about five years. That major program is now basically running out and we talked about it lately in the refinery in Australia et cetera but these are not major factors. So we’d expect $2 billion to $3 billion. The reason we often do more is that sometimes opportunity knock literally. It took us three weeks to define and close the whole divestment for $600 million last year.

And we, at that point in time, we don’t actually see major transactions that would take us above the $3 billion in the calendar year of 2013. That does not mean we are not looking potential for 2014 and beyond and back to the earlier question on free cash flow that is one of our major levers, but we don’t have a higher target. We may deliver more depending on opportunity. I hope that gives you some feel for how we see this.

Guy A. Baber – Simmons & Co. International

Yeah.

Simon Henry

Do you another question?

Guy A. Baber – Simmons & Co. International

Yeah. My follow-up was on U.S. gas production. That production very strong this quarter presumably on some Marcellus ramp, but hoping you could provide for us the framework for how you plan to manage productions in the balance of the year and activity level in line of some of the major variables. So Marcellus, some of the improvement we’ve seen in spot gas pricing, but also just considering how materially you’ve cut the capital budget there for gas this year.

Simon Henry

Okay. Most of the current gas activities actually in West Canada are in the Groundbirch more than Marcellus, twice as many rigs there. And we’re also producing some gas in the Eagle Ford along with the liquid. So that’s how some stronger gas production. In practice, going forward we’ve taken about 25% of the rigs out in North America from this time last year and that’s part because we reallocated the high level CapEx to other parts of the portfolio.

Price is now $4.30, I think, in gas terms. Even that price is probably still more attractive to keep the rigs very much on the liquids rig shale appraisal activity as much as production as well and to ensure that we are drilling, for example, the China, Ukraine exploration opportunities. So we’re not actually planning already then to ramp back up again in a material way in North America in gas at this point in the market.

Guy A. Baber – Simmons & Co. International

Okay. Thanks for the comment.

Simon Henry

Thanks. The next question please?

Operator

Thank you. The next question comes from Hootan Yazhari from Bank of America Merrill Lynch. Please go ahead with your question.

Hootan Yazhari – Bank of America Merrill Lynch

Thank you, Simon, two questions please. Starting with a very simple one. How should we be thinking about the CapEx figure for this year all in with all the different portfolio activities you’ve conducted both from a growth and net level? And then going forward, just to get a clear idea of how you’re thinking about project planning et cetera, how are you looking at projects to add value to Downstream in the United States versus your growth targets for 2017, 2018? I mean, is there a case to start to push up some of the potential LNG, GTO, GTT et cetera projects up the chain and thereby displace some of the growth there or do you feel that or would you be more willing to relever the balance sheet up and include everything? Thank you.

Simon Henry

Thanks Hootan. CapEx for this year is a fairly good question. Actually the Board is asking rather at the moment and other than $34 billion plus $2 billion, which is the official statement plus Repsol I’ve no real change to make. The $34 billion organic plus $2 billion acquisition, which is completing last year barrels we have in Iraq and less $3 billion divestment, net $33 billion add back Repsol, which is effectively full point for cashless whatever we have in the lock box when we open it. And Repsol might be next year in practice as happens. So and with lot of the things I’ve talked about in portfolio terms were already allowed for in what I’ve just stated and won’t really impact CapEx until future years. We’ll update as we go through the year with more detail. Obviously, as I answered the previous question on free cash flow portfolio activities will be discussed and agreed from Board level down with the free cash flow objective in mind.

And projects Downstream in the U.S. actually there are quite a few opportunities, everything ranging from buying railcars to LPG exports to tweaking the refineries to protest the crudes that are available, all being thought about in progress not just by others well of course at the moment.

In absolute materiality terms not yet that significant will help to grow CFFO or protect current CFFO. So very much part of the thinking as is the same thinking around gas, where will the gas get moved within the continent.

The big projects to monetize, well, we already talked about Elba and the gas to transport project. These are what I call the medium sized projects and committed on those export LNG. Big projects Canada LNG is pretty much highest priority that we do need to get move in because of the good partners we have there. Again that Gas-to-Liquids, Gas-to-Chemicals very much in the mix in terms of optionality unlikely to see a whole lot of CapEx in that period up to 2015.

Could we accelerate would be a challenge for engineering reasons more than anything else and that they are more of the projects we will invest in the second half of the decade that will deliver the growth out beyond the 2017, 2018 period rather than for the 2017, 2018 period. Hopefully that gives you feel for the phasing.

Hootan Yazhari – Bank of America Merrill Lynch

Yeah, that was very clear. Thank you, Simon.

Simon Henry

Thanks. Next question please?

Operator

Thank you. The next question comes from Jason Kenney from Santander. Please go ahead with your question.

Jason S. Kenney – Banco Santander South America

Hi, Simon. Thanks for taking the call. It’s been quite a long question-and-answer session for you, I understand. I’ve got a query on the tax charge, underlying tax charge, which I think was around 38% in the quarter versus perhaps a more normal 45%. I did notice that there was the tax credits in result it was a $730 million, which compares to the whole year 2012 $629 million. So can you just give me some detail around tax and that tax credit in particular?

And then, maybe secondly, on the gearing at 9.1%, have you got a view of where gearing might exit 2013, if Brent oil price stayed at $100?

Simon Henry

Thanks Jason. Tax charge, two things really, structurally the more the downstream mix in proportion of the total will lower the effective tax rate and, but there are some more that I mentioned in the indentified items in Australia and there was one court judgment went in our favor in Europe. So we’ve $600 million of tax credit and indentified items. The actual underlying clean effective tax rate was 42%, which compares with about 44% a year ago. So it is going down, but that shift is mainly the downstream being more high percentage of the earnings.

9% gearing, a good place to be if we execute all of the buybacks and if we just stick to the net CapEx I’ve just talked about plus paying for Repsol and it’s not going to go down further I don’t think. Having said that, there are quite a few things that could change between now and then. Our range is 0% to 30%. My aim is to keep the lower half of that because our rating agency friends look at everything that’s not on the balance sheet also and which actually make the effective gearing a bit higher than 9%. And thanks Jason.

Jason S. Kenney – Banco Santander South America

Thanks.

Simon Henry

Next question?

Operator

Thank you. The next question comes from Lucas Herrmann from Deutsche Bank. Please go ahead with your question.

Lucas O. Herrmann – Deutsche Bank

Thanks very much. Simon, afternoon. Two, if I can. First, just chemicals, if you could talk a little bit more about the performance. Doesn’t seem the environment has changed dramatically, but the profit performance certainly appears to have. And secondly, a broader question, are you happy with the way that cash flow is developing vis-à-vis your forecast and the question simply that the guidance broadly was $100 over the four year period $200 billion or so of operating cash flow, about $46 million last year. You are annualizing at $110 million this year, somewhere near $44 million. So it condensates $110 million is what you need in 2014, 2015. So are you happy with how things are developing and are we really looking for this. Are you ready to take another step change in Gulf of Mexico barrels come on in 2015 and Gorgon comes on in 2015 and those businesses start to make a material difference to the cash delivered?

Simon Henry

Okay, thanks Lucas. Good afternoon. Chemicals performance is generally pretty solid around the world. Even in Europe, we have base chemicals performance improving and staying reasonable demand and margins. And Asia-Pacific it was good place to be in, some of the more specialist products, the intermediate products, mono ethyl glycol, MEG and ethylene oxides. So just generally well positioned business and benefits compared to say four, five years ago fundamentally from the switch to ethane field in the United States, so, quite a robust performance, great outcome from (inaudible) in charge.

The general CFFO developing, am I happy? Lucas, I am a CFO, I am paid not to be happy. So it clearly there are quite a few issues area that I think we can improve on, but strategically and structurally the big projects are either up and running or they are in place. The growth you are absolutely right, needs to continue from now till the end of 2015 to meet those real expectations up to $175 billion to $200 billion over the full year.

So as to put it simply, you have to get to $50 billion via cash flow and then push on from that towards $55 billion and beyond. So to get to $50 billion, there is improvement underlying improvement whether it’s cost and the unit margins we generate, the improved customer profitability, lots still to come, downstream and to be honest upstream and adjusting things better in the business. It is not big project, it is the 87,000 people, doing the right thing everyday and doing it a bit better tomorrow.

There are some major projects coming through clearly Majnoon, Kashagan, obviously Majnoon will start to kick in, we are seeing LRF kicking in.

Now, Majnoon and Kashagan will make little difference this year, hopefully seasoned performance next year. You mentioned that deepwater projects, Yes, Mars-B, Cardamom and BC-10 together with in 2015, definitely we’d like to see Gorgon producing. Those big projects will certainly make a difference. We are talking multiple billion or plus that.

But fundamentally the challenge today, 12 months is primarily steady progress, downstream and upstream, taking the extra dollars and the flow of the hydrocarbons that we’re involved in. We’ve always said these are ambitious target, and whatever way you do the arithmetic we are bit behind the curve and some of that we can look at the macro, so of those things we ourselves work on. I will only say that if you look in the competitive performance we are currently behind the curve against our own aspirations, we seem to be ahead of everybody else. And I will support that Lucas.

Lucas O. Herrmann – Deutsche Bank

Simon, I will let you stop there. Listen, thank you.

Simon Henry

Thank you. Let me move on. Next question please.

Operator

Thank you the next question comes from Stephen Simko from Morningstar Equity Research. Please go ahead with your question.

Stephen Simko – Morningstar Equity Research

Hi, how are you doing?

Simon Henry

Hi, Stephen.

Stephen Simko – Morningstar Equity Research

Simon, I just wanted to ask you, I believe it was last quarter, you kind of gave a sort of multi-quarter view of upstream Americas, again sort of helping the progress in terms of production coming on line from the Gorgon shale and the profitability coming from your Gulf of Mexico project that will be coming staring to come online next year. And I just wondered if you could again for investors looking at just how profits are going to trend up from here. Simon, can you hear me, okay.

Simon Henry

Yeah, I can hear you, there is little bit of background noise, but Americas I shy away from production forecast, but we are established now 320,000 of production a day onshore. We are about 190,000 in the Gulf in the deepwater offshore, that 190,000 was a bit below trend, some plant maintenance, some downtime in the Gorgon platform. We are ramping up still production in Great White, (inaudible).

So there are still production to return in the Gulf that is production to grow although not as quickly as we have done over the past three to four months, over the rest of this year. The oil sands was producing, yeah pretty much a potential in the first quarter, it was a good quarter performance. So as the production growth should be steady and the income should come with it this year, the major projects next year, that’s Mars-B and Cardamom in particular.

And when we report Upstream Americas we include Brazil, so the BC-10 and (inaudible) both have additional production coming on next year. So next year is the where you see some of the step up is more a steady growth this year as we effectively the availability in the onshore. I hope, and as well as the perspectives. I think it’s just time to move to the last question please and if there as well.

Operator

Thank you. That was the last question. Please continue with any points you’d like to rope.

Simon Henry

Okay. That’s the last question. Thank you. And it’s been quite a (inaudible), so thank you for your questions. Thank you for your interest. And the second quarter results will be released on the first of August, and I hope that’s not too late for you and your holiday plans, and I look forward to talking to you again then. Thank you very much for listening. Take care.

Operator

Thank you. That concludes today’s conference. Thank you for participating. You may now disconnect.

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