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Royal Dutch Shell plc (NYSE:RDS.A)

Q2 2014 Results Earnings Conference Call

July 31, 2014 02:00 AM ET

Executives

Ben van Beurden - Chief Executive Officer

Simon Henry - Chief Financial Officer

Analysts

Theepan Jothilingam – Nomura International

Thomas Adolff - Credit Suisse

Oswald Clint - Sanford Bernstein

Jason Gammel - Jefferies

Iain Reid - BMO

Lydia Rainforth - Barclays

Jon Rigby - UBS

Irene Himona - SG

Martijn Rats - Morgan Stanley

Michele della Vigna - Goldman Sachs

Christopher Kuplent - Bank of America

Thijs Berkhelder - ABN AMRO

Anish Kapadia - Tudor, Pickering, Holt & Company

Bertrand Hodee - Raymond James

Operator

Welcome to the Royal Dutch Shell Q2 Results Announcement Call. There will be a presentation followed by a Q&A session. (Operator Instructions).

I’d like to introduce your host, Mr. Ben van Beurden.

Ben van Beurden

Okay. Thank you very much good afternoon ladies gentlemen and very warm welcome to you all. So we've announced our second quarter results today and Simon and I will run you through that. And then we'll update you on the key portfolio strategy developments in the company as well and then of course there will be plenty of time for your questions.

The disclaimer statement first. And then let me start by saying that the crash of Malaysia Airlines MH70 in the Ukraine is a real terrible tragedy for everyone involved. And I’m very sad to say that in Shell we lost 12 people in this crash, staff, spouses and also children. Shell has staff and operations in Russia and Ukraine and we are watching this very complicated and fast moving security and political situation, of course very closely. And I’m sure you will have questions for me later on this, but let me say now that I speak on behalf of everyone in Shell to say that our thoughts are with everyone affected by this very tragic event.

We'll then move to the 2014 priorities. I believe we are making good progress with the priorities that I set out at the beginning of the year, just to balance growth and returns, by focusing on better financial performance, enhanced capital efficiency and a continued strong project delivery. Shell's strategy is founded on technological expertise, disciplined capital investments, integrated operations and large scale. And this is underpinned by an unrelenting focus on safety.

We aim to grow cash flow through the cycle and deliver competitive shareholder returns. And our financial performance for the second quarter of 2014 was more robust than year ago levels, but I want to see more competitive results right across the company and particularly from oil products and the North America resources plays. So we are taking firm actions to improve our capital efficiency by selling selected assets and making tougher project decisions. And we have continued to ramp up production at Mars B in the Gulf of Mexico, which is part of Shell's industry-leading deepwater portfolio and our exploration program is delivering, with new finds in the Gulf of Mexico and Malaysia.

We've set clear priorities for 2014 and beyond consistent with Shell's long-term strategy and at the same time we are sharpening up in a number of areas. As you know, we've implemented a series of new performance units in the company for a more robust appraisal system, there is about 150 of these, which are clusters of assets, markets or value chains, such as integrated refineries or groups of oil & gas fields in similar geology and tax regimes.

And we continue to drive stronger alignment between the company and the shareholders, with increased shareholding requirements expected for the senior leaders in Shell, beginning from 2015. These new shareholding requirements will complement our existing remuneration programs, which include a company-wide annual scorecards, individual performance assessment and a long-term incentive plan with performance measures including total shareholder return relative to competition.

Now turning to the results and Simon will give you a bit more detail in a moment. Our second quarter 2014 underlying CCS earnings were $6.1 billion and cash flow from operations was $8.6 billion. On a 12 month rolling basis, which for me is a more meaningful measure than a single quarter, we’ve delivered some $21 billion of underlying earnings and $39 billion of CFFO.

Free cash flow, which is the cash generation after investment, the money available for payout and debt pay down has been on a rising trend in the last few quarters, as our acquisitions and divestments turn to a net positive.

Our dividend for the second quarter of 2014 is a 4% increase on year-ago levels and we are expecting over $30 billion of distributions to shareholders in 2014-15, dividends and buybacks. And all of this of course underlines the company’s recent improved performance as well as future potential.

Now, let me update you on restructuring in Oil Products and North American resources plays, which together represent about one-third of our capital employed and as I said before, have not been delivering acceptable returns. And let me start with Oil Products.

The Downstream business generated 7% underlying return on average capital employed and $7 billion of CFFO in the last 12 months, and that’s some 15% return in Chemicals, 5% in Oil Products. We are driving for $10 billion CFFO target per year and 10% to 12% return for the Downstream overall, on a sustained basis. Restructuring in this segment included a $2.3 billion net impairment in the first quarter of 2014 which was some 14% of the refining asset base. A strong drive on efficiency and costs through our performance unit approach; and exit from non-core portfolio in four countries, with $1.1 billion of disposals completed in Downstream in the first half of 2014.

So Oil Products earnings in the first half of this year, around $2 billion, were similar to year ago levels, and that is despite a weaker industry environment in Asia and Europe. So, we are making progress, but there is a lot more to do.

Now, turning to the North America resources plays. Excluding divested assets such as Eagle Ford, we have some 260,000 barrels of oil equivalent a day of production on stream, around 80% of this production base is gas. This is a major long-term growth opportunity for Shell’s shareholders. However, Upstream Americas resources plays remained in loss for the first half of 2014, about $400 million loss. And although this does represent a positive earnings swing of some $900 million on the first half to first half basis, reflecting higher gas prices and the improvement plans that we have underway.

We have updated our view on portfolio and strategy, both for dry gas and liquids rich shales. Major divestments of non-core liquids-rich shales positions are now complete, totaling some $800 million of proceeds in 2014. And around 60% of our near-term resources plays investment in North America, will continue to be directed at liquids-rich shales acreage. And this will be in appraisal drilling and potentially material liquids-rich positions in the Permian and Western Canada.

In gas, our Western Canada acreage has the resources and potential to underpin a large scale LNG project, and we have a 12 million ton per annum scheme in front end engineering and design at Kitimat. We are assessing the remaining potential for Shell in Lower 48 gas, including exploration, and as we work through the portfolio there could be further asset sales and impairments there. Okay, so that’s an update on some of the steps we are taking to improve our financial performance.

Turning then to the second priority of capital efficiency. Shell is opportunity rich and capital constrained, and this is driving hard choices in the portfolio. So, this involves moving ahead with growth projects, such as LNG Canada and Appomatox in the Gulf of Mexico, where we are in front end engineering and design, and at the same time being more selective on new FEEDs, with a routine in place now where I review FEEDs with $500 million or greater cost implications with my colleagues on the Executive Committee.

The asset sales program is making good progress. We have around $8 billion completed in the first half of the year. So we’ve have made a good start here against our plans for $15 billion of asset sales for 2014 and 2015 combined. So, we are having a busy year on asset sales.

In the longer term, I would expect to see around $5 billion a year of asset sales as the norm for Shell as we apply rigorous portfolio management on a much more on-going basis. And there’s no change in our guidance for around $35 billion of organic capital spending in 2014.

Turning then to the third priority of project delivery. Mars B, which started up six months ahead of the original schedule in February of this year is still on track for ramp up to its 100,000 barrels of oil equivalent per day plateau in 2016; and Mars B averaged around 38,000 barrels a day in the second quarter of 2014. So our overall Gulf of Mexico production increased from 177,000 to 231,000 barrels of oil equivalent a day on a Q2 '13 to Q2 '14 basis, an important profitability driver for us. And if I look into the second half of this year, the Gumusut-Kakap platform and Cardamom tie back are both on track for start up later this year, much as planned.

Now, let me update you then on conventional exploration, where we’re spending around $4 billion in 2014. So very long term plays like Arctic and other frontier basins could deliver really substantial new oil and gas fields. But at the other end of the spectrum, near field drilling can add higher value barrels in a short timeframe. And we expect to continue to add new discoveries in our Heartland basins where basic geology and technical risks are well understood.

Regarding Alaska drilling. At the moment we are blocked by the US Courts and we are not prepared to commit to a drilling campaign there until those issues are resolved. However, we continue to work with local stakeholders on logistics and on permitting to keep the option to drill there safely in the future. Near field and Heartland activity is around half of our exploration spending and it’s heard that we’ve had some good well results recently.

Let me highlight two areas the deep water Gulf of Mexico and Malaysia. So in the Gulf, the Rydberg discovery in 2,300 metres of water is our third find in the Norphlet play. Rydberg takes the headline discovered potential in the Appomatox area to 700 million barrels and we are assessing if Rydberg will be developed as a tie back to Appomatox or as a standalone project.

In Malaysia deepwater, the new Rosmari discovery is the latest in a series of new gas discoveries which could potentially feed into existing LNG schemes there. Rydberg and Rosmari are both examples of where Shell is adding value, material value for shareholders with the drillbit in our heartlands, and looking into the second half of this year, we have some important wells coming up in Albania and of course the Libra field, in Brazil sub-salt.

With that, Simon, over to you.

Simon Henry

Thanks Ben. Good to talk to you all today. And I will start with the earnings. Our reported current cost of supply or CCS earnings included a negative $1 billion of identified items that included impairments of some $2 billion predominantly related to the dry gas properties in the US, partly offset by divestment gains of $1.4 billion mainly related to first sell down of Woodside and Wheatstone both in Australia. The impairments in the U.S. come primarily as a consequence of reduced intended development spending on the Lower 48 dry gas properties that leads in turn to reduced production and cash flow expectations in the near term.

Second quarter CCS earnings excluding those identified items were $6.1 billion, earnings per share increased by 33% from the second quarter last year. We've announced a $0.47 per share dividend for the second quarter of 2014, 4% higher than year ago levels, the buybacks in the quarter to the end June with $300 million, $1.6 billion to the end of June and $1.8 billion up to and including last night.

Turning now to the businesses in more detail. Upstream clean earnings for second quarter 2014 were $4.7 billion, that’s an increase year-over-year of $1.2 billion, or 34%. Integrated gas and Upstream Americas both showed robust earnings momentum on a second quarter to second quarter basis. I do need to flag we had a positive year-over-year impact in the Upstream from an increase in a deferred tax liability in Australia due to the stronger dollar there, $100 million positive effect in the quarter a year ago it was a negative $400 million. On the flip side recognition of the second quarter dividend to Shell from one of our LNG joint ventures slipped into Q3 paid early July that was around 200 million.

The headline oil and gas production for the second quarter was 3.1 million barrels of oil equivalent per day, that’s an underlying increase adjusting for divestment et cetera of 4%. The volumes were supported by ongoing ramp up at Mars B platform in the Gulf of Mexico and particularly in Majnoon in Iraq, we also saw new volumes from reramping older fields in deep-water Brazil and the Gulf.

A year-ago, production was reduced by higher levels of maintenance compared to what we saw in the recent quarter. Our LNG liquefied natural gas sales volumes were up 28% Q2 to Q2 that was driven by the acquisition of Repsol’s Atlantic and Peru LNG business, but also much improved feedgas supply into the Nigeria LNG unit.

Now you will see some points that are in the table here for the third quarter that covers production and some other financial items that you can expect to see. In the Downstream underlying earnings were $1.3 billion as a $180 million or 15% higher than year ago levels, increases in both oil products and in chemicals. In oil products, we delivered an increase in refining results and that was due to a combination of better operating performance and stronger Gulf Coast, U.S. Gulf margins; and the overall result was delivered despite pressure on industry margins in other regions everywhere else in the word.

Our refinery availability averaged 94% in the second quarter, that is an improved performance. And our marketing and trading results declined slightly from year-ago levels. Chemicals results were lifted by the improved base chemicals industry conditions primarily in North America. You could also see on this slide some points for the third quarter in the Downstream.

Let me flag that repairs at Moerdijk chemical plant here in the Netherland, where we did have an incident while the reported in second quarter, (inaudible) will run through well into next year, into 2015.

Turning to cash flow and the balance sheet. Cash generation on a 12 month rolling basis was some $39 billion average run price of $109 per barrel. Free cash flow, cash generation less investment adjusted for divestment that was nearly $8 billion in the quarter compared to an aggregate of $7 billion in the last 12 months, so the gearing at the end of June sat at 13.4%. Earlier this quarter we announced that the scrip dividend would be cancelled, so there will not be a scrip dividend for Q2 payout and on with thereafter.

Cancelling the scrip underlines the confidence we have in our cash flow and also the growth in the free cash flow, means that we are free to buyback the A shares or the B shares, whichever is the most commercially attractive option. Buybacks for this year and 2015 combined should be in the range $7 to $8 billion, of which $1.6 billion already in the bank end of June.

Turning now to the financial frame work, just let me make some comments on how we think about our financial framework, how it integrates with the business strategy. There is a little bit of miss understanding there perhaps confused by the way some of our competitors talks.

We aim to add shareholder value with sustainable through cycle growth in the dividend. In financial terms, this means our ongoing operations cash flow from ops must be able to finance both our organic investment and the growth in the dividend. This chart shows the last decade of performance. Seven to eight years you’ll recall, we lifted our investment level as part of this strategy. We knew we might face some headwinds along the way, spending would increase before we saw the benefits from increased cash flow. The chart on the left of the slide shows the track record on organic free cash flow by just deducting the organic capital investment and the dividend declared which you can see growing steadily over time. Strategically, we will aim to ensure the cumulative surplus of these two trends upwards over the cycle.

If not, then we know we need to reconsider some of the key parameters such as investment levels and priorities for that investment. So, as 2010 when the major new investments came on line, we have indeed trended up with again on this line. And our ongoing priority is to reinforce this relative trend, growing the cash flow from operations ahead of investments so that we earn before we spend. The right hand chart on the slide here shows our track record on the acquisitions and divestments.

The strategic intent here is to focus on high grade portfolio. We expect a fairly regular flow of divestments and you can see that here, typically over $5 billion a year or 2% to 3% of the capital base. Acquisitions and divestments are both being of the similar magnitude in recent years although there has been a net surplus since 2005, you can see here.

There is not a precise target to balance these out. And the contribution made by these two elements is not an essential part of the financial framework. We can however plan the balance sheet, assuming a fairly regular contribution from divestment. And we retain flexibility in the overall framework for acquisitions which are inherently more opportunistic.

We do have other tools for the financial framework: They are the gearing; scrip and the share buyback program. And we have to look at all of the above in the context of the strong balance sheet. So this next chart shows how all these elements are combined over time to drive the financial framework.

The yellow here is the cash payout to shareholders. You can see the impact of both the global credit crisis and the investment choices that we've made through the cycle and we’ve used all the available levers in a prudent way throughout this period to meet financing needs.

Although, we did reduce the cash distributions to shareholders in recent years, our investments have delivered underlying growth and cash flow and we've begun again to increase cash distributions since 2012. All of this support our expectation absent black swan events occur that we will distribute over $30 billion to shareholders in the two years 2014 to ‘15.

Now, moving on to competitive performance. I'm aware some of you concern we don't have targets explicit in the market. This chart records the key metrics on which we said please judge it. Track our progress on growth, both cash generation from operations and free cash flow but also move to more competitive return on capital employed. So we take a dashboard approach here looking for more competitive performance on a range of metrics over time, not single point outcomes by a single date in the calendar.

Our cash flow from operation development have become more competitive in this sector, you can see that here. It’s been a major strategic objective to show in the last few years to grow this figure.

But it’s good to see the return on capital employed and free cash flow trending higher this year, but as Ben laid out, we know that we need to do more here, we have to drive these more sustainably through the cycle, and to take other metrics higher. There is no complacency here, despite the more robust results we have seen in the last six months there is still and awful lot to do. So with that, Ben, back to you.

Ben van Beurden

Thanks Simon. We are making progress with the priorities that I set out at the beginning of the year to balance growth and returns, by focusing on better financial performance, enhanced capital efficiency, and continued strong project delivery. We are taking firm actions to improve our capital efficiency by selling selected assets and by making tougher project decisions.

We’ve continued to ramp up newer production and our exploration program is delivering, with new finds in the Gulf of Mexico and in Malaysia. So we have distributed more than $11.6 billion of dividends in the last 12 months, and we’re expecting distributions of over $30 billion for 2014 and 2015 combined. All of this is underlining our commitment to shareholder returns.

And with that, let’s take your questions. Please could we have just one or two each, so that everyone has the opportunity to ask a question.

Operator, can you please poll for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Theepan Jothilingam from Nomura International. Please go ahead.

Theepan Jothilingam - Nomura International

Yes afternoon, Ben, Simon. Just two topics please; firstly, just on the Arctic do you think -- how do we go about thinking about the cost? How long can you continue to have an expense in the Arctic without really having much activity levels or well results from that? And I'm thinking, is there a possibility to turn down that spend in the context of overall exploration spend?

And secondly, more strategically for the group I think you've talked about reducing costs particularly in North America, but could you talk about now what the opportunities are more wider corporate level? Thank you.

Simon Henry

Okay. Thanks Theepan. Arctic first, yes. So what I said we was very, very clear we wanted to make sure that when we get into the drilling season, we want to be ready for it from a let's say operational perspective, we want to be able to do this completely flawlessly. We obviously need all the permits in place and we need to be free of any sort of legal issues or blockages.

We can't do it this year for reasons that as all known to you and let's see better next year, we will be back up. In the meantime of course, we do carry costs absolutely and we can't do this indefinitely, so there will be a moment where we will have to make up our mind but that is imprecision as we can continue to be or not. That moment has not been decided, but it will be before the next season.

Cost in North America. Yes, absolutely you are right, if I take North America here as short hand for unconventionals, we have of course been focusing very much on cost take out, take out overhead cost, take out cost very much equipment cost that are wellhead, gas processing, plant cost is the next phase that we are focusing on. It’s an absolute must for us to be cost competitive together with being in the sweet spot in order to be able to have a profitable business there. That will continue to be a drive coming forward. Cost will continue to be of course a key focus area across the business. And we have certainly in downstream and upstream had a good track record of taking out cost. I have decided not to have an explicit target out there, but you will see the cost result, the cost take out results comes through in the results in the bottom-line.

Ben van Beurden

Thanks Theepan. Can I have the next question?

Operator

Thank you. Our next question comes from Thomas Adolff from Credit Suisse. Please go ahead.

Thomas Adolff - Credit Suisse

Good afternoon. Thanks for taking my questions. Two please, one on the buybacks you said over 14 and 15, its $7 million to $8 million. Just wondered whether you can share the method around that number, just trying to figure out why from your perspective 7 and 8 is the right number for buybacks?

And the other question is on oil products. You target is to reach $10 billion in cash flow. I generated 7 billion over the past 12 months. Can you deliver on this purely from operational improvements or do you actually need the macro to play also in your favor? Thank you.

Ben van Beurden

Yes. Thanks very much Thomas. Let me take the oil products question Simon will talk to the buybacks. Let me just correct you slightly, it is actually the downstream as a whole you are talking about, so oil products and chemicals combined. And we said we would indeed expect a 10 billion cash from operation and 10% to 12% return. That would be again to sort of macro-conditions that we're seeing in 2013, so there is an upside on that of course as macro conditions could also improve because we still consider '13 to be not exactly a cycle average year.

If a lot of it will be achieved by the initiatives of your second motion, so much more focus on the bottom line. A stronger margin orientation in the business in addition to the strong operational excellence orientation and you would have seen that the results can be quite material the results that we are seeing in this quarter, very, very strong operational performance but matched with very high utilizations, a much higher access to advantage feedstocks and as a result of an improved refining performance. We will continue to look at where some of our aspects in the portfolios simply cannot get there. And therefore I don’t rule out portfolio action in this somewhat weaker parts of our all products portfolio.

Chemicals portfolio is pretty much where it needs to be in terms of robustness. Simon, the buybacks?

Simon Henry

Thanks Bernard note on d oil periods cash generation were about 8 billion over the last 12 months, 8 billion in the previous year as well, but as you can see the actual performance is a little bit better this year.

So lot of the improvement we're starting to see from the work that we're doing on our side, because the environment this year it is not being any better than it was in early year. And as on the buyback turned to 8 billion we've already completed at of last night 1.8 billion whereby 150 million shares short of offsetting the cumulative impact to the scrip which is about 2% dilution. And getting back that 2% dilution is the key target. We always intended to do that within the full year framework. We set out the financial framework to do, we are acutely aware the leases effect of the scrip. And it was just a matter of time in terms of the confidence in the cash flow building out from the new projects that have been coming on stream before we effectively rent up the next buyback impact, of course canceling the scrip, based on the net buyback impact not much more powerful and means that we don't have to buyback on quite such a rate.

We can certainly accelerate that pending the generation of cash flow, the free cash flow. We're in a pretty strong position on the balance sheet at the moment, but now the 7 billion to 8 billion together with the expected dividend. As I said, absent black swan events where we made the shareholder distribution over the two years of $30 billion, which we feel is appropriate, given this both we have from shareholders in a period of high investment.

Ben van Beurden

Okay. Thanks Simon. Can I have the next question please?

Operator

Thank you. Our next question comes from Oswald Clint from Sanford Bernstein. Please go ahead.

Oswald Clint - Sanford Bernstein

Yes, thank very much and good afternoon. First question was really maybe on your comments about long-term LNG ambitions in Canada using your unconventional portfolio and exporting it from there. I just wanted to highlight those ambitions may or may not have changed given the Russian pipeline gas deal into China. It could appear that a large part of the demand may just have been absorbed by that pipeline deal and I wonder if that’s affected your long-term views on Canadian LNG exports.

Second question was just on your comments in the release about improved well performance in the Gulf of Mexico, so over and above Mars B, what's going on with the well performance that you're seeing there? It seems to have lifted the US liquids volumes quite strongly. Thank you.

Ben van Beurden

Okay, thanks Oswald. I will thank you for those questions. Yes. I think our long-term LNG ambitions are just that long-term LNG ambitions haven’t really changed our LNG business is an incredibly important business for us, it’s a huge opportunity to continue to grow in a reliable way, it’s a very, very material business as you know already producing very, very strong returns and we will be looking at advantage LNG project to take that business further.

I think Canada LNG is an advantaged LNG project if you consider the fact that it’s still aimed at what at this stage and in the future will remain to be an advantaged markets one of the strongest market the North Asian market as well as the sector of course Canadian gas is slightly more challenged to get to market than gas in the lower 48. So therefore there is in principal the largest value arbitrage available in the market.

Of course the Chinese deal with Gazprom will take care of a significant amount of gas demand in China, but if you look at the volumes and if you look at prospects for China to grow, bearing in mind that gas demand in China is 5.8% of the energy mix at the moment, there is a huge amount of demand growth still available for us. And no matter how we analyze it you see there will be room for a number of LNG projects to get in there.

So therefore the projects that we see for LNG Canada possibly even for a follow on investment are still very strong and very much there and therefore we continue to move forward with it.

Would you take the second question, Simon?

Simon Henry

Sure thanks Ben. You are absolutely right Clint that the U.S. liquids production has improved year-on-year, primarily driven by the deep water performance. We’ve also got an uptick in Brazil I mentioned other projects with both BC-10 and (inaudible) had new well activity come on the stream this year which is given from uptake in the Upstream America result overall.

And the Gulf itself, Gulf of Mexico, we have 24,000 barrels a day ourselves, our share of Mars-B, we have in Na Kika Phase 3 project coming on stream. We have ramp up in Perdido particularly. Perdido is pretty much at capacity at the moment. And a year ago across Q2, Q3 we had quite a significant maintenance program, particularly across the Auger platform, as we built some of the modifications to bring in future expansion there from the Cardamom development. The Auger platform is back on the stream. So, you put that altogether, Q2, Q3 last year were effectively the low point for our Gulf of Mexico production at around 170,000 barrels a day average over those two quarters. In the recent quarter, 2014, we were 230,000 barrels a day. So, we have 60,000 barrels up on that low point from the middle of last year. And of course Mars-B is still ramping up. The Cardamom is still to come on. There is a fair bit more to come in the Gulf from that Deepwater as we progress the investment program.

So, it is a strong story, deliberate strategic choice. Remember these are high unit margin barrels. So, overall while we may not be entirely replacing the production that we are saying net of Abu Dhabi or elsewhere, we are certainly getting an uptick in earnings and cash generation per barrel.

Also I’d just take the chance note that in September, we'll be in the U.S. talking a bit more with the investors about precisely this development which is looking pretty strong at the moment. Thanks.

Ben van Beurden

Okay. Thanks Simon. Thanks Oswald. Can I have the next question please?

Operator

Thank you sir. Our next comes from Jason Gammel from Jefferies. Please go ahead.

Jason Gammel - Jefferies

Thanks very much. I just wanted to follow-up on the comments that you made about the oil products business and enhancing the profitability there. Two specific ones. It seems to me that the low hanging fruit in the portfolio is potentially the Port Arthur refinery where you put in a lot of incremental investment and not necessarily had fantastic results early on. Can you talk about where you are at in terms of the overall economic capacity of Port Arthur and where there might be some more room for further profit enhancement there? And then second, just on the European business, while Pernis might be an advantaged refinery within a pretty bad region, what solutions would you have if you decide that some of the other refineries in Europe are not going to be profitable, is there a real exit strategy there for you?

Ben van Beurden

Okay. Thanks Jason. Yes, first of all with Port Arthur, it indeed significant amount of investment being put into Port Arthur. As you know, of course, we’ve had some teasing trouble starting it up, we had some constraints at the time with the crude unit, as a result some of other teasing issues that have been resolved. The focus now has moved from running it reliably to making sure that we maximize the yields that we can get out of it. Some of it is sort of taking advantage of the availability of advantage crude and other feedstocks. Of course Port Arthur very much a heavy feedstock machine, so therefore not necessarily you could argue suited for the light crude that tend to be an abundance at the moment. But nevertheless, we can put in there some residues and other feedstock to make sure that we load up the units fully.

I think with the phase of getting the operational excellence piece right and now focusing very much on strengthening the asset from a margin perspective, you will see that Motiva in Port Arthur but certainly also in the other refineries has moved to a much more intense game of utilizing all the assets for maximum margin delivery.

And in the process also finding out what logistics bottlenecks are there to get access to even more advantage feedstock. It’s a practice, the same strategy that we follow throughout North America. We have been pushing our entire system to be more equipped to deal with advantage feedstocks, so feedstock that I've discussed in pricing and what we see is that year-on-year we continue to make progress. We hope to be at about 44% of advantage feedstock capability for our entire refining system in North America. I think the low hanging fruit in Motiva is still pretty much there in that respect.

And a lot of the improvement that you’ve heard us talk about is indeed Motiva improvement that we have ready flagged in the first quarter which very much is in evidence and growing in the second quarter.

Europe, the way you have to look at refining, refining particularly in Europe but also in the Far East is in our portfolio going to be concentrated in those areas where we have highly complex refineries in very deeply traded refining hubs so that we can get access to a wide range of feedstocks and can place products in a wide variety of markets. Then having refining operations, supply operations and trading operations very well integrated which is basically the organizational business change that we made in the course of last year and implemented on the 1st of January we improved that particular approach to what we call integrated hub refining.

And for I think Pernis, we will still be in an advantage position compared to the rest of the market because it is after all one of the most complex refineries in the deepest liquid trading hub in Europe. So we have to look in Pernis to making sure we can take advantage of niche fruits, niche markets and by opening up the operating window to deal with more flexibility requirements that will be offered to us through market opportunities.

And I think yes, it is a challenged environment at the moment, but Pernis is at the moment still and that's the most advantage in a challenged environment. And if the market environment picks up and as we indeed understand how to play this game better and debottleneck the refinery, you will see that this has the potential to still be a very strong asset.

Okay, thanks Jason. Can I have the next question please?

Operator

Thank you, sir. Our next question comes from Iain Reid from BMO. Please go ahead.

Iain Reid - BMO

Hi, gentlemen. Just a question on the Lower 48 gas. (inaudible) I am just wondering what is going to push rather than direct you there. Is there a macro side of that, presumably there is in terms of having changed your long-term Henry Hub assumption or is there a more technical analysis required of the individual assets in order to make your mind up on that? And the second question is, on your MLP, now you've crossed the Rubicon of realizing, you don't have to own all these utility start assets, you've got a huge amount of resource of assets elsewhere in the world, particularly LNG production assets, et cetera; is it your intention to put this philosophy to work elsewhere in the world?

Ben van Beurden

Thanks Iain. Simon will take the MLP question. Let me start with the Lower 48. The Lower 48 is pretty much concentrated at the moment on a significant position that we hold in Pennsylvania the Marcellus and the Utica positions that we have there. And then we have some other smaller positions around there. So some of them will maybe give us opportunities for further concentration for the clean up but if I just focus at the Lower 48 sorry at the Pennsylvania position, I think it’s going to be first of all appraising that position further to really understand how good it is.

We still have some work to do there to really understand the full potential. And then it’s a matter of deciding whether that is indeed good enough to develop in its own right against the prevailing gas prices that we see, whether we have the capital to dedicate to it and whether that indeed is the best use of our capital or whether we can find that this is better developed by somebody else and we basically get the value of the position at the sort of gas prices that you would see going forward or better.

So it is going to be purely a value play and of course very much value play that has a free condition that we need to understand a little bit better what is there so there is still some appraisal activity to be carried out. It is not part of a larger strategic integrated play much like the Western Canadian position integrated with LNG Canada. On the MLP Simon do you?

Simon Henry

Thanks Ben just reminder upfront I can’t actually say anything there yet the specific MLP program already launched because for legal reasons, I know I’ll refer you to the prospectus but the question I think aim was broader applicability of the same principals alternative forms of financing of the assets already in the portfolio today. Essentially MLP structure takes advantage in the U.S. of significant available very large liquid pool of potential investment looking for particular type of return in a tax advantage manner. That type of return typically fits well with utility type returns from asset such as infrastructure.

Yes, we have assets of that nature around the world, they are not necessarily in a place where we can attract such a liquid pool of investment. Even if they were, it would become a question. It’s essentially a financing issue it's not a strategic issue. That becomes a question what is the cost of that financing? Remember we are borrowing typically 5 year to 10 year money, 3% maybe less pretax tax deductible and our incremental cost of finance is fairly low. But to get equivalent types of returns and then we have to think very carefully about how we would structure something. The other issue is of course the MLP structure in the North and South particularly as we retain the general partnership remain consolidated on the balance sheet. So they don't impact the overall metric which you guys and we tend to look at in terms of capital employed and return on that capital employed.

And maybe there are other types of financing strategies that would do so, but that's something I think for the future at a moment our metric both in the equity market and the debt market predicated on most effective financing been done either through equity or through accessing medium to long-term debt at pretty attractive rates. I do think overtime we can sustain a greater level of access to debt type finance, but I think we have to prove we can make the basic books balanced both sustainably and grow that organic cash flow a lot of other opportunities open and I factor that I think once we’re pretty much stand on the basics.

Ben van Beurden

Okay. Thanks Simon. Can I have the next question please?

Operator

Thank you sir. Our next question comes from Lydia Rainforth from Barclays. Please go ahead.

Lydia Rainforth - Barclays

Thanks and good afternoon. Two questions if I could, the first one just a clarification. On the divestment proceeds a number of $15 billion, 2014 to 2015 is that a cash in the bank by the end of 2015 number or is it announced yield? And then the second one with the equipment sold that Harry Brekelmans, Projects and Technology Director is what you are looking for from that division changing given the increased focus on capital discipline? Thanks.

Ben van Beurden

Can you remind us last one Lydia, what is changing?

Lydia Rainforth - Barclays

So with the appointment of Sir Harry as Projects & Technology Director, it’s what you're looking for from that division within Shell changing particularly given the focus on capital discipline? Thanks.

Ben van Beurden

Yes. Okay thanks Lydia. Good questions. The divestment of $15 billion in two years pre-tax number of course it is we will be looking at completing the deals, but it is no good of course to announce and not the level. So that’s why we also talk, when we talk about the delivery what is that we have in the back. On PMT, let me first of all say that PMT of course very important and very crucial part of our organization is the fact that we have put that capability together and have really high graded it and made it a very prominent capability represented that the executive committee level has really helped us to make sure that we get very, very focused on the key things that I do the Bell’s performance, project delivery, hydrocarbon maturation as well as a number of other things that sit in that technical IT, contracting and procurement, et cetera, et cetera.

Matthias has been incredibly successful has had a very, very successful career. He will be retiring going back to Switzerland in October. And really the trend that he has set, the agenda that he has will be the agenda that Harry will take off. So there will be no changes that will go inside with it I am sure that Harry will have his own stamp on it, will have his own style in doing it with very much the underlying philosophy that we want to have excellence in these skills that are core to the delivery of our business that philosophy will remain and that focus will remain.

Thanks Lydia, can I have the next question?

Operator

Thanks our next question comes from Jon Rigby from UBS. Please go head.

Jon Rigby - UBS

Thank you. Thanks for taking the questions, good afternoon. Two questions please. The first is sort of connecting two things that are on the presentation. The first is your discussion around Lower 48 and your ambitions around that; and then you talk around the conventional exploration of budget of $4 billion. So I am thinking in terms of a company that's using that's producing about 3 billion barrels a day annually. If you are not going to be active in developing conventionals in North America if you sort of restricting the boundary what you want to do, its $4 billion a year conventional exploration enough to keep filling the result up moving forward.

The second question is just going back to the financial framework track record overtime, this sort of balance of free-cash flow that you indicate through 2005 it occurred to me if you go back to 2005 production was close to 20% higher and returns almost double where they are now. So what are things that have to be done just balancing cash in and cash out seems to me that if anything cash in and cash out balance is through manage decline of the business over that period?

Ben van Beurden

Okay, thanks John good questions. On the lower 48 or rather your $4 billion of potential exploration, is that enough to replace the hub, no, it's not, we know that. We will need a mix of finding hydrocarbon by the drillbit and getting them to MBD activities that we will develop a good enough funnel to continue to replace and grow to business give us enough opportunities to have a rich set of choices.

And then we can always balances these if we have a very, very successful run of exploration results. The impression to do deals is less than and vice-versa. If we run into very, very good opportunities quite often you've seen us do the Libra, we will plan find that the money for that in a sensible way out of our exploration budget, but are of course cannibalizing the opportunity set.

But it will always be too like its strategy to make sure that our opportunity funnels for all the different investment themes are adequately filled. And that's what we do, we look at the individual investment themes very much of what is it that we have under operation. Again we understand what is still very strong attractive resilient business, what do we have under development, what's coming on, what do we have in terms of opportunity that we can now start maturing and do we have enough very, very early opportunities much more in exploration or acreage stage of the game to continue to have that funnel grow. And you have to take a long-term view, because particularly in things like deep water we are looking at a 10 year maturation cycle. So we don’t necessarily bet on 100% exploration success, we bet on the mix of the two. Simon will you take the financial framework question?

Simon Henry

Sure thanks, John. Give me a chance I think to maybe reiterate some message that I said before. Clearly 10 years ago industry was in a different place, it was in my humble opinion living off the fruits of the legacy. In our case we basically opened up one new province since the (inaudible) today which is the deepwater Gulf of Mexico. And we had as an industry being hugely under investing, that’s why the oil prices are 100 today not 20 as it was 12 years ago. And of course returns were higher, but that is not a sustainable situation, you can see that for everybody. Oil price rises, costs rise with it.

We made some choices as I noted and I think you will recall and partly because fundamentally our portfolio was tired relatively mature and needed a major refresh with significant new positions that would become the legacy assets of the future. We knew we had to invest, we said at the time we would do that over 10 years, this has played out. Over that period we have opened up for example, cycling activity, gas hour, refresh completely Australia Northwest shale, Brazil deepwater, completely refresh again the Gulf of Mexico and certainly built out the heavy oil position in Canada in a way that just creates 10, 20, 30 years of future investments rather than nibbling around the edges looking for 5 million barrels here or 20 million there to sustain high returns in mature legacy asset area.

So, fundamentally, there's been a shift, return have come down. As we move now to a more balanced position, while we've got core legacy assets, we would call it the Upstream engine that we can certainly for next ten years still drive strong returns from that and strong cash flow, we would recycle that into the pure growth areas of integrated gas in Deepwater, both of which have decades ahead of them are strong high return performance, competitive performance. And we create through either exploration or the unconventional activities, additional opportunities to build on and we'll have the strength both financially, but also operationally and technologically to make choices around that portfolio.

So, over the period cash in, cash out has been a challenge and knew it would be. Going forward, I would suggest that what we choose to do with the cash is more an indicator of where the values both will come from and how we will distribute that value, whether that is back to the shareholders or whether we chose to reinvest for longer term future, but there will always be a balance between the two of course. But our strategic aim was always to be the choice would be ours because of the strong performance not that it would forced upon us by events such as the credit crisis and as running out of cash. We kept this investment, going through that cycle, remember, when that was a tough call to make given the change in the free cash flows that you can see there.

And I have to say 8, 9, 10 years ago, golden age of refining, $2 billion to $3 billion step back in the Downstream contribution (inaudible) we may not see that recover again, but we can certainly revert back to early conversations, we can do better there as well. So, of course just staying still isn’t good enough but that’s not the intent. Thanks.

Ben van Beurden

Okay. Thanks Simon. Can I have the next question please, operator?

Operator

Thank you, sir. Our next question comes from Irene Himona from SG. Please go ahead.

Irene Himona - SG

Thank you. Good afternoon. My first question concerns Russia. You have about 5% of your production there. I wonder if you could share your thoughts on the potential threat that the current sanctions being implemented, specific to the oil industry may pose to [shareholders]? My second question is on LNG, a very good second quarter, thanks to the Repsol acquisition. But actually spot prices did collapse in the quarter; we can see that in the numbers. Was there an effect on your business and what do you think drove such a dramatic decline? Do you think it's sustainable or reversible? And what is the impact on the underlying Shell business? And my final question very briefly, Ben, you referred to the challenging refining environment in Europe. Exxon has recently announced a fairly sizable upgrade in the European refinery. Does that impact the Shell view of the challenges of European refining? Thank you.

Ben van Beurden

Okay. Thanks Irene very good questions. Let me take the first and last one and then Simon will talk to the LNG pricing. So Russia yes, I find it very high to make sort of definitive pronouncements on a day like today when there is so much still uncertain happening as we speak. So we have of course a pretty good idea conceptually what sort of sanctions are being proposed, but the devil will be into detail here. If you look at the oil and gas technology sanctions that are being proposed, you could look at them and say well it’s very much sort of oil targeted, of course for reasons that also the EU wants to protect its own gas supply security from Russia.

So you could on the one hand argue that of course investments that we have in Sakhalin should be spared if you like from sanctions. But at the same time, of course we have to in the end see in detail what these sanctions will entail, particularly also the financial sanctions which look like financial instrument sanctions but they can be quite some double in the detail on how that looks as well.

So we're monitoring this intently, we have as you can imagine teams in not only in our Russian joint ventures but also here to understand how it could affect us. We are looking at what sort of contingencies do we need to have there. Of course, we have every intention of obeying with sanctions that is without any doubt.

But it's very, very hard at this stage of the game to just say well this is how we see it play out, this is how we are going to respond to it. So, I cannot sit here and say listen we are completely risk free when it comes to Russia based on our knowledge of sanctions. The only thing is you know our business as well as I do, it is a good, it is a profitable business, it's very much focused of course in two upstream joint ventures that are possibly at risk the Sakhalin Energy joint venture and Salym. Of course our downstream operations are very much domestically focused and therefore much less dependent on technology, financing tools, et cetera from the outside.

So I am afraid I can't give you any sort of definitive details other than what I said just now.

The refining environment in Europe, yes, it is, absolutely it is challenged and it as is said earlier on to response to Jason's question, it is, in my mind the last person standing strategy, but the strongest refining position, very well integrated into very strong markets, both from a feedstock suppliers, product off take perspective and having the highest degree of flexibility in your refinery to indeed take advantage of transient pocket sold value that will come by that will be the strategy. And if you will look back at what we have been doing over the last years is to basically concentrate our refining portfolio to those assets to potential to play that game as we need that.

I can’t comment in detail on Exxon’s investments that they announced in their Antwerp refinery, but they are pretty consistent I would argue with sort of things that I've just said. So getting higher complexity in your refining, get in areas access to good handle on markets but also the Atlantic Basin at large seems the sensible strategy, as it is the same strategy that we are following.

So that's probably all I can say about Exxon’s investment. But I do have the belief that in the end, we will end up with a strong position in Europe as the industry further restructures and as we continue to have a very strong capability and margin capability focus in our products business. And we also add if can’t get to that point then there will be no mercy also for those refineries, we will not tolerate having structurally underperforming assets that cannot deliver or cannot punch their weight in the portfolio either. Simon, will you take the LNG pricing?

Simon Henry

Sure, just overall the integrated gas was very strong again, primary drivers year-on-year were actually gas to liquids at its highest ever capacity utilization to-date. And the total LNG volumes been quite a higher a bit 1 million tons higher in the quarter, three quarters of which came as a result of the Repsol acquisition, most of the rest is Nigeria.

In pricing terms, first quarter where the same spot cargos at 20, they ended second quarter some at 12 or lower. However the vast majority of our sales are linked to long-term oil prices. We have slightly fewer diverted cargos which can mean or link to spot. We have slight fewer in the second quarter than we had in the first quarter but overall our exposure to that spot market remains limited. So the uptick is primarily GTL and the total volume.

Of course going forward, the spot prices are very driven by short-term effects which include weather around the world, gas demand has been quite a bit lower because of the weather but also some of the choices particularly in Europe made around the power, all of the constituents of the power mix. So therefore, more coal less gas and therefore more carbon dioxide seems to be the European energy policy and that does reduce the number of cargos going into Europe. Having said that, I am not sure how sustainable that will be. Going forward, we remain confident that not only will prices remain attractive but that long-term element linked to the original investment promise will pertain to support the current significant investments going into Gorgon, Prelude, Elba Island and the future potentially in Canada rails and Indonesia.

Ben van Beurden

Okay. Thanks Irene. Can I have the next question please?

Operator

Thank you. Our next question comes from Martijn Rats from Morgan Stanley. Please go ahead.

Martijn Rats - Morgan Stanley

Yes good afternoon. I've got two if I may. Looking back at 2013 one of the problems with 2013 was not just that the overall earnings and cash flows were lower but they were also quite volatile. And that made forecasting quite difficult. We've now had two quarters in a row that feel much more robust and where the changes in the earnings kind of follow sort of factors that we can sort of broadly foresee. Now two quarters of course they were very short period from where we are sitting, but from where you are sitting would you say that you see the business slowly but surely moving into a regime where performance is more forecastable and more gradual again?

And the second thing I wanted to ask you relates to the $30 billion figure of combined dividends and buybacks over the two-year period of course the absolute amount is a pretty impressive figure. And I wouldn't imagine that you probably would feel less enthusiastic about doing so if you felt a bit sort of worried about commodity prices. Is there a sort of embedded sort of message in the $30 billion figure that your incrementally more comfortable that oil prices are going to stay broadly at the levels where they have been recently at least over those two periods rather than declining from here on?

Ben van Beurden

Thanks Martijn. I'll have Simon talk to them first.

Simon Henry

Thanks. You are absolutely right Martijn 2013 volatility is a problem for us as much as you. I think I have on record as saying that before. Yes, it's very much been the case in the last six month the Kit has performed well. People have picked up the challenge that Ben gave to them. Let’s make the most of what we have, let’s bring the new projects on stream, let’s do it in a much more predictable and manageable way and things that work reasonably well. That’s not to say I can project but going forward because many of the things have happened to great volatility in the past not been and under our control for example Nigeria for example the hurricane season actually very easy on non- hurricane season last year that’s not will be the same this year and the Gulf of Mexico and now these things do have quite important impact on our quarter result.

But it is pleasing to see that our fundamental structural performance on issues such as refining availability, upstream time, turnaround activity and new projects coming on stream and ramping up has indeed over the last six months been more predictable. The last cause of volatility last year was very much expiration, while the write-off particularly in the latter half of the year were quite substantial uptick and difficult for you and us to predict of course be the bottom-line impact.

The performance this year in expiration overall has actually been better. Ben talked about it therefore fewer write-off. I cannot predict there will be no further write-offs, but we’re operating at a fairly transparent level of what we spending where we spending updating the market I think much earlier and more specifically about what the results we actually see up. On the $30 billion of I think fundamental we have combination of the dividend which takes us with this reduction or increase 23 plus after that the $7 to $8 billion of buyback, so the dividend is not linked to the commodity price. The buybacks we’re pretty confident we are going to deliver sufficient free cash flow to support the $7 billion to $8 billion, therefore we make that comment independent of commodity price. Like commodity price does kick in importantly as more on that medium term three to four year window organic cash generation against capital investment. If we project and see of volume prices remember $10 is roughly $3 billion of cash generation per year. So $10 move in the crude oil price and if we see weakness there we do need about investment levels at the margin and also the impact that fall in revenue or commodity prices usually have on capital cost the unit cost of capital as well as the total amount of activity and negotiating effectively with suppliers around some level of flexibility in that.

And then we do have some of that in place in terms of contract just changes and market rates. So we have to move through cycle at the investment level if we start to worry about the commodity price.

Ben van Beurden

Thanks Simon. Thanks Martijn, can we have the next question please?

Operator

Thank you. Our next question comes from Michele della Vigna from Goldman Sachs. Please go head.

Michele della Vigna - Goldman Sachs

Good afternoon thank you for taking my question. You have worked a lot on refocusing on your share exploration over the past year, year and half. I was wondering if you could give us an update on what level of resources or potential you see in your liquid rich Shell portfolio in the Permian in West Canada and also if you could give us an update on your international share strategy? Thank you.

Ben van Beurden

Simon.

Simon Henry

Thanks Michele, resource level in the Permian in West Canada we talked small number of billion, it's still appraisal, still some exploration to do. We have quite large positions in both and we’d hope to see in liquid-rich shale development quite significant resource bases overtime. We've not yet pulled the trigger on a major development program but we are seeing growth for example in the Permian we are about $13 000 a day Shell had where were a year ago and that's without actually pulling the trigger on the development program.

So we would hope to be able to build up fairly into several billion barrels equivalent. And around the world the Shell program there are several countries small countries where we look try and we think what was the long-term exposure in countries such as Tunisia and Turkey and we have already stepped back in the couple of countries onshore stepping back for example in Latin America. So the major place outside North America and China and Argentina in terms of the activity that we are embarking on today. China as we said before remains geological challenged we can see the hydrocarbon potentially producing economically. We after working all the couple of plays in Sichuan with our partners we're not at the point where we can define development program there just yet and we are exploring and appraising acreage in the back where to play in Neuquen Province in Argentina at the moment.

The other place that I'm sure you are aware we've been involved in Russia in Ukraine I think that is going to add very little to Ben’s earlier statement about the uncertainty going forward and the fact we are effectively the fact that temporarily suspended operations in the Ukraine.

Ben van Beurden

Okay. Thanks Michele thanks Simon. Can I have the next question please

Operator

Thank you. Our next question comes from Christopher Kuplent from Bank of America. Please go ahead.

Christopher Kuplent - Bank of America

Thank you, good afternoon. Just two questions. Your announcement regarding the longer-term recycle rate of $5 billion annual disposals. Are you announcing that today because given the success you had already this year in your asset disposal program, you want to make clear that we shouldn't wait for the next $20 billion disposal program announcement next year? And Simon I know I'm only teasing you but does that mean you also have a longer-term ambition of an annual $5 billion M&A budget? Thank you.

Ben van Beurden

Yes thanks very much, Chris. As we said the $5 billion is pretty much if you look at it the average that we have been doing. And if you think if it we have a portfolio $220 billion of capital employed that has assets in them that will at some point in time become late life in the upstream or assets that will lose that competitive strength more in the down stream and therefore you will have to have a program in addition of course keeping them as healthy as you can you will have a program of basically termination there, you proven the things that basically do not have the run length anymore or do not warrant the capital anymore to get the incremental future value out of it. And therefore sort of almost statistically you have to say think of $5 billion a year as a good sort of outcome if you would expect to suite this pruning systematically every time you review one of the strategic themes in our company.

So we don’t necessarily set targets for that. We don’t need this disposal for the financial framework. We basically expect that this will be the outcome of good stewardship of our portfolio.

Now on the M&A piece, basically completely opportunity driven. So we basically look around all the time, where are opportunities, smaller or larger that we cannot grow ourselves, but we can acquire and do we see value in that. Simon says, over the longer run, probably you will see two balance each other, but we don't necessarily have to balance the books there every year. If we want to do that, it's just too constraining, because both of them are basically driven by different dynamics around the decision making.

Simon Henry

I'd just add on the balance sheet is where we need to look, if we want to think about what is available for acquisition opportunity. The back end of last year, we have the BC-10, the Libra and the Repsol opportunities all come along at the same time, too good commence all of them. So, they didn't actually worry me too much, but in totality, that was close to $9 billion and that's where the balance sheet is for. Actually the divestment program is at least in part to offset that. But we can take out time over that as well. So, to ensure that on both sides of the ledger we are adding value.

Ben van Beurden

Okay. Thanks for that question Chris. Can I have the next one please?

Operator

Thank you sir. Our next question comes from Thijs Berkhelder from ABN AMRO. Please go ahead.

Thijs Berkhelder - ABN AMRO

Yes, thank you. Two questions from my side. I heard the question on the divestments already and your answers there, but you more or less announced already 12 billion of divestments with the target of 15 billion. And with the 5 billion guided on disposals going forward, you more or less are saying that you almost have finalized already your restructuring program. Is that right?

And is that, and if that’s the only way further indeed improving the operations of what you have or is the there strategically more in the pipeline? Second question relates not to LNG pricing but to European gas pricing. European gas prices have decoupled from the oil price and also your realized gas price in Europe is clearly lower than we've seen in the past. What is that meaning in terms of strategy for you as a company, looking at European gas assets?

Ben van Beurden

Okay. Thanks Thijs. Simon will deal with the European gas pricing question. Let me say a little bit about the divestment program. Yes, 12 announce, 8 in the bank, I think you should focus on the 8 in the bank not on the 12 announced, because that’s at the end what we want to do, we want to deliver the cash not announce future arrival.

So, is it almost finalized, I don’t think that’s necessary the way to look at it. So, if I go back to my answer on Chris’s question we do restructuring because we’re not comfortable of content with the quality of a particular business or the quality of the portfolio. What comes out of it is a divestment number that is a result rather than target. And sort of statistically you could say $5 billion a year seems to be the right sort of number to expect from a company that continuously reviews and prunes the portfolio.

So if we have announced 12, have delivered 8 and if you say what typically we should do 5 a year, you could argue that the 15 is eminently doable. And let me just leave it at that. But ultimately, again it's not a target, it is and expectation. We will be restructuring portfolio if we will be taking care of weaknesses in our portfolio to make the business healthy. And if it takes more or deeper restructuring or longer restructuring, we will not hesitate to do that. And again, the divestment number that flows from it will be a result rather than a target.

Simon Henry

Thanks Ben. European gas price indeed, the spot price, the hub prices at the moment are probably at three four year low. That has been probably driven by weather conditions, which is both reduced demand but also ensure the stocks remain high, not necessarily related to the medium or longer term supply demand situation which is perhaps more driven by politics and the relative economics of gas of a source of fuel for the power sector. The politics driving the current demand and then practice and if you follow the power sector nearly 60 gigawatts of gas capacity in Europe currently not being used, 2 gigawatts is roughly equivalent to 6 million tons of carbon die oxide, the year which ultimately has currently been replaced by coal. So there is a massive disconnected policy level which we can’t see pertaining or sustaining, at least not what politicians retaining any level of credibility on the subject.

So gas demand, we do think will grow in Europe. That will have an impact on price. But strategically quite a few things have already happened. Fundamentally we've moved away from all linked pricing, it's much more hub, spot and a little bit of oil now; some long-term contracts but there has been a move towards shorter contracts. We've reflected that in the amount of both trading activity demands and investment we make in new European production and fundamentally not looking certainly in the medium term to be making any investment or strategic push towards bring LNG in to Europe. As and when the policy winds itself in the more rational passion, then we will be well placed to do that particularly given the additional LNG volumes that we now have in the Atlantic Basin. But our focus, primarily in gas markets is on North America and Asia Pacific and developing new LNG markets in emerging economies such as Southeast Asia and Latin America.

Ben van Beurden

Thanks Simon. Okay, can I have the next question please?

Operator

Thank you, sir. Next question comes from Anish Kapadia, Tudor, Pickering, Holt & Company. Please go ahead.

Anish Kapadia - Tudor, Pickering, Holt & Company

Good afternoon. Couple of questions from me as well please. Looking at the U.S. unconventional position, just wondering if Shell can really be cost competitive in the forefront of technology relative to some of the more niche focused independent players in the liquids-rich shale? For example Shell seems to have been left behind somewhat in the Permian. And thinking about market valuations in the Permian, I was just wondering why you don’t look to monetize instead? And then the second one is looking at exploration, you clearly have some good near-field success in your exploration portfolio. But I was wondering if you could review your exploration performance in more frontier areas over the last few years? And then just specifically, if you can comment on results of your Gabon pre-salt offshore wells this year?

Ben van Beurden

Thanks very much Anish. Simon will take the exploration question. U.S. unconventional is going to be cost competitive, that's a key question, I think it’s probably more question for dry gas where indeed the price setting mechanism particularly if you sell into the pipeline market could very well be set by the marginal operator with the more advantage cost structure. No that doesn’t mean that we don’t need to be cost competitive in LRS, and a lot of things that we have been doing over the last 18 months or so has been very much targeted at improving our cost competitiveness.

So we have talked about this earlier, we have taken about 40% of the headcount down or rather that’s in the process of being run down in 2014, about half to contract staff out. We focus very much on equipment standardization and better procurement channels for equipment, particularly on well site equipment where we are well on our way of realizing a 30% cost reduction. We are now getting into the next phase of central processing plant, cost reductions through standardization and advantage procurement roots. So I think all together we can get very, very close if not in some areas better than some of our competitors, also the more so called nimble independent competitors. And there is a high degree of transparency in this market because everybody joint ventures with everybody else. So the way we have approached our target setting on cost take out in this business, it’s pretty much to see individual categories of cost what is the best operator, so what should the cost be if you want it to be at pace setting level. And the target that we have set ourselves, the target that we are very much going after and are meeting in quite a few categories.

So I just want to, I wouldn’t ignore it but I want to put one side the argument that we cannot be cost competitive. Now having said that of course the whole cost competitive question as I said earlier on, this is much more important in dry gas. And in dry gas, of course you also have to ask yourself the question, how can I access more value? Because it's not necessarily a good game to just be the most competitive operator in a cutthroat market where supply is very, very long and pricing is being set in a very, very liquid market.

So, therefore, the focus on gas is very much bifurcated into two areas. One is Western Canada, where I do think we hold a very strong position. It can be a very cost competitive operator, but we will integrate it with our Canadian LNG position to make sure that we maximize the integrated value and therefore look at therefore dry gas position as part of that integrated value chain. And the Lower 48, yes, we just have to have top acreage. And we have to be a top producer and a top operator. And we have to see gas prices that will make it worthwhile to invest in it. And if we can't see all of that, then these positions will be under review, will continue to be under review or we will see better somebody else with a different outlook or different appetite will be a better owner of it. And that's basically the strategy that we have chosen and that is playing out.

Exploration, Simon?

Simon Henry

Thanks Ben. Thanks for the question, Anish. Just a reflection, you asked about an interesting specific asset there, Permian. That's precisely one where we operate entirely with Anadarko. In fact, Anadarko do quite a lot of the activity. We know we are cost competitive at the drill pad and we have to get a bit more competitive back at the ranch in the office.

And NFE success, yes, we do pretty well still around the basins that we know and close to the assets, bringing on within eight weeks in the recent case for example in Netherlands then certainly in Oman and Egypt with similar two to three months hook up and produce time post expiration. You then flip to Frontier I’ll go via Heartland in the areas the basins for example Malaysia and the Gulf of Mexico where we have a long history. We’ve been pretty successful in the last six 12 months in adding material volumes that we can develop either through infrastructure or even the potential to build out new infrastructure. So that Heartland’s activity has actually been the most value-adding if not the most immediately value adding which obviously comes on the Near field. On the Frontier program we spent two to three years building up the acreage program two to three years drilling it out. It has been statistically less successful than the Heartland program to-date we’ve had success in Albania, we have it depends how you define obviously Libra in Brazil is a significant step out from where we were and we’ve got remaining several phase and still to target from Nova Scotia through the Black Sea, South China Sea to New Zealand, so still a lot of activity to come.

On the specific question on Gabon, this is a two well program we drilled one. We’ve already spudded at the second wells on the way down. We really need to do both wells before we can update and give a view on the success. So as you probably aware this is subsalt new play for us and we do need to look at both wells together before we can get an indication.

Ben van Beurden

Okay. Thanks Simon. Can I have the last question please?

Operator

Thank you sir. Our final question comes from Bertrand Hodee from Raymond James. Please go head sir.

Bertrand Hodee - Raymond James

Yes. Hello gentlemen I have two questions two very short ones, your cash flow generation was strong in H1 near $24 billion of working capital movement. You lack a significant contributor to that given that you wish commercial production and that you are going to recover very rapidly some cost and this cash flow from Iraq sustainable in the coming year?

And the second question is you had also good performance on Mars B, already reaching around $40,000 barrel equivalent per day. Earlier comments from Simon if I recall were pointed to quite a slow ramp up at Mars B before reaching plateau of 100 000 barrels a day, do you still expect to this plateau of 100,000 barrels per day to be reached by early 2016 or before that?

Ben van Beurden

Okay thanks Bertrand. Simon, will you take it?

Simon Henry

Yeah sure first one within the first quarter in the CFFOs, about $500 million contribution from Majnoon small contribution from West Qurna how sustainable is that. But you may understand to have the contracts work in Iraq, but basically once we reached first commercial production in fourth quarter last year, we were entitled to recover cost. That cost shows us cash generation. The CFFO it also shows high depreciations. So the actual earnings contribution is fairly small. I have a current expectation is that we will recover the approximately 2 billion of investment there over the next 9 to 12 months. So it's sustainable for a period. Thereafter it will full back to reflect the service fee on the ongoing production plus recovery of any ongoing investment. Now there is still some ongoing investment there be on the first commercial production particularly looking gas treatment et cetera.

So yes, will be sustainable cash flow but not at the level that we've seen in the first half beyond effectively the second half of next year. Mostly slow ramp up we're running I think three wells on at the time at the moment and that's entirely normal for facility of this scale and complexity will bring them on one at a time there is an elements of waterflood associated with the activity both on Mars B into the Mars A reservoir and vice versa. So it’s quite a complex into play between the two platforms overtime and very important we do this safely, reliably and in way where we get to understand the reservoir as quickly as possible so that we can maximize the future production in the most reliable way.

So yes, we still effectively sometime away the full capacity. I have to say growth is under six months before we expected and the ramp up of the first two wells in particular was pretty trouble free competitive what's could have happened. But we cannot project this is a subsurface things happen. We can't project really any differently than we previously have. But 38,000 100% 24,000 is hours in the second quarter. So it's pretty good progress so far given this only came on stream in March. But let's see where we get by the end of the year.

The next key milestone by the way is Cardamom really, sometime depending on the hurricane season the weather plays out in the next three months that’s early before the end of the year we should be bringing the first well on to the over platform, but that’s the next big milestone in the Gulf and we look forward to sharing with you next at the conference call how we are going on and also as I mentioned at the U.S. Investor event in September.

Ben van Beurden

Okay thanks very much Simon, thanks Bertrand. And thanks to all of you for the questions and for joining in the call today. And as Simon just said, we have the Investor Day in New York on the 5th September and I really look forward to seeing many of you there again.

The other thing to put in your diary is that we will be releasing our third quarter results on the 30th of October and Simon will talk to you all then. So can I wish a very good day for those of you going on leave, very good leave and come back well rested and safely. Thank you very much.

Operator

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

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