Royal Dutch Shell Plc (RDS.A) Ben van Beurden on Q2 2016 Results - Earnings Call Transcript

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Royal Dutch Shell Plc (NYSE:RDS.A)

Q2 2016 Earnings Call

July 28, 2016 8:30 am ET

Executives

Ben van Beurden - Chief Executive Officer & Executive Director

Simon P. Henry - Chief Financial Officer & Executive Director

Analysts

Oswald Clint - Sanford C. Bernstein Ltd.

Iain Reid - Macquarie Capital (Europe) Ltd.

Brendan Warn - BMO Capital Markets Ltd.

Lydia R. Rainforth - Barclays Capital Securities Ltd.

Martijn P. Rats - Morgan Stanley & Co. International Plc

Jon Rigby - UBS Ltd. (Broker)

Thomas Y. Adolff - Credit Suisse Securities (Europe) Ltd.

Alastair R. Syme - Citigroup Global Markets Ltd.

Irene Himona - Société Générale SA (Broker)

Christopher Kuplent - Bank of America Merrill Lynch

Asit Sen - CLSA Americas LLC

Rob West - Redburn (Europe) Ltd.

Biraj Borkhataria - RBC Europe Ltd. (Broker)

Anish Kapadia - Tudor, Pickering, Holt & Co. International LLP

Operator

Welcome to the Royal Dutch Shell 2016 Q2 Results Announcement. There will be a presentation followed by a Q&A session.

I would like to introduce the first speaker, Mr. Ben van Beurden. Please go ahead.

Ben van Beurden - Chief Executive Officer & Executive Director

Thank you very much, operator. Ladies and gentlemen, welcome to Shell's second quarter 2016 results call.

I'd start, as usual, with the disclaimer statement. And then, it's been just two months since we had a Capital Markets Day where we gave an update on Shell's transformation strategy, which is to create a world-class investment case for shareholders. So what I want to do is recap on that a bit and then Simon will take you through the results and the progress that we are making with the financial framework.

Let me say that our Downstream and our Integrated Gas businesses delivered strong results this quarter, although the lower oil prices do continue to be a significant challenge across the business and particularly, of course, in the Upstream. I think, overall, when we look at Shell's results, we are in a transitional stage in 2016 where we – there have been life movements in our figures for the BG purchase and consolidation, the restructuring charges, and the buildup of debt amplified, of course, by lower oil prices.

And all of this comes in a period where we have substantial cost savings, spending reduction programs underway, combined with a large divestment program and a strong development pipeline. So, altogether, this is a very complex period for the company. But as these actions all come together in the next several years, we are reshaping the company to create a world-class investment case for shareholders.

We are firmly on track for $40 billion underlying operating cost run rate at the end of 2016. We are delivering on a lower and a more predictable investment plan around $29 billion this year, of which some $3 billion, by the way, is non-cash. We are progressing $6 billion to $8 billion of asset sales this year and that's a part of the $30 billion divestment plan, and delivering profitable new projects. So $10 billion a year of cash flow potential in 2018 and eight start-ups just in 2016.

As you know, we segment the portfolio in a number of strategic themes. We have our cash engines, they need to deliver strong and stable returns, a strong and stable free cash flow that can cover dividend and buybacks throughout the macro cycle, and then leave us with enough money to fund the future. Our growth priorities have a clear pathway towards delivering strong returns and free cash flow in the medium term, and our future opportunities should provide us with material growth in cash flow per share in the next decade. To all of this is our intention to be in fundamentally advantaged positions with resilience and running room, and asset sales have an important role to play in all of these strategic themes as we reshape the company.

By running through all of this, there's a great emphasis on uptime, on costs, and delivering profitable projects right across the company. And the examples you see here are all from the Upstream business. So, lower unit costs typically down 15% to 20% from 2014 levels and higher production, overall, that's a combination of more effective maintenance programs and the successful delivery of attractive growth projects. An example, our underlying oil and gas volumes increased by 2% Q2-to-Q2, all part of the drive to further improve efficiency as well as uptime.

Let me update you on the competitive position. Gearing has increased with the BG transaction and we want to reduce that level over time, of course. Returns on free cash flow are now in decline for the industry due to the oil price downturn and for Shell, our 12 months rolling free cash flow of some negative $13 billion includes the BG purchase price and is running at some $6 billion negative free cash flow on an organic basis. And total shareholder return, which, in the end, is how you and of course, we ourselves, measure our performance, well, we've improved in the last 12 months from a low baseline.

But, overall, there's a lot to do here. But I believe that by doing a better job on delivering higher and more predictable returns and free cash flow per share and underpinning all of that with a conservative financial framework, then we can create a better investment case and be a world-class investment case.

So, Simon will next update you on the levers as well as the results that we have announced today. So, Simon, over to you.

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Ben, and good afternoon to all. First, on the financial highlights, we've a seen a sharp decline in oil and gas prices compared to a year ago, reflecting primarily the OPEC policy change and Brent average $46 per barrel in the quarter, $16 a barrel lower. At the same time, the Downstream industry margins were also lower both in refining and in chemicals, and these macro effects have dominated in the results this quarter despite the strong progress that we're making on underlying cost.

Excluding identified items, Shell's current cost of supply or CCS earnings were $1 billion, that's 78% decrease in earnings per share from the second quarter 2015. On a Q2-to-Q2 basis, we saw an increased loss in the Upstream and lower earnings in Integrated Gas and then for Downstream. The return on average capital employed was 2.5% excluding the identified items and the cash flow generated from operations was around $2.3 billion or $4.8 billion excluding working capital.

Our dividends distributed in the second quarter were $3.7 billion or $0.47 per share, of which $1.2 billion were settled under the scrip program. And we find more detailed waterfall charts that show movements in earnings for each business as an appendix to this presentation and some guidance for the third quarter and I'd be quite happy to take any questions you have on that.

But in summary, at the group level, macro effects, oil and gas prices and the Downstream margin movements against the nearly $3 billion reduction in our earnings excluding identified items compared to a year ago. These environmental impacts are the dominant feature of the results. The remainder of the result is a combination of high depreciation charges and other effects such as taxes with an uplift from volumes, lower exploration charges and lower costs and that's comparing Shell plus BG this year against Shell alone a year ago.

Now turning to the balance sheet and the cash position. The cash flow generated from operations on a 12-month rolling basis was some $19.6 billion, and that was at an average Brent oil price around $43 per barrel. Gearing at the end of the quarter was 28%. This is a slight increase compared to the end of the first quarter, as we had expected, and the priorities for cash have not changed. First, debt reduction followed by dividends, then by decisions on capital investments and/or share buybacks.

Looking at the integration contribution from BG, the production from the key legacy BG growth asset continues to ramp up well. In Australia, QCLNG in Queensland have both LNG trains running at full design rates of 4.25 million tonnes per annum. In Brazil, our deep water production has reached around 200,000 barrels a day. The Petrobras operated eight FPSO, floating production storage units. Our Lula Central in the Santos Basin has started production in the last few weeks and the ninth FPSO in the same basin should be on stream later this year.

On the synergies, no change to the guidance, $4.5 billion of annual synergies in 2018, and we've already actioned the steps that will deliver around half of that figure. These include office closures, the staff reduction, exploration savings, and reductions in our overhead.

Turning to the financial framework. This particular slide we used on Capital Markets Day last month summarizes the potential from the levers that we're pulling to manage the financial framework in the down cycle. There is no doubt 2016 is a challenging year and will continue to be so, because it includes all the deal effects, the reduction in cash flow that we've seen in the first half from oil prices, and the negative working capital effects that are generated at least in part as the oil price is recovering somewhat.

So the potential outcomes here reflect the actions by all of my colleagues in Shell, all 90,000, and in practice, they reflect a reset of the way that we're doing business, particularly in terms of the underlying sustainable cost base. The levers we're pulling here are individually and collectively material. They will make a difference over time.

Just looking at each in turn, firstly, the asset sales. We are using asset sales as an important element of the strategy to reshape the company, it's not just about managing the balance sheet. Up to 10% of our upstream oil and gas production is earmarked for sale. These include several country positions and a number of midstream assets for sale into our MLP, the master limited partnership vehicle in the United States but also downstream positions. This is a value driven, not time or schedule driven, divestment program and is an integral element of the overall portfolio improvement plan in support of strategic intent.

Asset sales, in total, are expected to reach $30 billion for three years, 2016 to 2018 combined. But to keep it in perspective, although a large number, this $30 billion is about 10% of our total balance sheet. We have currently some $3 billion of transactions under way in which $1.5 billion already completed and we'd expect to see significant progress towards and including sales agreements on around $6 billion to $8 billion this calendar year. Now, as we've said before, we are not planning for asset sales at give-away prices, and there's no reason today to think the $30 billion figure will not be achieved.

Looking now at the capital spending. Our capital investment is being managed in the range, $25 billion to $30 billion per year through to 2020. This has also improved capital efficiency and developed a more predictable flow of new project. At the end of the second quarter, the rolling average capital investment was $31 billion, including a full four quarters of BG investment. We are firmly on track for the prior guidance of $29 billion this year which is some 38% lower than the pro forma Shell plus BG level back in 2014.

Our capital investment, of course, does include some non-cash items, such as and primarily, the finance leases for FPSOs. 2016 is an unusual year here as the total leases should be around some $3 billion. This is included in the capital investment guidance, the $29 billion number, but most of this has yet to be booked, it will come through in the second half of the year. And there are in addition some decisions ahead of us on idle rigs, unquote, which is committed spend which may move between OpEx and CapEx depending on how we choose to utilize the rigs.

I would encourage you all to take a look at the cash investment element of capital investment that is shown in the cash flow statement as well as looking at the headline capital investment that we quote on an all-in basis. The chart here shows the cash spending as well which you can pick directly from that cash flow statement. The difference between the two, to reiterate, expected to be around $3 billion in 2016. And that's in addition, of course, to the fact that the exploration expense is also not deducted from the cash from operations.

So, to operating cost, the third of the prime levers that we're pulling. We are delivering major reductions here already and more to come. In the statement that you can see today, the costs shown do include identified items. This particular slide we're showing here adjusts for this. Shell's stand-alone costs reduced by $4 billion, around 10% between 2014 and 2015. And we're seeing pretty much the same 10% reduction on the Shell plus BG basis in the 12 months to June.

We are firmly on track for our previous guidance of a 20% reduction between 2014 and the end of 2016 on a combined basis, therefore, reaching a $40 billion underlying run rate at the end of this year. Just as a reminder, some 40% of our operating costs are actually direct staff costs. Significant reduction programs under way here, hence, you will have noted the identified item on redundancy and restructuring in the quarter. So, overall on costs, there's clearly the remaining potential for multibillion dollar per year savings on an after-tax basis.

The fourth and final lever, of course, is delivering profitable new projects that turn prior investments into future free cash flow. By 2018, the start-up since 2014 and the combined portfolio should be producing more than 1 million barrels a day, primarily high margin barrels with cash operating costs around $15 a barrel and a 35% statutory tax rate.

In the second half of 2016, we expect to see contributions from some major projects, including Stones in the Gulf of Mexico, the deep water. The Gorgon LNG project in Australia and Kashagan oil project in Kazakhstan. These start-ups in 2016 should add more than 250,000 barrels of oil equivalent per day, 3.9 million tonnes per annum of LNG, for Shell shareholders once they're fully ramped up.

We've also been reordering our priorities for growth projects in the next decade. The LNG Canada joint venture recently announced the postponement of final investment decision. But today, we have updated that the Lake Charles in United States, the LNG final investment decision there has also been delayed out of 2016.

On the growth side, we have launched new petrochemicals investments with final investment decision in China and in the U.S. this year already. Looking a bit further out, we have had success with the drill bit this quarter. We are delighted to announce a new exploration discovery today in the deepwater Gulf of Mexico. Initial estimated recoverable resources for the Fort Sumter well are more than 125 million barrels oil equivalent, and this is 100% Shell activity.

Further operational drilling, planned wells and adjacent structures could considerably increase recoverable potential in the vicinity of this particular well. But that in itself builds on recent Norphlet, this is the Norphlet play exploration success at Appomattox first in 2010, Vicksburg in 2013 and Rydberg in 2014, bringing the total resources added by exploration in the Gulf for Shell since 2010 to over 1.3 billion boe. And of course, all of the discoveries noted on this chart potentially will be able to produce through the Appomattox project which is already under construction.

Now with that, I'll hand that back now to Ben.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks very much, Simon. So, in many ways, 2016 is going to be a transition year for us, lower oil prices and after lower results coinciding with a bedding down of the BG deal that we are doing now and coming to large extent ahead of the delivery of cost savings, asset sales and project growth. But I want to be very clear with you that we're on a pathway here for an ambitious transformation of the company, so higher returns, higher free cash flow, despite lower oil prices and has a lot of energy and enthusiasm in the company to deliver all of this. And BG, of course, is a fantastic opportunity and it's a natural way for us at Shell to align on what needs to be done.

And with that, let's go for your questions. So can I please have one or two of you each, so that everyone has the opportunity to ask a question under the time that we have. So, operator, can I have the first question please.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. We'll take our first question from Oswald Clint from Bernstein. Please go ahead.

Oswald Clint - Sanford C. Bernstein Ltd.

Yes. Thank you very much. Maybe, Ben, first off, just talking about Brazil and the progress you're having there. Obviously, as we look forward to the next phase of the growth that's coming from the replicant FPSOs in Brazil, so I'm curious just to understand what you're seeing there, your comfort level with the progress of those FPSOs coming onstream starting in 2017 onwards. I think an update there would be quite useful.

And then, Simon, please, in terms of trying to get to as clean as possible cash flow number for the second quarter if I get this $12.8 billion (19:40) adding back working capital, but if we start to add back the restructuring, redundancy, onerous contracts, and maybe there's something for Canadian costs in the quarter for fires, just trying to get back to a cash flow number that might be as clean as possible for the quarter. I'm just wondering if you could help us get there, please. Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Oswald. Simon, you want to start with the cash flow?

Simon P. Henry - Chief Financial Officer & Executive Director

Sure. Thanks, Oswald. Maybe a question of interest to everybody. We all know quarterly cash flow can be a no-easy number. Particularly when we bring the two companies together, there is some movement around working capital, et cetera. So, the $2.3 billion headline can be adjusted clearly for working capital, $2.5 billion.

We will probably adjust slightly downwards then for the cost of sales adjustment, but back up again for a $700 million charge tax on divestments. That is unique to the quarter, tax on the prior-year divestments. And there are one or two other moving pieces as well.

But, fundamentally, the last three quarters, taking into account some of the one-offs, have all been around $5 billion. That's taking into account an oil price not much higher than $40 on average. And therefore, that's reasonably representative if you – because that also takes out some of the intra-quarter variances.

I'm not sure if that helps a great deal, but going forward, of course, you're right that the provisions on severance and redundancy and idle rigs et cetera, may flow into cash flow flowing out. But, of course, that will be offset by delivery on the OpEx, the synergies and most importantly, on the new projects, all other things being equal. So, it is running at a run rate of around $5 billion. But coming back up again up from what essentially would be a low point in the first quarter.

Ben?

Ben van Beurden - Chief Executive Officer & Executive Director

On Brazil, Oswald, so at the moment, we have nine FPSOs onstream. Number nine mentioned by Simon came on stream in Q2. So, if I look at 2017, there's three more, including the Libra Extended Well Test FPSO, 2018 another three, and then a further three in the 2020-plus timeframe.

So, can I have the next question, please, operator?

Operator

The next question comes from Iain Reid form Macquarie.

Iain Reid - Macquarie Capital (Europe) Ltd.

Yeah. Hi, Simon. Just a quick confirmation on your sensitivity data you gave us on page 10 of the earnings release on the Upstream. When we're looking at this $3 billion per annum for every $10 movement in Brent on a year-on-year basis, I presume we have to include in that comparison the BG earnings from the year previously when we're trying to do a kind of quarterly estimate of how these numbers are moving on an annual basis, is that correct?

Simon P. Henry - Chief Financial Officer & Executive Director

Yes, because the volumes are moving as well. But in the first instance, the simple answer is yes.

I'll just put on record; I do not often have sympathy with you guys on the modeling. But just at the moment, I do, on the grounds that there are quite a lot of moving parts and this indeed is one of them. We've tried to help around it. The $3 billion, you're absolutely accurate on the Upstream, and also $2 billion sensitivity within Integrated Gas, which is overall a $5 billion sensitivity. But, of course, Integrated Gas has the added complexity of most of it being time lagged by four to six months on average.

So, just to reiterate in Q2, our gas price variance was impacted more by Q1 oil prices and by Q2 oil prices. So, it was probably at a low or at least in the recent trend, the gas prices would have been low. And so, we'll do what we can to help, Iain, but you're absolutely correct that it does include the BG volumes.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks very much, Simon. Thanks, Iain. Can I have the next question please, operator?

Operator

The next question comes from Brendan Warn from BMO Capital Markets.

Brendan Warn - BMO Capital Markets Ltd.

Yes. Thanks, gentlemen. I'll just skip the one question, I guess, similar – along the lines of what just Iain asked. Just in terms of this transition period that you talked about, the deal effect, working capital and tax and if we just focus in on upstream, if I would think forward a year, so let's say Q2 2017, and if we kept oil price out of it, what sort of benefits are we going to see in the Upstream because of synergies and just sort of trying to understand what would be a clean result projecting for the year?

Ben van Beurden - Chief Executive Officer & Executive Director

That's a tough question, Brendan, but let's see how much we can help you with it. Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

It maybe too tough for me, Brendan, but let me try. I think the – you need to watch three things, though. The costs are coming down in pretty much a straight line. We've had $40 billion total for the year. On an underlying basis, by the end of the year, that probably came down a little bit in an absolute term next year as well.

So, it's going at a run rate of around 10% on the cost and that's across all the three businesses in which the Downstream is just below 50% of the total and I guess, Iain, the Integrated Gas is about a quarter. So, you can take that. And so, Integrated Gas is more like around 15%, 12% to 15% depending on the quarter. So, that's an indication.

The synergies will kick in, for example, on exploration almost all in the Upstream and they – pretty much the $2 billion would be delivered by the end of this year on a run rate. So, there's significant contribution there relative to – if you go back to the 2014 timeframe.

Important factors for the Upstream will be the new projects where Stones will be onstream by then and should have ramped up. Gorgon in the Integrated Gas business, of course, we'll have two trains hopefully working by then. Kashagan will be beginning to play through. And the shale focus at the moment in the U.S. is developing the Permian, so should be an improved performance from that. All of those things coming through should improve the revenue, all other things being equal

What will say on the earnings, though, is that early production from deep water – Stones, for example – comes with very high-unit depreciation because of very low early proved reserved bookings until you've established production record in areas where you have no analogs. But Stones and Appomattox for that matter are both in new areas where there are no at-reservoir analogs so both come with high-unit depreciation. Average cash operating cost, to reiterate, $15 a barrel.

So, the only thing I could add is to repeat what I just said in the speech. Effectively, the start-ups will eventually get to 250,000 barrels a day and 3.9 million tonnes of LNG, but both Kashagan and Gorgon have quite long ramp-up period.

I know that doesn't quite answer the question, but those are the basic factors to watch. And we'll try and update on the actual progress on a quarter-by-quarter basis. Thanks.

Ben van Beurden - Chief Executive Officer & Executive Director

Sounds good. Thanks very much, Simon. Thanks, Brendan. Operator, can I have the next question?

Operator

We'll now take the next question from Lydia Rainforth from Barclays.

Lydia R. Rainforth - Barclays Capital Securities Ltd.

Thanks and good afternoon. I'll stick to one question as well. I know you hate to come back to the Upstream side again, but just in terms of when you're looking at the results from the first half of the year and the question comes back to the idea, are you happy with where you are on the cost side or are you looking at those results and going actually maybe we need to go back to that at the beginning and see if we can take out even more than we have done already, but we need to have another look at how we're doing things? Thanks.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Lydia. Let me make a few general comments and then maybe Simon wants to fill in on a bit more detail. Okay. I think, no, we are not happy on the cost takeout where we are at the moment. We are on a journey of cost takeout that will take us, as I've said, by the end of the year to a underlying run rate of $40 billion per year.

I think it is fair to say that we have made a lot of progress in all areas. Probably in Upstream, we have made, relatively speaking, most of the progress. The Downstream has been on a longer cost journey, and of course, has never really had the comfort that a very profitable Upstream business had, where the focus was indeed on delivering value even if it involves somewhat more marginal cost. And Integrated Gas, of course, has a smaller cost base to start off with.

So, yes, the focus is very much on the Upstream. But if I just look at where we are right now, and I now talk about total number, but you can imagine with most of the progress being made how the total number is actually different if you were to look at Upstream only.

We are now running the company with a overall cost base, BG and Shell legacy combined, that is lower than what the Shell-only costs were in the same quarter last year. So, there is a significant amount of momentum that has been established, but that momentum has not travelled through the end point, in my mind, Lydia. So, there is probably more to come.

And of course, here, we talk about operating costs. We haven't spoken about capital cost yet. In capital cost, there is a similar thing going on, combination of the general cost deflation that we see in the industry that we are doing everything with our supply chain to either help bring about or capitalize on, but also rescoping projects so that they are actually costed and configured in terms of scope for oil price resilience rather than volume maximization.

So what you see is that the unit capital cost is also coming down quite significantly there. And that's one of the reasons why we actually managed to also significantly drive down our overall capital spending. So, it's not just only a matter of postponing or cancelling projects; it's also making sure that we get more bang for the buck because of the improvements in capital intensity.

Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Lydia. Are we happy? We're, I think, positively pleased or inclined about the pace at which reductions have come through so far, but we're far from finished. There are severance or redundancy-related charges and restructuring, mostly office leases in the results but pre-tax close to $1.5 billion. And this will not be the end of that story because this does not yet reflect all of the reductions in employee numbers that we've already announced; the 12,500 people. So there will be some ongoing noise as we go forward because future reductions do have a little bit of cost up front and that will come through over the next couple of quarters.

We also see potentially some noise from third quarter reviews on things like impairment, decommissioning and restoration. But fundamentally, we've just brought two companies together and we're still learning a bit on the underlying implications on short-term performance and the quarterly movements. So, while we will do what we can to help you, it's still going to be a bit of volatility seen from your perspective for a couple of quarters yet. The aim is to be as one company clean as possible as of next year starting with the first quarter.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

The next question comes from Martijn Rats from Morgan Stanley.

Martijn P. Rats - Morgan Stanley & Co. International Plc

Yeah. Hi. Good afternoon. I wanted to ask you two things. First, I'm still trying to figure out why the results were so weak as they were. And one area where, at least relative to our forecast there seems to be some differences, is in terms of price realizations. So the oil and gas prices that you report relative to what we expected based on benchmark crude and gas prices seemed quite low.

Now, on the one hand, you can say, Martijn, your model wasn't very good. But at the other hand, we weren't very different from what others were forecasting. So, perhaps there is more general point to it. Would you say that conclusion is correct, that price realizations were relatively low relative to benchmarks? And if so, is there anything that explains that?

And the second question I wanted to ask relates to the debt, because the debt did increase by a decent amount during the quarter, from $69 billion to $75 billion. And I know on the last call, you said that the debt would continue to be on an upward slope for a bit. But would you still say that it will trend up from here on? Yeah. Those are the two questions.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Martijn. Simon, why don't you take them?

Simon P. Henry - Chief Financial Officer & Executive Director

Obviously, I can't comment on either individual or aggregate models, but do you remember on price realizations, the North American gas prices that we quote? We're quite heavily exposed to Alberta AECO prices, which were lower than Henry Hub and we also take first of the month, which was lower than the average through the quarter.

On global realized prices associated with the Integrated Gas business, there is that three, four months to six months lag and JCC was quite a bit lower relative to expectation than Brent headline. So, those are both factors that have impacted price realizations possibly more so than modeling would have thrown out.

I just want – let me just make a general statement on I appreciate that three months is of interest to you and it helped you restate your models. There is nothing in these results that has any impact on this longer term, medium-term intent for both improved performance and that strategic delivery that we talked about, 2019 through 2021. There is a lot of underlying noise. If there was a one big single factor, and it was pertinent to the longer term, we'd be telling you about it.

There are just a lot of – and there always is actually – $100 million, $200 million, here, there – that just that the net of them was quite negative this quarter as opposed to normally when they tend to wash out. So, I don't think there's too much point in going on further about the quarter. It is not that relevant in terms of the longer term.

Also, just one reminder, in the prospectus for the BG deal, we've had earnings per share accretion in 2017 at $65 a barrel. That's what we said in the prospectus. At $46 a barrel, we're doing well, but it's a stretch to get earnings accretion out. That's what we said, and that was after delivery of quite a bit of synergy. And the deal – everything to do with the deal on track to deliver value.

Martijn P. Rats - Morgan Stanley & Co. International Plc

Debt?

Simon P. Henry - Chief Financial Officer & Executive Director

And on the debt, it may go up before it comes back down. And the major factor is the oil price. The second factor is the divestments. And the divestments I spoke about earlier, in practice, the contribution this year to the bottom line is likely to be limited and that's why the debt may go up before it goes down.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

Next question comes from Jon Rigby from UBS.

Jon Rigby - UBS Ltd. (Broker)

Yeah. Thank you. Two questions. The first is on Upstream. I take your point that you can't infer too much of the future from quarter to quarter, but you have given sensitivity for your Upstream business.

And if we look 1Q to 2Q, there seems almost no leverage for the $10 rise in the oil price in the Upstream now. I know it's post-tax, some of that is some moving parts. But I'd just like to understand a little better what those moving parts might have been that would offset the sort of nominally $750 million gain or improvement that perhaps we ought to have seen in that quarter sequential.

Second, just on, you mentioned the dropdown since the MLP. Could you just go through the decision (37:41) mechanism for that? Would that involve equity raises in the MLP rather than debt so that you're not reconsolidating MLP debt? And is that $800 million a net number? So, obviously, it would be higher, the growth figure that's being dropped down. Thanks.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Jon. Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

Just on the MLP equity first, it's new equity raise, Jon. If we raised debt, then it wouldn't show in what we comment upon. But the entire MLP is consolidated. We actually own more than 50% of the LP units anyway still.

Jon Rigby - UBS Ltd. (Broker)

Yeah.

Simon P. Henry - Chief Financial Officer & Executive Director

But as long as we control the GP units, it will remain consolidated. It remains possible that we sell them LP units over time and they potentially count as divestments as well.

On the Upstream Q1/Q2, let me try. We reclassified Woodside. Therefore, it's held available for sale. Its price went down. There's $100 million negative that happens to be in the Integrated Gas results. NAM, $100 million reduction between Q1 and Q2 simply because lower production.

Fires in oil sands, $70 million. We all know that happened. Majnoon, we spend less money, reduces the earnings in Majnoon from a drilling effect. We had a plant shutdown in (39:04), $50 million. Italy, Val d'Agri shutdown, that's known in the public domain. It's been now $50 million. So, it's a very long list, Jon.

And there are at least four others, $100 million or so, associated – got several $100 million in total associated with BG. There's an FX movement on a not-entirely-hedged sterling holding. They are all individually in the wrong direction from both your viewpoint and our viewpoint.

They are not – none of those things I've just stated is relevant longer term, except I would actually like the cash in the back pocket today, but that's not how it is. Going forward, they won't get repeated.

Sorry, I can't. There's no more I can say on that. It's just a long list of individual items that are different. And just to repeat what I think the guys now all have been saying, sequentially, it's not always a good basis to look at Shell, although I do fully appreciate that you can go back to last year and easily translate BG.

The one thing I would just reiterate is that the PPA step-up on the depreciation remains $300 million a quarter, so $100 million a month. And that is a factor that you won't get if you just add Shell and BG.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks for that, Simon. Thanks very much, Jon. I'm sure a question that was on the mind of many of you. Can I have the next question, please, operator?

Operator

The next question will come from Thomas Adolff from Credit Suisse.

Thomas Y. Adolff - Credit Suisse Securities (Europe) Ltd.

Hi, Ben. Hi, Simon. I hope you're well. I've got only questions for Simon this time.

Simon, I've got a feeling that you might be – I'm probably the wrong person to say that you're being a bit conservative on the underlying cash flow during the quarter if you ex out the restructuring changes. Yes, cost savings cost money, but they're, at the same time, structural in nature. There's a good chunk of it.

So, I believe at least I think you've – when you make these adjustments ex the restructuring charges, actually cash flow was more than $5 billion. And should we be using that as underlying cash flow of the business as it stands today?

And following on from that, if you think about restructuring and redundancy charges, how much of that has already been cured or impacted? How much have impacted your cash flow and how much more is there to go?

And my final question on working capital in the first half of the year. If you ex out Iran, how much of that is reversible? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Thomas, good questions. We all had to smile at your first one because we have debated that one as well. So, Simon, why don't you kindly take them?

Simon P. Henry - Chief Financial Officer & Executive Director

If I do the similar breakdown of the smaller items, you're right, Thomas, it is above $5 billion for the quarter. But I deliberately gave average over the last three quarters. They're reasonable and it's a reasonable basis, but there is an underlying uptick in Q2. Although as with the earnings, it's impacted by one or two one-off items as well. So, I'm generally not sure I can say too much more about that.

Restructuring, how will they flow through? Well, quite a lot of those are not yet cashed. There was about $1.5 billion associated with the redundancy and restructuring pre-tax, about $0.5 billion on the idle rigs and most of that is still to flow through the cash line.

The working capital in Q1 had $2 billion out for the payment to the National Iranian Oil Company, but over the two quarters as a whole, there is a stock build – an inventory build as well as a price movement that has impacted working capital. We would expect about half of the inventory build to come back – a couple of billion dollars to come back over the rest of the year. Much of that inventory build was in the trading business and is revenue-generating, but around of a couple of billion should come back.

The rest is essentially price-driven and there are one or two, should we say, not easy to explain movements were in the longer term provisions. And once we are through some of the work in the third quarter and the D&R, the decommissioning, and you will see some quite big movements on the pension liabilities as well, we'll probably be able to give you a better fix.

We are still working on bringing, remember, $67 billion set of assets onto a $220 billion balance sheet and working through some of the details. So, you're talking about relatively small movements, but on very large numbers.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

The next question comes from Alastair Syme from Citi.

Alastair R. Syme - Citigroup Global Markets Ltd.

Hi. Thanks. Can I just quickly follow up on that last question, actually? So, all the restructuring charges you're taking are being accrued or are you putting anything straight through to cash flow, i.e., is there anything sort of bypassing working capital we need to think about?

And secondly, can I just clarify what you've done on Woodside? There's note in the statement that you've reclassified the way you're counting it. Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Both questions for Simon.

Simon P. Henry - Chief Financial Officer & Executive Director

All right. There's some cash effect from the restructuring, but it's relatively small. Let me pick the two items. The idle rig and the – what essentially is redundancy payments and restructuring for the office leases, where there is certain office buildings that we will vacate before we can subcontract or otherwise go with the lease, but we're taking the payment there into the P&L but not the cash payment.

So, it will play out. Most of it will play out in the next six to nine months, but it is likely, to reiterate, that there will be further redundancy changes because we do not yet reflect all of the 12,500 changes that we've previously made.

At Woodside, the shareholding is 13%, give or take. It has long been effectively as an asset with not a long-term strategic intent to hold. We have recently seen one of the Shell-appointed directors retire and we do not have the right to replace. So, we've gone effectively from two to one director. We, therefore – the influence level has fallen below that at which we can recognize the investment as an equity associate. It is now held as an asset for sale. So, there will be quarterly volatility in the earnings that we see.

But, importantly, there is a production and a reserves impact because we no longer will recognize the 25,000 barrels a day of production, that is the 13% share equivalent, and about 100,000 barrels of reserves will be de-booked because we no longer have sufficient influence to continue booking them. So, there will be ongoing volatility until such time as we actually sell the asset, but it is, in accounting terms, regarded as an available-for-sale financial asset and mark-to-market in practice every quarter.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

The next question comes from Irene Himona from Société Générale.

Irene Himona - Société Générale SA (Broker)

Good afternoon, gentlemen. Just one question please on – concerning marketing product sales. Obviously, the recent oil price weakness has been driven by concerns about demand. You are the largest marketer in the world. Your product sales show some quite sharp declines year-on-year, but some of that is obviously your disposals. So can you clarify on a like-on-like basis what is happening to your product sales? And is there anything, any conclusions you can draw regarding trends in global demand please? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Thanks, Irene. I'm sure Simon will have the precise numbers to hand in a moment. But of course, it is the margin that we make on the product that is more important than the absolute number. What we have seen, if I just decompose your question to two parts, first of all, we still see total oil demand robustly grow this year. As a matter of fact, in quite a few of the markets where we are, ourselves, pursuing a growth strategy, we have seen very, very significant increase in gasoline and diesel sales, also in places like China, but particularly also in markets like India where we have re-established a growth strategy.

And if I look at how our retail business and our global commercial, so predominantly lubricants business, with some aspect of specialities and aviation as well, how they have been doing, they have been very, very stable and ratable even at the sort of changes in volumes that you have been mentioning here. So, quarter-to-quarter, that business hasn't really changed very much. And neither do I expect that to be the case.

Simon, any specific details that you can add on some of the volume metric comments?

Simon P. Henry - Chief Financial Officer & Executive Director

Just note that when you look at our total sales, need to sort of split it into marketing, so about two-thirds, non-marketing volumes and supply sales, and remember that we sell about 6 million barrels a day, but only refine just over 3 million barrels. And therefore, we can increase supply sales just from the trading activity. The marketing sales are up about 0.3% and they reflect both the market development that Ben highlight, but also some of the specific to Shell issues where we may be growing in certain countries or have divested from others. Our non-marketing volumes are up around 3 percentage points. And that is essentially taking advantage of market opportunity. So they tend to be lower margin. And specialities or primarily lubricants, sales were up which is important because that of course is a high margin activity.

Ben van Beurden - Chief Executive Officer & Executive Director

There have been, for completeness sake also, Irene, there have been a few divestments of course quarter-to-quarter that may impact the volume as well, like (50:35) France, our commodity lubricants business in China, Tongyi, et cetera.

Okay. Thanks very much. Let's go to the next question, operator.

Operator

Yes. The next question comes from Christopher Kuplent from Bank of America.

Christopher Kuplent - Bank of America Merrill Lynch

Thank you. Very quick from me. I just – last quarter, you actually gave us your earnings contribution from BG on a pro forma basis. I can't find that comment anywhere this quarter. Do you have a number in mind? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Chris (51:04) Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

We have a number in mind. The reason we didn't share is we – it's becoming blurred at the edges or more than the edges now because, in particular, the trading activity has already moved over into Shell and Shell volumes. So, as we go forward, it's not a clean view. It is, however, a small loss and it's impacted by some of the one-off factors I spoke about earlier. And also note, the comment on EPS accretion at $65 that was in the original, and so step down from Q1, it's one of the contributions, the Q1 to Q2 trend, but nothing particularly significant in value terms.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Chris. Thanks, Simon. Next question please, operator.

Operator

The next question will come from Asit Sen from CLSA.

Asit Sen - CLSA Americas LLC

Thanks. Good afternoon, guys. I have two questions, one in Brazil and I was thinking LNG. Ben, in Brazil, if pre-salt rules were relaxed, what would Shell's appetite be to double down in the country? So that's on Brazil. And on LNG, Simon, wondering if you could provide any early thoughts on second half integrated gas profitability relative to, say a little below $2 billion in the first half? There would be some volume growth and appreciate the sensitivity comments, but it's a black box given trading, so any thoughts will be appreciated.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Asit. Let me take the Brazil one. Yeah, I think I said it before, if we see a relaxation of the participation rules in Brazil, so relaxing the 30% ownership, the operatorship rules, I think, yes, we would take a look at it. But at the same time, of course, you have bear in mind we would have to make sure that whatever we do in Brazil, stays within the capital constraints that we have set to ourselves. That we have been very, very clear on that. Going forward, no more than $30 billion of capital investment per year.

And if oil prices stay at the level that we are seeing today, we will be actually ramping that number further down towards the bottom of the range that we have set, so closer to $25 billion. If they really stay as they are today, we will go below $25 billion. So the competition for capital would become of course more intense. So there would have to be of course a more attractive proposition than some of the other things that we'll be completing.

Because believe me, if we hadn't put that ceiling in place, there would be a whole lot more to spend in the minds of our upstream development and integrated gas development folks than the range that I just mentioned. But in principle, I think we are not maxed out to the exposure that we would like to see in Brazil, particularly given the attractiveness of the acreage that is available there in principle.

On LNG, Simon, would you like to take it?

Simon P. Henry - Chief Financial Officer & Executive Director

Sure. The first half, by definition, had contribution from pricing in Q4 2015 and Q1 2016, so the second half had pricing from Q2 2016 and Q3 2016. So all other things being equal, there'll be a slight improvement from price. We'll have volume from Gorgon and as long as Pearl GTL, the gas to liquids blend stays at its current operating level, it will not have a maintenance (54:49) turnaround, which it did have a significant turnaround activity in March and April. So all those factors to the upside. To the downside is potentially hedges, running off on LNG pricing as we go forward. The BG portfolio was primarily was unhedged and which is one of the issues our own team are dealing with.

So I can't give a profit forecast, but those are the issues that are driving the gas performance as we go forward. I think – remember that they are very oil price linked, more so, far more so than gas price, but roughly three quarters of the earnings is with a lag as opposed to immediate Brent price linkage.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

Yes. The next question comes from Rob West from Redburn.

Rob West - Redburn (Europe) Ltd.

Hi, there. Thanks very much for taking my question. You've given us some really useful numbers today, that $5 billion cash flow per quarter, I think it's around $40 oil you mentioned and you've got the long-term target of $20 billion to $25 billion of free cash flow by 2020. Obviously, this quarter, there's been disruptions that have hit the cash flow. But I was wondering with those two numbers I just mentioned, what level of disruption due to that, that kind of ongoing inevitable disruption that happens in the oil business, what contingency is there in those numbers for that to continue? I'm really interested if you could make a comment on that.

And then, also in terms of some of the uncertainty arising from today, can you just comment on your attitude towards giving a bit of nearer-term cash flow guidance. I think, clearly, enormous amount of change under way at Shell. And we all understand that takes time, hence, your free cash flow targets being 2020 targets. But maybe could you give us your attitude around giving a 2017 operating cash flow number, what you might expect? Give us just a very, very broad range. Thanks very much.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks very much, Rob. Well, let me just reiterate what Simon said a little bit earlier on. First of all, I also understand that this is a very difficult quarter for you to reconcile the numbers to get your estimates right. And it's very difficult to go off what should be indeed a quarter two to quarter two comparison. So I can imagine that it has not been an easy process.

Let me also say that, while there is indeed a long list of points that Simon mentioned, there are no fundamental surprises in there. So it is unfortunate they point more than one direction than the other direction, but there is no surprises in it. Nor do they actually (57:51) surprises that we should be cautious of or be aware of going forward.

So, therefore, we are very, very confident to say that nothing in these results make me change any outlook statement that we have out there. Of course, not on the capital for this year, not on the capital range that we have mentioned, not on the point where we bring the operating cost to, but also not on what we believe is going to be the range of free cash flow, organic free cash flow in the end of the decade period. So all these numbers and principles still stand.

In terms of nearer-term guidance, it – we have not put anything out there. I hear what you are saying, Rob. I think we will probably come out with an update a little bit later in the year. Let me not give any prognosis what that will be, but we – I understand that we have to get to a point that our earnings and our cash flow becomes more easy to understand, more transparent for you to see, and in that respect, 2016 will indeed be a difficult year to work through with so many moving parts that we have now that we've bring the two companies together.

Simon P. Henry - Chief Financial Officer & Executive Director

(59:16)

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah, sure.

Simon P. Henry - Chief Financial Officer & Executive Director

Just – Rob, thanks for the question. The $5 billion of $40 billion, we take that as a baseline approximately at the moment. What we laid out for 2019 through 2021 was essentially to get the $11 billion, $12 billion a quarter (59:55) higher oil price, clearly at $60 (59:56). And to fill the gap, effectively the oil price is going to do somewhere close to $3 billion with that kind of (59:47) quarter. and the rest is essentially the delivery from the new projects coming on stream that are not necessarily included in the $5 billion.

And OpEx reductions or improvement will offset the decline in the underlying portfolio as well.

So this does hang together. It's not a set of data that is out of line or inconsistent with what we said three weeks ago in that context. But it does reiterate the importance of delivering the projects and the power of those projects as well.

And we are seeing some of that now, but obviously, there's only two quarters or five months worth of BG contribution here and our own new projects haven't really kicked in. We'll start to see that hopefully in the second half of 2016. So that plus the OpEx being able to offset underlying decline, those are the drivers of cash generation and we need to reset the capital investments in the, roughly the $7 billion a quarter average level in cash terms, or lower if necessary.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Simon. Operator, can I have the next question?

Operator

Yes. The next question comes from Biraj Borkhataria from Royal Bank of Canada.

Biraj Borkhataria - RBC Europe Ltd. (Broker)

Hi. Thanks for taking my question. I had a couple please. The first one on pensions on the balance sheet, you've got a fairly large pension deficit and given the way bond yields have moved, that deficit seems to have widened further. I was wondering how we should think about that and if I tie that into your 30% gearing limit, is there a scenario where gearing maybe – or net debt doesn't necessarily increase as much as you thought it might, but for mechanical purposes on the ratio, that you might breach that 30% limit? That would be my first question.

And the second question is on commentary from the service companies recently is all focused on the fact that they're no longer offering discounts and they're trying to push back in contracts. I know it doesn't really tie in with the continued cost reduction story for the majors. I was wondering if you had any comment on that or maybe recent conversations and how that relationship is going. Thanks

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Biraj. Let me tackle the second one and Simon will take the pension deficit one. No, I think we still see a continued cost takeout both in terms of capital cost, as well as our running cost in the upstream. Some of it is indeed through the competitive pressure that exists in a supply chain that sees just lower activity levels, so that is one. Secondly, with quite a few service companies, we're also reworking the way we work together. So it is genuine waste elimination, duplication of activities that if you really work very hard together with our on-well site staff and well site staff of service companies, you can find significant ways and means to reduce activity.

And in terms of capital projects, also significant ways to either simplify, apply more common standards, or actually scope down some of the activities that we – or some of the aspects of projects that we would not do in a world with where we believed in higher oil prices to stay forever.

So I don't see that effect that you described, but I'd probably see it for the right reasons which is that we actually take out activity and scope in addition to just applying the usual commercial pressure that is available to us now.

Biraj Borkhataria - RBC Europe Ltd. (Broker)

Pension?

Simon P. Henry - Chief Financial Officer & Executive Director

Yeah. Hi. Thanks for the question, Biraj. Indeed, there's been a significant increase in the accounting version of liabilities as a result of the reduction in bond rates, and therefore, the discount rate that we apply to the liabilities, it was around $2.5 billion uptick in the quarter and over $4 billion in the year-to-date. Because pension funds, mostly they are funded. There are a couple of unfunded funds out there in Germany in some of the post retirement medical benefit in North America. But, fundamentally, the funded funds are funded if that makes sense to you.

But you will see accounting movements that go through the comprehensive income statement and on the balance sheet and the lower for longer interest rate scenario that we effectively are looking at now, may lead to further increases in the liabilities. But the actual funds remain pretty solid

The balance sheet impact and the impact on gearing. Well, when I quote 28.1%, it does not include the pension fund liability. When the rating agencies and ourselves look at it, we look very much at the liability, we look at the actual cash cost of servicing the pension which is between $1.5 billion and $2 billion a year typically. And we look at the P&L charge and how this all hangs together in terms of the ratios and effectively adjust the credit rating agency ratios accordingly.

So it is a factor that impacts the way we think about cash flow over the balance sheet. It's not directly related to the 28% gearing number that we stated.

Ben van Beurden - Chief Executive Officer & Executive Director

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

Operator

Yes. The next question comes from Anish Kapadia from TPH. Please go ahead. Your line is open.

Anish Kapadia - Tudor, Pickering, Holt & Co. International LLP

Hi. Three questions from me. Firstly, on the cash tax on disposals, I was wondering if you could just give us some guidance on what's remaining from previously announced disposals to be booked through the cash flow? And also in terms of your $30 billion disposal target, what's your base case assumption in terms of cash tax that will be paid on those disposals?

And then the second question on the Lakes Charles postponement FID, I understand that you wouldn't be putting your own capital into that project. It would be [ECP] (01:06:40) that would be putting the capital in. So I'm just wondering the rationale for not going ahead with that project. Is it more that you're not as keen on the LNG market when those basically coming onstream or is there something else? And then just a very quick one on refining. If we see July refining margins persisting for the rest of the quarter, would it be reasonable to assume a loss for the net income line in refining? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks very much, Anish. I think we're making predictions on future income and refining as something I would like to stay away from. Refining is indeed a very cyclical business. We do – or rather we have seen, of course, quite a few cycles already in the last 12 months or so. We come off a second quarter 2015 that was pretty strong, then a drop off, then a recovery, and a drop off again. Now so in principle, we see the refining sector globally still being long. Therefore, we really have a strategy of shrinking our refining sector back to a strong core where we will indeed continue to invest in the remaining portfolio of refineries. So that we not only have strong intrinsic margin capability because of refining complexity, can deal with lower cost feedstocks and can also integrate our refining operations better with our trading operations, so that we can create more, shall we say, extrinsic value to it. But that's basically making the best out of an increasingly strengthening hand. Investing and refining going forward, we do not see as a strategically wise thing to do for our type of company.

In Lake Charles, no, it's not just – or not necessarily rather a cooling of the – of our interest in the LNG market. Although, you have to bear in mind, we have repositioned the integrated gas business from being a growth business to being a cash engine. So it is all about free cash flow optimization, so therefore, the general appetite that we have for new FIDs in quick succession has seriously reduced of course. That is just a bit of change of strategic intent that we have for this business.

It is also fair to say, of course, that at the moment, we see quite a bit of length in the market. The market is well supplied. There is still uncommitted volumes that are going to be placed. So these volumes, rebuy and then replace ourselves. So we make money off that short-term volume. But we see the markets getting tighter again and more balanced, probably only in the early part of the next decade.

We also still believe fundamentally the LNG business will be a growing business. It will be of the fossil fuels supply sources, the fastest growing one. So, therefore, we will remain an interest in taking investment decisions in that business, probably in the near-term, a little bit more on market development and as we see indeed the demand uptick and the supply demand retro (01:10:17) opening up also more in supply. But the prime reason for not taking a final investment decision on both LNG Canada and Lake Charles is driven by affordability reasons this year. We have not stated when we will revisit that decision. So, therefore, there is no new date to look forward to.

And on Lake Charles, by the way, there is – there would be multiple ways by which we would be able to do that project. And if indeed we were to take Lake Charles investment decision under the current contract, the commitment, of course, of the lease payments would still come onto our books. So, therefore, it's not just a matter of somebody else build and we will lift whenever we can. This would come, of course, with a back-to-back long-term commitment. So it is, therefore, more an accounting aspect that you're referring to than really avoiding the capital altogether. So my decision is – goes back to fundamentals. We don't feel at this point in time in the cycle, and at this point in time, in our financial framework, it is prudent to make that level of commitment to the LNG business.

Simon P. Henry - Chief Financial Officer & Executive Director

Just quickly on cash tax on disposals. It will always be a slight discrepancy between what we state on proceeds from disposals or anybody else for that matter, that's always a pre-tax figure and any tax will then flow through the CFFO as if it were a normal item. The item in Q2 is actually on sale in Nigeria sometime ago, so it actually usually follows a year or so later in the transaction, $700 million or so. And going forward, there is no carried-forward expectation of deals that have been done with a major tax impact.

We haven't done major deals for quite some month anyway. But as we then go forward with $30 billion, there are different ways of achieving how that could be done, and in many of them, either transactions are not subject to tax or the taxable base of the assets being sold would be close to or certainly non-zero. So close to the proceeds received. So the actual effective tax rate on disposal is all likely to be a serious factor, but it is something we'll try and be a bit more transparent about as we go forward. If we expect, identify and expect large one-off payments like we've just seen.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Simon. Thanks, Anish. Can I have – I think there's no more questions, operator?

Operator

That's correct. There's no further questions.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Let me then say thank you very much for being with us today and for the many good questions that you have asked. I again would like to, before closing, reiterate that – what we have posted before that 2016 will be a transition year for us. So it's all about consolidating BG, it's launching and executing a multi-year change program which will of course still have to play out at the bottom line. And then of course, all of this in the context of lower oil prices as well.

So, again, the overwhelming driver for our lower result that you have seen is the macro environment. So the $3 billion compared to the same quarter last year that is the result of lower oil prices, lower gas prices, as well as lower refining and chemical margins, and I think therefore, the guidance that we have given, the commitments that we have made, the outlook that we had for the end of the decade that we made a bit over a month ago is still all very much exactly the same. Let me remind you also that we will have good quarter results of course scheduled for November 1, 2016 and Simon will be there to talk to you then.

So, for now, many thanks for your attention and have a good day.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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