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Royal Dutch Shell (NYSE:RDS.A)

Q3 2007 Earnings Call

October 25, 2007, 9:15 AM ET

Executives

Peter Voser - CFO

Analysts

Theepan Jothilingam - Morgan Stanley

Jon Rigby - UBS

Nicki Decker - Bear Stearns

Neil McMahon - Sanford Bernstein

Edward Westlake - Credit Suisse

Robert Kessler - Simmons

Irene Himona - Exane BNP Paribas

Mark Gilman - Benchmark Company

Mark Iannotti - Merrill Lynch

Colin Smith - Dresdner Kleinwort

Neil Morten - MF Global

Fadel Gheit - Oppenheimer

David Klein - ABN AMRO

Presentation

Operator

Welcome to Royal Dutch Shell Q3 Results and nine months Call. There will be a presentation followed by a Q&A session. [Operator Instructions].

I would like to introduce our host speaker, Mr. Peter Voser.

Peter Voser - Chief Financial Officer

Okay. Thank you very much operator. Good afternoon, welcome to the Royal Dutch Shell third quarter 2007 conference call. I am going to review the results and portfolio activities for the quarter and then take your questions. Firstly please take a moment to read the disclaimer.

As we said in July, our main objective here at Shell is to generate competitive returns. And we aim to deliver value in ways that include good safety and environmental performance. We're delivering on our strategy to refocus and renew our portfolio. That means divesting non-strategic assets, both upstream and downstream and redeploying capital to growth regions by making disciplined capital choices. We have brought new fields on stream and new projects have been launched. The asset sales we have completed so far this year total some $7.7 billion against the plan for $9 billion this year.

And we continue to rejuvenate our portfolio by developing new long-life growth projects that will generate cash flow for decades to come. Our strategy is on track, and we are laying strong foundations for our future.

Now, let's turn to the results. Third quarter results we delivered $6.4 billion of CCS earnings. These competitive results come through a good operating performance from Shell, and they come despite weaker industry conditions downstream and continued cost challenges sector wide. Our Q3 earnings include one-time items adding up to $265 million. These one-offs included essentially non-cash pension charges for realignment of our global remuneration, tax rate changes, and mark-to-market effects. When you exclude identified items, our CCS earnings per share declined by 11% compared to Q3 '06. Cash flow was $9.8 billion for the quarter. That's an increase of 3% from Q3 '06. We are confirming the dividend for Q3 2007 at $0.36 per share, an increase of 14% versus year ago levels. Gearing including off balance sheet items was 12.1% at the end of the quarter. Share buybacks for Q3 were at $1.5 billion, bringing the nine months total for buybacks to $2.8 billion. Announced dividends and buybacks combined for the first nine months of 2007 were $9.5 billion.

Before I get to the details after our results, I would like to make a few comments on the economic environment. Oil prices increased from levels a year ago, whereas global gas prices remained relatively stable, and US gas prices declined. Oil prices increased at the end of the quarter and they remain at unusually high levels. Industry refining margins fell in the US West Coast compared to year ago levels and were slightly up in the US Gulf Coast. In the Eastern Hemisphere, industry refining margins rose, and Europe was essentially unchanged. Margins declined in all the regions compared to the second quarter of '07.

For Shell, Q3 margins were eroded by narrow or light heavy crude and product differentials, which do impact the more complex refining players. Retail margins decreased in the US compared to the same quarter last year and they increased slightly in other regions.

Turning to Chemicals, industry margins declined in the US and remained relatively stable in Europe compared to last year's levels. Asian margin, however, fell markedly. So far in the fourth quarter, downstream margins overall are under pressure as you would expect with such high oil prices.

Let me now talk about business performance in more detail. First on upstream. Excluding one-off items, upstream earnings declined versus year-ago levels. Earnings were impacted by lower production volumes, partially reflecting our sale of the stake in Sakhalin into Gazprom. They were also influenced by a decline in high margin oil production, higher exploration expense, impact from increases in estimated asset retirement obligations as well as industry-wide pressures on cost from taxes.

Upstream cash margins remained strong at around $23.2 a barrel of oil equivalent compared to $24.6 a year ago. Oil and gas production declined by 4%. Oil production including Oil Sands fell by 9%. Various gas production increased by 6%. Our dilution of Sakhalin into Gazprom combined with the deconsolidation effect removed some 40,000 barrels of oil equivalent per day in Q3 '07, so underlying volumes declined by some 2%.

During the quarter, we saw first production from Deimos in the Gulf of Mexico Mars Basin and from Ormen Lange in Norway. Overall, we are on track for a production at around 3.3 million barrels of oil equivalent per day for '07, as we have indicated previously.

Turning to LNG, equity sales volumes were 12% higher than the same quarter a year ago, driven in particular by increased feedgas supply in Nigeria. As I indicated in Q2, the next tranche of new LNG capacity will impact our growth rate across 2008. Gas and power, marketing and trading conditions were less favorable as mild weather conditions impacted storage places in both Europe and North America. So far in the fourth quarter, the marketing and trading environment for gas and power has been similar to Q3 '07. You will recall that we tend to publish the financials from Oil Sands as a separate business segment from Q4 '07 onwards. And I'm keen to make sure that the investors have good transparency on our activities. To give you an indication, Oil Sands earnings were some $180 million in Q3 2007 compared to $225 million a year ago. We will give you more historical data on an IFRS basis before the fourth quarter results.

Now let me turn to downstream. Earnings decreased from year-ago level with lower Oil Products earnings and Chemicals broadly unchanged. Refining earnings were impacted by weaker industry conditions and narrow or light heavy differentials and declined versus year-ago level. Marketing earnings were broadly unchanged from a year-ago level. Also, trading results were lower as a result of fewer market opportunities and reduced volatility. Shell's refining availability remained relatively stable at around 93% compared to 94% in the third quarter '06 despite hurricane impacts on the Gulf Coast. Availability for Q4 '07 is expected to be at slightly lower levels than Q3. This will include a three to four month partial shutdown program at Bukom in Singapore, where we are bringing forward in '08 plant turnarounds to this quarter.

In Chemicals, results were broadly unchanged from Q3 '06 and remain robust overall, although the trading impact was weaker than year-ago levels. Chemicals availability increased to 94% and were some 6 percentage points higher in Q3 2006, which was impacted by heavy turnaround activities. Chemicals availability for Q4 '07 is expected to be the same level as Q3 '07 and higher than Q4 '06, which was impacted by heavy turnarounds.

Now let's turn to the portfolio. We continue to rejuvenate our portfolio in the third quarter, focusing on capital discipline and capital efficiency. We have made more progress in Q3 towards our goal of shedding non-core and under-performing assets and to concentrate on areas with the greatest growth potential. Few examples. In France, we have made progress with the disposal of three Shell refineries with a total of some 300,000 barrels per day capacity. We expect these transactions to close in '08.

In Austria, we have announced the sale of our 25% equity holding in Austrian oil and gas producer, RAG. In Norway, we entered into an agreement with E.ON to sell our 28% equity interest in the undeveloped Skarv and Idun fields. And in Australia, we have entered a strategic transaction with Petronas, which will decrease our position in Evans Shoal gas to 25%. And we continue to make progress in building up Shell's activities in Russia, with strategic agreements signed with Rosneft and for heavy oil with Tatneft.

Let's go to LNG. We saw two important FIDs during the third quarter. One in the United States, Motiva, which is our Shell Saudio Aramco joint venture took FID on an expansion of the Port Arthur refinery, and I will say more about that in a moment. In Australia, Woodside, where Shell has a 34% stake, Woodside took FID on the Pluto LNG project. This is I believe the first [inaudible] FID in LNG this year and brings the number of LNG trains under construction for Shell to six. In total, Shell has over 13 million tons per year of LNG capacity onstream today and a further 8 million tons per year under construction.

Turning to Port Arthur, I'm very pleased with the final investment decision to expand the refinery in Port Arthur, with our Motiva partner, Saudi Aramco. At Shell, we believe that the refining industry remains a cyclical one. Our strategy remains to concentrate the large complex manufacturing sites proficient in the best closed markets. As you know, we have put up some 9% of our global refining capacity for sale this year. Exiting from non-core provision is part of our strategy. However, on the other side, we do look to make selective growth investments in downstream. The scale of market position that Port Arthur offers is a very good fit with selective growth strategy. The expansion will be more than double the capacity of Port Arthur, which is already a highly sophisticated refinery to some 600,000 barrels per day, making it the largest refinery in the United States. The expansion will enhance the refinery's upgrading capability, enabling it to process a wider range of heavy sour and high acid crudes. These crudes come from Saudi Arabia, Canada, South America and some domestic sources.

So to recap, I think we have delivered another good set of results this quarter, driven by operating performance. We have made good progress with the portfolio. Major projects are going well. Our disposal program adds more focus to the company. And our strategy is on track, operational excellence, competitive cash flow and capital discipline.

With that let me stop and go for questions. Back to the operator.

Question and Answer

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Theepan Jothilingam from Morgan Stanley is now online with a question.

Theepan Jothilingam – Morgan Stanley

Yes. Hi, good afternoon Peter. Just a couple of questions please. Just firstly, you've been very active on the disposal program this year. And you've indicated around $9 billion for the full year. I just wanted to sort of talk about opportunities going forward, what sort of run rate you expected. As a follow-up question, just in terms of your cash cycle, even taking into account proceeds and sort of disposals. I wondered if you saw the opportunity to accelerate cash return to shareholders into the fourth quarter. Secondly, just in terms of some of the announcements around Russia, you've announced strategic partnerships with Rosneft and also Tatneft. I was wondering particularly on the latter in terms of the heavy oil program, whether you could give me a bit more color, particularly on timing and opportunities and in terms of volumes. Thank you.

Peter Voser - Chief Financial Officer

Yes, thanks and good afternoon. On the disposal side, I think as a guideline of going forward, we always use 3% to 4% of our capital employed as a kind of an annual portfolio management program, for divestment program. And I think I don't see any reason to change that in that sense. On the cash return, fourth quarter, I think in general, how we are optimizing our cash returns to shareholders. So, there is a long-term piece, which is quite clearly driven by the competitive dividends increasing with at least inflation. We've done more the last two years, 9% and 14% in our organic growth picture, maintaining a balance sheet, which is undoubtedly at the moment at the lower end of the given range where I would like to be, but with $80, $85 a barrel, it's a little bit more difficult to get to the 25, but we are on the way. And then we're optimizing that on a constant basis and we will let you know when... where we are at the end of the fourth quarter how the dividend and the rest will look like. So, I'm not going to make forecasts, but I think we have proven over the last two, three years that we are very determined to optimize the shareholder value in the short and in the long term. On Tatneft, I think it's a little bit early days on this one to give you timing. I think this is a good way of demonstrating that we are using our technical capabilities, which you are building up in other parts of the world and we are recognized in the markets. I'm talking about Canada and the US and other countries, and we are now bringing that into Russia as well. So it will be... it's a big resource at the end of the day. It will have to be competitive in terms of profitability and economics against the rest of the world, like Canada, for example, and we will then see how we take that forward. So, it's too early to give you more insight into the timing. Let us work the MOU a little bit more and then we'll come back on that. Next question please.

Operator

Jon Rigby from UBS is now on line with a question.

Jon Rigby - UBS

Yes hello, Peter. It's a question about Athabasca actually. I wonder whether you could just discuss whether you or members of the Shell Group have been in discussion with the Alberta authorities about the proposed changes to some of the royalty regime. Also, whether… clearly we don't know what the final decision will be, whether there is a chance that you would change your investment behavior depending on what the decision is. And also, just with respect to AOSP itself, are there any grandfathering issues with AOSP that might mean that it is not exposed to the changes in quite the way that maybe new projects are? Thanks.

Peter Voser - Chief Financial Officer

Yes, thanks. Good afternoon Jon. Yes, you have seen the panel recommendation. You most probably have seen at least or heard of the speech of the Premier last night from Alberta, where he announced the press conference for later today. So, we will see that later today what's coming out. We are part of the industry and the industry had talks with the government, but it is an industry talk in that sense, and we will see what's coming out. I think from a general point of view, as we are managing our resources and our projects against hurdle rates, and we are ranking our global portfolio, these projects will have to be competitive internally against other projects and maybe we will see which one takes it through. The grandfathering as well, I would say is part of the wider discussion with the government and is clearly pursued through the industry as well. So, I think this goes into the same category, too early to say. We will wait until the government expresses their views and then comment on it. Now in general… we have talked about that before, it is clear if we are aiming to invest a significant part of our money and projects into areas, where in the longer run, so in a 30 years, 40 years period, you can expect some fiscal stability. We have seen a few countries changing after oil prices come from 20 to 90 totals more or less. So, we take a long-term view on these things as you know. And some countries have learned it the hard way that by changing taxes too aggressively, that project FIDs will start to slip and projects will be done somewhere else. So, I think all of these will be taken into account by the government, but also we will be taking into account some rerun projects.

Jon Rigby - UBS

Thank you.

Peter Voser - Chief Financial Officer

Okay. Thanks. Next question please.

Operator

Nicki Decker from Bear Stearns is now on line with a question.

Nicki Decker – Bear Stearns

Good afternoon Peter. A couple of questions please. First of all, on upstream production, if you are maintaining your guidance of 3.3 million to 3.5 million barrels a day, that would imply a pretty good bump up sequentially in production. So, wondering if you could highlight some of the sources of that growth. And secondly, Peter, my question would pertain to downstream returns. Given the portfolio activity in refining, how might we look at return on capital employed for refining going forward?

Peter Voser - Chief Financial Officer

Okay. Thanks Nicki and good afternoon. I think you are slightly breaking up on the first question, but I think you went after the production for 2007 and the fourth quarter. Is that correct?

Nicki Decker – Bear Stearns

That's right.

Peter Voser - Chief Financial Officer

Okay. We have said we will be around the 3.3 million barrels. I think I also would like to remind you that Q4 '06 included some 103,000 barrels of oil equivalents for a resolution of a contract issue for the full year, the full '07 taken in the fourth quarter last year. So, you need to neutralize for this one, and then I think you will get closer to what a normal quarter for us will be. So, from that point of view, 3.3 neutralized Q4 '06 for the 103 and then do your calculations there again. Refining, I think we do not give obviously returns out on our capital employed just for this business. We do normally on an annual basis give you the earnings split between marketing and refining. So, we intend to do the same again for the 2007 in January when we come out with the results. I think we are looking at a cyclical business and we have to be very clear on this. This is a 5 to 7 year cycle type of business. We have enjoyed a few years of very high margins, but when you take a decision like we are doing on Port Arthur or the roughly 300,000 barrels which we have sold, we look at the cyclicality quite clearly. We take that into account. But the more important thing is actually to look at the complexity of refinery, how does it link into our demand structure around the refinery. How does the overall supply envelope for the country look or the region look, and this drives the investments much more. Or in the case of Port Arthur, clearly, you need to look at the full value chain, starting even up in the Oil Sands and then look at Port Arthur upgrading capabilities, make sure that demand like… market like the US being close to the market with the upgraded. So, these are very important elements for our calculations when we look at the margins. We also obviously take a view on the overall supply/demand balance and envelopes in the certain regions, as I said. So, I think from that point of view, that's how we look at our return expectations in the long run and the medium term. So, we do not look just on the next few years. And other items like I have explained have a real important input here. Next question, please.

Operator

Neil McMahon from Sanford Bernstein is now online with a question.

Neil McMahon – Sanford Bernstein

Good afternoon Peter. I've got a few questions. I'll just queue them all up. The first is really on Sakhalin. I know you were starting to commission the LNG facility. Could you give us a bit more color on the timing through 2008 with some of the first significant deliveries there? And maybe some comments around talks of a third train of LNG at that facility. Secondly, could you go through maybe the amount of trading activity that caused chemicals to be weak? What sort of value should we be putting on that that you would have thought was abnormal for the quarter and where prices actually started to improve? And third, just on oil demand, if you can see any implications globally of any turndown in oil demand at the minute. Thanks.

Peter Voser - Chief Financial Officer

Okay. Neil thanks. Could you just maybe repeat your second question, because I had a problem to hear it.

Neil McMahon - Sanford Bernstein

The second question was on, just on Chemicals. The numbers looked a bit weak and you suggested that may have been due to some trading activity. Maybe if you could put a number on that what a normalized Chemicals earnings would have been in the third quarter to reflect that trading activity?

Peter Voser - Chief Financial Officer

Yes. Okay. Thank you. On Sakhalin, as we said we have imported an LNG cargo in order to start commissioning. I think you need to look at the whole project and I think on the start up and the completion, we're looking still at the second half of 2008 as we have said. So, you have to imagine this as being in various startups across the whole production chain, so this will take time. So, I think the major impact from the production coming on stream will be in May '09. Regarding the third train, as part of the dilution of Sakhalin to Gazprom, we said we signed an AMI with Gazprom to develop further business opportunities into Sakhalin Island area. And as part of that, we are looking into the third train and we are doing some work there to see how we can actually use gas switches available in the neighborhood in order to fill the third train. Too early to say where this goes but we're working on it. I think your third question first, which is the oil demand. It's an interesting question, because if you look at our numbers or look at our marketing numbers, the marketing volume numbers, if you exclude what we have divested, actually our numbers went up by 2.2% QonQ this time. And it was really driven by the big markets where we have gone in over the last few years maybe, somewhat relatively recent. So, I'm talking about Brazil, India, Indonesia, Turkey, Malaysia. That's where we have seen quite significant growth coming through. They're focusing the world where the demand certainly is weakest. I think the US would be one of those countries where we have to watch it more and more carefully, Europe is another strong growth country there, but for us overall it was a very positive quarter. I think on the Chemicals, yes, we did say trading was weaker. It's very difficult to give you a generalized number, because it really depends on the market volatility and the possibilities you have there. I think the one which I would like to add there as well is our performance in the US in Chemicals is very dependent on the oil price, because we have got... we are using liquids to actually produce our chemical feed stock etcetera. And obviously prices have gone sharply up in the third quarter and that also has slowed our margins somewhat down, maybe comparing it to other players who are more gas driven rather than oil driven. And so I think you need to see this as a whole package on the index and trading a lot weaker, but I think the impact is a rather smaller impact compared to some other stuff.

Neil McMahon - Sanford Bernstein

Thank you.

Peter Voser - Chief Financial Officer

Thank you. Next question.

Operator

Edward Westlake from Credit Suisse is now online with a question.

Edward Westlake – Credit Suisse

Yes, good afternoon Peter. If I could just come back to this issue of CapEx and disposals, I have seen on the tapes some discussion of 22 to 23 ballpark CapEx in the medium term. I presume that is a net number. If you can maybe talk about headline CapEx and disposals within that? And then secondly around the SEC reserve replacement, obviously it's early, but you have talked about choices in terms of the key projects in Gorgon and LNG, I understand are delaying. So, in terms of your general expectation for the '04, '08 sort of reserve replacement target?

Peter Voser - Chief Financial Officer

Yes. Okay, thanks and good afternoon. Let me take you through the CapEx guidance starting with '07. '07, we are on track for $22 billion to $23 billion of net spending, made up of 24, 25 for organic and $2 billion of net acquisition disposals. At the end of Q3, organic spending was about 18.1, acquisitions some 7.1, disposals some 7.7 as I have mentioned. So, the net spending comes to something like 17.5. For next year, we don't have any specific guidance for you on that and you'll get it next year. But what we've said so far and that's what I meant this morning as well. I think it was in Reuters afterwards, is that the net spending will be relatively stable in '08 and later. Now let me also just talk here as you are talking CapEx a little bit, the inflation side. The market is seeing some inflation at this stage, which is around 20%. Now for us internally here, we see inflation of about 10%. This has been achieved through global contracting on procurements reading the markets right, taking the rigs earlier etcetera. We are also seeing the effect of weaker dollar, which obviously pulls us out of our CapEx as well. So I think it is a good indication for you on the organic trend. Disposals, we typically see as I said already 3% to 4% of capital employed per year, and we have roughly 125 of capital at this stage. So, if you take all these numbers I think and use it… what we've said on the net spending going forward being relatively stable. That gives you a good insight on how we are moving on CapEx.

Good, and the second question was around SEC. Now, you are quite right, it's early. Second, I think it is also fair to say that we look at this in a slightly different way. As you know, it is an outcome for us. It is... we are looking at trends in a three to five year time horizon. And hence we will be updating on that next year, then again as and when we get into '08 and have finished the work. And just a few comments on which I have said earlier on. We booked quite a little bit of Pearl last year, but we haven't booked everything. We haven't booked anything yet on the Qatargas-4 LNG project. Gorgon is obviously out from... out there for to take [inaudible] you need to talk to Chevron on that one. So, there is quite a bit of things still going to come, but they will come most probably lumpy, and hence we are going forward to three to five years, let's say sequence. The other one which I would like to remind everybody on the call is dilution of Sakhalin and a buyout of minority. We will see that reflected in our net reserves and we've already said that the impact of that is roughly minus 100 million barrels, if you take the two together on the net basis. The gross reporting will be slightly different, but we will take you through that again at the end of January when we come out with the financial results for 2007.

Neil McMahon - Sanford Bernstein

Thank you.

Peter Voser - Chief Financial Officer

Next question please.

Operator

Yes. Robert Kessler from Simmons is online with a question.

Robert Kessler - Simmons

Good afternoon Peter. Your corporate segment results were again quite robust at $413 million. I know it is volatile, but it was several times your normal guidance. And I am wondering if you could delineate between the various influencing factors, the reinsurance income, foreign exchange, interest earned and the like?

Peter Voser - Chief Financial Officer

Yes. Okay, let me try to do that. Good afternoon. Let me tackle both corporate and minorities, because both were obviously different. And I saw some differences in the forecasts as well. So starting with corporate, it is interest income and expense we have, that is the first one in. So this is typically interest, this is internal loans and this is capitalized interest what we have. Second item which we have is currency exchange gains and losses. Now this is on group financing, but tends to be very small. So, this is not a big item as we are financing normally in those currencies, which are reporting currencies to avoid currency exchange gains and losses. Then we have the categorizes of others, which includes a really three major items which is corporate cost, I will come back to that. It is the Shell reinsurance companies, which charge out to the business premiums and then if there are no claims etcetera, you get the effect obviously in corporate. And then to tax impacts on financing. So, what we saw in Q3 was a positive impact from capitalized interest in the interest income, because you also have seen interest rates going up, so that comes through. We have seen a limited number of claims against group insurance. Hence we generate a profit, and we saw positive elements on tax credits. Now coming back to corporate costs, that is normally embedded cost of $800 million to $1 billion per year in corporate for central functions. Now obviously there can be also positive impacts such as tax credits on intergroup financing, insurance premium etcetera. Now recently these trends have been positive, which obviously is a good thing. Now I take money and profit in whatever segment it is. So, I'm not changing the guidance for corporate, but I am giving you the details so that you more or less know where the effects are coming from, when you can do some estimations. But we're still keeping our guidance which is zero to plus/minus, around the $50 million in corporate excluding the FX, but I already said FX is a rather smallish number. So, that is on corporate. On minorities, I think the main factor is clearly it's Shell Canada and Sakhalin [inaudible] other minorities. As you may know them, it is Shell Gabon, it's a refining company in Malaysia, same in the Philippines. It is Pernis refinery here, and it's [inaudible] in Malaysia as well. So these are the typical minority companies. That's it.

Robert Kessler - Simmons

Peter, any chance you can give us a more precise number on net interest earned and on the positive tax items for the quarter?

Peter Voser - Chief Financial Officer

I'm not going further than what is in the… in the press release. So, I think… if I'm not mistaken, but I will check that in a minute. We actually gave some net interest income and expense numbers, so you actually will see it there. If you give me a second, then I will get you to Page 12. Next question please. That is page 12. You have got corporate actually split up into interest in investment income and expense, currency exchange gains and losses and then others. So, it is listed there. Next question please.

Operator

Irene Himona from Exane BNP Paribas, she is now on line with a question.

Irene Himona – Exane BNP Paribas

Good afternoon Peter. A question on the Port Arthur FID. Is this already included in your CapEx guidance for a relatively stable net of $22 billion, $23 billion. And my second question concerns depreciation in the quarter. We saw quite a decline in the upstream charge. Is there any specific reason for that and can you perhaps give us some guidance for the full year? Thank you.

Peter Voser - Chief Financial Officer

Okay, thank you very much, good afternoon. I will start with the second one. Yes it's indeed, the number looks a little bit down even with the lower production. But they are some one-time impact in the Q3 numbers for EP, and they have actually mentioned them. So, we had the Sakhalin consolidation. We had obviously also reversal, an impairment reversal, so we have highlighted both of them. Now, we don't give precise guidance for Q4, but I'd say that the underlying trend of unit TGNA is rising due to new fields coming into the production profile. So, that would be my guidance for you to go forward. Now Port Arthur, as you know, it is a joint venture, it is 50-50, it’s equity accounted. So, therefore that is where you will see the CapEX number. It only comes through if actually Motiva would be financed through shareholder loans, that would then be seen as CapEx. As we have got significant cash generation in Motiva, I would more or less see no need to actually fund Motiva, and you will not see that CapEx in our numbers.

Irene Himona - Exane BNP Paribas

Thank you.

Peter Voser - Chief Financial Officer

Next question please.

Operator

Mark Gilman from Benchmark Company is now online with a question.

Mark Gilman – Benchmark Company

Peter good afternoon. I had a couple of things. First, I noticed what appears to me to be some hesitancy as to the successful conclusion of the French refinery sales as well as a bit of a delay in the timetable. Am I reading the tea leaves correctly that this is not a fait accompli at this point. I also have a follow up.

Peter Voser - Chief Financial Officer

Okay, no you're not reading it correctly. We are adjusting the normal process. So, we announced that we have signed an agreement subject to finalizing the deal. Financing the deal in the sense of actually having consultation to do with unions, employee bodies, state etcetera, and that takes time. You are in France. So, it will take a little bit of time. So, this is a normal process, it's going well and we just can't see it actually finishing in 2007, which we said that you early on. These things do drag on. So no hiccups, no big hurdles etcetera.

Mark Gilman - Benchmark Company

Okay, if I could, just two quick others. I believe you have also indicated an intent to divest essentially all of your remaining US retail station facilities, company owned. How many stations are involved in that?

Peter Voser - Chief Financial Officer

Yes, I wouldn't go as far as you say it. I think we are changing the operating model in the US, which will move out somewhat more to a wholesale model. And as part of that, yes there will be some change, but I don't have the number actually with me. I need to check if we have given it or not. If we have done so, then we will get back to you.

Mark Gilman - Benchmark Company

Okay and finally there have been some recent conversations and talking in the press regarding changes in fiscal terms in Nigeria with some specific reference to going from the standard MOU for the onshore and near offshore to a PSC type format, with associated questions regarding reserve bookings and the like. Could you provide some color on exactly what changes are being contemplated here?

Peter Voser - Chief Financial Officer

Yes, I can't give you too much, because we have not officially seen or heard anything from the Nigerian government. So, it is a lot of talks and I think we have seen the same as you. So, it is too difficult and too soon for us to make a comment. Let me just take you through the various regimes which we have, so that at least you are well prepared when things go forward. As you know, we have several parts in portfolio in Nigeria, and with different activities in fiscal regimes. So, on the one side, we have the joint venture, which is onshore, which is SPDC, which is semi-fixed margins, $2 to $3 a barrel, and we are producing currently about 216,000 barrels a day. And then we have the deep water, which is roughly 175,000 barrels a day, which is in our other company in Nigeria, and [inaudible] with Exxon. And this is typically on PSC, which is typically around 5% of our total production. So, as a sum Nigeria is important for us, but we have got an overall worldwide well-balanced portfolio, even in Nigeria well balanced. So, we will have to see and wait what tax changes might come, and what that will do to encourage investments on the other side in the country. As you know, I pointed out last time, there are some funding issues, so we will certainly talk with the government when these things come out and how we can actually accelerate maybe growth by having the right contractual arrangements and the right funding arrangements.

Mark Gilman - Benchmark Company

Thank you Peter.

Peter Voser - Chief Financial Officer

Okay, next question please?

Operator

Bert Von [inaudible] from DeVries & Co. is on line with a question.

Unidentified Analyst

Yes, good afternoon, this is Bert from DeVries. A few questions. First, you already expanded a bit on the minority, and you have mentioned a number of items there. But I understood that after the bid for Shell Canada, minorities will go down to something like 50 million a quarter. Can you give us sort of a guidance, what sort of figure we have to expect in the coming quarters? And the other one is on Saudi Arabia gas venture. I understand you had a few wells there, but not very selling so far. Can you give us some color on the activities over there?

Peter Voser - Chief Financial Officer

Yes okay. Thank you. The minority obviously, we are not giving guidance in that sense, because as you... I've seen with the companies I mentioned, some are downstreams, some are upstreams. They have different profiles in terms of their earnings capacity. So, it will be very difficult to give you a precise forecast. We need to do that every quarter and see what earnings come in, because we have got on the one side, GTL on the other side, we've no more refineries. So, I think we've not given as low as 50 as you said. We will need to calculate that every quarter. Now on the Saudi Arabia, yes, we are doing some seismic and some activities there. We have decided and have announced that as well that we do second and fourth quarter updates on any exploration activities in the group. So, we have to bear [inaudible] until the end of January when we update on the financial results. And then we will give you either there or during the strategy update in March further insights into our activities, which will include Saudi Arabia.

Unidentified Analyst

Thank you. And then final follow-up question on your decommissioning cost, how much have you provided for the time being or should we also expect that by the year-end?

Peter Voser - Chief Financial Officer

That is also something, which comes at the year end, because typically you can take that out of Form 20-F. So, you will have to wait for that or then use 2006.

Unidentified Analyst

Great. Thank you.

Peter Voser - Chief Financial Officer

Okay. Thank you. Next question.

Operator

Mark Iannotti from Merrill Lynch is now on line with a question.

Mark Iannotti - Merrill Lynch

Hi, most of my questions have been answered, but I will ask one quick one. Can you just explain the basis for the Alaskan expiration rate of this quarter, why it just wasn't expensed as a normal ongoing item?

Peter Voser - Chief Financial Officer

Thanks Mark, and good afternoon. Because this is very different. This is actually related to our Alaska drilling, which has had some legal problems, but actually not the legal problems associated to us. It was actually against the permitting agencies in the US and hence we decided that this is not a normal write-off, this is created by some court actions and hence we treated it as a special one.

Mark Iannotti - Merrill Lynch

So, what is exactly happening again?

Peter Voser - Chief Financial Officer

We received some permits or we were in the process of receiving the permits and some groups have then in the Californian court actually started a legal case against the permitting agency of the US Government to stop the drilling. And these court hearings and decisions are still outstanding and during that time we can't actually drill. So, this is not the case against Shell, it is between a group of people against the United States Government. We're just in the middle of the very famous ham in the sandwich.

Mark Iannotti - Merrill Lynch

Okay.

Peter Voser - Chief Financial Officer

Okay. Next question please.

Operator

[inaudible] is online with a question.

Unidentified Analyst

Good afternoon. Thank you for taking the call. I have at least two questions. In the reading of your current materials, very little seems to be showing up recently about the gas-to-liquid technology and further developments etcetera. Has that... is that because the economics there have changed radically and therefore no longer paced, or is there something else additional to it?

Peter Voser - Chief Financial Officer

You were just breaking up when you mentioned which technology, can you just repeat it.

Unidentified Analyst

I'm sorry. In your recent reports, I have seen relatively little about gas-to-liquid technology and further developments in France being built utilizing it. Is that because you cannot change and it is not viable under current economics or is there something further to that?

Peter Voser - Chief Financial Officer

Yes.

Unidentified Analyst

Second question relates to the capital outlay that is anticipated with respect to refining. I believe that just as we have cyclicality and commodity prices with respect to oil and also has that with respect to construction cost and so forth, is there any anticipation that projects are going to be put off to take advantage of probable cyclical down… reduction in prices which as we come to the other side of this particular cycle?

Peter Voser - Chief Financial Officer

Yes, okay, good. On the first question, as you know we are operating one plant already which is being tooled now for 12 years producing 14,000 barrels with a utilization of 98%, 99% very successfully. Building the TTL plant in Qatar, which is a two-train plant, which is on the construction at this stage. What we said is we want… which is a factor five to one. So, it is 270,000 barrels range versus the 14,000 barrels we are running. We want to construct it first, operate it and then look forward to the next expansions. So, this is a cautious way, typically like we do it. We start, we build, we operate and then we expand. And there is a possibility to look at expansion of those two trains in Qatar or their move to other areas where gas is available relatively close to some demand centers in that sense. So, economics still very attractive. You know the cost what we have set is 3 billion barrels of gas averaged $4 to $6 development costs. So this project is one of our key projects and no reasons to believe that this cannot be done somewhere else, but we want first to deliver this one. On the refinery side, let me give you a few numbers first and then give you an answer. So, there is roughly 22% of additional refining capacity coming on Stream East of Suez over the next two, three years. So, these are projects in India, these are protects in the United Emirates etcetera. We have got two ongoing big projects now is Motiva, Port Arthur and one in Singapore. We just finished the petrochemicals plant in Nanhai, so that is very active. Now costs have come up as you rightly say. There is a lot of capacity coming now on stream. So, we will see how the markets react in terms of further new projects, if it will slow down because of capacity reasons slowdown, because of cost reasons. I think you will hear a lot of that in the market that certain precautionary measures are being taken. So, we will see how that goes and how the refinery cycle works out. I leave it at that as general. We have said we are interested in refining capacity in China. We will see how that develops.

Unidentified Analyst

Thank you.

Peter Voser - Chief Financial Officer

Next question?

Operator

Colin Smith from Dresdner Kleinwort is now online with a question.

Colin Smith – Dresdner Kleinwort

Good afternoon Peter.

Peter Voser - Chief Financial Officer

Good afternoon Colin.

Colin Smith - Dresdner Kleinwort

My question was just to see if you could provide some color on what you think you got with Gulf of Mexico Lease Sale 205? And can you also just clarify two sort of technical points. One, the accounting treatment, will that be written off as a lease acquisition or as you capitalize it? And secondly does it come within the $2 billion for exploration and appraisal expenditures that you indicated was the budget for 2007? Thank you.

Peter Voser - Chief Financial Officer

Okay, Thanks Colin. The color I can give you on the first one is we were the highest bidder in more than 30 of the bids. So, we are very pleased with it. We have still to wait for the allocation of it, so I can't give you any more color in that sense. So, we will give that update quite clearly when we update on exploration, most probably somewhere either in January or in March. I think we see this as an acquisition cost rather than as a CapEx cost. So, it is in the next, but it is clearly not in the $2 billion exploration bucket. Then I think… what was the other question, there was one more.

Colin Smith - Dresdner Kleinwort

It was, will it be written off through the P&L or would you capitalize it?

Peter Voser - Chief Financial Officer

No, I think I am a little bit out of text now, but I don't think we will write it off though it is capitalized. If the study is not true and if my accounting gurus tell me something else, I will get back to you.

Colin Smith - Dresdner Kleinwort

Okay, thank you.

Peter Voser - Chief Financial Officer

Okay. Next question please.

Operator

Neil Morten [ph] from MF Global is now online with a question.

Neil Morten – MF Global

Good afternoon. Just a couple of questions left. Just firstly on pensions, I think you spoke in the past about making quarterly payments of around $400 million. There have been some recent press articles mentioning that your scheme is not fully funded. Talking about pension holdings, I wonder if you could give us any guidance about modeling that going forward. And just secondly, going back to the Tatneft deal on bitumen. You mentioned at the Q2 stage you thought that the Oil Sands projects required $30 plus to meet your hurdle rates. I wondered if you could give us a compatible figure for bitumen. Thank you.

Peter Voser - Chief Financial Officer

Okay, thanks. The answer to the second one is, no I can't. So, I can only give you the ones, which we have given for Oil Sands at this stage. We will see it later on if... once we've developed something we can give you further insights there. So, sorry this is too early. On the pension, yes, you are right in saying that we have well managed pension funds. We have a surplus of $7.2 billion at the end of last year. And I would say at this stage that '07 at least our internal numbers, we normally only listed out at the year-end when it is audited. But our internal estimate is actually to suggest that we have further improved on the surplus. Now the aggregate level of contributions to groups sponsored pension schemes is based on actuarial advice, which we normally do in the fourth quarter, and this is always done in each county. So, the only way I can do it is actually using the 2006 one, because it's too early for '07. We had approximately 1.3 billion pre- tax there, and now the trend is for progressively lower contributions, but realization will be depending obviously on the actuarial assumptions, for example on future investment market performance and changes to discount rates. So, we will need to do these tests every fourth quarter as we normally do, and then we can give you more color on this one. So, this is from a timing point of view not the right time.

Neil Morten – MF Global

Okay. Wait till next year then, thank you.

Peter Voser - Chief Financial Officer

Yes, thanks. Okay the last two questions, next one.

Operator

Fadel Gheit from Oppenheimer is online with a question.

Fadel Gheit - Oppenheimer

Hi, Peter. Just looking at your unit profit, and it looks like unit profits is not keeping up with the higher oil price, any reason why?

Peter Voser - Chief Financial Officer

Thanks for the question. I think if I start at the top and I look at my price realization, I think we are doing well. So, we are capturing that. But if you go further down, quite clearly, and we talked around in this call already there are three elements, which are coming in. We see OpEx increase, and you've seen over the last two or three years we had increases of more than $1 per year per barrel. We see the DD&A increase as already described, not in the third quarter but trend wise upwards, and then you have quite clearly foreign exchange element in it. We are European based in many areas as you know and the dollar has weakened. So, that gives you higher pressure on the costs. I think that's what I can offer as an explanation.

Fadel Gheit - Oppenheimer

But you don't see, because QonQ the price realization was about $3 to $4, but the unit profit only increased by less than $1. So, I don't expect that unit cost has increased significantly quarter-over-quarter, or did it?

Peter Voser - Chief Financial Officer

No. I've already given indications on how I see cost increases, cost inflation around the 10% FX I have already mentioned. So, I think we're looking at average this year. I would have to go back into the very detailed calculations to see if there was anything special, but on the average basis, we haven't seen anything special.

Fadel Gheit - Oppenheimer

Thank you.

Peter Voser - Chief Financial Officer

Okay. Next question please, and that's the last one.

Operator

David Klein from ABN AMRO is online with a question.

David Klein – ABN AMRO

Good afternoon. Just a couple of final questions. Firstly on Nigeria, can you give us some source on latest developments on the volume side and how you expect things to evolve in the coming months? And secondly on the CapEx inflation, you mentioned industry wide about 20% into 2008, you're mitigating that to around 10%, I think you said. I wonder if you could just give us... I know you gave some color on how you are managing to achieve that, but could you expand on that in any way?

Peter Voser - Chief Financial Officer

Yes. Okay. Thanks for the question David. On Nigeria, I think you are mainly interested on the onshore side. I think in general we have come back in certain areas, and we do that in a safe way. And we can go back and assess the damage and repair it and bring production back on stream. So, we have seen some improvements there, but it is a very slow improvement. So, it's difficult to already say that we are back at certain stage with the production. Now we are producing roughly 260, which is an average for Q3 1,000 barrels a day. We have about 189, 190 at an average shut-in, which brings you to the total production for SPDC, which is anywhere between 308,000 and 400,000 under normal circumstances. These are Shell shares in that sense. So, difficult to say how fast it comes back. We are working on it, we're getting support from the government [inaudible], but situation is still critical in some areas. You have heard about a kidnapping over the weekends, which ended okay. On Monday, they were released. But it is not an easy environment still at this stage. So, we will see how fast we can get back. Then on Nigeria, on inflation to 10%, I think apart from managing finance, they also have contracting and procurements, and I will use some examples out of this one. Quite clearly if I take what we have done on the rigs, which I have used a few times, we went into the rig market in 2005. We analyzed the demand, we saw a crunch coming, an increase in the rates. So, we committed in '05 up to 2009 most of our rig requirements, and through that we are still paying at this stage 2005 rates rather than 2007 rates and that is a big change. We're all also, for example, working on the various programs across the company. We have a target of getting into a first quartile benchmark performance, competitive performance, the supplies to business and all supplies to functions. Out of that program, since we are working on that since 2005, there is $0.5 billion of annual savings, which are coming into our numbers. We have other areas where we are using our global purchasing powers. We, for example, have set off for China sourcing center, where we are actually sourcing goods out of China for the rest of the group, which gives you significant savings. So, these are just a few examples on how we are optimizing our organizational structures through outsourcing, offshoring, through streamlining our organization, but on the other side, we are also using our global purchasing power.

David Klein – ABN AMRO

Many thanks for that.

Peter Voser - Chief Financial Officer

Okay. This was the question. Let me close by giving a short update on the next events. Let me invite you for the 17th of March, 2008. That is where we will be giving you an update on portfolio and strategy. Before that on the 31st of January, we will give you the fourth quarter results, and we will be simply covering in that call our 2007 financials, which will be a shared one between the Jeroen and myself. And then we will have the March update. Thank you very much for calling in and hope to see you soon and speak to you soon again. Good bye.

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Source: Royal Dutch Shell Q3 2007 Earnings Call Transcript
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