• China lends Nigeria Dollars 2bn in exchange for oil talks. • Ft com site : China oils Nigeria talks with loan

investigating a CO2 capture option, with which we involve capturing CO2 at the Scotford upgrader processing units and injecting it into nearby sequestration zones. That's the oil sands mining story and I'd like to hand over to Peter. Thank you.
PETER VOSER, CFO, ROYAL DUTCH SHELL PLC: Thanks, Rob. Good afternoon. So let me update you on the financial framework. We have the largest investment program in Shell's history and the largest in our industry. We keep the right balance in the Company, so projects will have low unit development costs, high unit cash flows and improved exposure to price upsides. What we have shown you today is the tremendous portfolio of new projects that are under construction. These are actually projects that will underpin the Company in the first decade of 2000 -- of the 21st century.
So how are we going to finance all of this and what is the thinking behind the financial strategy? As I said a year ago, our main priority is to make sure that we can fund sustained organic spending and sustain competitive pay-out for shareholders. I don't want to go back to a Shell, to the position where we had up and down capital spending programs, which we have seen in the late '90s, early 2000s. For example, in the year 2000, our organic spending was some $8 billion or a net investment in that year was actually just $1.6 billion and the balance sheet was inefficient, it was a positive net cash position.
A lot has changed since then. Oil prices, inflation, et cetera that fundamentally that level of spending was too low for a company of our size. And to some extent, we are still in a catch up mode for that in our strategy today. So in 2007, net spending was $24 billion, with large projects on the way in our upstream and downstream, the right level of spending in HSE areas and appropriate investments in R&D and exploration and business development for our future. The balance sheet efficiency has improved, with gearing of 16% and an increase in long-term debt and we keep the flexibility to maintain spending and pay-out if oil prices go down.
Shell's earnings and cash flow margins, both upstream and downstream, are amongst the best in the industry. And we look to improve on that as we move the assets into top quartile, as you heard -- as you have heard from [Malcolm]. So we are investing our cash flow into projects that will generate good returns and cash generation in the future. To keep projects we have under construction, upstream and downstream, we'll have higher unit cash flow than the portfolio today. We look to maintain a competitive pay-out for our shareholders.
So let me a little bit recap the financial performance in the last years. Cash flow from operations remains strong. Cash flow per share has increased by 50% since 2004 and this is one of the best growth rates in our industry. I put particular focus on operating cash flow, since this is how we will fund new growth projects and pay competitive dividends. Operational cash flow and operational excellence are in fact over 50% of the scorecard measure that we use to calculate the bonuses for the staff in Shell.
Cash flow from operations was around $40 billion in '06 and '07, both record years for the Company. Asset sales continue to be a key element of the strategy and we are making some good progress here. This is all about high-grading the portfolio, getting a top quartile asset base and recycling the capital into new growth projects and pay-out. So we sold some $10 billion of assets in '07 or you can also say 26 billion in total since 2004. This is an equivalent to 21% of average capital employed since 2004.
Pay-out ratio also remains competitive. In '07, we paid the highest dividend of any of the major oil companies. So I think this is good progress on the financial side in 2007. In our company, we have a very competitive portfolio of new projects. Projects that have taken FID and projects for the future. So we have over 200 projects in hand today. This is a 30% increase since 2004 and a great testament of exploration and business development performance into Shell's technology, as you have seen outside as well.
This is important in an environment where project access is a challenge for the industry. You can see that the number projects that we have under construction has risen steadily and more than doubled since '04. Capital employed has been increasing during this period, obviously. Capital under construction is around -- is at around $30 billion currently, which is around 26% of the total. And I expect that this percentage will remain high in the coming years. The impact in [Roche] is roughly 6%, but the returns overall do remain competitive as -- at 24% in '07.
As you know, we have been increasing the capital spending program for Shell. Some of you have commented on the absolute size of the spending program. I have to say we can do this because we have a good set of opportunities to invest in, and more importantly also the financial capacity. In fact, the spending program is not aggressive relative to the size of cash flows we are generating and certainly not out of line with our peer group as some have suggested in the past.
So let me update you on 2008 capital spending. Guidance for organic spending is unchanged. As we have said before, we will make discretionary acquisitions above the core program if the right opportunities come along. In '06, Shell Canada acquired BlackRock for some $2.2 billion. In '07, we bought a minority stake in Shell Canada for $7.1 billion. And in '08, as Malcolm already mentioned, with some $2 billion we have committed to the new exploration leases in the Chukchi Sea. These are all discretionary deals and come on top of the organic spending program. You will see that all of these are about undeveloped resources and new potential where Shell can add value through scale on the one side and technology on the other side.
Let me turn a little bit to costs. We have talked to you before about the inflation trends that the industry's seen and this is an industry-wide challenge. Jeroen already mentioned CERA, so the inflation is running at about 20%, and you can see some data from the CERA here at the segment level as well. At Shell we are seeing at least 10% CapEx inflation and the impact of the weak dollar. If you look in more detail at the industry numbers, you can see that inflation is running at very different rates in different segments. You could make the argument that the inflation rate is easing in some of the sectors, but it's too early to say and we certainly don't stand still on costs.
We have been going after the costs in Shell for several years and this therefore is not new for us and you have heard Rob and my colleagues talked about that. So we have firm actions in place, for example in contracting and procurement. We are going for the best prices by combining our orders on a number of projects together and being smart on the global basis about contractor arrangements and timings.
We're also working on reducing our overheads, by outsourcing and creating shared service centers in the functional areas such as HR, finance, et cetera. In finance for example, I expect the Shell headcount to fall by some 2,500 people by the end of the decade as we move to a shared service center approach and move to simplification and standardization of processes.
Now let me make some comments on the costs and profitability potential from our new projects. We have some 10 billion barrels of resources under construction. Over 50% of the project spending is going into long-life projects, which will generate over 70% of the new production. The average cost is around $7 per barrel for post-FID projects. That figure includes midstream, downstream elements like LNG plants, oil sands upgraders and GTL, so I think you can see that this is an attractive and competitive replacement cost structure. But what you also can see is that about 75% of the resources under construction are being developed at below average cost.
So how does this all come together on the profitability side? As you know, we don't have a precise oil sands forecast for you and you certainly shouldn't read from the slide any particular Shell oil price outlook. But we think it is useful actually to look at the portfolio under construction, as it might perform, should we see macro conditions in the future as we have in the last four years to five years.
So firstly, we do rank projects and make the right capital allocation and for that we are actually using the profitability index, which is a classical tool to do so. So the net present value of the cash inflow from projects compared to CapEx. We look for good profitability ratios from all projects, irrespective of geography, project life, decline rate, et cetera. So this is all about a strong capital allocation process. You see that the weighted average profitability ratio here is between one and 1.4 times.
On the other side, we look at IRR, so the internal rate of return, measured -- that is a measurement, which gives you an indication of the life cycle returns of projects. Again, this is a classical economics tool. IRR, as you know, is very sensitive to project life, since it is partially a measure of up front spending and time value.
So a project with a lot of up front costs and a very long production life, with low ongoing CapEx, for example, like oil sands or LNG, can have a slightly lower IRR, but a very attractive, stable, long-term cash flow. Commercially, a project with a rapid production buildup and a swift decline can have a higher IRR. So you have to balance these two things when you look at your long-term stability of cash flows and the returns.
So more than half of our spending is going into these long-life projects which will generate more than 70% of the new production. If you look at the weighted average of IRRs, then this is in the 10% to 15% range. This is an attractive balance of returns and project life. I will leave it to you to make the judgments, but I think this is one of the most competitive long-term portfolios in the industry and a good foundation for the Company in the future. And if the question comes about the scale, I will not give the scale, because that goes a little bit too far.
Let met turn to the next one. Let me make some comments, and you know that we have discussed that in the past, I've put a lot of emphasis on long-term cash flow and the risk profile expected in that. As we have said, new upstream projects will have higher unit cash flows in their portfolio today. Now this chart will take some time to deduce to, so let me explain a little bit what we are looking at. The total area of each box represents the operating cash flow from upstream. The colors and bands represent the risk profile of the region that the cash comes from and the type of margins we expect.
So for example, if you take upstream cash flows for '06 and '07, that's $53 billion, and measure the area of green, the you see that some 75% of upstream cash flow is coming from low-risk regions and about 85% from medium and high-margin barrels. If you do the same for 2013, you can see that low-risk cash contribution is stable at around 75% and that the contribution from medium and high-margin barrels increases to over 90%.
So this we think is a positive trend and it is part of our strategy to position the Company for, on the one side, upside in oil price, but on the other side, maintain a sensible risk balance. So let me come to an end and summarize. We think we have established a real financial performance culture in Shell and you can see that coming in the financial results. Capital discipline is well embedded in the Company and we have a balance sheet that can finance world scale projects and competitive returns to shareholders.
We have the largest investment program in Shell's history and in the industry and if we keep the right balance in the Company, projects will have low unit development costs, high unit cash flows and the improved exposures to price upsides. I think this is good news for our shareholders. And with that, I will let Jeroen wrap up the session.
JEROEN VAN DER VEER: [Those] low type assertions or let that [maybe] assured. In the business environment where we expect volatility, but we see a lot of chances. We think we have a clear strategy, the strategy is unchanged for upstream as well as downstream and within that strategy there are simply four priorities, safety, one, operational excellence, two, strong project management, number three, and four, technology, technology in the right sense of the word as a long-term key differentiator, to make sure that with our technologies, we've got a good seat at the table, be it as IOCs or NOCs, or by simply oil and gas assets. So let me stop here. We tried to share with you how we create long-term shareholder value. We are glad to take your questions. And we do that, just the five of us.
OPERATOR: (OPERATOR INSTRUCTIONS)
JEROEN VAN DER VEER: I suggest we start on the right-hand side. I see you [pick] your [microphone]. I think Tim was before you. So shall we go there and then we go over there. About here. And then I ask for the telephone. Let me take stock of our --
TIM WHITTAKER, ANALYST, LEHMAN BROTHERS: Tim Whittaker, Lehman Brothers. Jeroen, if I compare you with your major U.S. competitor, you have lower returns, less free cash flow and it appears many greater growth prospects. So I'd like to understand your response to that. And secondly, could you update us please on succession planning for your own position.
JEROEN VAN DER VEER: Shall we leave the room? Okay. I think that Peter will start with the financial question so I can think what to say about succession.
PETER VOSER: As we have said for the last few years, Tim, we have positioned the Company for this -- with a strategy, which works for long-life projects, with a gross prospect of 2% to 3% into the next decade and we have put a lot of emphasis on the shareholder return, at the same time actually for organic growth for the next 20 years to 30 years. I think we are positioning the Company on the upstream like that.
We are positioning the Company on the downstream by expanding into the east, by expanding also on the marketing as well as on the refinery side, so I think we are well positioned from a return point of view in the longer term as we are today, if you add back the capital under construction. So I think we don't have to shy away from a competitive analysis against our U.S. competitors, if I look at the key performance indicators, as we normally do.
We are in a building up phase in our new heartlands and from that point of view, you would expect us to be slightly more intensive in terms of capital spending. But I think we have the balance sheet to actually finance that and our operational performance has generated substantial cash and in a good competitive sense, substantial cash so that we can actually build the future on -- of the new company.
JEROEN VAN DER VEER: At unification of the companies three years ago, we had discussed how we would handle future successions. And the process in Shell is we have a nominating committee, the leader is the Chairman, the non-executive Chairman, and two non-executive directors. So the sitting directors have, in the preparation process, not any formal role to decide about succession. The Chairman has made it very clear that he is in the lead and the lead of the process and he has announced to the markets that I will retire in July 2009. So this year you can speculate about it, you can waste your time so far, you have simply to wait. Mark?
MARK IANNOTTI, ANALYST, MERRILL LYNCH: Yes, Mark Iannotti of Merrill Lynch. Three questions please. First of all, Malcolm, can you maybe make some comments on your outlook for volumes both for this year and maybe out to the end of the decade? Also possibly give us some comments in Nigeria with respect to the status of the JVs in terms of funding and also with respect to any negotiations that may be going on of your PSEs. And then finally, with reference to bully rigs, do you see that as one-off move back into the service market or a first step in trying to regroup, being some pricing power in that market?
MALCOLM BRINDED: Okay. In terms of volumes, I don't think we're saying anything different to what we said before, which is essentially volumes for this year, we would expect with -- if all things being equal with last year in terms of oil price security issues and so forth, a slight decline. There are many moving parts. Key in that will be the divestments we actually make, which I think will have a full year price effect by the time we've completed them, that we've announced and expect to deliver about 50,000 barrels a day for the year.
Looking further out, we've given and not given guidance to the end of the decade because again, I think the situation both on oil price impact and on Nigeria are particularly uncertain. And our -- what we're saying, and that I think is key, in terms of Tim's question, the money's going into long-life assets. We're talking about 15 year, 20 year, 25 year plateau period and we need to establish a base of those in order to have the platform for production growth. We're confident that we can do, we've got a resource base, as I've said, of 66 billion barrels. And it's that that will be foundation and give us the potential for that 2% to 3% per annum growth from the end of the decade.
You asked a question about Nigeria and I think on the JV funding, I think it's been a challenging time in Nigeria on both the security and the funding front. That's clear. I think on security, it -- I wouldn't say strong progress, but there has been real progress in the sense that where the federal authorities and the states get together and take -- and make concerted effort, we've been able to gain access and reenter and begin to restore some of the production potential that was shut in for quite a long time. We still have about 140,000 barrels a day shut in Shell share, but we are making progress on that.
As you rightly say, funding has been the key constraint in that. The extent to which we would like to fund the joint venture, but NMPC, the Nigerian state company, does not have that -- have access to the funds to pay their 55% share. Actually I think that Jeroen was there with the President about ten days ago and we made decent progress in terms of agreeing basic principals. But we've now got a lot of detailed negotiations to fill in the gaps.
I'm more confident than, I would say, I was a few months ago that we can see a way through this. We can see a funding solution and remember that will bridge, if you like, the short and medium term and the Nigerian government have in their minds that the long-term solution will be incorporation of these joint ventures so that they can be self-financing, which makes sense for the long time -- long-term, but getting from here to there is what's crucial.
The last question was on bully rigs, I think it's very exciting in the rig market, which is because we've seen a technology breakthrough that we were involved in the design of, working with the contractor and we want the benefit from that. I don't see it as a general part of our philosophy, but we -- what I suppose is consistent is trying to build partnerships with long-term contractors that are key in our supply chain.
And you see us do that with actually the whole suite of contractors, with rig contractors, but the global framework, long-term agreements we have with Haliburton and Schlumberger. That's very important to us. It's not so much -- so it's not so much about us taking an equity position in those markets, but having more effective long-term contracts, which use our global scale in terms of buying power.
JEROEN VAN DER VEER: Go ahead.
NEIL MCMAHON, ANALYST, SANFORD BERNSTEIN: Neil McMahon with Sanford Bernstein. Again, three questions, I'll make them quick. First on Nigeria LNG, maybe just an update on the future project streams seven and also the other projects you're involved in. And then they weren't coming on your charts for 2010 to 2012, maybe just a bit of timing on -- if we're talking 2015 for those projects.
Just secondly, on the Chukchi Sea, is this a similar environment to the North Slope or is it a bit more compressional in nature? And what do you see there that's making you very excited? And lastly, on the retail marketing strategy, have we seen the end of the divestments? Is that the major restructuring done? Or can we expect more in your more mature areas like Europe? Thanks.
JEROEN VAN DER VEER: Okay. This Linda starts, followed by Malcolm or Rob.
LINDA COOK: Thanks, Neil, for the question. So on the chart that I showed, other than Australia, I think they were essentially all projects that were post-FID. So it's showing you the growth that is actually already under construction. So for that reason, Train seven and Nigeria LNG and the [Olacola] LNG project in Nigeria didn't feature on them. We're in both -- for both projects, of course there's plenty of gas in Nigeria, that's not the problem. The projects are both in feed stages, various stages of maturity in the final design.
But I think they will not go forward until we have clarity on some of the other issues that Malcolm already talked about and that has to do with security and funding of the upstream ventures because the last thing we all want to do is build an LNG plant and then find that there's no gas showing up when it's ready to go. So I think we'll be cautious with our partners on the timing of that.
MALCOLM BRINDED: In Alaska, Neil, obviously we made a big punt in the Chukchi and it was -- we saw it as a huge opportunity in an environment, which we understood, from an operational point of view, 100 meters to 200 meters water depth and which we had unique proprietary basin knowledge as well as technical insights from both 2D seismic and 3D seismic.
The 3D had actually only be done by ourselves and ConocoPhillips, they were the other big bidder in the sale. So it was on the combination of drilling history, our own operations there, 2D seismic, reprocessed, basin know-how and 3D. And that gave us all a conviction that this was worth going for. I must stress it's still exploration. We won't know until we actually put the drill bit in. But we're excited about it.
JEROEN VAN DER VEER: Okay. I switch -- I come back later to you. Sorry, I forgot. What --
ROB ROUTS: That's all right. It's a big step for Chukchi to retail. So it is a very profitable business for us. So we're -- it's a bit counterintuitive to say sell it off. Because in principle, there's a lot of money here. On the other hand, you've seen our approach in the U.S., which is basically one of the weakest markets that we have and we'll continue to sell down that 15% that is still there. In Europe, we will continue to look at markets and see if they have a strategic fit and their cash potential and in the East, basically, we're into a growth mode. So that will continue to do so.
JEROEN VAN DER VEER: For me, I'll start out with the left-wing questions. You are the most far left.
GORDON GRAY, ANALYST, JP MORGAN: I couldn't possibly comment on that. Gordon Gray from JP Morgan. A question on CapEx if I could. You talked about still being in a model of catching up from a historical underspend. With that as a context, can you just give us a little bit more of a longer-term feel about your spending plans and as and when they might peak? Thanks.
ROB ROUTS: I think the net CapEx, we are forecasting to be flat to what we have spent in this year, so I think you can more or less project this forward around the same levels as they are at this stage from a net CapEx point of view.
JEROEN VAN DER VEER: You go first and then followed by you. The microphone here.
IRENE HIMONA, ANALYST, EXANE BNP PARIBAS: Thank you. It's Irene Himona at Exane BNP Paribas. I had a couple of questions on refining and marketing, if I may. First of all, could you talk a little bit about the actual environment in Q1, given the unprecedented oil price in terms of refining marketing, petrochemicals margins. Secondly, you mentioned that you never believed the strength of margins in '05/'06. Could you perhaps tell us what you think the trend is for industry capacity additions and therefore margins going forward? And my third question is a general one, assuming we remain with the current environment of $100-plus for a bit longer than we all assume, what changes in terms of Shell? Thank you.
JEROEN VAN DER VEER: Rob will you start?
ROB ROUTS: Yes let me take the downstream comments first. In terms of quarter one what we're seeing of course is a very strongly rising oil price. We see refining margins that were quite depressed certainly in January and getting a bit better in February. So that's the piece that we're seeing. And we can also say that our refining system has been running fairly well in the first quarter certainly compared to some quarters of last year.
In terms of going back to the '05/'06 period, we have seen at the time refining margins that I in the 37 years that I've been with Shell have never seen. I've also been there in 2002 when we were negative so we've gone through incredible cycles. And if you look at the fact, last year I showed that east of Suez before 2010 there was going to be about 22% capacity addition, which this year of course in India is partly being started up and also in China. So in terms of an outlook for refining margin the chances that this '05/'06 period comes back are fairly slim, I would say.
JEROEN VAN DER VEER: $100-plus. There must be eight points, we know exactly where it is that the amount starts to react, classic economic loss will work. Maybe there's a bit of time delay but if you are in a poor country and there must be something that people can't afford or even try to fuel up your car in the UK you pay a lot.
The second thing is in the physical flow, that is there are not problems in the world. So if you look at I know tankers waiting in the Middle East, you still get your gas at home, so is there a real fundamental logic that the price is where it is. Big question mark. So one may expect a lot of volatility. Then those people who don't expect volatility up and down then I think that the present oil and gas price is to create a kind of umbrella for renewal roles for fairly expensive unconventionals. And that of course will have an impact on the supply side.
Last but not least, if you calculate the present oil price the daily income to the Middle East and what that brings because a lot of oils there are still very cheap to produce and that is massive capital built up. And I leave that to you, I listen to the financial world basically what they expect, how they will spend it, but I think as I read the papers today they have some ideas how to do it. Okay then I go to you, I promise I'll do you first and then we go back to you.
COLIN SMITH, ANALYST, DRESDNER KLEINWORT: Colin Smith from Dresdner Kleinwort, I've got three questions as well. Just coming back to the historic under spend issue and thinking about it in the E&P context, you've paid some pretty large amounts for lease acquisitions this year and last year. And while the resource base might be going up, the actual proven reserve base isn't and still some ten years and that's going hand in hand with production going backwards. Can you just talk a little bit about whether you're comfortable with the acreage position the group has, or whether you think there still needs to be quite a lot of work done there to give you the full degree of exploration potential you'd expect to require for a company of your size? That's the first question.
A couple of technical questions on Nigeria, you mentioned that the T6 build up could take some time. Could you just comment about whether that is related to gas supply and if so why there's a problem there? And also more generally just talk about whether flaring is an issue for you guys with the current legislation as it stands in Nigeria. And finally, a question I probably won't get an answer for, Rob is also sadly I think perhaps looking at a happy retirement after having done a great job over the last few years in reviving the downstream business. And again the same question about succession planning there.
JEROEN VAN DER VEER: Okay, I think Malcolm starts with the (inaudible) lease acquisitions, will you [cover] the trains of Nigeria? Then we see how we worked flaring question and I'll do the succession again.
MALCOLM BRINDED: So good questions, I think in EP you're right, it is a long-term regeneration of the portfolio. But that's particularly where we put the effort into development capital spending. On the exploration side and the portfolio side I think we've got a decent set of opportunities, but when there's a lease sale that comes along where you've got unique basin insight and proprietary knowledge, especially in positions that fit our strategy of running room on the volume side and good price upside, then you go hard for them.
And you've always got to judge the competitive environment, but we're very pleased with the outcome of both the Gulf sale and the Chukchi sale. And I think we'll go on looking but again at the competitive environment and whether we think we've got differentiated knowledge into the lease sale, which is usually key for me to really go particularly hard.
I think in terms of are we comfortable with our position on reserves life and so forth, well of course a key part of our job is to improve both the reserves and the resource position. How are we doing? Well I'm pleased that [$60 million] has gone up to [$66 million] and I'm pleased that we've been able to add $1.5 billion of barrels reserves organically. If you stand back from on the reserve side, the three-year average including the year-end price effect is 113% and obviously we want to go on doing that long-term.
So you look at what else is coming through the funnel and that's why adding $1.4 billion from pure exploration and another $600 million of resources from essentially appraisal and development drilling, so $2 billion with the drill bit, that gives me confidence for the future. But we need to go on doing that year after year. So you need to regenerate your acreage, which we've done quite well on for the last three or four years, and you need to keep drilling successfully and aggressively.
I think we've got an industry leading exploration capability so I think there's value in maintaining and feeding that machine actually, and giving it enough to push forward with. It doesn't necessarily mean, if you're a big spender in exploration, that you have to take everything all the way through and spend all the development CapEx and keep the assets for life.
And that's why you see us also churning assets and being ready to monetize at the right time. And that's why I gave you the Scarv example, because yes some is late life but some are assets that we're selling at FID and making a lot of value from the exploration phase and there's the take to FID phase of business development.
JEROEN VAN DER VEER: T6 supplies?
LINDA COOK: Nigeria. So yes indeed it was very deliberate and on purpose that I said sales from train six will ramp up slowly over time as gas supply is available. But it wasn't deliberate because there's a problem, this is as it was anticipated when we made the investment decision. And all customer commitments are going to be met so there's not an issue with that.
You might say then well why did you build train six when you did if the ramp up was going to be slow. We were building train four and train five still when we made the train six investment decision and believe me, we saved a lot of money by using that crew and those contractors and going ahead and building train six when we did, rather than wait and push it into, so with hindsight this is easy to say, rather than wait and push it into what was a much higher cost environment later. So all according to plan so far, Colin, with respect to that.
COLIN SMITH: But if the market's short, why wouldn't you ramp it up as quickly as you can?
LINDA COOK: Because we're waiting on gas supply. So the train's ready all according to schedule, gas supply is coming according to schedule but it wasn't scheduled to all be there 100% on day one.
JEROEN VAN DER VEER: Okay so flaring in Nigeria and the succession. The flaring is building a gas gathering system in an offshore area about as large as England, so it's a huge area. So this is --
LINDA COOK: Onshore.
JEROEN VAN DER VEER: Onshore, what did I say? Okay fine. So onshore the very difficult area in this delta area to do that. About half is done. Now due to all the security problems we had over the past years and as well the funding problems, we couldn't go, especially over the past year, with the speed we would have preferred. Now we have still nearly one year to go.
In discussions with the President ten days ago we have said, okay let's be realistic, we take the current realities into account what can be done, this is a practical approach, what can be done this year. And we have said that we have still the ambition as our aspiration is to stick to the time table as we had said before and that was by the end of this year. But of course we will now update it and take it from there. That's about the flaring.
The succession of Rob is basically the same question as to Tim, that is part of the same process by [non-core]. And it is simply too early to speculate, it's all about later. Meantime Rob continues to deliver. But I feel good about it that we have really separated that so that people don't select their own successors. Okay yes I'm sorry, you first and then we'll go back to the right wing.
THEEPAN JOTHILINGAM, ANALYST, MORGAN STANLEY: Hi, it's Theepan Jothilingam from Morgan Stanley, three questions actually. Firstly on Canada, you've outlined the significant potential in Canada, I was just wondering whether you could talk a little bit about the challenges. Clearly there are some challenges on cost, service, labor, raw materials, whether you could give any indications on cost inflation, whether you have an outline on the cost for the expansion on plays one and what sort of break even you use there or expect for oil sands.
Secondly a very quick question just on decline rates for Malcolm, if you could give your assumptions on decline rates, whether they've changed in recent years and how you see them going forward. And lastly just on LNG, Linda, there's been some talk recently of delays in not Shell projects in Qatar but whether some of your peers, I was wondering whether there are any implications for the [Eurang] Qatar LNG project. Thank you.
JEROEN VAN DER VEER: Rob starts with the Canada question.
ROB ROUTS: The situation in Canada in terms of construction, you know all about it, Alberta is a very difficult place to be, it's an overheated market and it's a battle and a struggle to get the construction resources to where they need to be. Together with our Becktell and Aramco we are building a major effort to actually build those resources. We've had extremely cold weather in Canada over December/January, the temperatures which were for weeks below minus 30 degrees, it's extremely difficult to operate under those conditions. So that has added to some of the complexity out there.
We haven't done an update on our estimates that Shell Canada has shown last year so we'll continue to operate under the circumstances where we are. In terms of the development costs, Peter showed you an average of $7 a barrel and you'll find this project at the high end of that curve that he was showing.
MALCOLM BRINDED: Decline rates, there's no change to the guidance, it's 3% to 6% in that range, 2007 slightly lower decline rate than 2006 but basically similar.
LINDA COOK: Our project is Qatargas 4 and as I said, so far generally in line with our expectations when we took the investment decision. But you're right, there are reports of the trains that are earlier in the queue being constructed by the same contractor experiencing some delays. And is there risk that that rolls over into our project? I think that the potential for that is there but so far holding generally more or less the schedule we've put in place. I think we'll know more in about a year. But it's not talking about years of delay, it's months of delay if there is one.
JEROEN VAN DER VEER: I'll come back to that side but first go to that one.
JON RIGBY, ANALYST, UBS: Yes it's Jon Rigby from UBS, three questions. The first is on Nigeria and the PSCs. Is the potential for some renegotiation possibly holding up FIDs on some of the other developments on the Bongo block? And can you just discuss where we are with that figure, I think there was a question earlier which I don't think was directly answered.
And the second is on Athabasca, obviously changes in tax and CO2 since last year and I think you talked a lot last year about how you liked Athabasca because of the stability of the fiscal and political background. Can you make a couple comments on that and more specifically about CO2 costs, the techniques that you're looking at maybe in a bit more detail about how you'd sequester it and what additional cost it would bring in.
And then the last one just for Linda, you talked about contract reopeners and so on the LNG contracts that you have in Asia Pacific, can you talk a little bit more about the prize that's there, where we are on the S-curve, I presume we're very horizontal at the moment, and what the potential is say on a calorific value equivalent of where potentially we can move up and also what volume we're talking about in terms of the contracts you have potentially to reopen? Thanks.
JEROEN VAN DER VEER: Rob, start, Rob, Linda.
MALCOLM BRINDED: Jon thanks. On the Nigeria deepwater portfolio, we've indeed got a great portfolio of opportunities there. I think our first priority is make sure that the Bongo and area hubs are kept full. And so development drilling and infill programs and so forth is going on on that front. And we continue to appraise the discoveries we've made to basically keep making decisions about what's the right concept for the next wave of development.
And that concept, your thinking on that also matures as you understand the geology more, the performance of the existing reservoirs and you're weighing the decision are we going to, for example, wait and tie them back as subsea satellites to the existing hubs later when spare capacity appears, or will we build another new hub. And actually most of the issues around that debate, which also takes into account how many wells we're going to need and what rig rates are we looking at, is it going to be $0.5 million a day forever, as it were.
So the issues is at the moment we're not delayed in taking FIDs by PSC renegotiations but we are obviously in the early stages of that discussion and we don't know where that discussion will go. And that may well have a bearing on when we do come to those decisions, but that isn't something we're facing as of today.
ROB ROUTS: Two things on Athabasca, first was the royalty. Of course the royalties were quite favorable for our industry to develop the whole oil sand scene and now we're looking at a royalty regime that actually increases with crude pricing. So there is an impact on the profitability of our projects but no reason to change our strategy in that part of the world.
In terms of CO2, like I told you, on the Phase 1 expansion there are already a number of measures built in to make the extraction more efficient at the mine. On the original project we have actually reduced our emissions quite a bit since the start up of the plant so we've been working on this for a while. We are looking at CCS as a solution and also in the latest federal guidelines to be regulations in legislation that's come out last week it's clear that the federal government in Canada is going to focus very much on CCS.
We're looking at opportunities. Because we're using hydrogen addition in our upgrading, we're getting a fairly concentrated high pressured CO2 stream out of our processes, which makes it more or less, as far as you can talk about attractiveness of capturing CO2, more attractive than doing other things. So I think we're well positioned. In terms of cost of CO2 capture, it's no different for oil sands than any other of our capital projects that we're doing. Projects get tested against a certain price of carbon, which we don't disclose usually.
LINDA COOK: And then LNG, so we decided to show a bit more insight into LNG pricing in the presentation today. Of course that opens up the risk but then you just want to know more, I'm afraid, Jon. And it's a bit hard because this is all very confidential and we're in the middle of discussions now, or one of our joint ventures is now, so it's hard to give any specifics really about it.
But we have a basket of contracts, some are relatively flat and some have quite steep slopes. And overall we have a contract pricing regime that has some slope to it if we look at the average of our contracts. The indication we're trying to give is that the slope in the deals you can do today is considerably higher indexation. And so as we do have the price reopener opportunities, on average we're seeing pricing move up and that should be then over time reflected in the realizations that we see in our portfolio, which is heavily weighted towards Asia Pacific.
JEROEN VAN DER VEER: Questions from -- yes, go ahead.
NEILL MORTON, ANALYST, MF GLOBAL: Yes, it's Neill Morton from MF Global, I've going to buck the trend here and ask just one question. It's on Australian LNG. You've spoken in the past about how the Shell Canada deal simplified your footprint in North America. Could you talk about how simple or indeed complicated your footprint is in Australian LNG, given your direct and indirects taken in the North West Shelf JV, your Shell-owned exploration portfolio and your take in Woodside which is now retrenching back to focus on domestic LNG? Thank you.
LINDA COOK: I think everyone's portfolios in Australia are relatively complex because, if you look at all of the projects, most of them have multiple partners and most of us are partners in multiple projects. And so it is just a complicated partnering environment there. I don't necessarily think our interests in Woodside makes life more complicated for us, in fact we like the holding. They have retrenched as you've said to focus almost exclusively on Gulf of Mexico and Australia which are key areas for us, but the strategic fit is good.
JEROEN VAN DER VEER: Any questions from the telephone? Nope. Any questions more from the right? We have satisfied the right wing. Okay. Now the left wing. Yes, go ahead.
UNIDENTIFIED AUDIENCE MEMBER: (inaudible) The unavoidable question about the empty quarter which so far has proven quite empty. Your partner has pulled out, of course it's difficult to say, but how far will you go along, you've drilled two dry holes, could you expand a little bit on your view on that area?
Secondly, traditionally you always gave a hurdle rate for oil prices, I understand of course the reality is much more complex these days but you trend to more expensive and more unconventional areas, for example, Chukchi, would $70 be a reasonable guess or $65 or something like that? Could you maybe give a bit of color on that?
MALCOLM BRINDED: I'll deal with Saudi and Peter will deal with the oil prices. The -- as far as the empty quarter is concerned the [Rubihay], let me start by saying it is an unexplored area, was unexplored, but it's the size of the UK. And so far we've got three wells in it. So in a country which has got obviously the world's most impressive working, hydrocarbon systems and we want to understand the geology of this very large area through a combination actually of some advanced techniques for looking at the total area and then the areas where we've done 2D and 3D seismic and then homing in with drilling.
We had a commitment at the beginning of the program with Saudi Aramco and Total was then partnered to drill between three and seven wells, exit point at three or at seven. We've decided to stay in for seven. Totala had decided for their reasons to leave at three. We think that in an area that size with a partner that is as strong for us, as Saudi Aramco, it makes absolute sense to keep going particularly because we've seen all the elements of a working hydrocarbons system, in terms of source rock, reservoir seals, we just need to get the combination working in the right place, together. Which is a big just, but that's what we're after.
And we will go on to drill those remaining wells, obviously assessing each time where in this vast area should we go based on the knowledge we've got to date. But it's a very large area and it's real new territory exploration which we said right from the beginning is bound to be very high risk.
PETER VOSER: And the oil and gas price, I think in the past many international oil companies were focusing on one price. I think that is no longer the case. What you normally do in companies like we are, you focus on low, medium and high prices. You look at, what I have already demonstrated, are your risk profiles from a political but also from a fiscal point of view.
And you take that, the length of the project, the cash flow generation of the project and that's what you would then take into account when you actually do your capital allocation program. So we will not give prices because quite clearly in this volatile world and as Joern would say, we have never actually gotten it right anyway in the past. We would rather stay away from it. So it's a mixture of key indicators which we are looking at when we take these investment decisions.
JEROEN VAN DER VEER: Any more?
IAIN ARMSTRONG, ANALYST, BREWIN DOLPHIN SECURITIES LTD.: Iain Armstrong at Brewin Dolphin. Peter said that you've got 26% of your capital employed tied up in capital under construction. When do you see that -- what sort of figure could you see that peaking at and how going forward can you see, because of the higher returns that you're also getting on the capital, and you mentioned that the projects coming onstream will be even higher returns, can you see that figure staying in that sort of 20-plus level or can it go back to the levels it was at the early part of the decade?
PETER VOSER: Well thanks for the question Ian. No, I think at this stage you would say it stays or less in the same band going forward. As I have said, we are looking at a net CapEx number which is rather at the same level going forward, flat. So I would also expect that to stay in the area, or in the numbers we have today.
JEROEN VAN DER VEER: I'm checking how many questions there are still left. Please raise your fingers who are still questions. So one, that's it? Any on the radio? Okay. So you start and then I go back there.
UNIDENTIFIED AUDIENCE MEMBER: You've given us an indication that you plan to unlock additional projects with [$6 billion] barrel of oil equivalent. Can you give us some feel for the breakdown of that from what kind of projects it should come? And then looking at the IRR, on the long-life projects it seems that you are choosing for a future portfolio in which IRR is basically down whereas the risk is not coming down. Can you comment on that?
MALCOLM BRINDED: Yes. In terms of the [$6 billion] of oil that are in design I think we said that there is around 20 projects there. With a potential for 800,000 barrels a day, where it starts with for instance Gorgan should be coming along we hope next year. We talked about the deepwater offshore in Nigeria, so Bonga, southwest and some other deepwater projects in Nigeria. [Temprosa] in Italy, the second and third expansions in Athabasca, the Peace River project I mentioned. Also North Rankin in Australia, so North Rankin B, so that's the sort of portfolio.
And as I think Joern said earlier, these are real projects that are under design today. So whether they're all go ahead at the right time, I Think that will always be a decision driven by value considerations as we approach FID. But it's a healthy train coming towards us, of opportunities.
ROB ROUTS: On the IRR question, quite clearly when you look at, and the chart shows it, in blocks of years, you look at your risk profile but also mainly at the long-term cash flow impact from these projects. If you have sustained long-term cash flow impact with relatively low decline rates, as Malcolm has mentioned, then hence relatively low CapEx additional CapEx to come in later years. That is what you are driving at, so you get a balance between the short-term which gives you a higher IRR and long-term which approaches the cash flow as you are starting to depreciate your upfront, high CapEx over time. So we are looking at the two things from long-term cash flow point of view.
OPERATOR: (OPERATOR INSTRUCTIONS)
Thank you. You have a question, David Klein from ABN Amro.
DAVID KLEIN, ANALYST, ABN AMRO: Couple of questions. Firstly, you spoke a little bit about the Carmon Creek expansion project. I wonder if you could just give us some outline of the hurdles that need to be crossed before you are in a position to think about an FID on that particular project?
Secondly you did mention in the presentation that you took eight FIDs in the upstream in 2007 I think. Apologies if this has been disclosed elsewhere but could you tell us what those eight projects were?
MALCOLM BRINDED: I'll try to answer the first and then I might struggle on the second. In terms of Carmon Creek, the -- it's a -- first of all let me explain where it is. It's at Peace River where we've had an operation for many years and in fact we've got at the moment, we've tried various technologies, we've got the pilot actually of our in-situ upgrading processes operating there and we've run various types of thermal process. So there is quite a lot of infrastructure there and we have the application lodged already for the development that we're talking about.
And we have to yet see how that application with the authorities will go through. I am hopeful that it will go through. We also have to complete the design. So I think it's more an issue around the regulatory processes that will actually dictate the timing, than it is around the scale and nature of the project which we're still in the design for. And I would think the final investment decision will be made towards the end of the decade.
The other question, I think, was the list of FIDs last year. And let me think, Gumusut definitely, [Scroner Back] was key, we took [Carnall stein] the previous year. Pluto of course took FID last year and BC-10 was the previous year. So those are three of them I think, the full eight I haven't got to hand.
JEROEN VAN DER VEER: Otherwise you contact Investor Relations. Let me stop here. What we tried to share with you this afternoon, we feel that we have a good portfolio today. We are building a very strong portfolio in the future, and we make sure that we have the long-term tools to win in the increased competitive environment. Thank you for your questions, thank you for coming. I close this meeting
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Document FNDW000020080324e43h000uu

FT.com site : The CEQ on FT.com: China's 3G adventure.
Gabriel Wildau, CEQ Beijing bureau chief

918 words

17 March 2008

Financial Times (FT.Com)

FTCOM

English

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