31st Jul 2008 07:00
Royal Dutch Shell plc
2ND QUARTER 2008 UNAUDITED RESULTS
* Royal Dutch Shell's second quarter 2008 earnings, on a current cost of supplies (CCS) basis, were $7.9 billion compared to $7.6 billion a year ago. Basic CCS earnings per share increased by 7% versus the same quarter a year ago. * A second quarter 2008 dividend has been announced of $0.40 per share, an increase of 11% over the US dollar dividend for the same period in 2007. * Cash flow from operating activities for the second quarter 2008, excluding net working capital movements, was $15.9 billion. Net capital investment for the quarter was $5.7 billion. Total distribution to shareholders, in the form of dividends and share repurchases, was $3.8 billion and gearing was 14.5% at the end of the second quarter. * On July 17, 2008, Royal Dutch Shell, through its wholly owned subsidiary Shell Canada Limited, launched an offer to acquire all of the outstanding shares of Duvernay Oil Corp. at a total price of C$5.9 billion, including debt. The offer is subject to certain conditions and regulatory approvals.
Royal Dutch Shell Chief Executive Jeroen van der Veer commented: "This is another set of competitive earnings for Shell shareholders. Good operating performance, combined with increased oil and gas prices, offset the impact of weaker downstream conditions in the second quarter 2008. Shell is making substantial, targeted investments to grow the company for shareholders and help ensure that energy markets remain well supplied. Spending is increasing on new acreage and selective acquisitions as we refresh the portfolio with new options for future growth. Our strategy is on track."
SUMMARY UNAUDITED RESULTS Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 %1 2008 2007 % Income attributable to 11,556 9,083 8,667 +33 shareholders 20,639 15,948 +29 Less: Estimated CCS adjustment for Oil Products and Chemicals 3,654 1,307 1,111 (see note 2) 4,961 1,460 7,902 7,776 7,556 +5 CCS earnings 15,678 14,488 +8 1.87 1.47 1.38 +36 Basic earnings per share ($) 3.34 2.54 +31 Less: Estimated CCS adjustment 0.59 0.21 0.18 per share ($) 0.80 0.23 1.28 1.26 1.20 +7 Basic CCS earnings per share ($) 2.54 2.31 +10 0.40 0.40 0.36 +11 Dividend per ordinary share ($) 0.80 0.72 +11 1 Q2 on Q2 change
KEY FEATURES OF THE SECOND QUARTER 2008
* Second quarter 2008 CCS earnings were $7,902 million or 5% higher than in the same quarter a year ago. * Second quarter 2008 reported income was $11,556 million or 33% higher than in the same quarter a year ago. * As a result of strong increases in oil and related product prices during the second quarter 2008, Oil Products earnings were reduced by some $450 million of non-cash charges related to fair value accounting of commodity derivatives. In addition, strong increases in natural gas and power prices resulted in Gas & Power earnings being reduced by non-cash charges of some $300 million related to fair value accounting of commodity derivatives associated with long-term contracts. (see Note 8) * Basic CCS earnings per share increased by 7% versus the same quarter a year ago. * Total cash returned to shareholders in the form of dividends and share repurchases in the second quarter 2008 was $3.8 billion. * Cash flow from operating activities, excluding net working capital movements, was $15.9 billion compared to $10.6 billion for the same quarter last year. Including net working capital movements, cash flow from operating activities was $4.2 billion compared to $8.8 billion in the second quarter 2007. * Capital investment for the second quarter 2008 was $8.0 billion, with net capital investment (capital investment, less divestment proceeds) of $5.7 billion. As the portfolio focus continues, asset sales proceeds in 2008 are expected to increase from around $4 billion to some $5 billion. Acquisitions in 2008 are estimated at around $10 billion, including new growth positions such as new exploration and Australia coal bed methane assets and the offer to acquire Duvernay Oil Corp. Net capital investment for the full year 2008 is expected to be in the range of $35-36 billion, including these acquisitions. * Return on average capital employed (ROACE), on a reported income basis (see note 3), was 25.8%. * Gearing (see Note 5) was 14.5% at the end of the second quarter 2008 versus 12.0% at the end of the second quarter 2007. * Oil and gas production, including oil sands bitumen production, for the second quarter 2008 was 3,126 thousand barrels of oil equivalent per day (boe/d), compared to 3,178 thousand boe/d in the same quarter last year. Excluding the impact of divestments and production sharing contracts (PSC) pricing effects, second quarter 2008 production was in line with the same quarter last year. * Liquefied Natural Gas (LNG) sales volumes of 3.08 million tonnes were 5% lower than in the same quarter a year ago. * Oil Products refinery availability was 92%, at the same level as in the second quarter 2007. Chemicals manufacturing plant availability increased to 95% from 93% in the second quarter 2007. Oil Sands upgrader availability was 96%, unchanged compared to the same quarter last year. * Oil Products sales volumes in the second quarter 2008 increased by 2% compared to the same quarter last year. Chemical product sales volumes decreased by 5% compared to the second quarter 2007.SUMMARY UNAUDITED RESULTS Quarters $ million Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % 5,881 5,143 3,099 Exploration & Production2 11,024 6,492 625 948 779 Gas & Power 1,573 1,582 351 249 202 Oil Sands2 600 317 1,075 1,194 2,936 Oil Products (CCS basis) 2,269 4,424 (142) 201 494 Chemicals (CCS basis) 59 974 201 146 177 Corporate 347 978 (89) (105) (131) Minority interest (194) (279) 7,902 7,776 7,556 +5 CCS earnings 15,678 14,488 +8 1 Q2 on Q2 change
2 As from the fourth quarter 2007, the earnings of the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production earnings up to the third quarter 2007 have been reclassified by the amounts reported under the Oil Sands segment.
SUMMARY OF IDENTIFIED ITEMS
Earnings in the second quarter 2008 reflected the following items, which in aggregate amounted to a net gain of $73 million (compared to a net gain of $660 million in the second quarter 2007), as summarised in the table below:
* Exploration & Production earnings included a net gain of $98 million, reflecting a gain from divestments of $487 million, which was partly offset by a charge of $312 million related to the mark-to-market valuation of certain UK gas contracts and net tax charges of $77 million. Earnings for the second quarter 2007 included a net gain of $153 million reflecting a gain from divestment of $226 million and a gain of $19 million related to the mark-to-market valuation of certain UK gas contracts, which were partly offset by tax charges of $92 million. * Gas & Power earnings for the second quarter 2007 included a gain from divestments of $247 million. * Oil Products earnings included a gain of $181 million, reflecting a divestment gain of $167 million and a tax credit of $14 million. Earnings for the second quarter 2007 included a divestment gain of $205 million. * Chemicals earnings included a net charge of $206 million, reflecting asset impairments and provisions of $265 million, which were partly offset by a divestment gain of $59 million. * Corporate earnings for the second quarter 2007 included a gain of $55 million related to the sale of property in the United Kingdom.SUMMARY OF IDENTIFIED ITEMS Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Segment earnings impact of identified items: 98 (66) 153 Exploration & Production 32 257 - (11) 247 Gas & Power (11) 286 - - - Oil Sands - - 181 - 205 Oil Products (CCS basis) 181 29 (206) - - Chemicals (CCS basis) (206) - - - 55 Corporate - 459 - - - Minority interest - - 73 (77) 660 CCS earnings impact (4) 1,031
These identified items generally relate to events with an impact of greater than $50 million on Royal Dutch Shell's earnings and are shown to provide additional insight into its segment earnings, CCS earnings and income attributable to shareholders. Further additional comments on the business segments are provided in the section 'Earnings by business segment' on page 4 and onwards.
Commodity price effects
During the second quarter 2008 worldwide oil and gas related commodity marker prices significantly increased.
As a consequence, net working capital increased by $11.8 billion during the second quarter 2008, mainly due to the higher cost-valued inventory in Oil Products and increased net accounts receivable.
Second quarter 2008 Gas and Power marketing and trading earnings were reduced by non-cash charges of around $300 million as a result of fair value accounting of commodity derivatives associated with long-term contracts, as required under the International Financial Reporting Standards (IFRS).
Second quarter 2008 Oil Products marketing and trading earnings were reduced by non-cash charges of around $450 million as a result of fair value accounting of commodity derivatives. As required under IFRS, physical crude oil and oil products inventories were recorded at cost although their market value was higher. Commodity derivatives were recorded at market prices (see Note 8).
EARNINGS BY BUSINESS SEGMENT
EXPLORATION & PRODUCTION Quarters $ million Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % 5,881 5,143 3,099 +90 Segment earnings2 11,024 6,492 +70 Crude oil production (thousand b/ 1,711 1,756 1,817 -6 d) 3 1,733 1,841 -6 Natural gas production available 7,789 9,755 7,367 +6 for sale (million scf/d) 8,772 8,170 +7 Barrels of oil equivalent 3,054 3,438 3,087 -1 (thousand boe/d) 3 3,246 3,250 - 1 Q2 on Q2 change
2 As from the fourth quarter 2007, the earnings of the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production earnings up to the third quarter 2007 have been reclassified by the amounts reported under the Oil Sands segment.
3 Excludes oil sands bitumen production
Second quarter Exploration & Production segment earnings were $5,881 million compared to $3,099 million a year ago. Earnings included a net gain of $98 million related to identified items, compared to a net gain of $153 million in the second quarter 2007 (see page 3 for details).
Earnings compared to the second quarter 2007 reflected higher gas production volumes and the benefit of higher oil and gas prices on revenues, which were partly offset by lower oil production volumes, higher royalty expenses and higher operating costs.
Global liquids realisations were 74% higher than in the second quarter 2007, compared with marker crudes Brent and WTI increases of 76% and 91% respectively. Global gas realisations were 54% higher than a year ago. Outside the USA gas realisations increased by 57% whereas in the USA gas realisations increased by 53%.
Second quarter 2008 production (excluding oil sands bitumen production) was 3,054 thousand barrels of oil equivalent per day (boe/d) compared to 3,087 thousand boe/d a year ago. Crude oil production was down 6% and natural gas production was up 6% compared to the second quarter 2007.
Production compared to the second quarter 2007 included additional volumes principally from Ormen Lange (Shell share 17%) in Norway, West Salym (Shell share 50%) in Russia, Stybarrow (Shell share 17.1%) in Australia, Changbei (Shell share 50%) in China, Deimos (Shell share 71.5%) in the USA, Starling (Shell share 28%), Caravel (Shell share 71%) and Shamrock (Shell share 100%) in the United Kingdom and Champion West Phase 3B/C (Shell share 50%) in Brunei.
Second quarter portfolio developments
In Australia, Shell signed a preliminary agreement with Arrow Energy Ltd. to acquire a 30% stake in Arrow's coal bed methane acreage in Queensland, and a 10% stake in Arrow International, for a cost of up to $0.7bn . Shell and Arrow plan to jointly develop projects to extract clean-burning natural gas from coal deposits. Completion of a definitive agreement is expected by the end of 2008.
In Peru, Shell signed a preliminary agreement with BPZ Energy Inc. to jointly explore for oil and gas in the northern part of the country.
During the first half of 2008, Shell had four notable exploration discoveries in offshore Nigeria, Australia and Brunei and onshore USA. Shell also significantly increased its overall acreage position through acquisitions of new exploration licences offshore northwest Australia, in the Chukchi Sea and the Gulf of Mexico in the USA.
GAS & POWER Quarters $ million Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % 625 948 779 -20 Segment earnings 1,573 1,582 -1 LNG sales volumes (million 3.08 3.51 3.25 -5 tonnes) 6.59 6.55 +1 1 Q2 on Q2 change
Second quarter Gas & Power segment earnings were $625 million compared to $779 million a year ago. Earnings for the second quarter 2007 included a gain of $247 million related to an identified item (see page 3 for details). In addition, second quarter 2008 marketing and trading earnings were reduced by non-cash charges of around $300 million as a result of fair value accounting of commodity derivatives associated with long-term contracts (see Note 8).
Gas & Power earnings compared to the second quarter 2007 reflected strong LNG prices, which were partly offset by lower LNG sales volumes and lower marketing and trading contributions.
LNG related earnings for the second quarter 2008 were approximately 50% higher than in the same quarter a year ago, mainly reflecting strong LNG prices.
LNG sales volumes of 3.08 million tonnes were 5% lower than in the same quarter a year ago, mainly as a consequence of lower feedgas supplies, planned maintenance shutdowns and changed lifting schedules of cargoes compared to the same quarter last year.
Marketing and trading earnings, non-LNG related, were lower than in the same quarter a year ago, reflecting lower earnings in North America, which was partly offset by higher European contributions.
Second quarter portfolio developments
In the Middle East, an agreement was reached with Qatargas 4 and the Dubai Government for the supply of LNG during the summer months for 15 years. The LNG will be delivered from Qatargas 4 and Shell's portfolio of other LNG volumes.
In Germany, the sale of the BEB Erdgas und Erdoel GmbH gas transport business (Shell share 50%) to NV Nederlandse Gasunie was closed on July 1, 2008, with all required approvals in place. Proceeds have been mainly received in July 2008, with a remaining payment expected by the end of the year.
OIL SANDS Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 %1 2008 2007 % 351 249 202 +74 Segment earnings 600 317 +89 Bitumen production (thousand b/ 72 84 91 -21 d) 78 93 -16 104 144 141 -26 Sales volumes (thousand b/d) 124 141 -12 96 94 96 Upgrader availability (%) 94 95 1 Q2 on Q2 change
Second quarter Oil Sands segment earnings were $351 million compared to $202 million in the same quarter last year.
Earnings compared to the second quarter 2007 reflected the impact of higher oil prices on revenues, which were partly offset by lower production volumes and higher operating costs.
Bitumen production decreased by 21% compared to the same quarter last yearmainly as a consequence of the execution of the mine tailings management planwhich has temporarily led to lower ore grade being mined and due to planned andunplanned maintenance. Upgrader availability was 96%, unchanged compared to thesame quarter last year.OIL PRODUCTS Quarters $ million Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % 4,539 2,367 3,928 Segment earnings 6,906 5,730 Less: Estimated CCS adjustment 3,464 1,173 992 (see note 2) 4,637 1,306 1,075 1,194 2,936 -63 Segment CCS earnings 2,269 4,424 -49 3,464 3,694 3,806 -9 Refinery intake (thousand b/d) 3,579 3,707 -3 Total Oil Products sales 6,642 6,831 6,490 +2 (thousand b/d) 6,737 6,449 +4 92 92 92 Refinery availability (%) 92 89 1 Q2 on Q2 change
Second quarter Oil Products segment earnings were $4,539 million compared to $3,928 million for the same period last year.
Second quarter Oil Products CCS segment earnings were $1,075 million compared to $2,936 million in the second quarter 2007. Earnings included a gain of $181 million related to identified items, compared to a gain of $205 million in the second quarter 2007 (see page 3 for details). In addition second quarter 2008 marketing and trading earnings were reduced by a non-cash charge of around $450 million as a result of fair value accounting of commodity derivatives (See Note 8).
CCS earnings compared to the second quarter 2007 reflected substantially lower realised refining margins, higher operating costs, mainly as a result of exchange rate movements, and lower trading contributions.
Industry refining margins compared to the same quarter a year ago were lower in Europe, declined significantly in the US Gulf Coast and US West Coast and were higher in the Asia-Pacific region. Refinery availability remained at 92%, the same level as in the second quarter of 2007.
Marketing earnings compared to the same period a year ago declined due to higher operating costs and lower lubricants margins. In addition, retail margins, net of exchange rate movements, declined, which were partly offset by higher B2B margins.
Oil Products (marketing and trading) sales volumes increased by 2% compared to the same quarter last year. Marketing sales volumes were 1% lower than in the second quarter 2007 and excluding the impact of divestments were 2% higher mainly because of increased aviation, marine and commercial fuels sales.
Second quarter portfolio developments
In Qatar, a Letter of Intent was signed with Qatar Petroleum International andPetroChina to build an integrated refinery and petrochemical manufacturingcomplex in China.CHEMICALS Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 %1 2008 2007 % 157 348 626 Segment earnings 505 1,153 Less: Estimated CCS adjustment 299 147 132 (see note 2) 446 179 (142) 201 494 - Segment CCS earnings 59 974 -94 5,396 5,459 5,653 -5 Sales volumes (thousand tonnes) 10,855 11,220 -3 Manufacturing plant availability 95 95 93 (%) 95 92 1 Q2 on Q2 change
Second quarter Chemicals segment earnings were $157 million compared to $626 million for the same period last year.
Second quarter Chemicals CCS segment earnings were a loss of $142 million compared to a profit of $494 million in the same quarter last year. Earnings for the second quarter 2008 included a net charge of $206 million related to identified items (see page 3 for details).
CCS earnings compared to the second quarter 2007 reflected lower realised margins, higher operating costs and lower income from equity-accounted investments. In addition, identified items reflecting provisions and asset impairments, which were partly offset by a divestment gain, impacted earnings.
Chemicals manufacturing plant availability increased to 95%, some 2% higher than in the second quarter 2007.
CORPORATE Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 201 146 177 Segment earnings 347 978
Second quarter Corporate segment earnings were $201 million compared to $177 million for the same period last year. Earnings for the second quarter 2007 included a gain of $55 million related to an identified item (see page 3 for details).
Earnings compared to the second quarter 2007 reflected higher tax credits and lower shareholder costs, which were partly offset by lower net underwriting income and lower net interest income.
PRICE AND MARGIN INFORMATION OIL & GAS Six Quarters Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Realised oil prices - Exploration & Production1 (period $/bbl average) $/bbl World 110.96 90.40 64.88 outside USA 101.15 59.94 118.07 92.55 61.06 USA 105.02 56.34 111.92 90.72 64.27 Global 101.70 59.36 Realised oil prices - Oil Sands (period $/bbl average) $/bbl 116.20 85.08 59.94 Canada 98.12 55.49 $/ Realised gas prices thousand $/thousand scf (period average) scf 9.38 9.00 5.95 Europe 9.19 6.93 World outside USA (including 6.31 5.85 4.01 Europe) 6.09 4.36 11.89 9.52 7.78 USA 10.69 7.48 7.30 6.52 4.74 Global 6.91 4.98 Oil and gas marker industry prices (period average) Brent ($/ 121.26 96.66 68.86 bbl) 108.96 63.31 123.81 97.86 64.89 WTI ($/bbl) 110.83 61.47 Edmonton Par 125.18 97.91 66.21 ($/bbl) 111.58 61.96 Henry Hub ($ 11.36 8.55 7.56 /MMBtu) 9.95 7.36 UK National Balancing Point (pence 60.41 53.05 20.20 /therm) 56.73 21.25 Japanese Crude Cocktail - 100.96 93.13 64.76 JCC ($/bbl)2 95.09 61.16 REFINING & CRACKER INDUSTRY MARGINS3 Six Quarters Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Refining marker industry gross margins (period $/bbl average) $/bbl ANS US West Coast coking 11.55 8.75 23.10 margin 10.10 22.65 WTS US Gulf Coast coking 10.55 8.70 27.05 margin 9.60 19.95 Rotterdam Brent 5.85 3.55 6.30 complex 4.70 5.00 Singapore 80 /20 Arab light/Tapis 3.95 1.80 3.60 complex 2.85 3.35 Cracker industry margins (period $/tonne average) $/tonne 484.00 359.00 320.00 US ethane 422.00 326.00 Western Europe 346.00 433.00 423.00 naphtha 390.00 474.00 North East 92.00 55.00 138.00 Asia naphtha 74.00 328.00 1 As from the fourth quarter 2007, the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production realised oil prices up to the third quarter 2007 have been reclassified. 2 JCC prices for the second quarter and six months 2008 are based on available market data up to the end of April 2008. Prices for these periods will be updated when full market data are available. 3 The refining and cracker industry margins shown above do not represent actual Shell realised margins for the periods. These are estimated industry margins based on available market information at the end of the quarter. OIL & GAS - OPERATIONAL DATA Quarters Six Months Q2 2008 Q1 2008 Q2 2007 %1 2008 2007 % thousand b/d Crude oil production thousand b/d 390 416 442 Europe 402 445 314 322 305 Africa 318 322 196 208 235 Asia Pacific 202 233 434 428 428 Middle East, Russia, CIS 431 425 293 301 328 USA 297 335 84 81 79 Other Western Hemisphere 83 81 Total crude oil production 1,711 1,756 1,817 -6 excluding oil sands 1,733 1,841 -6 72 84 91 Bitumen production - oil sands 78 93 Total crude oil production 1,783 1,840 1,908 -7 including oil sands 1,811 1,934 -6 Natural gas production available million scf/ million scf/d2 for sale d2 2,930 4,894 2,496 Europe 3,912 3,299 549 619 601 Africa 584 560 2,512 2,438 2,414 Asia Pacific 2,475 2,435 230 232 251 Middle East, Russia, CIS 231 255 1,096 1,105 1,091 USA 1,101 1,126 472 467 514 Other Western Hemisphere 469 495 7,789 9,755 7,367 +6 8,772 8,170 +7 Total production in barrels of thousand boe/d3 oil equivalent thousand boe/d3 895 1,260 872 Europe 1,077 1,014 409 429 409 Africa 419 419 629 628 651 Asia Pacific 628 653 474 468 471 Middle East, Russia, CIS 471 469 482 492 516 USA 487 529 165 161 168 Other Western Hemisphere 164 166 Total production excluding oil 3,054 3,438 3,087 -1 sands 3,246 3,250 - 72 84 91 Bitumen production - oil sands 78 93 Total production including oil 3,126 3,522 3,178 -2 sands 3,324 3,343 -1 1 Q2 on Q2 change
2 scf/d = standard cubic feet per day; 1 standard cubic foot = 0.0283 cubic metre
3 Natural gas converted to oil equivalent at 5.8 million scf/d = thousand boe/d
OIL PRODUCTS AND CHEMICALS - OPERATIONAL DATA Quarters Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % thousand b/d Refinery processing intake thousand b/d 1,498 1,741 1,713 Europe 1,619 1,651 741 756 810 Other Eastern Hemisphere 749 785 874 845 905 USA 859 899 351 352 378 Other Western Hemisphere 352 372 3,464 3,694 3,806 -9 3,579 3,707 -3 Oil sales 2,067 2,083 2,224 Gasolines 2,076 2,244 816 814 731 Kerosenes 815 726 2,225 2,337 2,238 Gas/diesel oils 2,281 2,176 776 839 667 Fuel oil 807 673 758 758 630 Other products 758 630 6,642 6,831 6,490 +2 Total oil products * 6,737 6,449 +4 *Comprising: 1,781 1,959 1,826 Europe 1,870 1,830 1,276 1,245 1,238 Other Eastern Hemisphere 1,260 1,241 1,436 1,396 1,518 USA 1,416 1,460 704 755 679 Other Western Hemisphere 730 666 1,445 1,476 1,229 Export sales 1,461 1,252 Chemical sales volumes by main thousand tonnes product category 2** thousand tonnes 3,061 3,119 3,222 Base chemicals 6,180 6,502 2,333 2,338 2,429 First line derivatives 4,671 4,711 2 2 2 Other 4 7 5,396 5,459 5,653 -5 10,855 11,220 -3 **Comprising: 2,189 2,289 2,220 Europe 4,478 4,493 1,294 1,228 1,380 Other Eastern Hemisphere 2,522 2,633 1,760 1,784 1,873 USA 3,544 3,744 153 158 180 Other Western Hemisphere 311 350 1 Q2 on Q2 change 2 Excluding volumes sold by equity-accounted investments, chemical feedstock trading and by-products. NOTE
All amounts shown throughout this Report are unaudited.
In this announcement, excluding in the financial statements, we have aggregated our equity position in projects for both direct and indirect interest (for example, we have aggregated our indirect interest in North West Shelf LNG via our 34% shareholding in Woodside Energy Ltd).
Third quarter results are expected to be announced on October 30, 2008 and fourth quarter results are expected to be announced on January 29, 2009. There will be a Shell strategy update on March 17, 2009.
In this document "Shell", "Shell group" and "Royal Dutch Shell" are sometimes used for convenience where references are made to Royal Dutch Shell and its subsidiaries in general. Likewise, the words "we", "us" and "our" are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. ''Subsidiaries'', "Shell subsidiaries" and "Shell companies" as used in this document refer to companies in which Royal Dutch Shell either directly or indirectly has control, by having either a majority of the voting rights or the right to exercise a controlling influence. The companies in which Shell has significant influence but not control are referred to as "associated companies" or "associates" and companies in which Shell has joint control are referred to as "jointly controlled entities". In this document, associates and jointly controlled entities are also referred to as "equity-accounted investments".
This document contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management's expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "objectives", "outlook", "probably", "project", "will", "seek", "target", "risks", "goals", "should" and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this document, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell's products; (c) currency fluctuations; (d) drilling and production results; (e) reserve estimates; (f) loss of market and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including potential litigation and regulatory effects arising from recategorisation of reserves; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. All forward-looking statements contained in this document are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of this document, July 31, 2008. Neither Royal Dutch Shell nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this document.
Please refer to the Annual Report and Form 20-F for the year ended December 31, 2007 for a description of certain important factors, risks and uncertainties that may affect Shell's businesses.
Cautionary Note to US Investors:
The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We may use certain terms in this announcement that the SEC's guidelines strictly prohibit us from including in filings with the SEC. US Investors are urged to consider closely the disclosure in our Form 20-F, File No 001-32575 and disclosure in our Forms 6-K, File No 001-32575, available on the SEC's website www.sec.gov . You can also obtain these forms from the SEC by calling 1-800-SEC-0330.
July 31, 2008
APPENDIX: ROYAL DUTCH SHELL FINANCIAL REPORT AND TABLES
STATEMENT OF INCOME (SEE NOTE 1) Quarters $ million Six Months Q2 Q2 2008 Q1 2008 2007 %1 2008 2007 % 131,419 114,302 84,896 Revenue2 245,721 158,376 109,261 96,780 68,715 Cost of sales 206,041 129,381 22,158 17,522 16,181 +37 Gross profit 39,680 28,995 +37 Selling, distribution and 4,444 3,969 4,120 administrative expenses 8,413 7,898 408 325 450 Exploration 733 722 Share of profit of 2,671 2,425 2,138 equity-accounted investments 5,096 3,946 Net finance costs and other (140) (53) (477) (income)/expense (193) (1,378) 20,117 15,706 14,226 +41 Income before taxation 35,823 25,699 +39 8,363 6,505 5,415 Taxation 14,868 9,447 11,754 9,201 8,811 +33 Income for the period 20,955 16,252 +29 Income attributable to minority 198 118 144 interest 316 304 Income attributable to shareholders of Royal Dutch 11,556 9,083 8,667 +33 Shell plc 20,639 15,948 +29 1 Q2 on Q2 change
2 Revenue is stated after deducting sales taxes, excise duties and similar levies of $25,462 million in Q2 2008, $22,920 million in Q1 2008, $18,993 million in Q2 2007 and $17,305 million in Q1 2007.
BASIC EARNINGS PER SHARE (SEE NOTES 1, 2 AND 7) Quarters Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 1.87 1.47 1.38 Earnings per share ($) 3.34 2.54 1.28 1.26 1.20 CCS earnings per share ($) 2.54 2.31 DILUTED EARNINGS PER SHARE (SEE NOTES 1, 2 AND 7) Quarters Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 1.87 1.46 1.38 Earnings per share ($) 3.33 2.53 1.28 1.25 1.20 CCS earnings per share ($) 2.53 2.30 EARNINGS BY BUSINESS SEGMENT (SEE NOTES 2 AND 4) Quarters $ million Six Months Q2 Q1 Q2 2008 2008 2007 %1 2008 2007 % Exploration & Production2: 3,952 3,540 2,183 +81 - World outside USA 7,492 4,724 +59 1,929 1,603 916 +111 - USA 3,532 1,768 +100 5,881 5,143 3,099 +90 11,024 6,492 +70 Gas & Power: 788 933 494 +60 - World outside USA 1,721 1,176 +46 (163) 15 285 - - USA (148) 406 - 625 948 779 -20 1,573 1,582 -1 351 249 202 +74 Oil Sands2: 600 317 +89 Oil Products (CCS basis): 765 978 1,827 -58 - World outside USA 1,743 2,985 -42 310 216 1,109 -72 - USA 526 1,439 -63 1,075 1,194 2,936 -63 2,269 4,424 -49 Chemicals (CCS basis): 112 304 454 -75 - World outside USA 416 923 -55 (254) (103) 40 - USA (357) 51 - (142) 201 494 - 59 974 -94 7,790 7,735 7,510 +4 Total operating segments 15,525 13,789 +13 Corporate: - Interest and investment income 81 110 158 /(expense) 191 741 - Currency exchange gains/ 27 (62) 20 (losses) (35) 66 93 98 (1) - Other - including taxation 191 171 201 146 177 347 978 (89) (105) (131) Minority interest (194) (279) 7,902 7,776 7,556 +5 CCS earnings 15,678 14,488 +8 Estimated CCS adjustment for Oil 3,654 1,307 1,111 Products and Chemicals 4,961 1,460 Income attributable to shareholders of Royal Dutch 11,556 9,083 8,667 +33 Shell plc 20,639 15,948 +29 1 Q2 on Q2 change
2 As from the fourth quarter 2007, the earnings of the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production earnings up to the third quarter 2007 have been reclassified by the amounts reported under the Oil Sands segment.
SUMMARISED BALANCE SHEET (SEE NOTES 1 AND 6) $ million Jun 30, 2008 Mar 31, 2008 Jun 30, 2007 Assets Non-current assets: Intangible assets 5,336 5,282 5,126 Property, plant and equipment 109,191 105,806 90,584 Investments: - equity-accounted investments 32,514 31,198 27,185 - financial assets 2,975 3,333 2,954 Deferred tax 4,089 3,409 3,108 Pre-paid pension costs 6,215 5,878 4,772 Other 6,504 6,406 5,548 166,824 161,312 139,277 Current assets: Inventories 39,624 32,184 26,497 Accounts receivable 127,241 87,507 60,649 Cash and cash equivalents 8,990 14,417 15,117 175,855 134,108 102,263 Total assets 342,679 295,420 241,540 Liabilities Non-current liabilities: Debt 11,072 11,378 12,236 Deferred tax 13,994 13,473 13,159 Retirement benefit obligations 6,162 6,304 6,282 Other provisions 14,086 14,016 10,877 Other 4,857 4,189 3,784 50,171 49,360 46,338 Current liabilities: Debt 5,352 5,684 5,266
Accounts payable and accrued liabilities 126,246 89,531 61,978
Taxes payable 15,895 14,412 11,214 Retirement benefit obligations 419 455 324 Other provisions 2,687 2,815 2,076 150,599 112,897 80,858 Total liabilities 200,770 162,257 127,196 Equity attributable to shareholders of Royal Dutch Shell plc 139,809 131,130 112,621 Minority interest 2,100 2,033 1,723 Total equity 141,909 133,163 114,344 Total liabilities and equity 342,679 295,420 241,540 SUMMARISED STATEMENT OF CASH FLOWS (SEE NOTE 1) Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Cash flow from operating activities: 11,754 9,201 8,811 Income for the period 20,955 16,252 Adjustment for: 8,701 6,405 5,460 - Current taxation 15,106 9,727 269 178 130 - Interest (income)/expense 447 328 - Depreciation, depletion and 3,439 3,146 3,238 amortisation 6,585 6,498 (757) (281) (1,133) - (Profit)/loss on sale of assets (1,038) (1,495) - Decrease/(increase) in net (11,751) 2,784 (1,704) working capital (8,967) (2,103) - Share of profit of (2,671) (2,425) (2,138) equity-accounted investments (5,096) (3,946) - Dividends received from 2,447 1,752 1,519 equity-accounted investments 4,199 3,106 - Deferred taxation and other (152) 322 214 provisions 170 62 10 94 (676) - Other 104 (1,123) Cash flow from operating 11,289 21,176 13,721 activities (pre-tax) 32,465 27,306 (7,121) (4,314) (4,873) Taxation paid (11,435) (7,277) Cash flow from operating 4,168 16,862 8,848 activities 21,030 20,029 Cash flow from investing activities: (7,352) (7,429) (5,652) Capital expenditure (14,781) (11,013) Investments in equity-accounted (521) (616) (319) investments (1,137) (689) 2,026 445 6,270 Proceeds from sale of assets 2,471 6,650 Proceeds from sale of 272 61 279 equity-accounted investments 333 394 Proceeds from sale of /(additions 275 10 585 to) financial assets 285 1,140 269 285 295 Interest received 554 580 Cash flow from investing (5,031) (7,244) 1,458 activities (12,275) (2,938) Cash flow from financing activities: Net increase/(decrease) in debt with maturity period 839 (863) (1,185) within three months (24) (844) 131 185 1,634 Other debt: New borrowings 316 4,396 (1,479) (664) (274) Repayments (2,143) (1,887) (369) (298) (290) Interest paid (667) (641) 34 (7) (3,585) Change in minority interest 27 (6,695) (1,350) (1,073) (900) Net issue/(repurchase) of shares (2,423) (1,386) Dividends paid to: - Shareholders of Royal Dutch (2,489) (2,329) (2,300) Shell plc (4,818) (4,400) (115) (51) (77) - Minority interest (166) (119) Treasury shares: - Net sales/(purchases) and 242 200 568 dividends received 442 552 Cash flow from financing (4,556) (4,900) (6,409) activities (9,456) (11,024) Currency translation differences relating to cash and (8) 43 36 cash equivalents 35 48 Increase/(decrease) in cash and (5,427) 4,761 3,933 cash equivalents (666) 6,115 Cash and cash equivalents at 14,417 9,656 11,184 beginning of period 9,656 9,002 Cash and cash equivalents at end 8,990 14,417 15,117 of period 8,990 15,117 CAPITAL INVESTMENT Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Capital expenditure: Exploration & Production1: 3,038 2,202 2,281 - World outside USA 5,240 5,153 916 2,530 774 - USA 3,446 1,361 3,954 4,732 3,055 8,686 6,514 Gas & Power: 1,006 823 711 - World outside USA 1,829 1,368 3 1 2 - USA 4 3 1,009 824 713 1,833 1,371 761 711 421 Oil Sands1 1,472 789 Oil Products: 862 456 640 - World outside USA 1,318 1,114 68 61 132 - USA 129 327 930 517 772 1,447 1,441 Chemicals: 399 374 184 - World outside USA 773 337 34 34 96 - USA 68 179 433 408 280 841 516 83 37 75 Corporate 120 120 7,170 7,229 5,316 Total capital expenditure 14,399 10,751 Exploration expense 218 135 143 - World outside USA 353 270 86 80 46 - USA 166 88 304 215 189 519 358 New equity in equity-accounted investments 347 365 308 - World outside USA 712 555 41 5 3 - USA 46 20 388 370 311 758 575 New loans to equity-accounted 133 246 8 investments 379 114 7,995 8,060 5,824 Total capital investment* 16,055 11,798 *Comprising: 4,621 5,439 3,463 - Exploration & Production1 10,060 7,355 1,156 925 808 - Gas & Power 2,081 1,540 761 711 421 - Oil Sands1 1,472 789 934 536 777 - Oil Products 1,470 1,476 439 412 280 - Chemicals 851 518 84 37 75 - Corporate 121 120 7,995 8,060 5,824 16,055 11,798
1 As from the fourth quarter 2007, the results of the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production results up to the third quarter 2007 have been reclassified by the amounts reported under the Oil Sands segment.
ADDITIONAL SEGMENTAL INFORMATION1 Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Exploration & Production3 5,881 5,143 3,099 Segment earnings 11,024 6,492 Including: 408 325 450 - Exploration 733 722 - Depreciation, depletion & 2,228 2,165 2,311 amortisation 4,393 4,599 - Share of profit of 1,103 1,212 659 equity-accounted investments 2,315 1,572 8,659 10,329 7,031 Cash flow from operations 18,988 13,141 Less: Net working capital (374) 923 1,469 movements2 549 383 Cash flow from operations excluding net working capital 9,033 9,406 5,562 movements 18,439 12,758 49,185 47,927 42,207 Capital employed 49,185 42,207 Gas & Power 625 948 779 Segment earnings 1,573 1,582 Including: - Depreciation, depletion & 85 81 77 amortisation 166 151 - Share of profit of 620 584 428 equity-accounted investments 1,204 848 149 1,917 210 Cash flow from operations 2,066 797 Less: Net working capital (845) 902 76 movements2 57 (93) Cash flow from operations excluding net working capital 994 1,015 134 movements 2,009 890 21,010 19,305 16,133 Capital employed 21,010 16,133 Oil Sands3 351 249 202 Segment earnings 600 317 Including: - Depreciation, depletion & 45 44 43 amortisation 89 82 645 298 421 Cash flow from operations 943 907 Less: Net working capital 66 (102) 113 movements2 (36) 524 Cash flow from operations excluding net working capital 579 400 308 movements 979 383 5,881 5,292 3,672 Capital employed 5,881 3,672
1 Corporate segment information has not been included in the table shown. Please refer to the Earnings by Business segment section for additional information. The above data does not consider minority interest impacts on the segments.
2 Excluding working capital movements related to taxation.
3 As from the fourth quarter 2007, the results of the Oil Sands operations, which were previously reported as part of the Exploration & Production segment, are disclosed as a separate business segment. For comparison purposes, the Exploration & Production results up to the third quarter 2007 have been reclassified by the amounts reported under the Oil Sands segment.
ADDITIONAL SEGMENTAL INFORMATION1 (continued) Quarters $ million Six Months Q2 2008 Q1 2008 Q2 2007 2008 2007 Oil Products 1,075 1,194 2,936 Segment CCS earnings 2,269 4,424 Including: - Depreciation, depletion & 609 608 571 amortisation 1,217 1,227 - Share of profit of 441 267 721 equity-accounted investments 708 1,001 (4,148) 2,362 1,464 Cash flow from operations (1,786) 3,587 Less: Net working capital (9,439) (435) (2,220) movements2 (9,874) (2,539) Cash flow from operations excluding net working capital 5,291 2,797 3,684 movements 8,088 6,126 63,298 55,768 46,546 Capital employed 63,298 46,546 Chemicals (142) 201 494 Segment CCS earnings 59 974 Including: - Depreciation, depletion & 356 162 150 amortisation 518 305 - Share of profit of 92 158 167 equity-accounted investments 250 355 361 386 451 Cash flow from operations 747 567 Less: Net working capital (216) (9) (230) movements2 (225) (744) Cash flow from operations excluding net working capital 577 395 681 movements 972 1,311 11,328 11,233 9,888 Capital employed 11,328 9,888
1 Corporate segment information has not been included in the table shown. Please refer to the Earnings by Business segment section for additional information. The above data does not consider minority interest impacts on the segments.
2 Excluding working capital movements related to taxation.
NOTES
1. Accounting policies and basis of presentation
The quarterly financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and are also in accordance with IFRS as adopted by the European Union.
The Oil Sands operations, which were previously reported within the Exploration & Production segment, are reported as a separate business segment with effect from the fourth quarter 2007. Prior period financial statements have been reclassified accordingly.
The accounting policies are unchanged from those set out in Note 2 to the Consolidated Financial Statements of Royal Dutch Shell plc in the Annual Report and Form 20-F for the year ended December 31, 2007 on pages 117 to 121.
2. Earnings on an estimated current cost of supplies (CCS) basis
To facilitate a better understanding of underlying business performance, the financial results are also analysed on an estimated current cost of supplies (CCS) basis as applied for the Oil Products and Chemicals segment earnings. Earnings on an estimated current cost of supplies basis provides useful information concerning the effect of changes in the cost of supplies on Royal Dutch Shell's results of operations and is a measure to manage the performance of the Oil Products and Chemicals segments but is not a measure of financial performance under IFRS.
On this basis, Oil Products and Chemicals segment cost of sales of the volumes sold during the period are based on the cost of supplies during the same period after making allowance for the estimated tax effect, instead of the first-in, first-out (FIFO) method of inventory accounting. Earnings calculated on this basis do not represent an application of the last-in, first-out (LIFO) inventory basis and do not reflect any inventory drawdown effects.
3. Return on average capital employed (ROACE)
ROACE is defined as the sum of the current and previous three quarters' income adjusted for interest expense, after tax, divided by the average capital employed for the period.
Components of the calculation are:
$ million Q2 2008 Q2 2007 Income (four quarters) 36,628 28,020 Interest expense after tax 752 665 ROACE numerator 37,380 28,685 Capital employed - opening 131,846 122,818 Capital employed - closing 158,333 131,846 Capital employed - average 145,090 127,332 ROACE 25.8% 22.5%
ROACE up to the fourth quarter 2007 has been shown on a Shell share basis. As a consequence of the significant reduction of minority interest during 2007, ROACE calculations are now presented on a 100%-basis. Prior period ROACE calculations have been adjusted for comparison purposes.
4. Earnings by business segment
Operating segment results are presented before deduction of minority interest and also exclude interest and other income of a non-operational nature, interest expense, non-trading currency exchange effects and tax on these items, which are included in the Corporate results. Operating segment results are after tax and include equity-accounted investments.
5. Gearing
The numerator and denominator in the gearing calculation, as demonstratedbelow, used by Shell are calculated by adding to reported debt and equitycertain off-balance sheet obligations as at the beginning of the year such asoperating lease commitments and unfunded retirement benefits (if applicable)which Shell believes to be in the nature of incremental debt, and deductingcash and cash equivalents judged to be in excess of amounts required foroperational purposes.$ million Jun 30, 2008 Jun 30, 2007 Non-current debt 11,072 12,236 Current debt 5,352 5,266 Total debt 16,424 17,502 Add: Net present value of operating lease obligations1 14,387 11,319 Unfunded retirement benefit obligations (after tax)1 - - Less: Cash and cash equivalents in excess of operational requirements 6,690 13,217 Adjusted debt 24,121 15,604 Total equity 141,909 114,344 Total capital 166,030 129,948 Gearing ratio (adjusted debt as a percentage of total capital) 14.5% 12.0% 1 As of December 31, 2007 and 2006, respectively.
6. Equity
Total equity comprises equity attributable to shareholders of Royal Dutch Shell and to the minority interest. Other reserves comprise the capital redemption reserve, share premium reserve, merger reserve, share plan reserve, currency translation differences, unrealised gains/(losses) on securities and unrealised gains/(losses) on cash flow hedges.
Ordinary share capital Treasury Other Retained Minority Total $ million shares reserves earnings Total interest equity At December 31, 2007 536 (2,392) 14,148 111,668 123,960 2,008 125,968 Income for the period - - - 20,639 20,639 316 20,955 Income/(expense) recognised directly in equity - - 1,853 - 1,853 (110) 1,743 Capital contributions/ (repayments) from/ to minority shareholders - - - - - 27 27 Changes in minority interest - - - 59 59 25 84 Dividends paid - - - (4,818) (4,818) (166) (4,984) Treasury shares: net sales/ (purchases) and dividends received - 442 - - 442 - 442 Shares repurchased for cancellation (5) - 5 (2,237) (2,237) - (2,237) Share-based compensation - - (107) 18 (89) - (89) At June 30, 2008 531 (1,950) 15,899 125,329 139,809 2,100 141,909 Ordinary share Treasury Other Retained Minority Total $ million capital shares reserves earnings Total interest equity At December 31, 2006 545 (3,316) 8,820 99,677 105,726 9,219 114,945 Income for the period - - - 15,948 15,948 304 16,252 Income/(expense) recognised directly in equity - - 1,397 - 1,397 (101) 1,296 Capital contributions/ (repayments) from/ to minority shareholders - - - - - 819 819 Acquisition of Shell Canada - - - (5,445) (5,445) (1,639) (7,084) Sakhalin partial divestment - - - - - (6,711) (6,711) Other changes in minority interest - - - 7 7 (49) (42) Dividends paid - - - (4,400) (4,400) (119) (4,519) Treasury shares: net sales/ (purchases) and dividends received - 552 - - 552 - 552 Shares repurchased for cancellation (3) - 3 (1,386) (1,386) - (1,386) Share-based compensation - - 222 - 222 - 222 At June 30, 2007 542 (2,764) 10,442 104,401 112,621 1,723 114,344
7. Basis for Royal Dutch Shell earnings per ordinary share
The total number of Royal Dutch Shell ordinary shares in issue at the end of the period was 6,279 million. Royal Dutch Shell reports earnings per share on a basic and on a diluted basis, based on the weighted average number of Royal Dutch Shell (combined A and B) ordinary shares outstanding. Shares held in respect of share options and other incentive compensation plans are excluded in determining basic earnings per share.
Basic earnings per share calculations are based on the following weighted average number of shares:
Millions Q2 2008 Q1 2008 Q2 2007 Royal Dutch Shell ordinary shares of euro 0.07 each 6,170.3 6,195.5 6,281.7
Diluted earnings per share calculations are based on the following weighted average number of shares. This adjusts the basic number of shares for all share options currently in-the-money.
Millions Q2 2008 Q1 2008 Q2 2007 Royal Dutch Shell ordinary shares of euro 0.07 each 6,189.1 6,211.4 6,303.1
Basic shares outstanding at the end of the following periods are:
Millions Q2 2008 Q1 2008 Q2 2007 Royal Dutch Shell ordinary shares of euro 0.07 each 6,159.1 6,187.0 6,276.8
One American Depository Receipt (ADR) is equal to two Royal Dutch Shell shares.
8. Accounting for Derivatives
IFRS require that the derivative instruments be recognised in the financial statements at fair value. Any change in the current period between the period end market price and the contract settlement price is recognised in income because hedge accounting is either not permitted or not applied to these contracts.
The physical crude oil and related products held by the Oil Products business as inventory is recorded at historical cost or net realisable value, whichever is the lowest, as required under IFRS. Consequently, any increase in value of the inventory over costs is not recognised in income until the sale of the commodity occurs in the subsequent periods.
In the Oil Products business, the buying and selling of commodities includes transactions conducted through the forward markets using commodity derivatives to reduce the economic exposure. The derivatives are typically associated with a future physical delivery of the commodities.
These differences in accounting treatment for physical inventory (cost or net realisable value, whichever is the lowest) and derivative instruments (at fair value) can create timing differences in the recognition of the gains or losses between the reporting periods.
Similarly the earnings from long-term contracts held by Gas & Power are recognised in the results upon realisation. Associated commodity derivatives are recognised at fair value as of the end of each quarter.
These differences in accounting treatment for long-term contracts (on accrual basis) and derivative instruments (at fair value) can create timing differences in the recognition of the gains or losses between the reporting periods. _________________________________________________________________________________
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