20-F 1 u49747e20vf.htm FORM 20-F e20vf
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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 20-F
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2005
 
Commission file number 1-32575
 
Royal Dutch Shell plc
(Exact name of registrant as specified in its charter)
 
England and Wales
(Jurisdiction of incorporation or organisation)
Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands
tel. no: (011 31 70) 377 9111
(Address of principal executive offices)
 
Securities Registered Pursuant to Section 12(b) of the Act
     
   
Title of Each Class   Name of Each Exchange on Which Registered
American Depositary Receipts representing Class A ordinary shares of the issuer of an aggregate nominal value 0.07 each
  New York Stock Exchange
American Depositary Receipts representing Class B ordinary shares of the issuer of an aggregate nominal value of 0.07 each
  New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act
None
Securities For Which There is a Reporting Obligation Pursuant to Section 15(d) of the Act
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Outstanding as of December 31, 2005:
3,817,240,213 Class A ordinary shares of the nominal value of 0.07 each.
2,707,858,347 Class B ordinary shares of the nominal value of 0.07 each.
                         
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
  þ   Yes       o   No
 
                       
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
  o   Yes       þ   No
 
                       
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.        
 
                       
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
  þ   Yes       o   No
 
                       
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
                       
 
                       
Large accelerated filer    þ        Accelerated filer    o   Non-accelerated filer    o  
 
                       
Indicate by check mark which financial statement item the registrant has elected to follow.
  Item 17   o           Item 18    þ        
 
                       
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  o   Yes       þ   No
Copies of notices and communications from the Securities and Exchange Commission should be sent to:
Royal Dutch Shell plc
Carel van Bylandtlaan 30
2596 HR, The Hague, The Netherlands
Attn: Mr. M. Brandjes

 


Table of Contents

Cross Reference to Form 20-F
 
               
 
Part I           Pages  
 
Item 1.   Identity of Directors, Senior Management and Advisers     N/A  
Item 2.   Offer Statistics and Expected Timetable     N/A  
Item 3.   Key Information        
 
  A.   Selected financial data     7-9, 212  
 
  B.   Capitalisation and indebtedness     N/A  
 
  C.   Reasons for the offer and use of proceeds     N/A  
 
  D.   Risk factors     15-17  
Item 4.   Information on the Company        
 
  A.   History and development of the company     6, 12, 17, 21, 23-24, 27, 33-42, 44-47, 55-58, 60-63, 181  
 
  B.   Business overview     12-18, 20-42, 44-58, 60-63, 66-70, 157-163  
 
  C.   Organisational structure     6, 199-200  
 
  D.   Property, plants and equipment     12-14, 17, 20-42, 44-58, 60-63, 65-70  
Item 4A.   Unresolved Staff Comments     N/A  
Item 5.   Operating and Financial Review and Prospects        
 
  A.   Operating results     7-9, 12-18, 20-42, 44-58, 60-74, 157-177  
 
  B.   Liquidity and capital resources     62-65  
 
  C.   Research and development, patents and licences, etc.     21, 36-37, 42, 47, 58, 61, 75  
 
  D.   Trend information     12-18, 20-42, 44-47, 54-58, 60-70  
 
  E.   Off-balance sheet arrangements     63  
 
  F.   Tabular disclosure of contractual obligations     65  
 
  G.   Safe harbour     N/A  
Item 6.   Directors, Senior Management and Employees        
 
  A.   Directors and senior management     4-5  
 
  B.   Compensation     84-101  
 
  C.   Board practices     5, 79-85  
 
  D.   Employees     71-72  
 
  E.   Share ownership     73-74, 178  
Item 7.   Major Shareholders and Related Party Transactions        
 
  A.   Major shareholders     78, 178, 183  
 
  B.   Related party transactions     186, 197, 208  
 
  C.   Interests of experts and counsel     N/A  
Item 8.   Financial Information        
 
  A.   Consolidated Statements and Other Financial Information     50-51, 75, 102-155, 187-208, 210-211  
 
  B.   Significant Changes     75, 198  
Item 9.   The Offer and Listing        
 
  A.   Offer and listing details     178-179, 209  
 
  B.   Plan of distribution     N/A  
 
  C.   Markets     178  
 
  D.   Selling shareholders     N/A  
 
  E.   Dilution     N/A  
 
  F.   Expenses of the issue     N/A  
Item 10.   Additional Information        
 
  A.   Share capital     N/A  
 
  B.   Memorandum and articles of association     180-184  
 
  C.   Material contracts     76, 94-95  
 
  D.   Exchange controls     184  
 
  E.   Taxation     184-185  
 
  F.   Dividends and paying agents     N/A  
 
  G.   Statement by experts     N/A  
 
  H.   Documents on display     iii  
 
  I.   Subsidiary Information     N/A  
Item 11.   Quantitative and Qualitative Disclosures About Market Risk     17, 164-177  
Item 12.   Description of Securities Other than Equity Securities     N/A  
 
 
               
 
Part II
          Pages
 
Item 13.   Defaults, Dividend Arrearages and Delinquencies     N/A  
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds     N/A  
Item 15.   Controls and Procedures     18, 82-83  
Item 16.   [Reserved]        
Item 16A.   Audit committee financial expert     80  
Item 16B.   Code of Ethics     79  
Item 16C.   Principal Accountant Fees and Services     73, 81  
Item 16D.   Exemptions from the Listing Standards for Audit Committees     79  
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers     64  
 
 
               
 
Part III
          Pages
 
Item 17.   Financial Statements     N/A  
Item 18.   Financial Statements     102-155, 187-208  
Item 19.   Exhibits     213  
 

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About this Report
This Report combines the Annual Report and Accounts and the Annual Report on Form 20-F (“Report”) for the year ended December 31, 2005, for Royal Dutch Shell plc (“Royal Dutch Shell”) and its subsidiaries. It presents the Consolidated Financial Statements of Royal Dutch Shell (pages 102-155) and the parent company-only Financial Statements of Royal Dutch Shell (pages 187-200). This Report complies with all applicable UK regulations. The official English language version of this Report prevails for statutory purposes. The Dutch language version of the Report is a convenience translation only. This Report also includes the disclosure included in the Annual Report on Form 20-F for the year ended December 31, 2005 as filed with the U.S. Securities and Exchange Commission (“SEC”). Cross references to Form 20-F are set out on the previous page of this Report.
In this Report “Group” is defined as Royal Dutch Shell together with all of its consolidated subsidiaries. The expressions “Shell”, “Group”, “Shell Group” and “Royal Dutch Shell” are sometimes used for convenience where references are made to the Group or Group companies in general. Likewise, the words “we”, “us” and “our” are also used to refer to Group companies 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. The expression “Group companies” as used in this Report refers 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 the Group has significant influence but not control are referred to as “associated companies” or “associates” and companies in which the Group has joint control are referred to as “jointly controlled entities”. In this Report, associates and jointly controlled entities are also referred to as “equity accounted investments”.
The expression “operating companies” as used in the Report refers to those Group and equity accounted investments that are engaged in the exploration for and extraction of oil and natural gas and delivery of these hydrocarbons to market, the marketing and trading of natural gas and electricity, the conversion of natural gas to liquids and the refining of crude oil into products including fuels, lubricants, petrochemicals, and other industry segments such as Hydrogen and Renewables. The term “Group interest” is used for convenience to indicate the direct and/or indirect equity interest held by the Group in a venture, partnership or company (i.e., after exclusion of all third-party interests).
Except as otherwise specified, the figures shown in the tables in this Report represent those in respect of Group companies only, without deduction of minority interests. However, where figures are given specifically for oil production (net of royalties in kind), natural gas production available for sale, and both the refinery processing intake and total oil product sales volumes, the term “Group share” is used for convenience to indicate not only the volumes to which Group companies are entitled (without deduction in respect of minority interests in Group companies) but also the portion of the volumes of associated companies and jointly controlled entities to which Group companies are entitled or which is proportionate to the Group interest in those companies.
Except as otherwise stated, the Financial Statements contained in this Report have been prepared in accordance with applicable laws in England and Wales and with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. As applied to Royal Dutch Shell, there are no material differences with IFRS as issued by the International Accounting Standards Board. This Report is prepared under the one-time accommodation provided by the SEC to allow, for a limited period, foreign private issuers that prepare financial statements in accordance with IFRS to present only one year of comparative information in their first IFRS Financial Statements. Tables and disclosure that provide data over a five year period show 2005 and 2004 on an IFRS basis and 2003, 2002 and 2001 on a US GAAP basis.
The Consolidated Financial Statements of Royal Dutch Shell and its subsidiaries have been prepared using the carry-over basis to account for the Unification and on the basis that the resulting structure was in place throughout the periods presented.
Except as otherwise noted, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars’’ or “$’’ are to the US currency.
The Operating and Financial Review (“OFR”) and other sections of this Report contain historical and 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 Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for the Group’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, project delay or advancement, approvals and cost estimates; and (m) changes in trading conditions. All forward-looking statements contained in this Report 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 Report. 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 Report.
This report contains references to Shell’s website. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com.
Documents on display
Documents concerning Royal Dutch Shell, or its predecessors for reporting purposes, which are referred to in this Report have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this Report by mail. For further information on the operation of the public reference room and the copy charges, please call the SEC at (800) SEC-0330. All of the SEC filings made electronically by the Group are available to the public at the SEC website at www.sec.gov (commission file number 1-32575). This Report, as well as the Annual Review, is available in the Dutch and English language, free of charge, at www.shell.com/investor or at the offices of Royal Dutch Shell in The Hague, the Netherlands and London, UK.

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Abbreviations
 
Listed below are the most common abbreviations used throughout this Report.
         
 
Units of measurement   Abbreviation    
 
barrels of oil equivalent (per day)
  boe(/d)    
 
billion cubic feet per day
  bcf/d    
 
British thermal units
  Btu    
 
megawatts
  MW    
 
million tonnes per annum
  mtpa    
 
standard cubic feet
  scf    
 
(thousand) deadweight tonnes
  (k)dwt    
 
 
       
 
Products
       
 
Gas to Liquids
  GTL    
 
liquefied natural gas
  LNG    
 
liquefied petroleum gas
  LPG    
 
mono-propylene glycol
  MPG    
 
natural gas liquids
  NGL    
 
polytrimethylene terephthalate
  PTT    
 
propylene oxide derivatives
  POD    
 
styrene monomer/propylene oxide
  SM/PO    
 
 
       
 
Miscellaneous
       
 
American Depositary Receipt
  ADR    
 
Annual General Meeting
  AGM    
 
Corporate Social Responsibility
  CSR    
 
engineering, procurement and construction
  EPC    
 
front-end engineering design
  FEED    
 
health, safety and environmental
  HSE    
 
health, safety, security and environmental
  HSSE    
 
International Financial Reporting Interpretation Committee
  IFRIC    
 
International Financial Reporting Standards
  IFRS    
 
Operating and Financial Review
  OFR    
 
production sharing contract
  PSC    
 
Remuneration Committee
  REMCO    
 
Research and Development
  R&D    
 
United States Generally Accepted Accounting Principles
  US GAAP    
 
United States Securities and Exchange Commission
  US SEC    
 

iv 


 

Royal Dutch Shell – Vision
The objectives of the Shell Group are to engage efficiently, responsibly and profitably in oil, oil
products, gas, chemicals and other selected businesses and to participate in the search for and
development of other sources of energy to meet evolving customer needs and the world’s growing
demand for energy.
We believe that oil and gas will be integral to the global energy needs for economic development
for many decades to come. Our role is to ensure that we extract and deliver them profitably and in
environmentally and socially responsible ways.
We seek a high standard of performance, maintaining a strong long-term and growing position in the
competitive environments in which we choose to operate.
We aim to work closely with our customers, our partners and policymakers to advance more efficient
and sustainable use of energy and natural resources.

     
 
  Chairman’s Message
 
 
   
 
  Chief Executive’s Message
 
 
   
 
  The Board of Royal Dutch Shell plc
 
 
   
 
  Unification of Royal Dutch and Shell Transport
 
 
   
 
  Selected Financial Data
 
 
   
 
  Index to the Operating and Financial Review (OFR)
 
 
   
 
  Business and market overview
 
  Risk factors and control
 
  Summary of Group results
 
  Upstream – Exploration & Production
 
  Upstream – Gas & Power
 
  Downstream – Oil Products
 
  Downstream – Chemicals
 
  Other industry segments and Corporate
 
  Liquidity and capital resources
 
  Social and environmental
 
  People
 
  Other matters
 
 
   
 
  Report of the Directors
 
 
   
 
  Corporate Governance
 
 
   
 
  Directors’ Remuneration Report
 
     
 
  Report of the Independent Auditors
 
 
   
 
  Index to the Consolidated Financial Statements
 
  Consolidated Financial Statements
 
  Notes to the Consolidated Financial Statements
 
 
   
 
  Supplementary Information – Unaudited
 
  Supplementary Information – Oil and gas (unaudited)
 
  Supplementary Information – Derivatives and other financial instruments and derivative commodity instruments (unaudited)
 
  Supplementary Information – Control of registrant (unaudited)
 
 
   
 
  Index to the Parent Company Financial Statements
 
  Parent Company Financial Statements
 
  Notes to the Parent Company Financial Statements
 
 
   
 
  Index to the Royal Dutch Shell Group Dividend Access Trust Financial Statements
 
  Royal Dutch Shell Dividend Access Trust Financial Statements
 
  Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
 
 
   
 
  Additional Shareholder Information (unaudited)
 
 
   
 
  Exhibits
 
 Form of Director Indemnity Agreement.
 Calculation of Ratio of Earnings to Fixed Charges.
 Significant Group companies as at December 31, 2005.
 Section 302 Certification of Royal Dutch Shell plc.
 Section 302 Certification of Royal Dutch Shell plc.
 Section 906 Certification of Royal Dutch Shell plc.
 Consent of PricewaterhouseCoopers LLP, London.
 Consent of PricewaterhouseCoopers LLP, London relating to the Royal Dutch Shell Group Dividend Access Trust.


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      (PHOTO - AAD JACOBS)
 
     
 
     
 
     
 
  CHAIRMAN’S
MESSAGE

 
 
       

In 2005 shareholders approved the Unification Transaction of our parent companies under Royal Dutch Shell plc. This far-reaching change is already bringing benefits. Our new clearer, simpler governance structure is helping to reduce duplication, speed up decision making and increase accountability. The single smaller Board and its committees are working well and their reports can be found on pages 75 to 101. I am also pleased that the clearer lines of accountability in the new structure have been widely welcomed by shareholders.
The Board believes that our organisation is now better placed to build and develop our business for the future and meet the challenges ahead. At the heart of those challenges is the need to find and develop the resources to meet the growth in global energy demand. We will also need to produce those
resources in a way that minimises the effect on the environment. The Chief Executive and his team have been successfully driving forward Shell’s work both in securing and producing more oil and gas and in developing energy solutions for the longer term. This will ensure that Shell can play its part in meeting the world’s future energy needs.
There were many business challenges in 2005, some of which were linked to the natural disasters that struck many parts of the world. The effects of the tsunami in Asia, hurricanes in the Gulf of Mexico and the earthquake in India and Pakistan, were felt across Shell and in the communities in which we work. The Board is proud of the response of Shell staff to these tragedies and their tireless work both to support the affected communities and to restore our business as quickly as possible.
It has been a great privilege for me to be the first Chairman of Royal Dutch Shell plc and to see it make such a successful start. I am confident that we can build on that success and that, with the proposed appointment of Jorma Ollila as my successor, the future of the company is in good hands.
-s- Aad Jacobs
Aad Jacobs Chairman


2   Royal Dutch Shell plc

 


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“Shell’s commitment to technology and innovation, combined with the dedication and skill of our employees, will enable us to play a leading and competitive role in meeting the world’s future energy needs.”
  (PHOTO - JEROEN VAN DER VEER)
 
  CHIEF EXECUTIVE’S
MESSAGE
 
 
       

Thanks to the great efforts of many Shell people, 2005 was a year of recovery. We achieved a great deal, but there is more to be done to ensure that recovery continues. We delivered record earnings and cash generation; we were successful in securing significant new resources; and we reinforced our leading positions in liquefied natural gas (LNG) and Oil Products. Our strong financial position has allowed us to return over $17 billion to our shareholders. We also made capital investments of $15.6 billion (excluding the minority share in Sakhalin). Our strategy continues to be more upstream and profitable downstream. This is reflected in our capital investment programme, which will increase to $19 billion in 2006, keeping pace with our earnings, and will be targeted at the upstream.
In Exploration & Production a number of important new fields came on stream and we met our production target, despite the damage to our facilities caused by hurricanes in the Gulf of Mexico. There were, however, large cost overruns on our Sakhalin II project and we are ensuring that we learn the lessons from these. We believe that gas demand will continue to grow rapidly and, in 2005 our Gas & Power business strengthened its leading positions in the key markets of Asia, Europe and North America, with a number of new LNG projects starting operation or construction.
In the downstream, Oil Products earnings were up 31%, reflecting strong refining margins and good operational performance. By standardising and simplifying our processes we have reduced costs and improved customer service. We also continued to provide customers with an increasing range of fuels that can improve engine performance and reduce environmental impact. At the same time, we strengthened our position as the world’s leading marketer of biofuels. Chemicals also had good earnings in 2005 and, with the completion of the Nanhai petrochemicals complex in southern China, made an important step in securing a position in this rapidly growing market. Much of the increase in energy demand is coming from emerging economies in the Asia Pacific region and we are ensuring that we extend our presence in those growth markets.
I believe that Shell’s commitment to technology and innovation, combined with the dedication and skill of our employees, will enable us to play a leading and competitive role in meeting the world’s future energy needs. This includes taking on bigger and more demanding projects and ensuring we integrate economic, and social and environmental considerations into our management of those projects. Our Project and Commercial Academies, which have made a good start, will be at the heart of our work to acquire and to develop projects successfully in the future. In our operations we aim to be a “first-quartile” performer. We
continue to focus on Health, Safety, Security and Environment (HSSE).
We also realise the importance of managing the carbon dioxide emissions from oil and gas resources. This offers opportunities to develop our business and we are investing in a range of research into carbon capture and storage that can help us to develop greener fossil fuels. At the same time, Shell aims to develop at least one substantial business in alternative energy. In the past year we have made good progress on projects in wind, hydrogen and advanced solar technology that will help us move towards that aim.
All of us in Shell are pleased with the progress we have made in 2005 in improving our operational performance; in developing projects; and in securing new resources. I believe we now have a strong foundation to build for the future to deliver the leading performance and competitive returns that our shareholders want to see. So this means 2006 will be the year of delivery and growth for Shell.
-s- Jeroen van der Veer
Jeroen van der Veer Chief Executive


Chief Executive‘s Message   3

 


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The Board of Royal Dutch Shell plc
 
 
(GROUP PHOTO)
 
 
(GROUP PHOTO KEYLINES)

4   Royal Dutch Shell plc

 


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Royal Dutch Shell has a single tier Board of Directors chaired by a Non-executive Chairman, Aad Jacobs. The executive management is led by the Chief Executive, Jeroen van der Veer. The members of the Board of Royal Dutch Shell plc meet regularly to discuss reviews and reports on the business and plans of Royal Dutch Shell. In 2005, the Nomination and Succession Committee recommended to the Board the appointment of Jorma Ollila, currently Chairman and CEO of Nokia Corporation, to succeed Aad Jacobs as Non-executive Chairman of Royal Dutch Shell. The Board adopted this proposal. A resolution has been proposed to be put to the Annual General Meeting of shareholders of Royal Dutch Shell, to be held on May 16, 2006, for the election of Mr Ollila as a Director of Royal Dutch Shell, with effect from June 1, 2006.
1 Aad Jacobs ○
Non-executive Chairman
Born May 28, 1936. A Dutch national, appointed Non-executive Chairman of Royal Dutch Shell in October 2004. He became a member of the Royal Dutch supervisory board in 1998 and Chairman in 2002 and was a Board member1 of Royal Dutch until the merger of the company on December 21, 2005. He was previously Chairman of the Board of Management of ING Groep N.V. He is Chairman of the supervisory boards of Joh. Enschedé B.V., Imtech N.V. and VNU N.V.; Vice-Chairman of the supervisory boards of Buhrmann N.V. and SBM Offshore N.V.; and a member of the supervisory board of ING Groep N.V.
2 Lord Kerr of Kinlochard GCMG + ○
Deputy Chairman and Senior Independent Non-executive Director
Born February 22, 1942. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a Non-executive Director of Shell Transport from 2002 to 2005. A member of the UK Diplomatic Service from 1966 to 2002 (and its Head from 1997 to 2002), he was successively UK Permanent Representative to the EU, British Ambassador to the USA, Foreign Office Permanent Under Secretary of State and Secretary-General of the European Convention. He is a Non-executive Director of Rio Tinto plc and Rio Tinto Limited and Scottish American Investment Company plc and Chairman of Court/Council of Imperial College. Trustee of the National Gallery and of the Rhodes Trust.
3 Jeroen van der Veer
Chief Executive
Born October 27, 1947. A Dutch national, appointed Chief Executive of Royal Dutch Shell in October 2004. He was appointed President of Royal Dutch in 2000, having been a Managing Director of Royal Dutch since 1997 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. He was a Director of Shell Canada Limited from April 24, 2003 until April 29, 2005. He joined the Group in 1971 in refinery process design and held a number of senior management positions around the world. He is a Non-executive Director of Unilever (which includes Unilever N.V., Unilever plc and Unilever Holdings Ltd.).
4 Peter Voser
Chief Financial Officer
Born August 29, 1958. A Swiss national, appointed Chief Financial Officer of Royal Dutch Shell in October 2004. He was appointed a Managing Director of Shell Transport and Chief Financial Officer (CFO) in October 2004. In 2002, joined the Asea Brown Boveri (ABB) Group of Companies, based in Switzerland as CFO and Member of the Group Executive Committee. Also responsible for ABB’s Group IT and the Oil, Gas and Petrochemicals business. Originally joined the Group in 1982 where he held a variety of finance and business roles in Switzerland, UK, Argentina and Chile, including CFO of Oil
Products. He is a member of the supervisory board of Aegon N.V. (he will retire April 25, 2006) and a member of the supervisory board of UBS AG.
5 Malcolm Brinded CBE FREng
Executive Director, Exploration & Production
Born March 18, 1953. A British national, appointed an Executive Director of Royal Dutch Shell in October 2004. He was previously a Managing Director of Shell Transport since March 2004 and prior to that a Managing Director of Royal Dutch since 2002. Joined the Group in 1974 and has held various positions around the world including Country Chair for Shell in the UK, and Director of Planning, Environment and External Affairs at Shell International Ltd.
6 Linda Cook
Executive Director, Gas & Power
Born June 4, 1958. A US national, appointed an Executive Director of Royal Dutch Shell in October 2004. She was appointed a Managing Director of Royal Dutch in August 2004 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. She was President and Chief Executive Officer and a member of the Board of Directors of Shell Canada Limited from August 2003 to July 2004. Joined Shell Oil Company in Houston in 1980, and worked for Shell Oil Company in Houston and California in a variety of technical and managerial positions. Member of the Society of Petroleum Engineers and a Non-executive director of The Boeing Company.
7 Rob Routs
Executive Director, Oil Products and Chemicals
Born September 10, 1946. A Dutch national, appointed Executive Director of Royal Dutch Shell in October 2004. He was a Managing Director of Royal Dutch from 2003 to July 4, 2005. Joined the Group in 1971. Held various positions in the Netherlands, Canada and the USA. Previously President and Chief Executive Officer of Shell Oil Products USA, President of Shell Oil Company and Country Chair for Shell in the USA and Chief Executive of Equilon. He is a member of the Board of Directors of Shell Canada Limited since April 29, 2005 and director of INSEAD.
8 Maarten van den Bergh #
Non-executive Director
Born April 19, 1942. A Dutch national, appointed Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 2000 to July 4, 2005. Managing Director of Royal Dutch from 1992 to 2000 and President from 1998 to 2000. Chairman of the Board of Directors of Lloyds TSB (he will retire at the AGM of Lloyds in May 2006) and, member of the Boards of Directors of BT Group plc and British Airways plc and a member of the supervisory board of Akzo Nobel N.V.
9 Sir Peter Burt FRSE ■
Non-executive Director
Born March 6, 1944. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. Non-executive Director of Shell Transport from 2002 to 2005. He was Chief General Manager and Chairman of the Management Board and subsequently Group Chief Executive, Bank of Scotland. Executive Deputy Chairman HBOS plc. Governor of Bank of Scotland from 2001. Retired 2003. He is a Chairman of ITV plc and Promethean plc.
10 Mary R. (Nina) Henderson ■ #
Non-executive Director
Born July 6, 1950. A US national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. She was a Non-executive Director of Shell Transport from 2001 to 2005. Previously President of a major division and Corporate Vice-President of Bestfoods, a major US foods company, responsible for worldwide core business development. Non-executive Director of Pactiv Corporation, AXA Financial Inc., Del Monte Foods Company and Visiting Nurse Service of New York.
11 Sir Peter Job KBE +
Non-executive Director
Born July 13, 1941. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004.
He was a Non-executive Director of Shell Transport from 2001 to 2005. Previously he was Chief Executive of Reuters Group plc. He is a Non-executive Director of Schroders plc, TIBCO Software Inc., Instinet Group Inc., and a member of the supervisory board of Deutsche Bank AG.
12 Wim Kok #
Non-executive Director
Born September 29, 1938. A Dutch national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 2003 to July 4, 2005. Chaired the Confederation of Dutch trade unions (FNV) before becoming a member of the Lower House of Parliament and parliamentary leader of the Partij van de Arbeid (Labour Party). Appointed Minister of Finance in 1989 and Prime Minister in 1994, serving for two periods of government up to July 2002. Member of the supervisory boards of ING Groep N.V., KLM N.V. and TNT N.V.
13 Jonkheer Aarnout Loudon + ○
Non-executive Director
Born December 10, 1936. A Dutch national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 1997 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. He was a member of the Board of Management of Akzo from 1977 to 1994 (Akzo Nobel as from 1994) and its Chairman from 1982 to 1994. He is Chairman of the supervisory boards of ABN AMRO Holding N.V. and Akzo Nobel N.V. (he will retire per May 1, 2006) and a member of the International Advisory Board of Allianz AG.
14 Christine Morin-Postel ■
Non-executive Director
Born October 6, 1946. A French national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. She was a member of the Royal Dutch supervisory board from July 2004 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. Formerly she was Chief Executive of Société Générale de Belgique and Executive Vice-President and member of the Executive Committee of Suez S.A. She is Non-executive director of Alcan Inc., 3i Group plc and Pilkington plc.
15 Lawrence Ricciardi ■
Non-executive Director
Born August 14, 1940. A US national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was appointed a member of the Royal Dutch supervisory board in 2001 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. Previously he was President of RJR Nabisco, Inc. and subsequently Senior Vice-President and General Counsel of IBM. He is Senior Advisor to the law firm Jones Day and to Lazard Frères & Co and member of the Board of Directors of The Reader’s Digest Association, Inc.
Beat Hess
Group Legal Director
Born July 6, 1949. A Swiss national, appointed as Shell Group Legal Director in June 2003. Previously General Counsel of ABB Group. Non-executive board member of Ciba Specialty Chemicals.
Michiel Brandjes
Company Secretary
Born December 14, 1954. A Dutch national, appointed as Company Secretary of Royal Dutch Shell in February 2005. Previously Company Secretary of Royal Dutch Petroleum Company and Group general counsel corporate. Joined the Group in 1980 as a Legal Adviser.
  Audit Committee
 
+   Remuneration Committee
 
#   Social Responsibility Committee
 
  Nomination and Succession Committee
 
1   As from July 4, 2005 Royal Dutch had a one tier board instead of a two tier board. This one tier board existed until the company merged into Shell Petroleum N.V. per December 21, 2005.


The Board of Royal Dutch Shell plc   5

 


Table of Contents

Unification of Royal Dutch and Shell Transport
 

In 2005, Royal Dutch Shell became the single 100% parent company of Royal Dutch Petroleum Company (“Royal Dutch”) and of Shell Transport and Trading Company Limited (previously known as The “Shell” Transport and Trading Company, p.l.c.) (“Shell Transport”) the two former public parent companies of the Group. These transactions include:
>   the scheme of arrangement of Shell Transport under the applicable laws of England and Wales (“the Scheme”) on July 20, 2005, pursuant to which Royal Dutch Shell acquired all the outstanding capital stock of Shell Transport;
>   the exchange offer (“the Exchange Offer”, and together with the Scheme, “the Unification Transaction”) for all of the ordinary shares of Royal Dutch, commenced on May 19, 2005, which became unconditional (gestanddoening) on July 20, 2005, and, including the subsequent offer acceptance period which expired on August 9, 2005, through which Royal Dutch Shell acquired a total of 98.49% of the outstanding capital stock of Royal Dutch; and
 
>   the series of restructuring transactions of the Group (“the Restructuring” and together with the Unification Transaction the “Unification”), which included the merger under Dutch law of Royal Dutch with its wholly-owned subsidiary, Shell Petroleum N.V. (“Shell Petroleum”), which became effective on December 21, 2005 (“the Merger”). Pursuant to the terms of the Merger exchange ratio, the remaining public shareholders of Royal Dutch, who collectively held 1.51% of the outstanding shares, received 52.21 per share in cash (or for certain eligible shareholders an equivalent principal amount of loan notes) and Royal Dutch Shell received shares of the surviving company, Shell Petroleum. As a result of the Merger, former holders of Royal Dutch shares received an aggregate of $1.9 billion equivalent in cash and loan notes. The loan notes were exchanged by Royal Dutch Shell for an aggregate of 4,827,974 Class A ordinary shares on January 6, 2006. As a result of the Merger, Royal Dutch and the Royal Dutch shares have ceased to exist and Shell Petroleum, the surviving company in the Merger, became a 100% owned subsidiary of Royal Dutch Shell.
The diagram at the bottom of this page illustrates the structure of the Group following completion of the Unification. Operating and service company subsidiaries are not shown.
Pursuant to the terms of the Unification Transaction, holders of ordinary shares of Royal Dutch (“Royal Dutch ordinary shares”), holders of Shell Transport Ordinary Shares (“the Shell Transport Ordinary Shares”), holders of Shell Transport bearer warrants and holders of American Depositary Receipts representing Shell Transport Ordinary Shares (“the Shell Transport ADRs”) received, respectively:
>   for each Royal Dutch ordinary share held in New York registry form tendered:
1 Royal Dutch Shell Class A American Depositary Receipta
>   for each Royal Dutch ordinary share held in bearer or Hague registry form tendered:
2 Royal Dutch Shell Class A ordinary shares
>   for each Shell Transport Ordinary Share (including Shell Transport Ordinary Shares to which holders of Shell Transport bearer warrants were entitled):
0.287333066 Royal Dutch Shell Class B ordinary shares
>   for each Shell Transport ADR:
0.861999198 Royal Dutch Shell Class B American Depositary Receiptsb
Royal Dutch Shell Class A ordinary shares (“Class A shares”) and Royal Dutch Shell Class B ordinary shares (“Class B shares”) have identical rights as set out in the Royal Dutch Shell Articles, except in relation to the dividend access mechanism applicable to the Royal Dutch Shell Class B ordinary shares. The dividend access mechanism is described more fully in “Supplementary Information – Control of registrant – Rights attaching to shares”.
The Unification Transaction did not result in the formation of a new reporting entity. Immediately after the Unification Transaction each former Royal Dutch and Shell Transport shareholder who participated in the Unification Transaction held the same economic interest in Royal Dutch Shell as the shareholder held in the Group immediately prior to implementation of the Unification Transaction. Accordingly, the Unification Transaction has been accounted for using a carry-over basis of the historical costs of the assets and liabilities of Royal Dutch, Shell Transport and the other companies comprising the Group.
Royal Dutch and Shell Transport entered into a scheme of amalgamation dated September 12, 1906 and agreements from 1907 by which the scheme of amalgamation was implemented and pursuant to which they “amalgamated” their interests in the oil industry in a transaction that would have been accounted for as a business combination under current accounting standards. From that time until the Restructuring, Royal Dutch owned 60% of the other companies comprising the Group and Shell Transport owned 40% of the other companies comprising the Group. All operating activities have been conducted through the subsidiaries of Royal Dutch and Shell Transport which have operated as a single economic enterprise. Prior to the consummation of the Unification Transaction, economic interests of the Royal Dutch and Shell Transport shareholders in the other companies comprising the Group reflected the 60:40 economic interests of Royal Dutch and Shell Transport in these companies. The Unification Transaction had little impact on the economic rights and exposures of shareholders of Royal Dutch and Shell Transport, as the separate assets and liabilities of Royal Dutch and Shell Transport are not material in relation to their interests in the rest of the Group, and the Unification Transaction did not result in the acquisition of any new businesses or operating assets and liabilities. In addition, the Unification Transaction did not affect the proved oil and gas reserve information reported by Royal Dutch Shell, Royal Dutch and Shell Transport or the other companies comprising the Group.
(FLOW CHART)


  Each Royal Dutch Shell Class A American Depositary Receipt represents 2 Royal
Dutch Shell Class A ordinary shares.
  Each Royal Dutch Shell Class B American Depositary Receipt represents 2 Royal
Dutch Shell Class B ordinary shares.

6   Royal Dutch Shell plc

 


Table of Contents

Selected Financial Data
The selected financial data set out below is derived, in part, from the Consolidated Financial Statements. The selected data should be read in conjunction with the Consolidated Financial Statements and related Notes, as well as the Operating and Financial Review in this Report.
The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which differ in certain respects from US GAAP. For a summary of the material differences between IFRS and US GAAP, see Note 38 to the Consolidated Financial Statements.
Except as otherwise stated, all selected financial data are prepared in accordance with IFRS.
Consolidated Statement of Income data
                 
 
    $ million  
 
    2005     2004  
 
Revenue
    306,731       266,386  
Income from continuing operations
    26,568       19,491  
Income/(loss) from discontinued operations
    (307 )     (234 )
Income for the period
    26,261       19,257  
Income attributable to minority interest
    950       717  
Income attributable to shareholders of Royal Dutch Shell
    25,311       18,540  
 
                 
 
Earnings per share           $  
 
Basic earnings per 0.07 ordinary share
    3.79       2.74  
from continuing operations
    3.84       2.77  
from discontinued operations
    (0.05 )     (0.03 )
Diluted earnings per 0.07 ordinary share
    3.78       2.74  
from continuing operations
    3.83       2.77  
from discontinued operations
    (0.05 )     (0.03 )
 
Consolidated Balance Sheet data
                 
 
    $ million  
 
    2005     2004  
 
Total assets
    219,516       187,446  
Share capital
    571       604  
Equity attributable to shareholders of Royal Dutch Shell
    90,924       86,070  
Minority interest
    7,000       5,313  
 
Capital investment
                 
 
    $ million  
 
    2005     2004  
 
Capital expenditure:
               
Exploration & Production
    10,858       8,699  
Gas & Power
    1,568       1,357  
Oil Products
    2,810       2,761  
Chemicals
    387       529  
Other industry segments and Corporate
    293       220  
 
 
    15,916 a     13,566  
Exploration expenses (excluding depreciation and release of currency translation differences)
    815       651  
New equity in equity accounted investments
    390       681  
New loans to equity accounted investments
    315       377  
 
Total capital investment*
    17,436       15,275  
 
*comprising
               
Exploration & Production
    12,046       9,708  
Gas & Power
    1,602       1,633  
Oil Products
    2,844       2,823  
Chemicals
    599       868  
Other industry segments and Corporate
    345       243  
 
 
    17,436       15,275  
 
  The difference between capital expenditure in this table and the capital expenditure on the next page (other consolidated data) relates to non-cash effects relating to leases.

Selected Financial Data   7

 


Table of Contents

Selected Financial Data
Other consolidated data
                 
 
    $ million  
 
    2005     2004  
 
Cash flow provided by operating activities
    30,113       26,537  
Capital expenditure
    15,904       13,566  
Cash flow used in investing activities
    8,761       5,964  
Dividends paid
    10,849       7,655  
Cash flow used in financing activities
    18,573       13,592  
Increase/(decrease) in cash and cash equivalents
    2,529       7,094  
 
Income by industry segment
               
Exploration & Production
    14,238       9,823  
Gas & Power
    1,573       1,815  
Oil Products
    9,982       7,597  
Chemicals
    991       1,148  
Other industry segments and Corporate
    (523 )     (1,126 )
Minority interest
    (950 )     (717 )
 
 
    25,311       18,540  
 
Total debt ratioa
    11.7 %     13.8 %
 
Dividends declared –
    0.92 b     0.86 c
Dividends – equivalent payment in dollars
    1.13 b     1.07 c
 
a   The debt ratio is defined as short-term plus long-term debt as a percentage of capital employed. Capital employed is net assets (defined as total assets minus total liabilities) plus short-term and long-term debt. Management of the Group believes that the debt ratio calculated on this basis (rather than the ratio of total debt to shareholders equity) is useful to investors because it takes account of all amounts of capital employed in the business. Management uses this measure to assess the level of debt relative to the capital invested in the business.
 
b   Includes a first interim dividend of 0.23 ($0.2973) made payable to shareholders of Royal Dutch Petroleum Company in June 2005 and a first interim dividend of 15.84 pence ($0.3014) made payable to shareholders of The “Shell” Transport and Trading Company, p.l.c. in June 2005, a second interim dividend of 0.23 ($0.2771) made payable to shareholders of Royal Dutch Shell plc in September 2005, a third interim dividend of 0.23 ($0.2787) made payable to shareholders of Royal Dutch Shell plc in December 2005 and a fourth interim dividend of 0.23 ($0.2771) made payable to shareholders of Royal Dutch Shell plc in March 2006. Together they will constitute the total dividend for 2005.
 
c   Includes interim dividend of 0.75 ($0.90) made payable in September 2004 and a second interim dividend of 1.04 ($1.33) made payable in March 2005. Together they constituted the total dividend for 2004.
Quarterly income data
The following tables contain our unaudited quarterly information.
                                                                                 
 
    $ million  
 
    2005     2004  
    Quarter 4     Quarter 3     Quarter 2     Quarter 1     Year     Quarter 4     Quarter 3     Quarter 2     Quarter 1     Year  
 
Revenue
    75,496       76,435       82,644       72,156       306,731       76,301       70,685       62,132       57,268       266,386  
Cost of sales
    63,889       60,704       69,464       58,565       252,622       65,358       58,604       51,860       47,437       223,259  
 
Gross profit
    11,607       15,731       13,180       13,591       54,109       10,943       12,081       10,272       9,831       43,127  
 
Selling, distribution and administrative expenses
    4,263       3,763       3,917       3,539       15,482       4,406       3,643       3,668       3,381       15,098  
Exploration
    502       275       248       261       1,286       515       294       889       111       1,809  
Share of profit of equity accounted investments
    1,389       3,081       1,080       1,573       7,123       1,519       1,254       1,111       1,131       5,015  
Interest and other income
    205       521       247       198       1,171       621       177       134       551       1,483  
Interest expense
    261       253       286       268       1,068       229       188       269       373       1,059  
 
Income before taxation
    8,175       15,042       10,056       11,294       44,567       7,933       9,387       6,691       7,648       31,659  
Taxation
    3,572       5,558       4,595       4,274       17,999       2,893       3,790       2,663       2,822       12,168  
 
Income from continuing operations
    4,603       9,484       5,461       7,020       26,568       5,040       5,597       4,028       4,826       19,491  
Income/(loss) from discontinued operations
          (93 )           (214 )     (307 )     (299 )     23       22       20       (234 )
 
Income for the period
    4,603       9,391       5,461       6,806       26,261       4,741       5,620       4,050       4,846       19,257  
Income attributable to minority interests
    235       359       225       131       950       170       249       153       145       717  
 
Income attributable to shareholders
    4,368       9,032       5,236       6,675       25,311       4,571       5,371       3,897       4,701       18,540  
 

8   Royal Dutch Shell plc

 


Table of Contents

Consolidated Statement of Income data (US GAAP)
                                         
 
    $ million  
 
    2005     2004     2003     2002     2001  
 
Revenue
    306,111       264,281       198,362       163,453       122,453  
Income attributable to minority interest
    1,010       626       353       175       360  
Income from continuing operations
    24,756       16,536       12,042       9,484       10,284  
Income/(loss) from discontinued operations
    378       1,646       25       187       37  
Cumulative effect of a change in accounting principle, net of tax
    554             255              
Income attributable to shareholders of Royal Dutch Shell
    25,688       18,182       12,313       9,656       10,301  
 
Earnings per share
                                    $  
 
Basic earnings per 0.07 ordinary share ab
    3.85       2.68       1.81       1.41       1.45  
from continuing operations
    3.71       2.44       1.77       1.38       1.45  
from discontinued operations
    0.06       0.24             0.03        
cumulative effect of a change in accounting principle, net of tax
    0.08             0.04              
Diluted earnings per 0.07 ordinary share ab
    3.84       2.68       1.81       1.41       1.45  
from continuing operations
    3.70       2.44       1.77       1.38       1.45  
from discontinued operations
    0.06       0.24             0.03        
cumulative effect of a change in accounting principle, net of tax
    0.08             0.04              
 
a   Earnings per Royal Dutch Shell Class A ordinary and Class B ordinary shares are identical. The historical earnings per share following the Unification have been accounted for on a carry-over basis using the aggregate weighted average outstanding shares of the constituent businesses adjusted to the equivalent shares of Royal Dutch Shell for all periods presented.
b   The basic earnings per share amounts shown relate to income attributable to shareholders of Royal Dutch Shell. The 2005 calculation uses a weighted-average number of shares of 6,674,179,767 (2004: 6,770,458,950; 2003: 6,811,314,175; 2002: 6,876,188,213; 2001: 7,100,044,876). The basic earnings per share number has been restated to exclude shares held by Share-Ownership Trusts for share-based compensation plans. For the purpose of the calculation, shares repurchased under the buyback programme are deemed to have been cancelled on purchase date. The diluted earnings per share are based on the same income figures. For this calculation, the following weighted-average number of shares are used. 2005: 6,694,427,705; 2004: 6,776,396,429; 2003: 6,813,444,740; 2002: 6,878,412,716; 2001: 7,105,915,746. The difference between the basic and diluted number of shares relates to share-based compensation plans as mentioned above.
Consolidated Balance Sheet data (US GAAP)
                                         
 
    $ million  
 
    2005     2004     2003     2002     2001  
 
Total assets
    223,646       193,625       169,766       153,320       112,050  
Equity attributable to shareholders of Royal Dutch Shell
    94,103       90,545       78,251       66,195       62,822  
Minority interest
    7,006       5,309       3,415       3,568       3,466  
 
Capitalisation table (US GAAP)
                 
 
    $ million  
 
    Dec 31,     Dec 31,  
    2005     2004  
 
Equity
               
Ordinary share capital
    571       584  
Preference share capital
          20  
Additional paid-in capital
    3,637       5,371  
Treasury shares
    (3,809 )     (4,187 )
Retained earnings
    95,965       85,791  
Accumulated other comprehensive income/(loss)
    (2,261 )     2,966  
Total equity
    94,103       90,545  
 
Short-term debt
    5,328       5,762  
Long-term debta
    4,589       5,774  
Total debt b
    9,917       11,536  
 
Total capitalisation
    104,020       102,081  
 
a   Long-term debt exclude $2.8 billion of certain tolling commitments (2004: $2.8 billion).
b   As of June 30, 2005, the Shell Group had outstanding guarantees of $2.9 billion (2004: $2.9 billion), of which $1.7 billion (2004: $1.7 billion) related to guarantees in respect of debt related to project financing.
Ratio of Earnings to Fixed Charges (IFRS and US GAAP)
The following table sets forth the consolidated unaudited Ratio of Earnings to Fixed Charges of Royal Dutch Shell on an IFRS basis for the years ended December 31, 2004 and 2005 and on a US GAAP basis for the years ended December 31, 2001, 2002, 2003, 2004 and 2005.
                                         
 
    %  
 
    2005     2004     2003     2002     2001  
 
Ratio of Earnings to Fixed Charges (IFRS)
    23.81       19.60                          
Ratio of Earnings to Fixed Charges (US GAAP)
    27.72       17.56       15.91       11.71       18.52  
 
For the purposes of this table, earnings consists of pre-tax income from continuing operations before adjustment for minority interests and Group share of profit of equity accounted investments plus fixed charges (excluding capitalised interest) less undistributed earnings of equity accounted investments, plus distributed income from equity accounted investments. Fixed charges consists of expensed and capitalised interest plus interest within rental expenses (for operating leases) plus preference security dividend requirements of consolidated subsidiaries.
Please refer to Exhibit 7 for details concerning the calculation of the Ratio of Earnings to Fixed Charges.

Selected Financial Data   9

 


Table of Contents

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10   Royal Dutch Shell plc

 


Table of Contents

Index to the Operating and Financial Review (OFR)
     
 
Operating and Financial Review 2005
 
12  
Business and market overview
15  
Risk factors and control
20  
Summary of Group results
22  
Upstream – Exploration & Production
38  
Upstream – Gas & Power
44  
Downstream – Oil Products
54  
Downstream – Chemicals
60  
Other industry segments and Corporate
62  
Liquidity and capital resources
66  
Social and environmental
71  
People
73  
Other matters
 

Operating and Financial Review – Index   11

 


Table of Contents

Operating and Financial Review – Business and market overview

Business and market overview
The Operating and Financial Review (OFR) provides a business, market and strategic overview of the operations and financial situation of the Group, as seen by Group management. It describes the activities, properties and performance of the Group and also discusses the risks and social and environmental challenges facing the Group.
Business overview
Royal Dutch Shell consists of the upstream businesses of Exploration & Production and Gas & Power and the downstream businesses of Oil Products and Chemicals. We also have interests in other industry segments such as Renewables and Hydrogen.
Over time and across the commodity cycle the Group has achieved higher earnings and returns on investment in the upstream compared with the other businesses, and sees significant growth potential in demand for natural gas. The downstream businesses continue to offer attractive returns, cash flow and growth potential in the growth markets of Asia Pacific and the Middle East and the portfolio is being restructured to capture that potential. The Group’s core strengths include the application of technology, financial and project management skills to develop large oil and gas projects; the ability to develop and manage a diverse and international business portfolio; and the development of customer-focused businesses built around the strength of the Shell brand.
Royal Dutch Shell strategy
Our strategy of more upstream and profitable downstream aims to reinforce our position as a leader in the industry, which aims to provide investors with a competitive and sustained total shareholder return.
We have announced an increase in capital investment to support that strategy and in 2006 we plan to spend a total of $19 billion (excluding capital contribution of minority shareholders in Sakhalin), of which around $15 billion will be invested in upstream projects. This increased investment will be used to grow and mature our hydrocarbons resource base; increase production; build on our strong position in integrated gas and unconventionals and enhance our competitive leadership in the downstream.
More upstream Increased capital investment will enable more upstream oil and gas development. This will include a sustained high exploration activity level and significant projects such as Salym, Bonga, Erha, Kashagan, Sakhalin, Qatargas 4, Pearl GTL and Ormen Lange. Further work will continue to develop unconventional oil projects including the expansion of the Athabasca Oil Sands project and also to prolong profitable production from our existing producing areas.
Included in the planned upstream investment are projects in Gas & Power, predominantly in liquefied natural gas (LNG) such as Sakhalin II, Qatargas 4 and expansions of LNG projects in Nigeria and Australia. These projects are part of the continued development of our integrated gas business through selective investment in opportunities across the value chain. That strength along the whole gas value chain from exploration to marketing will continue to be a key factor in our ability to maintain our global leadership in natural gas. At the same time, we will continue to promote our interests in Gas to Liquids (GTL), coal gasification and new opportunities in carbon management.
Profitable downstream Our downstream strategy focuses on sustaining strong cash delivery while building profitable new positions in higher-growth markets, especially in Asia Pacific, and maintaining and strengthening established positions in attractive markets.
We continue to reshape the portfolio and, in 2005, generated proceeds from divestments from various markets of over $3 billion. We will continue to focus on differentiating our business through the provision of premium fuels such as Optimax and V-Power as well as working to make cleaner fuels such as biofuels more widely and competitively available. Capital investment in downstream in 2006 will be over $4 billion and $1.7 billion of investment will include areas of strong growth potential to deliver competitive returns.
Meeting growing global demand for energy in ways that minimise the effect on the environment is a key challenge for our future business and we are pursuing a range of opportunities to develop alternative energy that will both complement today’s core businesses and establish major new income streams over the long term.
Reshaping the portfolio The target of raising $12-15 billion in divestment proceeds for the period 2004-06 has been achieved one year ahead of schedule. The investment programme is based on our strategy of more upstream and profitable downstream and is intended to position the Group competitively in a future environment.
Operational excellence Improving operational performance across all of our activities is a priority. This means operating in a safe, reliable and cost competitive way and ensuring that we meet high standards of environmental and social performance. Performance is measured through comprehensive internal and external benchmarking to establish a measure of performance relative to competitors. Our aim is to achieve top quartile performance across all of our activities when measured against those competitors.
Effective project delivery has become increasingly important as we take on larger and more complex projects. We have allocated more resources to improving project planning and delivery including setting up a Project Academy. The Project Academy will provide focused training and development on all aspects of project management to those working on projects across our businesses.
Technology and innovation Developing and implementing new technology is important to our business activities and to be competitive in securing new business opportunities.
Technology plays a particularly important role in helping us to access new resources, maximise the recovery of oil and gas from existing resources, develop the potential of unconventional hydrocarbons and alternative energy and find ways of reducing and managing the CO2 emissions related to energy production and use.
Creating the culture and organisation to deliver We have made significant progress in changing our organisation and shaping our culture to deliver our strategy and competitive returns to our shareholders over time. The Unification Transaction of the former parent companies under Royal Dutch Shell in 2005 has provided us with a clearer, simpler, more efficient and accountable form of governance. We continue to work to simplify our organisation and continue to make good progress in standardising processes across our businesses. The integration of the Oil Products and Chemicals businesses into one downstream organisation has been successful in creating a more dynamic, responsive and competitive downstream organisation.
Market overview
Global economic output expanded by around 4.5% in 2005, supported by strong activity in the US and Asia, down from 5.1% in 2004. The two key


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drivers underpinning this growth were US consumer resilience to higher energy prices and interest rates, and generally moderate inflationary pressures in key industrialised economies. Economic expansion is expected to stay broadly on track for 2006, despite prospects of continued higher oil prices, monetary tightening and further easing of investment growth in China.
In the US, business investment, residential sector spending and robust manufacturing output all contributed to high economic growth levels in 2005. For 2006, the expected moderate slow down in personal consumption and easing of the housing market would bring GDP growth largely in line with potential output growth of around 3.4%. In Europe, economic growth in 2005 came from export growth, partially fuelled by a weaker than expected euro, and a moderate increase in personal consumption, leading to an expansion of roughly 1.4%. Assuming moderate monetary tightening, and a more substantial recovery in personal consumption, this could increase to 1.8% in 2006. The Japanese economy is continuing on a path of gradual recovery with both private consumption and non-residential business investments generating substantial momentum during the first half of 2005. Whether such momentum can be maintained over the next year remains uncertain, but the structural factors are in place for the economy to grow at around 2% in 2006. In China, 2005 was characterised by a change in the structure of growth, with the economy relying increasingly on exports, and to a lesser extent on domestic demand. For 2006, domestic demand growth is expected to slow and net exports to make a smaller contribution. GDP growth is expected to reduce moderately to around 8% in 2006.
Risks are slanted to the downside with sustained higher energy prices, uncertainty linked to the US consumer, possible dollar depreciation, unusual trends in the bond markets, and the expected cooling of the housing market. Given the present forward momentum of the global economy, the probability of a severe slowdown in 2006 seems low.
Oil and natural gas prices
Brent crude oil prices averaged $54.55 per barrel in 2005 compared with $38.30 in 2004, while West Texas Intermediate (WTI) averaged $56.60 per barrel compared with $41.50 a year earlier. 2005 saw a steady increase in crude oil prices mainly driven by limited spare OPEC crude oil production capacity, weather related demand and supply effects and geopolitical tensions in the Middle East. WTI reached a new record high of just under $70 per barrel at hurricane Rita’s landfall at the end of August, but prices were subsequently reduced by the International Energy Agency’s decision to release emergency stocks. Brent and WTI crude oil prices ended 2005 at $58 and $61 per barrel respectively.
Based on internal Group analysis, oil prices are expected to remain strong in 2006 against ongoing supply concerns, the projection of low OPEC spare capacity and projected strong world economic growth, in particular the US and China. In the medium to longer term, the Group anticipates prices to moderate from present levels, as both supply and demand are expected to respond to the present higher price environment and stocks and OPEC spare capacity is being rebuilt.
Henry Hub gas prices in the US averaged $8.80 per million British thermal units (Btu) in 2005 compared with $5.87 in 2004. Prices were driven up in the summer by record hot weather boosting electricity demand from gas-fired power stations to run air conditioning. Prices increased further from late
August to the end of the year as a result of extensive supply disruptions caused by Gulf of Mexico hurricanes. Henry Hub closed at $9.45 per million Btu at year end. In 2006 Henry Hub prices are expected to ease with recovery from the weather related supply disruptions in 2005 and an increase in LNG imports, but are expected to remain above historical levels as robust demand continues to challenge the growth in supply.
The drivers of natural gas prices are more regionalised than the relatively global nature of crude oil pricing. While the Henry Hub price is a recognised price benchmark in North America, the Group also produces and sells natural gas in other areas that have significantly different supply, demand, regulatory circumstances and therefore pricing structure. Natural gas prices in continental Europe and Asia Pacific are predominantly indexed to oil prices. In Europe prices have also risen reflecting higher oil prices and strong demand. In the UK prices at the National Balancing Point averaged $6.39 per million Btu versus $4.72 in 2004 and Germany border prices averaged around $5.81 per million Btu versus $4.30 in 2004.
Oil and natural gas prices for investment evaluation
The range of possible future crude oil and natural gas prices to be used in project and portfolio evaluations within the Group are determined after assessment of short, medium and long-term price drivers under different sets of assumptions. Historical analysis, trends and statistical volatility are part of this assessment, as well as analysis of global and regional economic conditions, geopolitics, OPEC actions, cost of future supply and the balance of supply and demand. Sensitivity analyses are used to test the impact of low price drivers, like economic weakness and high investment levels in new production, and high price drivers, like strong economic growth, and low investment levels in new production. Short-term events, such as relatively warm winters or cool summers, weather and (geo)political related supply disruptions and the resulting effects on demand and inventory levels, contribute to price volatility.
During 2005, the Group used prices ranging from around $20 to the mid $30s per barrel to test the economic performance of long term projects at different prices or margin levels. As part of normal business practice, the range of prices used for this purpose continues to be under review and may change.


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Operating and Financial Review – Business and market
Activities, major interests and property
Our various activities are conducted in more than 140 countries and territories. The Group and its equity accounted investments constitute one of the largest independent oil and gas enterprises in the world (by a number of measures, including market capitalisation, operating cash flow and oil and gas production). Oil and gas, by far the largest of our business activities (including the Group’s Exploration & Production, Gas & Power, and Oil Products segments), accounted for approximately 90% of net proceeds in 2005. We market oil products in more countries than any other oil company and have a strong position not only in the major industrialised countries but also in the developing ones. The distinctive Shell pecten (a trademark in use since the early part of the twentieth century) and trademarks in which the word Shell appears support this marketing effort throughout the world. Taken together, the Group and its equity accounted investments also rank among the world’s major chemical companies (by sales); in 2005, the Chemicals segment accounted for almost 10% of the revenue of the Group. In downstream, we intend to further integrate the Oil Products and Chemicals businesses in order to provide opportunities to achieve cost efficiencies from shared services and common manufacturing sites, and from improved use of hydrocarbon resources on integrated sites.
A breakdown of revenue of the Group by industry segment and by geographical region for the years 2004 and 2005 is set out below:
                                 
Revenue by industry segment (including intersegment sales)a
    $ million     %  
 
    2005     2004     2005     2004  
 
Exploration & Production
Third parties
    23,970       18,400                  
Intersegment
    21,704       18,895                  
 
    45,674       37,295       13.0%     12.4%
 
Gas & Power
Third parties
    13,766       9,625                  
Intersegment
    1,858       1,210                  
 
    15,624       10,835       4.5%     3.6%
 
Oil Products
Third parties
    237,210       210,424              
Intersegment
    16,643       11,924              
 
    253,853       222,348       72.3%     73.8%
 
Chemicals
Third parties
    31,018       26,877              
Intersegment
    3,978       2,620              
 
    34,996       29,497       10.0%     9.8%
 
Other industry segments and Corporate
Third parties
    767       1,060              
Intersegment
          10              
 
 
    767       1,070       0.2%     0.4%
 
 
    350,914       301,045       100.0%     100.0%
 
                                 
Revenue by geographical area (excluding intersegment sales)
    $ million     %  
 
    2005     2004     2005     2004  
 
Europe
    122,684       94,206       40.0%     35.4%
Other Eastern Hemisphere
    61,388       50,652       20.0%     19.0%
USA
    101,308       103,429       33.0%     38.8%
Other Western Hemisphere
    21,351       18,099       7.0%     6.8%
 
 
    306,731       266,386       100.0%     100.0%
 
  The figures in this table are different from the table shown on page 51 as this table includes crude oil sales and non-fuel revenue.

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Operating and Financial Review – Risk factors and control

Risk management and internal control
The Group takes a risk-based approach to internal control. Management in the Group is responsible for implementing, operating and monitoring the system of internal control, which is designed to provide reasonable, but not absolute, assurance of achieving business objectives. Related requirements are set out in a Statement on Risk Management, which describes the methodology to be followed to manage risks to objectives. Our control framework is supported by a set of risk-based standards; these establish rules and instructions on enterprise-wide risks that require common treatment across the Group.
We have a variety of processes for obtaining assurance on the adequacy of risk management and internal control.
The Group has a structured process to identify and review risks to the achievement of Group objectives. The Executive Committee and the Audit Committee regularly consider Group-level risks and associated control mechanisms.
A formalised self-appraisal and assurance letter process is in place. As part of this annual process concerns about business integrity or instances of bribery or illegal payments are reported and assurance is provided on compliance with Group standards. The assurance letters are reviewed by the Audit Committee and support representations made to the external auditors.
In addition to these structured self-appraisals, internal audit’s risk-based audits of Group operations provide the Audit Committee with an independent view on the effectiveness of risk and control management systems.
Internal audit operates a business control incident reporting procedure, the results of which are reported to the Executive Committee and to the Audit Committee. Additionally, incidents or compliance issues relating to other standards, for example on Health, Safety and Environmental (HSE) are identified, investigated and their learnings shared. They report significant non-compliance to senior executives and to the relevant function head.
An ethics and compliance programme also supports the risk management and internal control environment. The Chief Compliance Officer leads the programme and champions ethics and legal and regulatory compliance in the Group and reports regularly to the Audit Committee.
These established processes allow the Board, via the Audit Committee, to regularly consider the overall effectiveness of the system of internal control and to perform a full annual review of the system’s effectiveness. Taken together, these processes provide confirmation to the Board that relevant policies are adopted and procedures implemented with respect to risk management and internal control.
In the context of reserves estimation and reporting, the Group has improved controls and procedures following the reserves restatements in 2004 and the related investigation and report to the Audit Committee at the time. We are continuing to make improvements to the controls and procedures relating to the determination of proved reserves, among other things to address those areas where existing procedures or compliance need improvement.
Risk factors
The Group is subject to various risks relating to changing competitive, economic, political, legal, social, industry, business and financial conditions. These risks to Group objectives are described below.
The Group’s operations and earnings are subject to risk related to fluctuating prices for oil, natural gas, oil products and chemicals.
Oil, natural gas, oil products and chemical prices can vary as a result of various factors, including natural disasters, political instability or conflicts, economic conditions or action taken by major oil-exporting countries. Fluctuations in these prices could test our business assumptions, and could have an adverse impact on the Group’s investment decisions, operational performance and financial position.
The Group’s operations and earnings are subject to risks related to project delivery and the ability to replace oil and gas reserves
The Group’s future oil and gas production is to a significant extent dependent upon the successful implementation of large-scale projects. Several uncertainties exist in developing these projects including uncertain geology, effect of frontier conditions, availability of new technology and engineering capacity, availability of skilled resources, project delay, cost overruns, and technical, fiscal, regulatory and other conditions. If these uncertainties materialise they could have an adverse effect on our ability to deliver these projects, which in turn could have an adverse impact on our results of operations and financial position. In addition, future oil and gas production will depend on the Group’s ability to access new reserves through exploration, negotiation with countries and other owners of known reserves and acquisitions. Failures in exploration, and in identifying and consummating transactions to access suitable potential reserves, could adversely impact the Group’s oil and gas production and reserve replacement, which in turn could have an adverse impact on the Group’s results of operations and financial position in the future.
Loss of business reputation may adversely impact results of operations and financial position
The Group has a strong corporate reputation and the Shell brand is one of the world’s leading energy brands. The Shell General Business Principles govern how the Group and its individual companies conduct their affairs. Perceived failure to meet these principles could impact our reputation, which in turn could impact our licence to operate, damage our brand and have an adverse impact on our results of operations and financial position.
The Group’s operations and earnings are subject to security breaches which could disrupt our activities
A number of our staff and assets are exposed to the threats of crime, social unrest, civil war and terrorist attacks. If these threats to our staff and assets materialise they could cause severe disruption to our activities.
The Group’s operations and earnings are subject to strong competition which may affect the Group’s financial position
The Group is subject to competition from within the energy industry and other industries. We face competition in several areas including: securing access to acreage and reserves; developing innovative products and solutions; and developing and applying new technology. Failure to adequately understand or respond to the competitive landscape could have an adverse impact on our financial position.
The Group’s operations and earnings are subject to risks related to operational hazards, natural disasters, pandemics and breaches of technical integrity
The Group operates in more than 140 countries and territories and employs approximately 109,000 people. The scale, diversity and complexity of the Group’s activities place it at the risk of operational hazards, natural disasters, pandemics and breaches of technical integrity, which could result in loss of life, adverse impact on the environment and cause disruption to business activities. Realisation of these risks could have an adverse effect on the results of operations and financial position of the impacted Group company.


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Operating and Financial Review – Risk factors and control

The Group’s operations and earnings are subject to risk of change in legislation and fiscal and regulatory policies
The Group’s operations are subject to risk of change in legislation, taxation and regulation and to expropriation of property. For exploration and production activities, these matters include land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. Changes in legislation, taxation, and regulations and expropriation of property could have an adverse effect on the results of operations and financial position of the impacted Group companies.
The Group’s operations and earnings are subject to risks related to currency fluctuations and exchange controls
The Group is present in more than 140 countries and territories throughout the world and is subject to risks from changes in currency values and exchange controls. Changes in currency values and exchange controls could have an adverse effect on our results of operations and financial position.
The Group’s operations and earnings are subject to resourcing inefficiencies which could impede delivery of the Group strategy
Successful delivery of the Group strategy depends on the availability of skilled employees. Changing global demographics, specifically declining numbers of science graduates in Europe and the US, add to the resourcing challenge and there is a risk of failing to resource critical aspects of the business, which could impede delivery of our strategy.
The Group’s operations and earnings are subject to information technology failures which could result in disruption to business activities and legal penalties
With an increasing focus on standardisation, reliance on global systems, relocation of IT services, and a dynamic regulatory landscape, the risk of the Group’s IT systems failing to deliver products, services and solutions in a compliant, secure and efficient manner, could result in disruption to business activities and legal penalties.
The Group’s operations and earnings are subject to the risk of doing business in politically sensitive or unstable countries
The Group’s operations and earnings throughout the world have been, and may in the future be, affected from time to time to varying degrees by political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of company facilities; price controls; tax increases and other retroactive tax claims; expropriation of property; cancellation of contract rights; and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the Group vary greatly from country to country and are not predictable. Realisation of these risks could have an adverse impact on the results of operations and financial position of the Group companies located in the affected country.
The Group’s operations and earnings are subject to risks related to effective governance of the Group
Successful delivery of the Group strategy requires effective governance. There is a risk of non-compliance with laws and regulations, and the risk of incorrect design and operation of internal controls, which may result in damage to the Group’s reputation, financial results and employees.
The Group’s operations and earnings are subject to risks related to failure of senior management
The Group’s leadership plays a critical role in the delivery of the strategy. There is the risk that leadership may make decisions, or take
actions, whose outcomes may cause damage to the Group’s reputation, results and employees.
The Group’s operations and earnings are subject to risks related to the lack of access to technology and inadequate innovation
Technology and innovation are critical for the successful delivery of the Group’s strategy. There is a risk that the Group does not develop or does not have access to the right technology, which may impede delivery of the strategy with a consequent impact on the Group’s financial results.
The Group’s operations and earnings are subject to risks
related to partners and ventures
There is a risk that the Group could lose the ability to influence and control the operations, behaviours and performance of business activities of other parties with whom the Group is engaged, This could result in the loss of access to hydrocarbons, damage to staff, assets and financial results.
The Group’s operations and earnings are subject to risks
related to economic and financial market conditions
Group companies are subject to differing economic and financial market conditions in countries and regions throughout the world. There are risks to such markets from political or economic instability. Realisation of one of these risks in a country or region could have an adverse impact on the results of operations and financial position of the Group companies operating in that country or region.
The Group’s operations and earnings are subject to risks
related to the estimation of reserves
The estimation of oil and gas reserves involves subjective judgments and determinations based on available geological, technical, contractual and economic information. They are not exact determinations. In addition, these judgments may change based on new information from production or drilling activities or changes in economic factors, as well as from developments such as acquisitions and dispositions, new discoveries and extensions of existing fields and the application of improved recovery techniques. Published reserve estimates can also be subject to correction for errors in the application of published rules and guidance.
The Group’s operations and earnings are subject to risks
related to US government sanctions
The Group currently has investments in Iran and Syria and certain operations in Sudan. US laws and regulations currently identify certain countries, including Iran, Syria and Sudan, as state supporters of terrorism and currently impose economic sanctions against Iran, Syria and Sudan. In the case of these countries, there are prohibitions on certain activities and transactions and penalties for violation of these prohibitions include criminal and civil fines and imprisonment. In addition, in the case of Iran, US legislation includes a limit of $20 million in any 12 month period on certain investments knowingly made in that country and authorises the imposition of sanctions (from a list that includes denial of financings by the US export/import bank, denial of certain export licences, denial of certain government contracts and limits of loans or credits from US financial institutions). However, compliance with this investment limit by European companies is prohibited by Council Regulation No. 2271/96 adopted by the Council of the European Union, so that the statutes conflict with each other in certain respects. The Group has exceeded and expects to exceed in the future the US imposed investment limits in Iran. While the Group seeks to comply with applicable legal requirements in its dealings in these countries, it is possible that the Group or persons employed by the Group could be found to be subject to sanctions or other penalties under this legislation in connection with their activities in these countries. Considering both the


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likelihood of the imposition of sanctions on the Group and the possible effects thereof, the Group does not believe that there will be a material negative effect on its results of operations or financial condition resulting from its investments and activities in these countries.
The Group’s operations and earnings are subject to risks
related to the impact of climate change
Concern about climate change is leading to government action to manage emissions and societal challenge to future oil and gas developments. As such, there is a delivery risk to future projects and a compliance risk for existing facilities which cannot demonstrate adequate emissions management. Realisation of these risks could have an adverse impact on the Group’s operational performance and financial position.
Risk mitigation programmes
Property and liability risks
The Group’s operating companies insure against most major property and liability risks with our captive insurance companies. These companies reinsure part of their major catastrophe risks with a variety of international insurers. The effect of these arrangements is that uninsured losses for any one incident are unlikely to exceed $400 million.
Treasury and trading risks
Group companies, in the normal course of their business, use financial instruments of various kinds for the purposes of managing exposure to currency, commodity price and interest rate movements.
The Group has treasury guidelines applicable to all Group companies and each Group company is required to adopt a treasury policy consistent with these guidelines. These policies cover financing structure, foreign exchange and interest rate risk management, insurance, counterparty risk management and derivative instruments, as well as the treasury control framework. Wherever possible, treasury operations are operated through specialist Group regional organisations without removing from each Group company the responsibility to formulate and implement appropriate treasury policies.
Each Group company measures its foreign currency exposures against the underlying currency of its business (its functional currency), reports foreign exchange gains and losses against its functional currency and has hedging and treasury policies in place which are designed to manage foreign exchange exposure so defined. The functional currency for most upstream companies and for other companies with significant international business is the US dollar, but other companies usually have their local currency as their functional currency.
The financing of most operating companies is structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged.
Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most Group companies is not permitted by their treasury policy.
Specific Group companies have a mandate to operate as traders in crude oil, natural gas, oil products and other energy-related products, using commodity swaps, options and futures as a means of managing price, and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are minimised. The Group measures exposure to the market when trading. Exposure to substantial trading losses is considered limited with the Group’s approach to risk.
Other than in exceptional cases, the use of external derivative instruments is generally confined to specialist oil and gas trading and central treasury organisations which have appropriate skills, experience, supervision and control and reporting systems.
Supplementary information on derivatives and other financial instruments and derivative commodity instruments is provided on pages 164 to 177 of this Report.
Environmental and decommissioning costs
Group companies are present in over 140 countries and territories throughout the world and are subject to a number of different environmental laws, regulations and reporting requirements. It is the responsibility of each Group company to comply with Group HSE standards, including the implementation of an HSE management system.
The costs of prevention, control, abatement or elimination of releases into the air and water, as well as the disposal and handling of waste at operating facilities, are considered to be an ordinary part of business. As such, these amounts are included within operating expenses. An estimate of the order of magnitude of amounts incurred in 2005 for Group companies, based on allocations and managerial judgment, is $1.2 billion (2004: $1.4 billion).
Expenditures of a capital nature to limit or monitor hazardous substances or releases include both remedial measures on existing plants and integral features of new plants. While some environmental expenditures are discrete and readily identifiable, others must be reasonably estimated or allocated based on technical and financial judgments which develop over time. Consistent with this, estimated environmental capital expenditures made by companies with major capital programmes during 2005 were $0.8 billion (2004: $0.6 billion).
It is not possible to predict with certainty the magnitude of the effect of required investments in existing facilities on Group companies’ future earnings, since this will depend among other things on the ability to recover the higher costs from consumers and through fiscal incentives offered by governments. Nevertheless, it is anticipated that over time there will be no material impact on the total of Group companies’ earnings. These risks are comparable to those faced by other companies in similar businesses.
At the end of 2005, the total liabilities being carried for environmental clean-up were $878 million (2004: $817 million). In 2005, there were payments of $190 million and increases in provisions of $243 million. The fair value of the obligations being carried for expenditures on decommissioning and site restoration, including oil and gas platforms, at December 31, 2005 amounted to $5,925 million (2004: $5,397 million).
Pension funds
It is anticipated that the actuarial valuations of the Group’s four main pension funds in aggregate at the end of 2005 will show a surplus of assets over liabilities. These actuarial valuations, rather than the Group Consolidated Financial Statements measures in accordance with IAS 19 (Note 22 to the Consolidated Financial Statements), are the basis on which the fund’s trustees manage the funds and define the required contributions from the member companies.


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Operating and Financial Review – Risk factors and control

Controls and procedures
As of the end of the period covered by this Report, the Chief Executive and Chief Financial Officer conducted an evaluation pursuant to Rule13a-15 promulgated under the Securities Exchange Act of 1934, as amended (‘‘the Exchange Act’’), of the effectiveness of the design and operation of the disclosure controls and procedures of the Group. Based on this evaluation, the Chief Executive and Chief Financial Officer concluded that, as of the end of the period covered by this Report, such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Royal Dutch Shell in reports it files or submits under the Exchange Act is recorded, processed, summarised and reported within the time periods specified in the rules and forms of the SEC.
There has not been any change in the internal controls over financial reporting of the Group or the Dividend Access Trust that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.
In 2005, the Royal Dutch Shell Group Dividend Access Trust was established in connection with the Unification Transaction. See “Supplementary Information – Control of registrant” for a discussion on the operation of, and controls relating to, the Trust.


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Operating and Financial Review   19

 


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SUMMARY OF GROUP RESULTS

 
Contents
  Earnings
 
  Capital investment
 
  Research and development
 
  IFRS


(PETER VOSER PHOTO)
PETER VOSER, CHIEF FINANCIAL OFFICER
The Group’s income reflects higher realised oil and gas prices and strong underlying performance in all segments. Cash flow from operating activities reached $30.1 billion, an increase of 13% from 2004.”
Overview
Our strategy of more upstream and profitable downstream will reinforce our position with the aim to provide investors with a competitive and sustainable shareholder return.
Highlights
  Income for 2005 of $26.3 billion, an increase of 36% from 2004.
 
  Robust financial position returning over $17 billion in the form of dividends and buybacks to our shareholders.
 
  Capital investment of $17.4 billion in the business.
 
  The 2004-2006 divestment programme was completed one year early, delivering $14.3 billion in 2004 and 2005 combined.


Earnings
                 
 
$ million  
    2005     2004  
 
Income from continuing operations
    26,568       19,491  
Income/(loss) from discontinued operations
    (307 )     (234 )
 
Income for the period
    26,261       19,257  
 
 
 
 
 
 
 
 
 
 
 
2005 compared to 2004
Earnings
The Group’s income for 2005 was $26.3 billion, an increase of 36% from 2004. These earnings reflect higher realised oil and gas prices in Exploration & Production and higher liquefied natural gas (LNG) volumes and prices in Gas & Power, as well as increases in refining margins and trading profits in Oil Products and higher margins in Chemicals.
The Group’s financial position is solid, and we returned over $17 billion to our shareholders through dividends, buybacks and the payment to Royal Dutch minority shareholders in 2005.
Exploration & Production earnings were $14,238 million, 45% higher than in 2004. Production in 2005 was 1% lower compared to 2004, excluding the impact of divestments, price effects and hurricanes in the Gulf of Mexico. The decline in production in mature areas was largely offset by the start of production in new fields. Hydrocarbon prices were higher in 2005 compared with 2004 with Brent crude prices averaging $54.55 a barrel compared with $38.30 in 2004 and West Texas Intermediate prices averaging $56.60 a barrel in 2005 compared with $41.50 in 2004. Prices reflected the effect of strong US and Chinese demand, geopolitical uncertainty in a number of producer countries, disruptions to production as a result of the hurricanes in the Gulf of Mexico and lower OPEC spare production capacity. The benefits of higher oil and gas prices were partly offset by lower hydrocarbon production, higher costs and depreciation.
Earnings in Gas & Power were $1,573 million, 13% lower than in 2004. Earnings in 2005 included net charges of $84 million mainly relating to divestments (InterGen). Earnings in 2004 reflected net gains of $444 million also mainly


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related to divestments. Excluding these non-operational items earnings were 21% higher, benefiting from higher LNG sales prices and volumes, and more favourable marketing and trading conditions. LNG volumes were up 5%.
Oil Products earnings increased by 31% compared with 2004 to $9,982 million, benefiting significantly from higher refining margins, improved operational performance and increased trading earnings. These results included divestment gains of $427 million.
Earnings in Chemicals were $991 million, after a loss from discontinued operations of $307 million from an impairment and charges associated with the divestment of the polyolefins joint venture Basell. In 2004, earnings of $1,148 million included a loss from discontinued operations of $199 million from an impairment of the investment in Basell of $353 million. The reduction in earnings from continuing operations relative to 2004 was attributable mainly to higher costs, partly offset by higher margins.
The results discussed above include a loss from discontinued operations of $307 million (2004: $234 million) including impairment charges as described in Note 10 to the Consolidated Financial Statements.
Capital investment
Capital investmenta in 2005 was $17.4 billion compared with $15.3 billion in 2004. Gross proceeds from divestments were $6.6 billion and cash flow from operating activities was $30.1 billion, an increase of 13% from 2004. At the end of 2005, the total debt ratiob was 11.7% compared with 13.8% in 2004. Cash and cash equivalents were $11.7 billion compared with $9.2 billion in 2004.
  Capital investment is capital expenditure, exploration expense and new investments in equity accounted investments.
  The total debt ratio is defined as short-term plus long-term debt as a percentage of capital employed. Capital employed is Group total assets minus total liabilities before deduction of minority interests, plus short-term and long-term debt.
Research and development (R&D)
Group R&D programmes are carried out through a worldwide network of laboratories, with major efforts concentrated in the Netherlands, the UK and the US. Other laboratories are located in Belgium, Canada, France, Germany, Japan and Singapore. Group companies’ R&D expenses (including depreciation) were $588 million in 2005 (2004: $553 million, 2003: $584 million, 2002: $472 million and 2001: $387 million.)
International Financial Reporting Standards (IFRS)
With effect from the first quarter of 2005, the Group has released its quarterly (unaudited) results under IFRS, including comparative data for 2004, together with reconciliations to opening balance at January 1, 2004 and to 2004 data previously published in accordance with accounting principles generally accepted in the United States (US GAAP). The Consolidated Financial Statements have been prepared in accordance with the applicable laws in England and Wales and with IFRS as adopted by the European Union. As applied to Royal Dutch Shell, there are no material differences with IFRS as issued by the International Accounting Standards Board.
See Note 2 to the Consolidated Financial Statements for disclosure on elections made on transition to IFRS.


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EXPLORATION & PRODUCTION
Exploration & Production is one part of the upstream organisation. Together with Gas & Power, upstream explores for and extracts oil and gas and builds and operates the infrastructure necessary to deliver these hydrocarbons to market.
 
Contents
 
  Earnings
 
  Prices
 
  Capital investment and portfolio actions
 
  Exploration
 
  Production
 
  Outlook and strategy
 
  Business and property
 
  Research and development


(PHOTO - MALCOLM BRINDED)
MALCOLM BRINDED, EXECUTIVE DIRECTOR
In 2005, we met our production target and delivered record cash flows. We are well positioned for future growth, building on our strong project portfolio and exploration successes.”
Overview
Our Exploration & Production business searches for and recovers oil and natural gas around the world and is active in 38 countries. Most of these activities are carried out with joint venture partners.
Highlights
>   Achieved production target of 3.5 million boe/d despite hurricanes and production sharing contract (PSC) effects
 
>   Increased earnings by 45% from 2004
 
>   Added 160 thousand square kilometres of exploration acreage including seven new basin entries


Earnings
                 
 
$ million  
 
    2005     2004  
 
Revenue (including intersegment sales)
    45,674       37,295  
Purchases (including change in inventories)
    (1,673 )     (2,669 )
Exploration
    (1,286 )     (1,809 )
Depreciation
    (8,152 )     (7,015 )
Operating expenses
    (9,295 )     (8,467 )
Share of profit of equity accounted investments
    4,112       2,463  
Other income/(expense)
    (272 )     (95 )
Taxation
    (14,870 )     (9,880 )
 
Segment earnings from continuing operations
    14,238       9,823  
Income/(loss) from discontinued operations
           
 
Segment earnings
    14,238       9,823  
 
 
2005 compared to 2004
Earnings
Segment earnings in 2005 were $14,238 million, 45% higher than in 2004 due to the benefits of higher oil and gas prices, which were partly offset by lower hydrocarbon production and higher costs.
The higher costs in 2005 reflected increased market rates and commodity prices, the build up of new production in Nigeria, Malaysia, Russia, the UK and the US, the development of projects and the impact of hurricanes in the US.
Earnings included a net gain of $1,727 million compared with a net charge of $4 million a year ago. The net gain in 2005 comprised divestment gains of $2,027 million, largely from the Netherlands, Norway, the UK and Australia, offset by a loss of $492 million related to the mark-to-market valuation of certain UK gas contracts. The $4 million charge in 2004 comprised divestment gains of $699 million and impairment reversals of $469 million, offset by mark-to-market losses, impairments, elimination of unrealised profit in stock and tax items.
Prices
Oil prices increased significantly in 2005 with Brent and West Texas Intermediate crude prices 43% and 36% higher than in 2004, respectively.
The Group’s overall realised oil and natural gas liquids (NGL) prices were $50.36 a barrel, up from $35.61 in 2004. In the US, realised oil and NGL prices averaged $48.94 a barrel, compared with $36.15 a year earlier and outside the US, realised prices averaged $50.56 a barrel compared with $35.53 in 2004. Realised prices differ from published crude oil prices because the quality, and therefore price, of actual crude oil produced differs from the quoted blends. In general, the Group produces crude oil of a lower quality than the quoted blends. The Group’s overall realised gas prices (excluding equity accounted


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(MAP)

investments) in Exploration & Production averaged $4.77 per thousand standard cubic feet (scf) compared with $3.59 in 2004.
Capital investment and portfolio actions
Capital investment in 2005 of $10.8 billion (excluding the contribution of our minority partners in Sakhalin of $1.3 billion) was 25% higher than 2004 and included exploration expenditure of $2.1 billion. The major centres of investment in 2005 included Russia, Canada, Nigeria and Norway.
Production started from the deepwater Bonga field, which is 120km off the Nigerian coast. The total investment to the startup of the field was $3.6 billion. Bonga field is expected to ramp up production to over 200 thousand barrels of oil per day in 2006. Shell Nigeria Exploration & Production Company has a 55% interest in the field, and operates the field on behalf of the Nigerian National Petroleum Corporation under a PSC.
Significant progress has been made with the Sakhalin project. The offshore concrete structures have been towed into position and by the end of 2005, construction of phase 2 of the project was 60% complete. During the year the Sakhalin Energy Investment Company announced that phase 2 project investment costs were now estimated at $20 billion. This represents very substantial cost overruns compared to earlier estimates. LNG deliveries are expected to start in 2008.
A Memorandum of Understanding was signed with Gazprom outlining the terms for an asset swap under which Gazprom could acquire a 25% interest plus 1 share in the Sakhalin II project and Shell could acquire a 50% interest in the Zapolyarnoye Neocomian field. The difference in value would be made up of a settlement of cash and other assets agreed by both parties.
In April 2005, the participants of the Gorgon LNG and domestic gas project (SDA, Chevron Australia and subsidiaries of ExxonMobil Corporation) announced the integration of their interests in these fields and the associated gas facilities, with Chevron holding 50% and Shell and ExxonMobil 25% each. The project has also now moved into the front-end engineering design (FEED) phase.
The Group’s equity interest was increased by 1.85% to 18.52% in the North Caspian Sea PSC, which includes the Kashagan project in Kazakhstan.
Agreement was reached to further develop the Changbei gas field in China in a joint venture with PetroChina. The development is expected to start delivering 1.5 billion cubic metres of gas a year (53 billion standard cubic feet) in 2007 and, when operating at full capacity, will produce 3 billion cubic metres of gas a year (106 billion standard cubic feet (scf)).
A Memorandum of Understanding was signed with Mubadala Development Company in Abu Dhabi forming a strategic alliance to seek areas of cooperation focusing initially on the Middle East and North Africa.
Extended production licences were secured in western Siberia for the Upper Salym field to 2032 and the West Salym field to 2034. The original licences had been due to expire in 2013. In November 2005, commercial production started at West Salym, the largest of the Salym fields. Total investment in developing the three Salym fields and associated infrastructure will be $1.25 billion.
In the US, the Group’s 17% interest in the Tahiti field, deepwater Gulf of Mexico was exchanged for Total’s 100% interest in four producing natural gas fields in South Texas with current production of 107 million scf per day. The swap was completed in the first quarter of 2006. The Group already operates fields close to those acquired.
First gas was delivered from the Shallow Clastics field in Malaysia which, once fully developed, is expected to produce 430 million scf per day to the E11 hub integrated gas project (Group interest 50%). The E11 hub will be further developed to reach a capacity of two billion scf per day (100%) from various new and existing fields.
We completed the divestment of the Laminaria and Corallina fields in Australia, and Schooner and Ketch in the UK. The sale of our interest in Gasunie’s gas transportation assets in the Netherlands was also completed (Group interest 25%).
Exploration
During 2005, we participated in 93 successful exploratory wells (including appraisal wells). These included discoveries in Australia, Brazil, Brunei, Egypt, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the US. All discoveries will now be appraised in order to establish the extent of the reserves they contain.
The Group made significant additions to its overall acreage position with new exploration licences in Algeria, Australia, Brazil, Canada, Cameroon, the Faroe Islands, Kazakhstan, Libya, Malaysia, Norway, Nigeria, the Republic of Ireland, the UK and the US (Alaska, Onshore and Gulf of Mexico). In 2005, 145 thousand square kilometres of additional exploration acreage was added in the above mentioned countries. Globally, the additional acreage was 160 thousand square kilometres.


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Operating and Financial Review – Exploration & Production

Production
In 2005, total hydrocarbon production (including oil sands) was 3,518 thousand barrels of oil equivalent (boe) per day, in line with our target, despite the impact of hurricanes in the Gulf of Mexico. This was 7% lower than in 2004. Excluding the effects of the hurricanes, the end of a PSC in the Middle East, the impact of higher prices on our entitlements from PSCs, and divestments, production was 1% lower than 2004.
Oil production was also specifically affected by field declines in the US, Norway, the UK, Brazil, Oman and Nigeria, as well as lower production from fields in the UK and Nigeria due to operational shutdowns.
Similarly, natural gas production was impacted by field declines in the US and the UK as well as by lower demand in the Netherlands.
A number of new fields started production during the year, including Bonga in Nigeria, the E11 Shallow Clastics field in Malaysia, West Salym in Russia and Clair in the UK. There was also increased production over the year from the Goldeneye Field in the UK, Jintan in Malaysia and Holstein in the US. These increases, along with production from new fields, added 131 thousand boe per day of production. Both oil and gas field declines were offset by additional production from new fields.
Outlook and strategy
The overall context for the exploration and production industry is characterised by current high oil prices, high activity levels, tightness in the supply of oilfield goods and services, cost escalation and competition for new opportunities and we expect this to continue in 2006. We believe that crude prices in the near future will continue to be influenced by OPEC supply policy, the rate of global economic expansion, particularly in the US and China, and the severity of the northern hemisphere winter. We also believe that growing global energy demand and the increased upstream investment required to meet that demand means that the oil price shift to higher levels will continue for at least the medium term.
Our strategy has four portfolio themes: existing oil; new material oil; integrated gas and unconventional oil. We will pursue an exploration programme to add more new acreage in these areas. We will also invest in organic growth, open up new positions and make selective acquisitions, divestments and asset swaps. Within our new and existing assets, we will focus on operational excellence and project delivery.
To deliver this strategy, capital investment in Exploration & Production will be increased to some $13 billion in 2006 (excluding investment by our minority partners in Sakhalin).
The Group will seek to sustain long-term production from existing assets and invest in new material oil projects such as Kashagan in Kazakhstan and offshore Nigeria.
The Group believes that natural gas demand will continue to grow at a faster rate than oil demand. We will look for further integrated gas positions, extending our leadership position in LNG, with opportunities in GTL production such as Qatar GTL. The Group’s significant presence across the natural gas value chain from exploration to production and markets enables maximisation of the value from integrated gas projects such as Sakhalin.
We also intend to build on our existing strength in unconventional oil technology and the success of the Athabasca Oil Sands Project in Canada, and are looking to expanding our presence in this area.
The Group has a good record of developing and applying technology and we intend to strengthen these capabilities to maintain our competitiveness in
the future. This will include investing in technology to recover and process conventional oil and gas as well as unconventional resources.
Another important focus of our strategy is to reduce costs through improving management of the supply chain and standardising processes globally. We are taking action to ensure improved and consistent project delivery. Having the skilled professionals in place will be vital in delivering our strategy and we are increasing our capacity through redeployment and external recruitment.
The Group’s production forecast for 2006 is expected at the low end of the range of 3.5-3.8 million boe per day. We expect production to grow and reach between 3.8 and 4.0 million boe per day by 2009. The Group’s longer term production aspiration remains some 4.5-5.0 million boe per day by 2014.
Community disturbances remain an ongoing risk to our business in Nigeria. In early 2006 there was an increase in such incidents targeting our facilities and those of other oil companies. This situation will be closely monitored throughout 2006.
Business and property
The Group and its equity accounted investments are involved in the exploration for and production of crude oil and natural gas and operate under a broad range of laws and regulations that change over time. These cover virtually all aspects of exploration and production activities, including matters such as land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. The conditions of the leases, licences and contracts under which oil and gas interests are held vary from country to country. In almost all cases (outside North America), the legal agreements generally are granted by or entered into with a government, government entity or state oil company, and the exploration risk practically always rests with the oil company. In North America, these agreements may also be with private parties who own mineral interests. Of these agreements, the following are most relevant to Shell’s interests:
>   Licences (or concessions) which entitle the holder to explore for hydrocarbons and exploit any commercial discoveries. Under a licence, the holder bears the risk of exploration, development and production activities and of financing these activities. In principle, the licence holder is entitled to the totality of production minus any royalties in kind. The state or state oil company may sometimes enter as a joint venture partner sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the state oil company or agency has an option to purchase a certain share of production. The lease agreement, typical in North America, is generally the same except for treatment of royalties paid in cash.
 
>   PSCs entered into with a state or state oil company oblige the oil company, as contractor, to provide all the financing and bear the risk of exploration, development and production activities in exchange for a share of the production. Usually this share consists of a fixed or variable part, which is reserved for the recovery of contractor’s cost (cost oil); the remainder is split with the state or state oil company on a fixed or volume/revenue-dependent basis. In some cases, the state oil company will participate in the rights and obligations of the contractor and will share in the costs of development and production. Such participation can be across the venture or be on a per field basis.
Group companies’ exploration and production interests, including acreage holdings and statistics on wells drilled and drilling, are shown on pages 30 to 32.


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Proved reserves
Details of Group companies’ and the Group share of equity accounted investments’ estimated net proved reserves are summarised in the following table and are set out under the heading “Supplementary information — Oil and gas (unaudited)” on pages 157 to 163. Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgment. Estimates remain subject to revision. It should be noted that totals are further influenced by acquisition and divestment activities. Proved reserves are shown net of any quantities of crude oil or natural gas that are expected to be taken by others as royalties in kind but do not exclude quantities related to royalties expected to be paid in cash (except in North America and in other situations in which the royalty quantities are owned by others) or those related to fixed margin contracts. Proved reserves include certain quantities of crude oil or natural gas that will be produced under arrangements which involve Group companies in upstream risks and rewards but do not transfer title of the product to those companies.
During 2005, a net total of 676 million boe was added to proved developed and undeveloped reserves by Group companies, consisting of 320 million barrels of oil and natural gas liquids and 2,066 thousand million scf of natural gas (in each case before taking account of production). These net additions include 655 million boe from organic activities (which excludes purchases and sales of minerals in place). The net addition to proved developed and undeveloped reserves consisted of reductions of 170 million boe from revisions and additions of 6 million boe from improved recovery and 819 million boe from extensions and discoveries, and 21 million boe from acquisitions and divestments. There was a net addition of 575 million boe to proved developed reserves and a net addition of 101 million boe to proved undeveloped reserves (before taking account of production).
During the same period, the Group share of proved developed and undeveloped reserve additions by equity accounted investments was 160 million boe, consisting of 157 million barrels of oil and natural gas liquids and 15 thousand million scf of natural gas (in each case before taking account of production). The Group share of net additions to proved developed and undeveloped reserves by equity accounted investments consisted of additions of 158 million boe from revisions, a reduction of 3 million boe from acquisitions and divestments and an increase of 5 million boe from extensions and discoveries. There was a net addition of 280 million boe to proved developed reserves and a net reduction of 120 million boe to proved undeveloped reserves (before taking account of production).
The most significant 2005 additions in proved reserves arose from new sales agreements and modifications to development plans covering gas volumes to be produced from the Sakhalin development in Russia and the recognition of volumes associated with the further development of the Kashagan field in Kazakhstan. Reserves from both these projects are expected to be produced later in the decade. The 2005 revisions reflect changes brought about by our reserves review procedures, including additional well and reservoir performance data.
At December 31, 2005, after taking account of Group companies’ 2005 net additions to proved developed and undeveloped reserves and production, total proved reserves for Group companies was 4% lower than at December 31, 2004. At the same date, after taking into account the Group’s share of equity accounted investments’ net additions and production, the Group’s share of total proved developed and undeveloped reserves of equity accounted investments was 3% lower than at December 31, 2004.
Proved developed and undeveloped reservesa (at December 31)
                         
 
million barrels of oil equivalentb  
 
    2005     2004     2003c  
 
Group companies
    7,761       8,064       11,625  
Group share of equity accounted investments
    3,705       3,818       1,355  
 
a   Petroleum reserves from operations that do not qualify as oil and gas producing activities, such as our Athabasca Oil Sands Project, are not included.
b   For this purpose natural gas has been converted to crude oil equivalent using a factor of 5,800 standard cubic feet per barrel.
c   In connection with the adoption of IFRS as of January 1, 2004, an entity in Europe that had previously been accounted for as a Group company on a proportionate basis, has instead been accounted for as an equity accounted investment. As a result of this change, some 20 million barrels of oil and 13.2 trillion standard cubic feet of gas proved reserves that, as of December 31, 2003, are shown for Group companies are, as of January 1, 2004, shown as part of the Group share of equity accounted investments.

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Operating and Financial Review – Exploration & Production
Proved developed and undeveloped reservesa
                                                         
 
million barrels of oil equivalente  
 
2005  
 
    Eastern Hemisphere     Western Hemisphere        
                    Asia     Middle East                    
    Europe     Africab     Pacificc     Russia, CISd     USA     Other     Total  
 
Proved developed and undeveloped reservesa
                                                       
Group companies
                                                       
At January 1
    1,981       1,582       1,418       1,726       945       412       8,064  
At December 31
    1,848       1,257       1,169       2,213       878       396       7,761  
Group share of equity accounted investments
                                                       
At January 1
    2,175             791       457       395             3,818  
At December 31
    2,078             709       490       428             3,705  
 
Proved developed reservesa
                                                       
Group companies
                                                       
At January 1
    1,302       775       600       504       565       301       4,047  
At December 31
    1,270       667       496       461       507       242       3,643  
Group share of equity accounted investments
                                                       
At January 1
    1,693             464       360       352             2,869  
At December 31
    1,755             412       360       348             2,875  
 
 
                                                       
 
million barrels
 
 
Oil sandsa
                                                       
Group companies
                                                       
At January 1
                                  615       615  
At December 31
                                  746       746  
 
a   Petroleum reserves from operations that do not qualify as oil and gas producing activities, such as our Athabasca Oil Sands Project, are not included in oil and gas reserves.
b   Excludes Egypt.
c   Excludes Sakhalin.
d   Middle East and former Soviet Union (Commonwealth of Independent States), which includes Caspian region, Egypt and Sakhalin.
e   For this purpose natural gas has been converted to crude oil equivalent using a factor of 5,800 standard cubic feet per barrel.

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Capital expenditure and exploration expense of Group companies by geographical areaa
                         
 
$ million  
 
    2005     2004     2003b f  
 
Europeb
    1,991       1,625       2,185  
Africac
    1,937       1,982       1,861  
Asia Pacificd
    1,070       536       579  
Middle East, Russia, CISe
    3,841       3,199       2,155  
USA
    1,486       1,282       1,652  
Other Western Hemisphere
    1,074       588       686  
 
 
    11,399       9,212       9,118  
 
a   Capital expenditure is the cost of acquiring property, plant and equipment, and – following the successful efforts method in accounting for exploration costs – includes exploration drilling costs capitalised pending determination of commercial reserves. In the case of material capital projects, the related interest cost is included until these are substantially complete. The amounts shown above exclude capital expenditure relating to the Athabasca Oil Sands Project.
    Exploration expense is the cost of geological and geophysical surveys and of other exploratory work charged to income as incurred. Exploration expense excludes depreciation and release of currency translation differences.
b   In connection with the adoption of IFRS as of January 1, 2004, an entity in Europe that had previously been accounted for as a Group company on a proportionate basis, has instead been accounted for as an equity accounted investment.
c   Excludes Egypt.
d   Excludes Sakhalin.
e   Middle East and former Soviet Union (Commonwealth of Independent States), which includes Caspian Region, Egypt and Sakhalin.
f   Figures for 2003 are presented on a US GAAP basis.
Average production costs of Group companies by geographical areaa
                         
 
$/barrel of oil equivalentf  
 
    2005     2004     2003b g  
 
Europec
    6.03       4.80       3.24  
Africad
    4.13       3.23       2.69  
Asia Pacifice
    2.89       2.92       2.05  
Middle East, Russia, CISf
    6.39       3.21       3.83  
USA
    6.57       4.19       2.93  
Other Western Hemisphere
    8.45       6.38       5.04  
 
Total Group
    5.54       4.02       3.19  
 
a   Excludes oil sands.
b   Natural gas has been converted to crude oil equivalent using a factor of 5,800 standard cubic feet per barrel.
c   Excludes Egypt.
d   Excludes Sakhalin.
e   Middle East and former Soviet Union (Commonwealth of Independent States), which includes Caspian Region, Egypt and Sakhalin.
f   In connection with the adoption of IFRS as of January 1, 2004, an entity in Europe that had previously been accounted for as a Group company on a proportionate basis, has instead been accounted for as an equity accounted investment.
g   Figures for 2003 are presented on a US GAAP basis.

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Operating and Financial Review – Exploration & Production
Crude oil and natural gas liquids productiona
                         
 
thousand barrels/day  
 
    2005     2004     2003  
 
Europe
                       
UK
    250       275       354  
Norway
    107       129       143  
Denmark
    143       142       141  
Italy
    30       21       19  
Netherlands
    7       8       8  
Germany
    4       5       5  
Others
      b       b     1  
Total Europe
    541       580       671  
 
Other Eastern Hemisphere
                       
Africa
                       
Nigeria
    324       349       314  
Gabon
    36       35       35  
Cameroon
    13       15       16  
Others
                 
Total Africa
    373       399       365  
 
Asia Pacific
                       
Brunei
    95       98       103  
Australia
    53       60       73  
Malaysia
    41       47       51  
China
    20       20       22  
New Zealand
    15       15       19  
Thailand
                14  
Others
    4       3       3  
Total Asia Pacific
    228       243       285  
 
Middle East
                       
Oman
    214       246       269  
Abu Dhabi
    134       133       126  
Syria
    36       35       44  
Russia
    35       32       30  
Egypt
    14       10       11  
Others
    10       15       17  
Total Middle East
    443       471       497  
 
Total Other Eastern Hemisphere
    1,044       1,113       1,147  
 
USA
    333       375       414  
 
Other Western Hemisphere
                       
Canada
    39       40       44  
Venezuela
    14       22       46  
Brazil
    26       43       11  
Others
    1         b       b
Total Other Western Hemisphere
    80       105       101  
 
Grand total
    1,998       2,173       2,333  
 
 
                       
 
million tonnes a year
 
 
Metric equivalent
    100       109       117  
 
a   Of Group companies, plus Group share of equity accounted investments, and including natural gas liquids (Group share of equity accounted investments is assumed to be equivalent to Group interest). Oil sands and royalty purchases are excluded. In those countries where PSCs operate, the figures shown represent the entitlements of the Group companies concerned under those contracts.
b   Less than one thousand barrels daily.

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Natural gas production available for salea
                         
 
million standard cubic feet/day  
 
    2005     2004     2003  
 
Europe
                       
Netherlands
    1,562       1,667       1,527  
UK
    925       984       1,002  
Germany
    428       411       437  
Denmark
    410       383       302  
Norway
    298       260       287  
Others
    36       34       32  
Total Europe
    3,659       3,739       3,587  
 
Other Eastern Hemisphere
                       
Africa
                       
Nigeria
    377       375       352  
Total Africa
    377       375       352  
 
Asia Pacific
                       
Malaysia
    858       739       706  
Brunei
    544       554       549  
Australia
    525       436       403  
New Zealand
    234       258       288  
Others
    164       145       190  
Total Asia Pacific
    2,325       2,132       2,136  
 
Middle East
                       
Oman
          471       468  
Egypt
    238       211       228  
Syria
    15       9       11  
Total Middle East
    253       691       707  
 
Total Other Eastern Hemisphere
    2,955       3,198       3,195  
 
USA
    1,150       1,332       1,527  
 
Other Western Hemisphere
                       
Canada
    413       449       466  
Others
    86       90       74  
Total Other Western Hemisphere
    499       539       540  
 
Grand total
    8,263       8,808       8,849  
 
a   By country of origin from gas produced by Group and equity accounted investments (Group share). In those countries where PSCs operate, the figures shown represent the entitlements of the Group companies concerned under those contracts.

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Operating and Financial Review – Exploration & Production
Location of activitiesa b c (at December 31, 2005)
                     
                     
            Development and/        
      Exploration     or production     Shell Operatord  
                     
Europe
                   
                     
Austria
               
                     
Denmark
               
                     
Germany
               
                     
Ireland
             
                     
Italy
               
                     
The Netherlands
             
                     
Norway
             
                     
UK
             
                     
Africa
                   
                     
Algeria
               
                     
Angola
                 
                     
Cameroon
             
                     
Gabon
             
                     
Libya
               
                     
Morocco
               
                     
Nigeria
             
                     
Asia Pacific
                   
                     
Australia
               
                     
Brunei
             
                     
China
               
                     
Malaysia
             
                     
New Zealand
               
                     
Pakistan
             
                     
Philippines
             
                     
Middle East, Russia, CIS
                   
                     
UAE (Abu Dhabi)
               
                     
Azerbaijan
                 
                     
Egypt
             
                     
Iran
               
                     
Kazakhstan
             
                     
Oman
             
                     
Qatar
               
                     
Russia
             
                     
Saudi Arabia
               
                     
Syria
               
                     
USA
                   
                     
USA
             
                     
Other Western Hemisphere
                   
                     
Argentina
                 
                     
Brazil
             
                     
Canada
             
                     
Venezuela
               
                     
a   Including equity accounted investments.
b   Where an equity accounted investment has properties outside its base country, those properties are not shown in this table.
c   This table shows different geographical categories compared to the map on page 23.
d   In several countries where “Shell Operator” is indicated, a Group company is operator of some but not all exploration and/or production ventures.

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Oil and gas acreage at year enda b c d (at December 31)
                                                                 
 
thousand acres     thousand acres  
                    2005                     2004  
    Developed     Undeveloped     Developed     Undeveloped  
    Gross     Net     Gross     Net                   Gross     Net     Gross     Net  
 
Europe
    9,852       3,110       14,507       4,415       8,449       3,200       14,024       4,904  
Africae
    7,175       2,382       27,206       14,806       6,597       2,058       15,584       8,398  
Asia Pacificf
    7,777       3,589       129,149       36,279       7,094       3,283       106,326       29,388  
Middle East, Russia, CISg
    32,064       10,284       64,956       29,995       34,753       11,152       63,469       29,882  
USA
    1,250       563       4,359       3,069       961       531       3,998       2,864  
Americas, Other
    872       551       30,097       20,314       855       529       27,236       20,421  
 
 
    58,990       20,479       270,274       108,878       58,709       20,753       230,637       95,857  
 
                                                                 
 
thousand acres  
                                                    2003  
                                    Developed     Undeveloped  
                                    Gross     Net     Gross     Net  
 
Europe
                                    10,172       3,204       15,977       5,307  
Africae
                                    6,956       2,193       18,595       10,253  
Asia Pacificf
                                    3,793       1,638       113,978       33,357  
Middle East, Russia, CISg
                                    34,729       11,062       65,106       30,079  
USA
                                    1,512       694       4,040       2,802  
Americas, Other
                                    853       529       28,094       19,835  
 
 
                                    58,015       19,320       245,790       101,633  
 
Number of productive wellsa b (at December 31)
                                                                 
 
                    2005                     2004  
    Oil     Gas     Oil     Gas  
    Gross     Net     Gross     Net                   Gross     Net     Gross     Net  
 
Europe
    1,762       491       1,355       448       1,786       478       1,445       491  
Africae
    1,234       413       36       12       1,215       396       36       12  
Asia Pacificf
    1,080       483       304       121       1,191       551       237       90  
Middle East, Russia, CISg
    4,128       1,279       38       38       3,795       1,198       40       38  
USA
    16,159       8,270       873       636       16,131       8,163       719       520  
Americas, Other
    122       117       351       284       117       112       329       270  
 
 
    24,485       11,053       2,957       1,539       24,235       10,898       2,806       1,421  
 
                                                                 
 
                                                    2003  
                                    Oil     Gas  
                                    Gross     Net     Gross     Net  
 
Europe
                                    1,799       468       1,432       485  
Africae
                                    1,380       414       43       14  
Asia Pacificf
                                    1,313       726       247       99  
Middle East, Russia, CISg
                                    3,673       1,145       203       129  
USA
                                    15,891       7,998       697       486  
Americas, Other
                                    116       111       322       265  
 
 
                                    24,172       10,862       2,944       1,478  
 
a   Including equity accounted investments.
b   The term “gross” relates to the total activity in which Group and equity accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Group companies plus the Group share of equity accounted investments’ fractional interests.
c   One thousand acres equals approximately four square kilometres.
d   Excludes oil sands.
e   Excludes Egypt.
f   Excludes Sakhalin.
g   Middle East and former Soviet Union (Commonwealth of Independent States), which includes Caspian region, Egypt and Sakhalin.

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Operating and Financial Review – Exploration & Production
Number of net productive wells and dry holes drilleda
                                                 
 
    2005     2004     2003  
    Productive     Dry     Productive     Dry     Productive     Dry  
 
Exploratory
                                               
Europe
    5       3       6       2       6       3  
Africab
    9       1       3       1       5        
Asia Pacificc
    6       3       5       5       5       7  
Middle East, Russia, CISd
    5       3       7       2       7       4  
USA
    9       3       2       3       10        
Americas, Other
    3       4       1       2       2       5  
 
 
    37       17       24       15       35       19  
 
Development
                                               
Europe
    25             27             19       1  
Africab
    13             11             20       1  
Asia Pacificc
    21       1       22       1       41       2  
Middle East, Russia, CISd
    173       4       150       6       149       4  
USA
    446             504       1       465        
Americas, Other
    26             10       1       8        
 
 
    704       5       724       9       702       8  
 
a   Including equity accounted investments. The term “net” relates to the sum of the fractional interests (on a well basis) owned by Group companies plus the Group share of equity accounted investments.
b   Excludes Egypt.
c   Excludes Sakhalin.
d   Middle East and former Soviet Union (Commonwealth of Independent States), which includes Caspian region, Egypt and Sakhalin.

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Major oil and gas interests
Major oil and gas interests as well as recent developments in countries where Group or equity accounted investments have exploration and production interests are summarised, by country, on the following pages. Certain aspects of the legislation, regulations or agreements affecting the activities of the significant companies are also included.
Europe
Austria Group companies’ hold 25% equity in Rohol-Aufsuchungs AG (RAG), an integrated upstream and downstream business headquartered in Vienna. RAG holds concessions in Austria and Germany (Bavaria) and produces and sells gas (predominantly), and some oil, primarily for the domestic Austrian market. RAG also owns and operates gas storage facilities in Austria.
Denmark A Group company has a 46% non-operator interest in a producing concession until 2012. The interest will be reduced to 36.8% thereafter, when the state will take a 20% interest in the concession. The licence was extended until 2042 in late 2003. Further, it holds interests in two (non-operated) exploration licences. Three other licences were relinquished in 2004. Shell has non-operated exploration interests in three licences in the Faroes (crown territory of Denmark with autonomous status), Shell EP Offshore Ventures Ltd (Licence 006, Group equity interest of 12.5%) and Shell U.K. Ltd (Licence 007, Group equity interest of 25% and Licence 009, Group equity interest of 20%). During 2005 a number of commercial deals have been successfully concluded in order to rationalise the acreage position, resulting in two wells planned for drilling in 2006 and 2007 on material prospects. There are no development assets in the Faroes.
Germany A Group company holds a 50% interest in the Brigitta & Elwerath Betriebsfuehrungsgesellschaft (BEB) joint venture (50:50). Exploration and production licences are awarded under the terms of Germany’s Federal Mining Law. Most licences are awarded to more than one company and are governed by joint ventures. Operatorship is normally awarded to the party holding the highest equity share. BEB is involved in some 30 joint ventures with varying interests and is the main operator in Germany. Further German interests include the 43% Group share in the outside-operated Deutsche Offshore Konsortium. Royalties are determined by the individual German states on a yearly basis and are different for the production of natural gas and oil. Royalty incentives are given for the development of tight gas reservoirs. Activities include production activities, gas storage, the operation of two large sour-gas treatment plants, numerous compression stations and some 3,000km of pipelines.
Ireland Shell E&P Ireland Ltd. (Group interest 100%) is the operator for the Corrib Gas Project (Group equity 45%), currently under development, and has further exploration interests in five licences in total offshore Ireland, of which four are operated and one is non-operated, two of these licences in the Rockall Basin were awarded in early 2005. In October 2004, planning permission was granted for a proposed gas terminal at Bellanboy Bridge, County Mayo to bring Corrib gas ashore.
Italy Shell Italia E&P S.p.A. (Group interest 100%) has assets onshore in southern Italy and various interests in producing assets (Monte Alpi, Monte Enoc and Cerro Falcone, which are operated by Eni on behalf of the JV partners), development projects (including Tempa Rossa, managed by Total) and nearby exploration prospects.
The Netherlands The Group share of natural gas and crude oil in the Netherlands is produced by Nederlandse Aardolie Maatschappij B.V. (NAM, Group interest 50%) in a 50:50 joint venture. An important part of NAM’s gas production is from its onshore Groningen gas field in which the
Dutch state has a 40% financial interest (through the wholly state-owned company EBN). NAM’s production of oil and gas is covered by production licences. Government participation in development and production does not exist in some older onshore production licences and one offshore production licence, but is otherwise 40% or 50%, depending mainly on the legislation applicable when the licences were granted.
Norway A/S Norske Shell holds an interest in a number of production licences, seven of which encompass producing oil and gas fields. A/S Norske Shell also holds an interest in several potential development assets, including Ormen Lange and Skarv. The development decision for the Ormen Lange gas development discovered in 1997 was taken by the joint venture in 2003, involving an onshore plant/terminal and pipelines for transportation to the markets in the UK and continental Europe. During 2004, Shell divested its interest in the producing Murchinson Field (Norwegian sector). Shell International Pipelines Inc. (Group interest 100%) holds interests in gas transportation and processing systems, pipelines and terminals. The licence period for these assets expires in the period from 2010 to 2020.
UK Shell U.K. Limited (Group interest 100%) is one of the largest integrated oil and gas exploration and production companies operating in the UK (by production volumes). Shell operates most of its interests in the UK Continental Shelf on behalf of a 50:50 joint venture. Most of Shell UK’s production comes from the North Sea. Natural gas comes from associated gas in mixed oil and gas fields in the northern sector of the North Sea and gas fields in the southern sector of the North Sea. Crude oil comes from the central and northern fields, which include Brent, Nelson and Cormorant. Fallow exploration acreage has become a significant issue for Shell throughout the UK sector of the North Sea. Exploration blocks that are not subject to significant investment, e.g. drilling of exploration and appraisal wells after three years, are deemed ‘‘fallow acreage’’. The situation is similar with fallow discoveries that for various reasons have not been developed to date. The company is currently investigating ways of progressing undeveloped discoveries in light of the high oil price regime and capacity availability in existing infrastructure. On the Atlantic Margin, Shell UK also has interests as a non-operating partner principally in the West of Shetlands fields (Clair/Schiehallion/Loyal). Licences issued before August 20, 1976 were valid for an initial period of six years. Following successful exploration, these were extended for a further 40 years in respect of half the original licence area. The exploration activity on the Atlantic Margin is in growth mode for Shell and, in the most recent licence rounds, Shell has been awarded acreage as operator and non-operator. Significant investment in the form of drilling and seismic acquisition is anticipated. Effective January 1, 2006, the corporate tax rate increased from 40% to 50%. Production under older licences is also subject to Petroleum Revenue Tax. The overall effective tax rate for the Group changes annually, falling over time as the relative share of production from older licences declines.
Africa
Algeria Shell Erdgas Beteiligungsgesellschaft mbH (SEB, Group interest 100%) acquired interests in two onshore permits, in the areas of Reggane Djebel Hirane and Zerafa, pursuant to contracts signed in April 2005. The contracts were gazetted and became effective September 2005, both licences are operated by the company. SEB is in the process of assigning its interest in each contract to two wholly-owned subsidiaries namely Shell Algeria Reggane GmbH and Shell Algeria Zerafa GmbH.
In February 2006, Shell and Sonatrach, the Algerian national energy company, signed a Memorandum of Understanding covering multiple


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Operating and Financial Review – Exploration & Production

business initiatives, both in Algeria and internationally. Areas of cooperation will include investigating the commercial and technical feasibility for joint developments in Algeria, including upstream development projects, LNG, products and marketing, and investigating possible asset swap transactions for upstream exploration, development and appraisal projects.
Angola Shell Deepwater Development A/S has a non-operating interest of 15% in Block 34 (Sonangol operator).
Cameroon Pecten Cameroon Company LLC (PCC, Group interest 80%) has a 40% working interest in a PCC operated property (Mokoko-Abana) and a 24.5% interest in a non-operated property (Rio del Rey). PCC has a 50% interest in exploration licences (PH60, PH59, Dissoni), which can reduce to 25% (PH60, PH59) or to 37.5% (Dissoni) depending on state participation after a commercial discovery.
Gabon Shell Gabon (Group interest 75%) has interests in eight onshore concessions/exploitation permits, five of which (Rabi/Kounga, Gamba/Ivinga, Toucan, Totou and Bende) are operated by the company. The Rabi/Kounga concession was transferred to a PSC with effect from January 1, 2003; it expires in 2022 and includes an option for a five year extension. The Gamba/Ivinga concession expires in 2042, the Toucan concession in 2023 and the Totou/Bende concession in 2020. The other three concessions (Avocette, Coucal and Atora) expire between 2010 and 2018 and are operated by Total Gabon. Shell Gabon’s portfolio also includes two onshore exploration permits (Awoun and Ozigo). The onshore Bilinga exploration permit was relinquished by Shell Gabon in 2005. Two Group companies, Shell Offshore North Gabon B.V. (SONG) and Shell Offshore Gabon B.V. (SOSG), were established to hold permits in ultra-deepwater areas in the north and south respectively. SOSG has relinquished its offshore licences and is in the process of being liquidated. SONG holds two licences (Ighengue and Igoumou).
Libya A Group company signed an agreement with the National Oil Corporation of the Great Socialist People’s Libyan Arab Jamahiraya (NOC) in May 2005 to conduct exploration activities in a number of onshore blocks in the Sirte Basin and to carry out improvements (rejuvenation) to the existing NOC Marsa El Brega LNG plant.
Morocco Two Group companies, Shell Exploration et Production du Maroc GmbH (SEPM), and Shell Deepwater Exploration Morocco GmbH (SDEM) relinquished interests in two exploration licences offshore Morocco at the end of the five year licence period on January 21, 2006.
Nigeria The Shell Petroleum Development Company of Nigeria Ltd. (SPDC, Group interest 100%) is the operator of a joint venture (Group interest 30%) with the Nigerian National Petroleum Corporation and two other companies. The venture’s onshore oil and gas mining leases expire in 2019 and offshore leases expire in 2008. SPDC voluntarily relinquished nine leases to the Nigerian Government as of July 2005.
Shell Nigeria Exploration & Production Company (SNEPCO, Group interest 100%) operates under a PSC (30 year term) with a 55% working interest in deepwater block OPL-212 and OPL-219. SNEPCO also has a 49.81% interest in deepwater blocks OML-125 and OPL-211 (Agip operated), a 43.75% interest in deepwater block OPL-209 (ExxonMobil operated), and 40% equity interest in shallow water block OPL 238 (co-venturer Sunlink with 60% equity).
Shell Nigeria Offshore Prospecting Limited (SNP, Group interest 100%) has a 35% working interest in block OPL250 (PSC, 50% Chevron operated, 8.625% Petrobras, 6.375% ConocoPhilips).
Shell Nigeria Ultra Deep Limited (SNUD, Group interest 100%) has a 100% interest in block OPL245 (PSC).
Shell Nigeria Upstream Ventures (SNUV, Group Interest 100%) has a 40% equity interest in OML 122 (co-venturer Peak Petroleum with 60%).
Shell Nigeria Exploration Properties Alpha Ltd. (SNEPA, Group interest 100%) operates under a 100% working interest in deepwater block OPL322 (40% Shell equity, 50% PSC with NNPC, 10% PSC with an indigenous Nigerian company Dajo Oil).
Shell Nigeria Exploration Properties Beta Ltd. (SNEPB, Group interest 100%) has a 27% working interest in deepwater block OPL318 (PSC, ConocoPhillips operated with 35%, ChevronTexaco with 18%, NPDC with 20%).
Somalia Shell Somalia B.V. holds a 50% working interest and operatorship of Blocks M3-M7, where operations are currently suspended due to force majeure conditions.
Asia Pacific
Australia Shell Development Australia (SDA, Group interest 100%) has interests in a number of offshore production and exploration licences in the Carnarvon basin, namely the North West Shelf (NWS), Greater Gorgon fields, Browse basin and Timor Sea area. The interests are held directly and/or indirectly through a shareholding (34%) in Woodside Petroleum Ltd. (Woodside), which is the operator on behalf of six joint venture participants of the NWS gas/condensate and oil fields. Gas and condensate are produced from the North Rankin and Goodwyn facilities to an onshore treatment and LNG facility on the Burrup peninsula. Together with Woodside, Shell also has interests in the significant liquids-rich Sunrise gas field in the Timor Sea, as well as the Browse basin. SDA is also a non-operating participant in the Gorgon joint venture (operator Chevron Australia Pty Ltd) covering a number of gas fields in the Greater Gorgon area of the Carnarvon basin, situated west of Barrow Island. In April 2005, the participants of the Gorgon LNG and domestic gas project (SDA, Chevron Australia and subsidiaries of ExxonMobil Corporation) announced the integration of their interests in these fields and the associated gas facilities, with Chevron holding 50% and Shell and ExxonMobil 25% each.
Brunei A Group company is a 50% shareholder in Brunei Shell Petroleum Company Sendirian Berhad (the other 50% shareholder being the Brunei government). The company, which has long term oil and gas concession rights both onshore and offshore Brunei, sells most of its natural gas production to Brunei LNG Sendirian Berhad (Group interest 25%). A Group company has a 35% non-operating share in the Block B Joint Venture (BBJV) concession where gas is produced from the Maharaja Lela Field, and a 53% operating interest in exploration Block A.
China Group companies hold a 30% interest in the offshore South China Sea Xijiang oil producing fields. Shell holds 100% of the contractor’s interest in the Changbei Petroleum Contract with China National Petroleum Corporation (CNPC), to develop the Changbei gas field in the Ordos Basin, onshore China. Changbei is expected to start delivering 1.5 billion cubic metres per annum of natural gas to markets in Beijing, Shandong, Hebei and Tianjin by 2007, rising to 3 billion cubic metres per annum by 2008.
Malaysia Group companies’ have 17 PSCs with the state oil company Petronas. In many of these contracts Petronas Carigali Sendirian Berhad (PCSB), a 100% Petronas subsidiary, is the sole joint venture partner. Shell is the operator, with a 50% working interest, of eight non-associated producing gas fields and the operator, with a 37.5% working interest, of a further two non-associated producing gas fields. Over 92% of the gas is supplied to Malaysian LNG Sendirian Berhad (Group interest 15% in MLNG Dua & Tiga plants) for deliveries of LNG to customers mainly in Japan, Korea and Taiwan. Regarding oil production and exploration, Shell has a 40% equity


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stake in the non-operated Baram Delta PSC and exploration interests in the deepwater SK-E block and inboard blocks SK-307 and SK-308. Shell operates five producing fields in Sabah waters of which Kinabalu in the SB1 PSC (80% equity share) is the most significant current producer. Group companies also have PSCs for exploration and production in Blocks SB-301, SB-G, SB-J, ND-6 and ND-7 offshore Sabah; material oil discoveries have been announced in Blocks G and J. Shell also holds a 50% interest in Blocks PM-301 and PM-302, which are operated by a joint operating company with PCSB; five gas discoveries have been made in the last two years in PM-301.
New Zealand Group companies’ have an 83.75% interest in the production licence for the offshore Maui gas field. In addition, Group companies’ have a 50% interest in the onshore Kapuni gas field and a 48% interest in the undeveloped Pohokura gas field. The gas produced is sold domestically, mainly under long term contracts. Group companies’ also have interests in other exploration licence areas in the Taranaki Basin. All of these interests are operated by Shell Todd Oil Services Ltd, a service company (Group interest 50%).
Pakistan A Group company (Group interest 100%) holds a 28% non-operated interest in the Bhit and Badhra development and production leases. These leases were excised from the Kirthar exploration licence, which was relinquished in 2003. Another Group company (Group interest 100%) holds 25% of an operated deepwater licence offshore of Pakistan, which was acquired in April 1998.
Philippines Group companies’ hold a 45% interest in the deepwater PSC for block SC-38. The SC-38 interest includes an exploration area and a production licence, the latter relating to the Malampaya and San Martin fields. Current production is gas and condensate from the Malampaya field via a platform located offshore north west of the island of Palawan. Condensate is exported via tankers at the platform and gas is transported via a 504km pipeline to an onshore gas plant in Batangas, on the main island of Luzon. Gas is sold to three combined-cycle gas turbine power plants. Shell also holds a 55% interest (and is operator) in SC-60, converted from the geophysical survey and exploration contract 99 or GSEC-99, covering a relatively unexplored area offshore north east Palawan.
Middle East, Russia and CIS (including Sakhalin, Egypt and Caspian region)
Abu Dhabi Crude oil and natural gas liquids are produced by the Abu Dhabi Company for Onshore Oil Operations in which a Group company’s concessionary share is 9.5% (licence expiry in 2014), arising from a 23.75% Group interest in the Abu Dhabi Petroleum Company, which in turn holds a 40% interest in the concession granted by the Abu Dhabi government. A Group company has a 15% interest in Abu Dhabi Gas Industries Limited, which extracts propane and butane, as well as heavier liquid hydrocarbons, for export sales from wet associated natural gas produced by Abu Dhabi Petroleum Company.
Azerbaijan A Group company holds a 25% interest in the non-operated Inam licence, offshore of Azerbaijan.
Egypt Shell Egypt (Group interest 100%) participates as operator in five exploration concessions and in four development leases. All concessions and leases are granted on the basis of PSCs. Included in Shell Egypt’s portfolio is an 84% interest in the north-eastern Mediterranean deepwater concession. Shell Egypt has a 50% interest in Badr Petroleum Company (Bapetco), a joint venture company with the Egyptian General Petroleum Corporation (the Egyptian national oil company). Bapetco executes the operations for those producing fields where Shell has formal operatorship.
Iran A Group company (Group interest 100%) has a 70% interest in an agreement with the National Iranian Oil Company (NIOC), as contractor, to develop the Soroosh and Nowrooz fields in the northern Gulf. This Group company handed over operatorship to NIOC following production startup in 2005. Under the agreement, the contractor is responsible for the execution of the development plan, the development operations and the provision of technical assistance and services following completion of the development phase. The term of the agreement expires when all petroleum costs and the remuneration fee have been recovered, which period shall not exceed seven years from the date of first production, unless extended by mutual agreement.
Kazakhstan A Group company (Group interest 100%) holds an 18.52% interest in the North Caspian PSC (increased from 16.67%) in respect of some 6,000 square kilometres offshore in the Kazakhstan sector of the Caspian Sea. Development of the giant Kashagan field is ongoing. Oil and gas discoveries at Kalamkas, Aktote, Karain and Kashagan SW are being further appraised. Shell holds a 50% interest in the Arman joint venture, a small onshore producing company.
In December 2005, a Group company (Group interest 100%) entered into agreements with Oman Oil Company and the Republic of Kazakhstan to take a 55% interest in a project to explore two offshore blocks in the Caspian Sea.
Oman A Group company has a 34% interest in Petroleum Development Oman (PDO), which is the operator of an oil concession expiring in 2044, or at such a later date as the government and the 40% concession-owning company Private Oil Holdings Oman Ltd. (in which a Group company has an 85% shareholding), may agree.
In July 2005 a Group company entered into a production sharing agreement (17% interest) to develop the Mukhaizna oil field.
Qatar In July 2004, Qatar Shell GTL (Group interest 100%) signed a development and production sharing agreement with the State of Qatar for the construction of a 140,000 barrels per day GTL plant in Ras Laffan, Qatar. Following the successful testing of two appraisal wells in 2004, the project is currently in the final stages of design and cost estimating. Final investment decision could be as early as 2006.
In February 2005, the Group and Qatar Petroleum (QP) signed a heads of agreement for the development of a large-scale LNG project (Qatargas 4, Group interest 30%). The project comprises the integrated development of upstream gas production facilities to produce 1.4 billion cubic feet per day (bcf/d) of natural gas, including an average of approximately 70,000 barrels per day of associated NGL from Qatar’s North field, a single LNG train yielding approximately 7.8mtpa of LNG for a period of 25 years and shipping of the LNG to the intended markets, primarily North America. The final investment decision was taken in December 2005 and at the same time the engineering, procurement and construction (EPC) contract for the project onshore facilities was awarded.
Russia Shell Sakhalin Holdings, B.V. (Group interest 100%) holds a 55% interest in Sakhalin Energy Investment Company Ltd. (SEIC). SEIC continues seasonal oil production from the Molikpaq facility on the Piltun-Astokhskoye field, offshore Sakhalin Island. Full development of the Piltun Satokhskoye oil field and Lunskoye gas field, including a LNG plant in the south of Sakhalin Island, continued during 2005. Salym Petroleum Development (Group interest 50%) commissioned the main facilities of the Salym fields in western Siberia in November 2005.


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Shell Caspian B.V. holds a 5.425% interest in the Caspian Pipeline Company, which manages a pipeline running from Western Kazakhstan to the Black Sea.
Saudi Arabia The Group is conducting an exploration programme in the Rub Al-Khali area in the south of the Kingdom. The Group leads the project and has a 40% interest, with Total and Saudi Aramco holding 30% each.
Syria A registered branch of Syria Shell Petroleum Development B.V. (Group interest 100%) holds undivided participating interests ranging from 62.5% to 66.67% in three PSCs that expire between 2008 and 2014 (Deir Ez Zor, Fourth Annex and Ash Sham). In addition, Group companies are parties to a gas utilisation agreement for the collection, processing and sharing of natural gas from designated fields for use in Syrian power generation and other industrial plants. Operations under these contracts are performed by Al Furat Petroleum Company, a Syrian joint stock company in which Syria Shell Petroleum Development B.V. holds a 31.25% interest.
Ukraine In December 2005 a Group company signed a cooperation agreement with national joint stock company Naftogaz Ukrainy (NAK) covering licences, agreed work programme levels and the main terms of joint activities.
Under the terms of the cooperation agreement, Shell will farm into 10 NAK Naftogaz Ukrainy held licences in the Dniepr-Donets Basin with access to deep potential reservoirs, which partly lie beneath large-scale shallower fields already in production. Shell will acquire a 50% interest in a joint activity agreement covering these licences (excluding the producing fields) in exchange for a commitment that comprises acquisition of seismic data and drilling of deep exploration wells over a three year time frame. It involves a total initial investment by Shell of around $100 million over this period. Work is scheduled to start during 2006.
USA
Shell Exploration & Production Company (SEPCo, Group interest 100%) produces crude oil, natural gas and NGL principally in the Gulf of Mexico, California, Texas, and Wyoming. The majority of SEPCo’s oil and gas production interests are acquired under leases granted by the owner of the minerals underlying relevant acreage (including many leases for federal onshore and offshore tracts). Such leases are currently running on an initial fixed term that is automatically extended by the establishment of production for so long as production continues, subject to compliance with the terms of the lease (including, in the case of federal leases, extensive regulations imposed by federal law). SEPCo has acquired interests in acreage located in Alaska, North Dakota, and Washington, where current and future exploration activities are being pursued. SEPCo acquired additional interests in the Gulf of Mexico and Texas. In Texas, the acreage is located in the Fort Worth Basin and is additionally producing natural gas interests in the Pinedale field in the Rocky Mountain region under two separate transactions.
Affiliates of SEPCo hold a 51.8% interest in a US-based exploration and production limited liability company, Aera Energy LLC, holding exploration and production assets in California. This venture is accounted for using the equity method of accounting.
Other Western Hemisphere
Argentina Shell Compania Argentina de Petroleo (CAPSA, Group interest 100%) holds a 22.5% interest in the Acambuco concession.
Brazil Shell Brasil Ltda (Group interest 100%) produces oil and gas in the Bijupirá and Salema fields located in the Campos Basin, offshore Rio de Janeiro, where the company is the operator with an 80% share. Shell Brasil
also has interests in 14 offshore exploration blocks – six operated (BC-10, BS-4, BM-S-31, ES-M-438, BM-S-43 and S-M-518) and eight non-operated (BM-S-8, BM-C-25, BM-C-31, ES-M-411, ES-M-436, ES-M-437, BM-ES-23 and BM-S-45). Group interest in these blocks ranges from 30% to100%. Through Pecten Victoria Inc (Group Interest 100%), the Group retain an interest in the producing Merluza gas field operated by Petrobras and located in the offshore Santos Basin.
Canada Shell Canada Limited (Group interest 78%) is a producer of natural gas, NGL, bitumen, synthetic crude and sulphur. 77% of Shell Canada’s gas production comes from the Foothills region of Alberta. In addition, Shell Canada holds a 31% interest in the Sable gas fields offshore of Nova Scotia and a 31% interest in the onshore gas plant. Shell Canada expanded its land inventory with varying interest percentages in onshore exploration prospects onshore in northeastern British Columbia and offshore in the Orphan Basin located in Newfoundland’s deepwater region. It is also the largest landholder in the West Coast offshore which is currently under a governmental moratorium. Exploration rights in Canada are generally granted for terms ranging from one to nine years. Subject to certain conditions, exploration rights can be converted to production leases, which may be extended as long as there is commercial production pursuant to the lease.
Shell Canada produces heavy oil through thermal recovery in the Peace River area (Shell Canada’s interest is 100%) and mining operations in the Athabasca oil sands area of Northern Alberta. Shell Canada holds a 60% interest in the Athabasca Oil Sands Project (AOSP) under a joint venture agreement to develop and produce synthetic crude from Shell’s Athabasca oil sands leases. The AOSP comprises the Muskeg River mine, located 75km north of Fort McMurray, Alberta, and the Scotford upgrader, which is adjacent to Shell Canada’s existing Scotford refinery north of Fort Saskatchewan, Alberta. In 2005 these facilities produced an average of 159,900 barrels per day of bitumen.
The production of bitumen and synthetic crude is considered under the SEC’s regulations to be mining activity rather than oil and gas activity.
In 2005, Shell Canada acquired additional oil sand leases in the Athabasca area. Shell Canada also owns four Shell-operated natural gas plants in southern and south-central Alberta.
Venezuela Shell Venezuela S.A. (Group interest 100%) holds an operating service agreement (expiring in 2013) with a state oil company, Petroleos de Venezuela (PDVSA), to develop and produce the Urdaneta West Field in Lake Maracaibo. In 2005, the Venezuelan Ministry of Petroleum mandated that all operating service agreements migrate to a joint venture in which PDVSA will have the majority interest. A “Transistory Agreement” signed on December 1, 2005 between PDVSA and SVSA will allow the two companies to continue negotiating the terms of reference for the new joint venture agreement under the 2001 Organic Hydrocarbon Law.
Research and development (R&D)
Our Exploration & Production R&D Directorate is responsible for the research, development and application of integrated technology solutions for Group operating businesses and assets around the world. The R&D Directorate’s primary business objectives are to select, develop and implement technologies that enable the Group operating businesses and assets to successfully discover and produce greater levels of hydrocarbons; to achieve continual improvement in cost-efficiency and performance; to increase operational safety and to reduce environmental impact.


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Exploration & Production R&D has two laboratory locations; Rijswijk, the Netherlands and Houston, Texas, USA. In-house capabilities are used in the research, development and application of proprietary exploration and production technologies in conjunction with service industry and/or academic capabilities where applicable. In 2006 a third technology centre will be opened in Bangalore, India.
The primary focus of our research and development work is in the following areas: enhanced sub-surface imaging; complex reservoir performance modelling; improving hydrocarbon recovery efficiency; improving well inflow performance to enhance production; recovery of unconventional hydrocarbons; enhanced well construction; reducing the unit technical cost of onshore and offshore processing facilities; enabling the development of ultra-deepwater fields; upgrading produced hydrocarbons; and developing solutions for utilisation and sequestration of CO2.
 


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GAS & POWER

Gas & Power is one part of the upstream organisation. Together with Exploration & Production, upstream explores for and extracts oil and natural gas, and builds and operates the infrastructure necessary to deliver these hydrocarbons to market.



Contents
  Earnings
 
  LNG volumes
 
  Capital investment and portfolio actions
 
  New business development
 
  Outlook and strategy
 
  Business and property
 
  Research and development

(PHOTO - LINDA COOK)
LINDA COOK, EXECUTIVE DIRECTOR
Shell’s Gas & Power business continued to benefit from its leading position in a strong business environment during 2005. We are well on track to deliver strong growth throughout the remainder of this decade.”
Overview
Our Gas & Power business liquefies and transports natural gas and develops natural gas markets and related infrastructure.
Highlights
>   Earnings, excluding non-operational items, up 21%
 
>   Record LNG sales volume, up 5%
 
>   LNG capacity increased at year end by 13%
 
>   Significant progress on major LNG and GTL project development


Earnings
                 
 
$ million  
    2005     2004  
 
Revenue (including intersegment sales)
    15,624       10,835  
Purchases (including change in inventories)
    (12,855 )     (8,680 )
Depreciation
    (290 )     (903 )
Operating expenses
    (2,087 )     (1,452 )
Share of profit of equity accounted investments
    999       1,142  
Other income/(expense)
    223       733  
Taxation
    (41 )     140  
 
Segment earnings from continuing operations
    1,573       1,815  
Income/(loss) from discontinued operations
           
 
Segment earnings
    1,573       1,815  
 























2005 compared to 2004
Earnings
Segment earnings were $1,573 million, compared to $1,815 million in 2004, benefiting in 2005 from record LNG volumes and strong prices, and favourable marketing and trading conditions. Whereas 2005 earnings included net charges of $84 million, mainly related to divestments of joint venture company InterGen’s power generation assets, earnings in 2004 included net gains of $444 million mainly related to divestments partly offset by an impairment in Coral (Shell’s principal Gas & Power marketing and trading entity in the US). Excluding these items, earnings increased by 21%.
LNG volumes
Record LNG sales volumes were up 5% from last year driven by the ramp up of the fourth train at the North West Shelf project (Group share 22%) in Australia. Following completion of construction of Train 4 in Nigeria and the new Qalhat project in Oman, Shell’s global LNG production capacity increased by 13% at year end.
Capital investment and portfolio actions
Capital investment in 2005 of $1,602 million was consistent compared to 2004 ($1,633 million) and mainly related to LNG projects. The total capital investment was focused on new integrated gas projects such as Sakhalin II, Qatargas 4 and Qatar GTL, displacing 2004 spend on InterGen.
We completed our exit from the InterGen power generation joint venture (Group interest was 68%) with the sale of InterGen assets through various transactions. These transactions contributed over $1 billion of proceeds to Shell’s divestment programme.
The sale of our interest in Gasunie’s gas transportation assets in the Netherlands was completed with net proceeds of $1.7 billion (gains recorded in Exploration & Production earnings).


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(COUNTRIES IN WHICH GAS & POWER OPERATE MAP)

New business development
Shell and Qatar Petroleum moved the Qatargas 4 joint venture (Group share 30%) into construction phase with the award of the onshore EPC contract in December 2005. This integrated LNG project includes upstream gas and liquids production and a LNG plant with a capacity of 7.8 million tonnes of LNG per annum (mtpa). This will be Shell’s seventh LNG joint venture. We have also agreed to acquire additional capacity at the Elba Island LNG import terminal in Georgia, US. This is intended to be utilised to import Qatargas 4 volumes into natural gas markets in the eastern US.
In Australia, joint venture partners moved the Gorgon greenfield integrated LNG project (Group interest 25%) into the FEED phase. This project, on Barrow Island in Western Australia, will provide a new two train LNG plant that will have an initial capacity of 10mtpa. Also in Australia, final investment decision was taken to build a fifth LNG train in the NWS LNG venture (Group direct and indirect interest 22%). The new train, currently under construction, will increase plant capacity to a total of 15.9mtpa.
In Nigeria, the Train 4 and 5 expansion at Nigeria LNG Ltd (Group interest 26%) has been completed. First production from Train 4 started in the fourth quarter 2005, and from Train 5 in January 2006. These two trains increase Nigeria LNG’s overall production capacity to over 17mtpa. Construction of Train 6 (4mtpa) continues to make good progress.
In February 2006, Shell signed a project development agreement with the Nigerian National Petroleum Corporation (NNPC) and other partners for the joint development of a greenfield LNG project (Olokola) in Nigeria. This project, envisioned to include up to four LNG trains, is in the early stages of engineering and design.
Further contracts were signed to supply LNG from the Sakhalin II project (Group interest 55%) to customers in Korea and Japan. Total firm sales now amount to 7.3mtpa, more than 75% of the total capacity of the plant.
Construction of the Qalhat LNG project in Oman (Group indirect share 11%) was completed, with first production achieved towards the end of 2005. LNG production capacity from the plant is 3.7mtpa.
In India the LNG regasification terminal at Hazira began operations. LNG from the first cargo was sold into the emerging Indian market in 2005.
An agreement was reached with the National Oil Corporation in Libya for exploration and development of gas in the Sirte basin, along with a project to modernise and upgrade the existing Marsa El Brega LNG plant. Options
to expand the existing plant and possibly build a new LNG plant are part of the agreement.
In the US, the US Maritime Administration gave approval for our offshore Gulf Landing LNG import terminal.
A joint venture agreement was signed with ERG Power and Gas S.p.A in Italy (Group share 50%) to build an LNG import terminal in Sicily. The terminal is planned to have an initial capacity of 5.8mtpa. Engineering and permitting work is ongoing.
The Pearl GTL project in Qatar awarded a project management contract to JGC and Kellogg. The Pearl project includes the development of upstream gas production facilities and the construction of the world’s largest GTL plant, which will produce 140,000 barrels per day of GTL products. Following the successful testing of two appraisal wells in 2004, the project is currently in the final stages of design and cost estimating. Final investment decision could be as early as 2006.
Our coal gasification technology was licensed to Datang International Power for its coal to propylene project in China. It was also selected by the Stanwell Corporation in Australia for a research study into an integrated gasification combined cycle (IGCC) plant, in which coal is converted into synthesis gas for power production and the carbon dioxide generated is captured and sequestered.
Outlook and strategy
The business environment for natural gas remains robust. We expect demand for natural gas to continue to increase at 2-3% per annum in the next 10 years. We forecast LNG demand growth to be in the order of 10% per annum in the coming years with demand growth in all major natural gas markets. In addition, new opportunities are emerging related to the clean use of coal and, in particular, Shell’s proprietary coal gasification technology.
We will seek to maximise opportunities from growing demand building on our position as one of the world’s largest natural gas producers and suppliers of LNG, with a significant presence in the key markets of North America, Asia Pacific and Europe. We aim to access and monetise new natural gas resources by offering competitive value propositions to our customers and major resource holders. In doing so, we leverage a diverse natural gas portfolio; global capabilities including commercial skills, financing, marketing, trading, shipping and project management expertise; premium market access (for LNG and GTL); and leading technology and technical services.


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Operating and Financial Review – Gas & Power
Business and property
Our Gas & Power business liquefies and transports natural gas, and develops natural gas markets and related infrastructure. It also markets and trades natural gas and electricity, and converts natural gas to liquids to provide clean fuels. A number of new opportunities are also emerging for application of our proprietary coal gasification process. The majority of these activities, in particular LNG, are carried out by associated companies.
LNG plants, Group interest in plantsa and capacityb (at December 31, 2005)
                         
 
            Group     100%  
            interest     capacity  
            %     mtpa  
 
Australia NWS
  Karratha
    22       11.7  
Brunei
  Lumut
    25       7.2  
Malaysia (Dua and Tiga)
  Bintulu
    15       14.6  
Nigeria
  Bonny
    26       13.6  
Oman
  Sur
    30       6.6  
Oman (Qalhat)
  Sur
    11       3.7  
 
a   Percentage rounded to nearest whole percentage point where appropriate.
b   As reported by the joint venture (excluding the impact of Train 4 debottlenecking in Australia).
LNG sales volumes (Group equity share) (million tonnes)
                                         
 
    2005     2004     2003     2002     2001  
 
Australia
    2.6       2.0       1.8       1.7       1.7  
Brunei
    1.7       1.8       1.8       1.7       1.7  
Malaysia
    2.0       1.9       1.5       2.3       2.3  
Nigeria
    2.3       2.4       2.1       1.5       1.5  
Oman
    2.1       2.1       2.1       1.9       1.7  
 
Total
    10.7       10.2       9.3       9.1       8.9  
 
GTL plant (at December 31, 2005)
                 
 
    Group     100%  
    interest     capacity  
    %     bbl/day  
 
Malaysia Bintulu
    72       14,700  
 

Europe
Shell Energy Europe B.V., a wholly-owned Group company located in the Netherlands, continued to develop gas and power activities throughout Europe, and provided advice and assistance to wholly-owned Shell affiliates active in the natural gas sector in Denmark, Germany, Italy, Spain, the Netherlands, the UK and other countries.
Other specific activities are summarised as follows:
Germany BEB Erdgas und Erdöl GmbH, a joint venture in which a Group company holds a 50% economic interest, is a major producer of gas in Germany and also one of the country’s gas transmission companies. Through BEB, Group companies have indirect minority shareholdings in gas transmission and distribution companies in Germany.
Greece The Group holds a 24% interest in Attiki Gas Supply Company S.A., a local gas distribution company currently with some 30,000 customers (mainly residential, but also some commercial and small industrial). Attiki Gas Supply Company S.A. holds a distribution licence to develop the distribution system infrastructure and to distribute gas to residential, commercial and small industrial customers in the Attiki area.
Italy In June 2005, Shell and ERG Power & Gas S.p.A. signed a joint venture agreement for the development of a LNG regasification terminal in Italy. The terminal is planned for an initial capacity of around 5.8mtpa of LNG.
The Netherlands On July 1, 2005, the Group transferred its 25% interest in N.V. Nederlandse Gasunie’s transport business to the Dutch State for a consideration of $1.7 billion (accounted for in Exploration & Production). The Group continues to be a 25% shareholder in Gasunie Trade & Supply, a large marketer of Dutch natural gas.
Eastern Hemisphere
Algeria Shell and Sonatrach, the Algerian national energy company, signed a Memorandum of Understanding in February 2006 covering multiple business initiatives, both in Algeria and internationally. Areas of cooperation will include investigating the commercial and technical feasibility for joint developments in Algeria, including upstream development projects, LNG, products and marketing, and investigating possible asset swap transactions for upstream exploration, development and appraisal projects.
Australia A Group company has a combined 22% direct and indirect interest in the LNG export phase and a 26% interest in the domestic gas phase of a joint venture formed to develop the gas fields of the North West Shelf (NWS). Current capacity (100%) of the LNG plant at year end 2005 was 11.7mtpa. The LNG is sold predominantly to customers in Japan. A Group company directly and indirectly has a 22% interest in seven vessels used to deliver LNG from the NWS.
The construction of a fifth LNG train commenced during 2005. This will raise total capacity of the plant to close to 16mtpa (100%). Under a contract agreed in 2004, the first deliveries of LNG to China from the NWS venture are expected in 2006. A Group company has a 5% interest in two LNG vessels under construction in China that will be used to deliver LNG under this contract.
A Group company has a 25% interest in the Greater Gorgon joint venture that is considering development of a LNG and domestic gas project on Barrow Island off Western Australia, to be supplied from the Gorgon and Jansz/Io gas fields. The project commenced FEED during 2005. A wholly-owned Group company is also involved in a number of licences in the Browse Basin and in the Timor Sea with opportunities for both domestic gas and LNG export.


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Brunei Gas is liquefied and sold to customers in Japan and Korea by Brunei LNG Sendirian Berhad (Group interest 25%). Current LNG capacity is 7.2mtpa (100%). The LNG continues to be delivered in a fleet of seven LNG vessels owned by Brunei Shell Tankers Sendirian Berhad (Group interest 25%), and an additional vessel owned by Brunei Gas Carriers Sendirian Berhad (Group interest 10%).
China In a 50:50 joint venture with China Petroleum and Chemical Corporation (Sinopec), we are developing our first coal gasification plant to supply synthesis gas to Sinopec downstream business units in Yueyang (Dongting), China. Project startup is expected around mid 2006. Shell’s proprietary coal gasification technology has been licenced to a total of 13 projects in China.
In 2005 we entered into a joint venture with the Hangzhou Gas Group and Hong Kong China Gas for supply of gas to industrial and commercial customers in Hangzhou, China.
India Shell holds a 74% interest in three companies – Hazira Gas Private Ltd., Hazira Port Private Ltd. and Hazira LNG Private Ltd., all of which are located in the State of Gujarat. Hazira Port Private Ltd. and Hazira LNG Private Ltd. commissioned the Hazira LNG import terminal in 2005, and the first gas was sold to customers. Hazira Gas Private Ltd. is using these facilities to import LNG and market natural gas to customers in Gujarat and north west India.
Iran A project framework agreement for the Persian LNG project (Group interest 25%) was signed in 2004. During 2005, the project made further engineering and design progress.
Libya In May 2005, a Group company and National Oil Corporation of the Great Socialist People’s Libyan Arab Jamahiriya (NOC) signed an LNG development agreement for the rejuvenation and upgrade of the existing LNG plant at Marsa Al Brega on the Libyan coast, together with exploration and development of five areas located in Libya’s major oil and gas producing Sirte Basin. Options to expand the existing plant and possibly build a new LNG plant are part of the agreement.
Malaysia Group companies’ hold a 15% interest in each of Malaysia LNG Dua Sendirian Berhad and Malaysia LNG Tiga Sendirian Berhad. Current LNG capacity is 14.6mtpa. Our interest in the Dua plant expires in 2015.
Adjacent to the LNG facilities is a GTL plant, operated by Shell MDS (Malaysia) Sendirian Berhad (Group interest 72%). This plant has the capacity to convert approximately three million cubic metres per day of natural gas into some 14,700 barrels per day of high-quality middle distillates and other products using Shell-developed technology. A full range of liquid and wax products is being sold into specialty markets in Asia Pacific, the US and Europe.
Nigeria Nigeria LNG Ltd (Group interest 26%) had a LNG capacity at year end 2005 of 13.6mtpa (100%) from Trains 1-4. Train 5 commenced production in January 2006, increasing capacity by a further 4mtpa. Train 6 is under construction and, when complete, will add an additional 4mtpa (100%) of LNG capacity.
In 2004, a Shell company (together with other venture partners) committed to proceed with the West Africa Gas Pipeline Project (Group interest 18%). This project is planned to supply gas from Nigeria to the neighbouring states of Ghana, Benin and Togo.
In February 2006, Shell signed a project development agreement with the Nigerian National Petroleum Corporation (NNPC) and other partners for the
joint development of a greenfield LNG project (Olokola) in Nigeria. This project, envisioned to include up to four LNG trains, is in the early stages of engineering and design.
In December 2005, Shell and its partners awarded the EPC and long-term service agreement contracts for the 630MW Afam VI power station, a key element of the Afam Integrated Gas & Power Project in Rivers State, Nigeria.
Within Nigeria, we operate a gas sales and distribution company, Shell Nigeria Gas (Group interest 100%), to supply gas to a number of industrial and commercial customers in the south of the country.
Oman Oman LNG L.L.C. (Group interest 30%) has an annual capacity of some 6.6mtpa. The majority of the LNG is sold to Korea and Japan under long-term contracts with remaining volumes sold to customers on short-term sales agreements.
During 2005, the Qalhat LNG S.A.O.C. project (in which Oman LNG has a 37% equity interest, giving Shell an 11% indirect interest) was commissioned. The first delivery from the Qalhat LNG project, which has a single LNG train with a capacity of 3.7mtpa, was achieved in late 2005.
Qatar In July 2004, Qatar Shell GTL (Group interest 100%) signed a development and production sharing agreement with the State of Qatar for the construction of a 140,000 barrels per day GTL plant in Ras Laffan, Qatar. Following the successful testing of two appraisal wells in 2004, the project is currently in the final stages of design and cost estimating.
In February 2005, the Group and Qatar Petroleum (QP) signed a heads of agreement for the development of a large-scale LNG project (Qatargas 4, Group interest 30%). The project comprises the integrated development of upstream gas production facilities to produce 1.4 bcf/d of natural gas, including an average of approximately 70,000 barrels per day of associated NGL from Qatar’s North field, a single LNG train yielding approximately 7.8mtpa of LNG for a period of 25 years and shipping of the LNG to the intended markets, primarily North America. The final investment decision was taken in December 2005 and at the same time the EPC contract for the onshore facilities was awarded.
Russia Shell Sakhalin Holding B.V. (Group interest 100%) holds a 55% interest in Sakhalin Energy Investment Company Ltd. (SEIC). Activities for the development of the offshore fields and onshore LNG facilities continued during 2005. The development includes a two-train LNG plant with a 9.6mtpa capacity.
In July 2005, Shell and Gazprom signed a Memorandum of Understanding regarding a swap of shares in the Zapolyarnoye-Neocomian and Sakhalin II projects. The Memorandum of Understanding sets out the high level principles of a transaction through which Gazprom could acquire up to 25% plus one share in the Sakhalin II venture and Shell could acquire a 50% interest in the Zapolyarnoye-Neocomian field. Negotiations on definitive arrangements for the transaction continue in 2006.
USA and Canada
During 2005, the Gas & Power business portfolio included: investments in Enterprise Product Partners L.P.; holding of capacity rights in US LNG import terminals; natural gas and power marketing, trading and storage; long-term gas transportation contracts; and energy management services.
The focus of the business in the USA on LNG has increased, encompassing existing LNG import capacity rights at the Cove Point and Elba Island terminals as well as the continued evaluation of various options to expand its


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LNG import capabilities. The US Maritime Administration approved the issuance of a licence for our offshore Gulf Landing LNG terminal in the Gulf of Mexico.
Other Western Hemisphere
Bolivia Transredes Transporte De Hidrocarburos S.A. (Group interest 25%), an oil and gas pipeline company has over 3,500 miles in total pipeline network. It also exports gas to Brazil through a pipeline owned by Gas Transboliviano S.A. (combined Group interests 30%), and interconnected to Transredes.
Brazil Companhia de Gas de São Paulo (Comgás) is a Brazilian natural gas distribution company in the state of São Paulo. The Group holds 18% through a joint venture.
Transportadora Brasileira Bolivia Brasil S.A. (Br), (combined Group interests 7%), interconnected to Gas Transboliviano S.A. (Bol), constitutes the Brazilian side of the Bolivia-Brazil pipeline with around 1,400 miles in total pipeline network covering five Brazilian states.
In the western part of Brazil, Shell has 50% interests across four companies related to an integrated pipeline and power station project in Cuiabá. The pipeline also crosses through eastern Bolivia. The Cuiabá gas-fired power plant (480MW) became commercially operational in 2002.
Mexico The Altamira LNG regasification terminal (Group interest 50%) is located in the port of Altamira, Tamaulipas, on Mexico’s Gulf coast. The facility is under construction and when complete will have an initial peak capacity of 4.4mtpa. Completion is scheduled for 2006. A separate marketing company (Group interest 75%) holds the capacity rights in the terminal and will supply up to the equivalent of 3.6mtpa natural gas for 15 years to CFE (state power company), ramping up from an initial 2.1mtpa. Shell also holds capacity rights to the Costa Azul LNG import terminal under construction in Baja California on Mexico’s west coast. Shell’s capacity rights total 3.75mtpa. Supply is expected from Shell’s portfolio of Asian LNG projects such as Sakhalin (Russia) and Gorgon (Australia).
LNG supply and shipping
Two operations, Shell Western LNG (SWLNG) and Shell Eastern LNG (SELNG), aim to secure supplies for downstream markets that we are developing. SWLNG sources LNG in the West and supplies our outlets in the Atlantic Basin (currently Spain and the US), while SELNG sources LNG in the East, and supplies our terminal in India and other potential outlets in the Pacific region, including China and the west coast of Mexico. These operations will primarily use ships, currently a fleet totalling seven, which have been acquired or chartered by Shell Tankers Singapore Limited, Shell Tankers (UK) Ltd, Shell Bermuda (Overseas) Ltd and SWLNG.
InterGen
In 2005, Shell divested all of its interests in InterGen (Group interest was 68%), an international operator and developer of power plants. This marked a significant step in our portfolio restructuring activities.
Research and development (R&D)
The focus of R&D is on technical and cost leadership in existing businesses and the creation of viable new business opportunities. A key focus is on maintaining our competitive position in LNG technology, particularly LNG processing, safety, transport and storage. The Group is further developing its strong position in GTL conversion through R&D programmes aimed at improving catalysts and process technology to further reduce capital costs and improve process efficiency, leading to lower CO2 emissions. GTL product development is also an important focus of work. The emphasis of work on coal gasification is on reducing capital costs and increasing the scale and efficiency of plants.


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OIL PRODUCTS

Oil Products are part of the downstream organisation. Shell’s downstream businesses engage in refining crude oil into a range of products including fuels, lubricants and petrochemicals, and marketing of the refined products.



Contents
  Earnings
 
  Capital investment and portfolio actions
 
  Outlook and strategy
 
  Business and property
 
  Trading
 
  Shell Global Solutions
 
  Research and development


(ROB ROUTS PHOTO)
ROB ROUTS, EXECUTIVE DIRECTOR
“We made great progress towards achieving our goal of sustainable downstream leadership. We strengthened our position in key markets as we reshaped our portfolio and increased our investment in higher growth markets in Asia and Eastern Europe. Our drive to bring innovative and new fuels to our customers continues.”
Overview
Shell’s downstream Oil Products include all of the activities necessary to transform crude oil into petroleum products and deliver these to customers worldwide.
Highlights
>   Earnings of $9.98 billion; an increase of 31% over 2004
 
>   Strong cash generation; $11 billion of cash surplus
 
>   Excellent operational performance; reduction of non hurricane related refining downtime to 4%
 
>   Continued portfolio management; $1.7 billion proceeds in 2005


Earnings
                 
 
$ millions  
    2005     2004  
 
Revenue (including intersegment sales)
    253,853       222,348  
Purchases (including change in inventories)
    (223,482 )     (195,270 )
Depreciation
    (2,622 )     (3,357 )
Operating expenses
    (16,141 )     (15,022 )
Share of profit of equity accounted investments
    1,713       1,277  
Other income/(expense)
    69       61  
Taxation
    (3,408 )     (2,440 )
 
Segment earnings from continuing operations
    9,982       7,597  
Income/(loss) from discontinued operations
           
 
Segment earnings
    9,982       7,597  
 

Canada
USA
Latin America
Argentina
Belize
Bolivia
Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Guyana
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Surinam
Uruguay
Venezuela
The Caribbean
Bahamas
Barbados
Bermuda
British Antilles
Dominican Republic
French Antilles &
Guiana
Grenada
Haiti
Jamaica
Netherlands Antilles
Puerto Rico
St. Kitts & Nevis
St. Lucia
St. Vincent
Trinidad & Tobago
Europe
Austria
Belgium
Bulgaria
Croatia
Czech Republic
Denmark
Estonia
Finland
France
Germany
Gibraltar
Greece
Hungary
Iceland
Republic of Ireland
Italy
Latvia
Lithuania
Luxembourg
The Netherlands
Norway
Poland
Portugal
Romania
Serbia and
Montenegro
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
Ukraine
UK


2005 compared to 2004
Earnings
Segment earnings in 2005 were $9,982 million, 31% higher than 2004, reflecting strong refining margins, improved operational performance and increased trading results partially offset by lower marketing results. Trading earnings benefited from high levels of volatility and profitable storage deals. Earnings included $427 million net gains in 2005 compared with $540 million in 2004, mainly relating to divestments in both years and impairments in 2004. Revenue was significantly higher, largely as a consequence of higher product prices in 2005.
Gross margin (calculated as revenue minus purchases) increased by $3,293 million in 2005, primarily driven by strong refining margins in all regions, particularly in the US. The high refining margins were sustained by a combination of refining capacity expansion continuing to lag behind strong global product demand growth, a cold winter in the northern hemisphere in the first and fourth quarters and extensive hurricane-related product supply disruptions in the Gulf of Mexico in the third and fourth quarters. Marketing margins declined mainly as a result of high crude-driven product cost.
Operating expenses, which include divestment gains, increased in 2005 mainly due to lower proceeds from divestments. The impact of a weaker dollar on non dollar denominated operating expenses and higher energy related operating costs also resulted in increased expenses.
Depreciation was $735 million lower in 2005 than 2004, largely as a result of divestments and impairment provisions on certain refining and marketing assets recognised in 2004.


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(COUNTRIES IN WHICH OIL PRODUCTS OPERATE MAP)
Capital investment and portfolio actions
Capital investment of $2.8 billion in 2005 was consistent with 2004 spending levels. The main areas of investment were in our manufacturing and retail businesses and included spending on refinery maintenance as well as upgrading and growing the retail network.
Our portfolio activities were focused on investment in high growth markets in the East and Turkey and consolidation of our position in Africa and Latin America. In China, our retail joint venture with Sinopec commenced operations with more than 200 stations now in service. In India, we are the first international oil company to have secured a nationwide retail licence. Eight service stations are currently operating, with another 50 under various stages of construction and acquisition. We started operation of our first service station in Indonesia. In Russia, an acquisition programme is ongoing, with 13 service stations now operational, and land for an additional 20 sites secured.
In China, a new joint venture, Anji Jiffy Lube Automotive Services Company Limited, was established in April 2005. Shell China holds a 40% Group interest in this business. Total investment will be $23 million (Group interest $9 million). The venture will build a network of fast car maintenance and service outlets and is modelled on the Jiffy Lube chain that operates in North America. The aim is to have 600 outlets in operation by 2015.
A partnership with CHOREN Industries GmbH was announced to construct the world’s first commercial facility to convert biomass into high-quality synthetic biofuel. A letter of intent was signed by Volkswagen, Shell and Iogen Corporation announcing a joint study to assess the economic feasibility of producing cellulose ethanol in Germany. This advanced biofuel, which is produced by Iogen, can be used in today’s cars and can cut CO2 emissions by 90% compared with conventional fuels.
A Memorandum of Understanding was signed with Kuwait Petroleum International to explore opportunities to develop and implement joint downstream investments worldwide.
In the US, a capital expenditure strategy to increase refining capacity at one or more of the Motiva joint venture (Group interest 50%) refineries was announced. Expansion projects being considered range from 100,000 barrels per day to 325,000 barrels per day.
In Turkey, Shell and Turcas Petrol AS agreed a joint venture to combine marketing and distribution activities. In addition, as part of Turkey’s privatisation programme, Koç (Turkey’s largest conglomerate) became the successful bidder for 51% of Turkiye Petrol Rafinerileri AS (Tupras) and we
acquired a 2% minority shareholding in Tupras. These transactions will enhance our position in Turkey, which is a key growth market.
The exchange of our 20% interest in the Rome refinery for Total’s 18% interest in the Reichstett Refinery in France was completed, increasing our ownership interest in the Reichstett refinery to 83%.
The Group sold 5% ownership of Showa Shell Sekiyu KK, a refining and marketing company in Japan, to Saudi Aramco. The Group’s interest was reduced to 35% as a result of this transaction.
The sales of the Bakersfield refinery and the LPG business in Portugal were completed.
The divestment of retail and commercial fuels marketing and distribution businesses in the Republic of Ireland, Northern Ireland, Romania, the Canary Islands, Eastern Caribbean and Guinea Bissau was completed.
Total proceeds from divestments during 2005 totalled $1.7 billion.
Agreements were signed relating to the sale of the marketing and distribution businesses in Uruguay and Paraguay, the retail and commercial fuels marketing business and lubricants blending and distribution business in Colombia and Shell’s retail business in Ecuador. Agreement was also reached regarding divestments of Oil Products’ businesses in Burundi, Rwanda, Cameroon, the Caribbean (Bahamas, Turks and Caicos and Jamaica) and in Papua New Guinea. We expect to complete these sales in 2006 when total combined proceeds of $350 million are anticipated.
Several of the sales in 2005 and 2006 included innovative Trade Mark Licence Agreements, whereby the buyer will continue to use the Shell brand.
Bids relating to the sale of Shell’s LPG business were received during the year. Following bid clarification and negotiation, we will take a decision on whether to go ahead with this divestment. We expect to complete this process during the first half of 2006.
Outlook and strategy
If product demand growth continues to outstrip refinery capacity additions, refining margins in 2006 are expected to remain firm, albeit at lower levels than 2005. The eventual level will be strongly influenced by the rate of global economic growth particularly in the US and China. Potential upside exists with tightening gasoline and diesel specifications in the US. Downward pressure may come with weaker product demand through persistent high oil prices. Marketing margins will continue to be influenced by oil price volatility, exchange rates and intense competition.


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Our strategy supports our aim of being the downstream leader in the markets in which we choose to operate. This includes improving the profitability of the downstream businesses through a focus on four key areas.
The first is to reshape the portfolio by divesting underperforming assets, making selective investments in manufacturing and marketing to enhance our competitive position and investing in high growth markets such as China and India. The second element is our work to continue to standardise our processes and systems through implementation of simpler global processes including a common IT system (enterprise resource planning) for Oil Products businesses across the world. We will also continue to improve our operational performance by ensuring our operations are safe, reliable and cost competitive. Third, we will work to maximise the value of our integrated hydrocarbon supply chain and the benefits of the integration of the Oil Products and Chemicals businesses. Finally, we will continue to seek opportunities to reinforce our position as the leading global brand across all the downstream businesses, including maintaining our focus on differentiated fuels.
Business and property
The Oil Products organisation is comprised of a number of different downstream businesses, which include Manufacturing, Supply and Distribution, Retail, Business to Business (B2B) and Lubricants. Collectively these businesses refine, supply, trade and ship crude oil products around the world and market fuels and lubricants for domestic, industrial and transportation use.
Manufacturing
Our global Manufacturing portfolio includes interests in 47 refineries, which produce products such as gasoline, diesel, light heating oil, aviation fuel, heavy heating oil, lubricants, and bitumen. Finished and intermediate products from the manufacturing sites provide a wide range of quality hydrocarbons required by our downstream partners in Retail, Lubricants, Chemicals and B2B to fulfil Shell customer requirements. Manufacturing also works closely with Supply and Distribution, Trading and Shell Global Solutions to maximise earnings from our manufacturing assets.
Supply and distribution
Supply and distribution acquires and delivers feedstock to Shell refineries and Chemical plants, and transports and delivers finished products to our downstream marketing businesses and customers. It handles 6 million barrels of inland fuel sales per day. Our distribution network currently includes 5,000 miles of pipeline in the US and some 20,000 trucks worldwide.
Retail
The Oil Products business operates the world’s largest fuel retail network with some 45,000 service stations. Convenience retailing offers a wide range of products and services to customers worldwide.
A growing range of fuels are sold at these retail outlets, including Shell
V-Power, V-Power Racing, V-Power Diesel, and Optimax, that are tailored to meet growing customer requirements for improved engine and environmental performance. Differentiated fuels were launched during 2005 in a number of new markets, including V-Power in France and a brand new V-Power Diesel using GTL technology in Italy. In Australia, Shell Optimax Extreme, a 100-octane fuel that uses 5% ethanol to deliver a higher level of engine responsiveness and performance, was launched. In Africa, Diesel Extra was launched in Swaziland, Botswana and Kenya and the V-Power Diesel pilot in South Africa has already achieved 15% market share.
Lubricants
Shell Lubricants is a global leader in finished lubricants, operating in approximately 120 countries worldwide, manufacturing and marketing some of the most recognised (by market share) lubricants brands including Shell Helix, Pennzoil, Shell Rotella, Shell Rimula and Quaker State. These lubricants are used across the transport sector in passenger cars, lorries, coaches, aeroplanes and ships. Shell Lubricants also delivers lubrication solutions to the manufacturing, food processing, mining and agriculture industries. In addition, through the Jiffy Lube fast lube network, Shell Lubricants provide oil change and service to some 30 million customers in the US and is building a presence in developing markets such as China.
Business to Business (B2B)
B2B sells fuels and specialty products to a broad range of commercial customers. The B2B portfolio comprises five separate businesses.
Shell Aviation is a leader in the marketing of aviation fuels and lubricants, and in the operation of airport fuelling. It supplies 1,100 airports in 90 countries and fuels some 20,000 aircraft and supplies over 21 million gallons (80 million litres) of fuel every day.
Shell Marine Products is a global sales and marketing business supplying marine fuels, lubricants and related services to the marine industry. The business supplies 20 different types of marine fuel to power diesel engines, steam and gas turbine vessels, together with around 100 different types of marine lubricants blended to provide optimum protection in the toughest environments. The business serves more than 15,000 customer vessels, ranging from large ocean going tankers to small fishing boats, in more than 730 ports in some 90 countries worldwide.
Shell Gas (LPG) The Group markets LPG in over 40 countries and territories. It supplies LPG to a range of customers for domestic, commercial, agriculture and industry purposes.
Commercial Fuels provides high-quality heating, transport and industrial fuels and oils to more than four million customers worldwide in three main segments. The bulk fuels business plays a key role in managing sales to all inland channels. The domestic heating oil business supplies more than 1.5 million households.
Shell Bitumen is the world market leader in the manufacture and sale of bitumen and bitumen products and works with over 1,450 customers across 33 countries.
Trading
Shell Trading trades about 14 million barrels of crude oil equivalent per day, comprising crude oil, refined products, natural gas, electrical power and chemicals. Companies within the Shell Trading network (including Houston, Barbados, Rotterdam, London, Dubai, Moscow and Singapore) are each distinct separate entities responsible for running their own businesses.
Shell Global Solutions
Provides business and operational consultancy, catalysts, technical services and research and development expertise to the energy and processing industries worldwide. It has an extensive network of offices around the world, with primary commercial centres operating in the US, Europe and Asia Pacific.


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Research and development (R&D)
R&D programmes continue to emphasise the improvement of key products and their applications and the further advancement of process technologies including related technical services that provide us with a competitive advantage. For the fuels business, top tier differentiated fuels have been launched in more than 40 countries. Further effort was focused on the cost effective formulation of new products and cost reduction in current formulations. Product stewardship considerations, particularly those related to health and the environment, continue to be given high priority in all areas.
Key drivers in process research have been the need to achieve best-in-class performance in terms of reliability and availability, supply chain optimisation, cost reduction and further reduction in energy consumption and CO2 emissions. Catalyst development has contributed to increased margin generation. Environmentally focused programmes provide solutions ranging from soil remediation techniques to explosion hazard assessments.
A strategic programme aimed at developing breakthrough options in sustainable energy and sustainable mobility is pursued, covering new routes from biomass to biofuels and a new approach to CO2 sequestration by mineralisation. The further development of the coal gasification, catalytic partial oxidation and GTL technology continues to be an area of focus across the business.


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Operating and Financial Review – Oil Products
Refininga
Cost of crude oil processed or consumed (including upstream margin on crude supplied by Group and equity accounted investment exploration and production companies)
                                         
 
$ per barrel  
 
    2005     2004     2003 i    2002 i    2001 b 
 
 
    48.24       37.22       26.75       24.35       23.56  
 
Operable crude oil distillation capacityc
                                         
 
thousand barrels/calendar day d e 
 
    2005     2004     2003     2002     2001  
 
Europe
    1,822       1,835       1,808       1,809       1,400  
Other Eastern Hemisphere
    899       1,050       1,072       1,108       1,155  
USA
    955       1,032       1,073       1,075       689  
Other Western Hemisphere
    350       350       361       395       398  
 
 
    4,026       4,267       4,314       4,387       3,642  
 
Crude oil processedf
                                         
 
thousand barrels/calendar day d e 
 
    2005     2004     2003     2002     2001  
 
Europe
    1,701       1,687       1,712       1,701       1,309  
Other Eastern Hemisphere
    802       942       916       870       933  
USA
    855       950       974       996       624  
Other Western Hemisphere
    364       364       347       314       361  
 
 
    3,722       3,943       3,949       3,881       3,227  
 
Group share of associated companies
    455       451       515       473       480  
 
Crude oil distillation unit intake as percentage of operable capacityg
                                         
 
%  
 
    2005     2004     2003     2002     2001  
 
Europe
    97       94       96       94       95  
Other Eastern Hemisphere
    92       91       89       84       90  
USA
    88       91       89       91       91  
Other Western Hemisphere
    91       93       90       86       91  
 
Worldwide
    93       92       92       90       92  
 
Refinery processing intakeh
                                         
 
thousand barrels/calendar day d e
 
    2005     2004     2003     2002     2001  
 
Crude oil
    3,722       3,946       3,949       3,881       3,227  
Feedstocks
    259       216       218       203       173  
 
 
    3,981       4,162       4,167       4,084       3,400  
 
Europe
    1,804       1,770       1,776       1,761       1,358  
Other Eastern Hemisphere
    849       962       956       941       1,018  
USA
    953       1,055       1,079       1,064       663  
Other Western Hemisphere
    375       375       356       318       361  
 
 
    3,981       4,162       4,167       4,084       3,400  
 
                                         
 
million tonnes per year  
 
Metric equivalent
    195       204       204       201       166  
 
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Refinery processing outturni
                                         
 
thousand barrels/calendar day e 
 
    2005     2004     2003     2002     2001  
 
Gasolines
    1,492       1,542       1,575       1,537       1,242  
Kerosines
    382       424       418       400       369  
Gas/Diesel oils
    1,256       1,297       1,312       1,287       1,068  
Fuel oil
    391       414       378       355       339  
Other products
    567       557       550       546       417  
 
 
    4,088       4,234       4,233       4,125       3,435  
 
a   The basis of reporting from 2002 has been changed to reflect only those activities relating to the Oil Products business; previously the volumes of the Mobil refinery in Alabama, a refinery owned by Chemicals, was included within the US volumes. The 2001 figures have been restated on a similar basis. Furthermore, from 2002 the US reported volumes include 100% of Shell Oil Products US and 50% of Motiva; the 2001 figures have been restated in accordance with the ownership interests prevailing at that time.
b   Figures for 2003, 2002 and 2001 are provided on a US GAAP basis.
c   Group average operating capacity for the year and excluding mothballed capacity.
d   One barrel daily is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
e   The calendar day capacity is the actual barrels processed during the year (maximum sustainable rate x utilisation) divided by the number of days in the year.
f   Including natural gas liquids; includes processing for others and excludes processing by others.
g   Including crude oil and feedstocks processed in crude oil distillation units, and based on calendar day capacities.
h   Including crude oil and natural gas liquids plus feedstocks processed in crude oil distillation units and in secondary conversion units.
i   Excluding “own use” and products acquired for blending purposes.
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Operating and Financial Review – Oil Products
Oil salesa
Product volumes
                                         
 
thousand barrels/day  
    2005     2004     2003     2002     2001  
 
Europe
                                       
Gasolines
    569       576       616       647       531  
Kerosines
    223       220       194       190       164  
Gas/Diesel oils
    920       934       936       950       776  
Fuel oil
    196       179       184       177       174  
Other products
    185       203       207       209       207  
 
 
    2,093       2,112       2,137       2,173       1,852  
 
Other Eastern Hemisphereb c
                                       
Gasolines
    318       337       315       332       328  
Kerosines
    174       168       166       142       132  
Gas/Diesel oils
    470       511       489       476       460  
Fuel oil
    151       168       180       188       200  
Other products
    119       136       138       149       138  
 
 
    1,232       1,320       1,288       1,287       1,258  
 
USA
                                       
Gasolines
    1,068       1,372       1,343       1,239       737  
Kerosines
    236       258       212       221       138  
Gas/Diesel oils
    368       430       430       401       266  
Fuel oil
    107       209       189       105       65  
Other products
    234       247       218       173       111  
 
 
    2,013       2,516       2,392       2,139       1,317  
 
Other Western Hemisphere
                                       
Gasolines
    263       293       296       317       315  
Kerosines
    74       73       72       74       80  
Gas/Diesel oils
    251       249       243       246       252  
Fuel oil
    77       85       86       92       100  
Other products
    43       44       52       49       54  
 
 
    708       744       749       778       801  
 
Export salesd
                                       
Gasolines
    186       182       193       251       202  
Kerosines
    104       114       154       155       154  
Gas/Diesel oils
    287       274       213       222       194  
Fuel oil
    313       208       181       196       168  
Other products
    121       130       138       198       197  
 
 
    1,011       908       879       1,022       915  
 
Total product sales
                                       
Gasolines
    2,404       2,760       2,763       2,786       2,113  
Kerosines
    811       833       798       782       668  
Gas/Diesel oils
    2,296       2,398       2,311       2,295       1,948  
Fuel oil
    844       849       820       758       707  
Other products
    702       760       753       778       707  
 
 
    7,057       7,600       7,445       7,399       6,143  
 
Sales by product as percentage of total product sales
                                         
 
%  
    2005     2004     2003     2002     2001  
 
Gasolines
    34.1       36.3       37.1       37.7       34.4  
Kerosines
    11.5       10.9       10.7       10.6       10.9  
Gas/Diesel oils
    32.5       31.6       31.1       31.0       31.7  
Fuel oil
    12.0       11.2       11.0       10.2       11.5  
Other products
    9.9       10.0       10.1       10.5       11.5  
 
 
    100.0       100.0       100.0       100.0       100.0  
 
a   Sales figures exclude deliveries to other companies under reciprocal purchase and sale arrangements which are in the nature of exchanges. Sales of condensate and natural gas liquids are included.
b   In Iran, a Group entity has a 61.57% interest in a joint venture that operates a lubricant oil blending plant and sells lubricants in Iran.
c   The Group operates in Sudan through The Shell Company of the Sudan Limited (Shell Sudan), which is an indirect wholly-owned subsidiary of Royal Dutch Shell. Shell Sudan’s activities consist of the sale of fuels and lubricants to retail and commercial customers. Shell Sudan also sold aviation fuels prior to the disposition of this activity in 2005. The Shell Group does not hold any oil or gas reserves in Sudan.
d   Export sales as a percentage of total oil sales amount to 14.3% in 2005, 11.9% in 2004, 11.8% in 2003, 13.8% in 2002 and 14.9% in 2001.
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Total oil sales volumesa
Oil products by geographical area
                                         
 
thousand barrels/day  
    2005     2004     2003     2002     2001  
 
Europe
                                       
Germany
    771       772       785       789       454  
UK and Republic of Ireland
    323       311       313       317       319  
France
    268       275       283       299       306  
the Netherlands
    199       191       180       191       204  
Others
    532       563       576       577       569  
 
 
    2,093       2,112       2,137       2,173       1,852  
 
Other Eastern Hemisphere
                                       
Australia
    222       215       190       194       203  
Others
    1,010       1,105       1,098       1,093       1,055  
 
 
    1,232       1,320       1,288       1,287       1,258  
 
USA
    2,013       2,516       2,392       2,139       1,317  
 
Other Western Hemisphere
                                       
Canada
    300       287       276       263       267  
Brazil
    179       170       168       191       203  
Others
    229       287       305       324       331  
 
 
    708       744       749       778       801  
 
Export sales
    1,011       908       879       1,022       915  
 
Total oil products
    7,057       7,600       7,445       7,399       6,143  
Crude oil
    3,695       5,160       4,769       5,025       4,461  
 
Total oil sales
    10,752       12,760       12,214       12,424       10,604  
 
                                         
 
million tonnes per year  
 
Metric equivalent
    527       627       611       621       530  
 
Revenue
by product
                                         
 
$ million  
    2005     2004     2003     2002     2001  
 
Gasolines
    62,189       55,594       44,830       38,861       30,455  
Kerosines
    21,775       16,308       10,826       9,170       8,710  
Gas/Diesel oils
    63,357       48,304       35,344       28,077       25,735  
Fuel oil
    13,218       9,688       8,424       6,591       5,900  
Other products
    17,505       15,279       13,834       11,420       9,845  
 
Total oil products
    178,044       145,173       113,258       94,119       80,645  
 
by geographical area
                                         
 
Europe
    55,968       44,010       35,618       30,228       25,077  
Other Eastern Hemisphere
    31,705       25,725       19,957       16,801       17,371  
USA
    49,574       46,500       34,533       26,200       17,199  
Other Western Hemisphere
    19,957       15,116       12,751       10,836       12,118  
Export sales
    20,840       13,822       10,399       10,054       8,880  
 
Total oil products
    178,044       145,173       113,258       94,119       80,645  
 
a   By country of destination, except where the ultimate destination is not known at the time of sale, in which case the sales are shown as export sales.
b   Export sales as a percentage of total oil sales volumes amount to 9.4% in 2005, 7.1% in 2004, 7.2% in 2003, 8.2% in 2002 and 8.6% in 2001.
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Operating and Financial Review – Oil Products
Average product revenue
by product
                                         
 
$ per barrel  
    2005     2004     2003 a    2002 a    2001 a 
 
Gasolines
    70.88       55.03       44.46       38.22       39.50  
Kerosines
    73.52       53.52       37.18       32.12       35.70  
Gas/Diesel oils
    75.61       55.04       41.90       33.52       36.19  
Fuel oil
    42.91       31.17       28.14       23.82       22.85  
Other products
    68.29       54.95       50.30       40.21       38.14  
 
Total oil products
    69.12       52.19       41.68       34.85       35.96  
 
by geographical area
                                         
 
Europe
    73.21       56.93       45.67       38.11       37.09  
Other Eastern Hemisphere
    70.52       53.30       42.45       35.77       37.83  
USA
    67.48       50.48       39.56       33.55       35.78  
Other Western Hemisphere
    77.28       55.51       46.64       38.18       41.47  
Export sales
    56.48       41.57       32.41       26.95       26.59  
 
Total oil products
    69.12       52.19       41.68       34.85       35.96  
 
a   Figures for 2003, 2002 and 2001 are provided on a US GAAP basis.
Trading
Shell Trading trades about 14 million barrels of crude oil equivalent per day, comprising crude oil, refined products, natural gas, electrical power and chemicals. Companies within the Shell Trading network (including Houston, Barbados, Rotterdam, London, Dubai, Moscow and Singapore) are each distinct separate entities responsible for running their own businesses.
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Shipping
During 2005, shipping portfolio changes included the contracting of three General Purpose product tankers (10,000 to 25,000dwt) on bareboat charter. Two new building US “Jones Act” Medium Range product tankers (25,000 to 45,000dwt) were contracted on time charter for delivery in 2007. The bareboat charters of two Large Range product tankers (45,000 to 160,000dwt) were extended from 2007 and two Large Range product tankers contracted in 2004 entered into service. Three LNG tankers (two of 140,000 cubic metres and one of 145,000 cubic metres) were contracted on time charter. One VLCC (Very Large Crude Carrier over 160,000dwt) and one LPG carrier (59,000 cubic metres) were redelivered from bareboat charter. These changes and other new charters, charter renewals and redeliveries from charter are summarised in the table below.
Oil tankersa (at December 31)
Owned/demise-hired
                                                                                 
 
    number of ships     million deadweight tonnes  
    2005     2004     2003     2002     2001     2005     2004     2003     2002     2001  
 
VLCCs (very large crude carriers over 160,000dwt)     4       5       7       7       7       1.2       1.5       2.1       2.1       2.1  
Large range (45,000 to 160,000dwt)     13       11       13       16       16       0.8       0.7       0.9       1.3       1.3  
Medium range (25,000 to 45,000dwt)     5       5       5       5       6       0.2       0.2       0.2       0.2       0.2  
General purpose (10,000 to 25,000dwt) /Specialist)     5       2       3       2       2       0.1       0.1       0.1       0.1       0.1  
 
      27       23       28       30       31       2.3       2.5       3.3       3.7       3.7  
 
Time-charteredbc                                                                                
VLCCs (very large crude carriers over 160,000dwt)     1       1       1       1             0.3       0.3       0.3       0.3        
Large range (45,000 to 160,000dwt)     18       19       15       18       17       1.6       1.7       1.3       1.5       1.5  
Medium range (25,000 to 45,000dwt)     14       8       13       15       7       0.5       0.3       0.5       0.6       0.3  
General purpose (10,000 to 25,000dwt) /Specialist)     13       12       10       6       7       0.3       0.2       0.2       0.1       0.1  
 
      46       40       39       40       31       2.7       2.5       2.3       2.5       1.9  
 
Total oil tankers     73       63       67       70       62       5.0       5.0       5.6       6.2       5.6  
 
Owned/demise-hired under construction or on order (oil)d     1       3                         0.1       0.3                    
 
Gas carriersa (at December 31)
                                                                                 
 
    number of ships     thousand cubic metres  
    2005     2004     2003     2002     2001     2005     2004     2003     2002     2001  
 
Owned/demise-hired (LNG)e     6       6       5       4       2       797       797       662       522       253  
Time-chartered (LNG)e     1       1                         145       145                    
Owned/demise-hired (LPG)     0       1       1       1       1       0       60       59       59       59  
Time-chartered (LPG)     2       2       2       3       2       136       136       136       145       113  
 
Total gas carriers     9       10       8       8       5       1,078       1,138       857       726       425  
 
Owned/demise-hired under construction or on order (LNG)d                 1       2       4                   135       277       556  
 
a   Oil tankers, ocean going articulated tug barges and gas carriers of 10kdwt and above which are owned/chartered by Group companies where the Group equity shareholding is at least 50%.
b   Time-chartered oil tankers include Consecutive Voyage Charters.
c   Contracts of affreightment are not included.
d   Owned/demise hired newbuilding contracts not in service but due for delivery post December 31, 2005.
e   LNG carriers reported in Gas & Power sector.
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CHEMICALS

Chemicals are part of the downstream organisation. Shell’s downstream businesses engage in refining crude oil into a range of products including fuels, lubricants and petrochemicals, and marketing of the refined products.
 
Contents
  Earnings
 
  Capital investment and portfolio actions
 
  Outlook and strategy
 
  Business and property
 
  Research and development


 

Overview
Chemicals produce and sell petrochemicals to industrial customers globally. The products are widely used in plastics, coatings and detergents, which in turn are used in items such as textiles, medical supplies and computers.
Highlights
>   Earnings from continuing operations of $1.3 billion
 
>   Strong cash generation; cash surplus of over $3 billion
 
>   Nanhai petrochemicals complex delivered on time, on budget
 
>   Successful sale of Basell and the cracker and butadiene business at Berre


 
Earnings
                 
 
$ million  
    2005     2004  
 
Revenue (including intersegment sales)
    34,996       29,497  
Purchases (including change in inventories)
    (29,565 )     (24,362 )
Depreciation
    (599 )     (695 )
Operating expenses
    (3,613 )     (3,205 )
Share of profit of equity accounted investments
    423       437  
Other income/(expense)
    (9 )     (25 )
Taxation
    (335 )     (300 )
 
Segment earnings from continuing operations
    1,298       1,347  
Income/(loss) from discontinued operations
    (307 )     (199 )
 
Segment earnings
    991       1,148  
 
2005 compared to 2004
Earnings
Segment earnings were $991 million and included $307 million of losses related to discontinued operations. 2004 earnings were $1,148 million, including the effect of $199 million of net losses from discontinued operations. Earnings from continuing operations in 2005 were $49 million below those in 2004 as higher margins and lower depreciation were offset by lower volumes and higher costs (legal provisions, increased portfolio activity and manufacturing plant expenditure).
Earnings this year benefited from more favourable margins (defined as proceeds less cost of feedstock and energy) and improved trading earnings, which outweighed the impact of lower sales volumes. Trading earnings increased, reflecting strong fundamentals and increased chemical feedstock trading. Sales volumes of chemical products decreased by 6% from 2004 mainly due to lower sales in first-line derivatives due to weaker demand for some products and a decrease in aromatics trading sales in base chemicals. Asset utilisation declined by some 3% mainly due to the impact of hurricanes on operations in the US. Depreciation decreased by $96 million from last year due to lower asset impairments. Higher costs reflected charges for legal provisions, costs associated with increased portfolio activity (project development, business exits and divestments) as well as higher manufacturing plant expenditure.
The loss from discontinued operations in 2005 related to a write-down of the carrying value and charges from the sale of Basell. In 2004, the loss from discontinued operations comprised an impairment of the investment in Basell of $353 million partly offset by $154 million share of operating profit from Basell.


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(CHEMICALS MAP)

Capital investment and portfolio actions
In 2005 capital investment was $599 million compared with $868 million in 2004. Capital expenditure decreased by $142 million from last year due to lower spending on manufacturing projects and lower capitalised expenditure for major plant inspection costs. Additions to equity accounted investments were $127 million below those last year, largely as the result of the completion of construction of the Nanhai petrochemicals complex in southern China (Group interest 50%). Operational startup at Nanhai is now well underway and when operating at full capacity the plant is expected to produce 2.3 million tonnes of chemicals a year to supply China’s domestic market.
Shell and BASF completed the sale of the polyolefins joint venture Basell (Group interest 50%) to Nell Acquisition S.a.r.l., an affiliate of New York based Access Industries. The sale proceeds to Shell, after debt, were over $1 billion. Shell also sold to Basell its 50% share in the ethylene cracker at Berre in France along with the butadiene business and assets and logistic assets associated with the cracker operation in Aubette, Berre and Fos. With the completion of the sale, the cracker became wholly-owned by Basell. Shell will continue to operate the cracker for Basell.
We announced plans to expand the capacity of the isopropyl alcohol plant at Pernis in the Netherlands by 50,000 tonnes a year. The expanded capacity is expected to be available in 2006 and will strengthen Shell’s position in the isopropyl alcohol market.
We awarded engineering and design contracts for the planned world-scale ethylene cracker facility at the Pulau Bukom manufacturing complex in Singapore. The integration of the ethylene cracker complex with the refinery would enable us to capture potential site and location benefits as well as supply and market logistics. Final investment decision for the project is expected in 2006.
Shell signed a letter of intent with Qatar Petroleum to develop an ethane based cracker and derivatives complex at Ras Laffan in Qatar. The agreement will allow for work to develop the technical and commercial aspects of the complex. It is intended that the plant will produce petrochemicals to be marketed primarily in Asian growth markets, with a startup date planned for early in the next decade.
Outlook and strategy
Further growth is expected in world petrochemicals demand in 2006. In addition, margins and demand may also be impacted as a result of continued high feedstock and energy costs.
The Chemicals strategy continues to focus on our portfolio of crackers and selected first-line derivatives, which supply bulk petrochemicals to large industrial customers.
In the short term, the Nanhai petrochemicals complex is expected to be onstream in early 2006 complementing a strong asset base in North America and in Europe. In the medium term, growth opportunities will be pursued, particularly in the East, through projects including the ethylene crackers in Singapore and in Qatar.
The integration of Chemicals into the Group’s downstream business is expected to deliver benefits through further optimisation of hydrocarbon streams, standardisation of processes and through the use of shared services.
Business and property
Our chemicals companies produce and sell petrochemicals to industrial customers globally. The products are widely used in plastics, coatings and detergents, which in turn are used in products such as fibres and textiles, thermal and electrical insulation, medical equipment and sterile supplies, computers, lighter and more efficient vehicles, paints, and biodegradable detergents.
Group companies currently produce a range of base and intermediate chemicals. They are major suppliers of base chemicals such as ethylene, propylene and aromatics, and intermediates such as styrene monomer, propylene oxide, solvents, detergents alcohols, and ethylene oxide.
The Chemicals portfolio includes CRI/Criterion, Inc. (CRIC) and several joint ventures including Infineum, Saudi Petrochemical Company (SADAF), CNOOC and Shell Petrochemicals Company Ltd. (CSPCL) (each as described below). Also included, until August 2005, is Shell’s interest in Basell NV (as described below):
CRIC (Group interest 100%) and other CRI or Criterion companies are major catalyst manufacturers in the global refinery and petrochemical markets, with seven manufacturing plants located throughout the world.
Infineum, a 50:50 joint venture between Group companies and ExxonMobil with manufacturing locations in eight countries, formulates, manufactures and markets high-quality additives for use in fuel, lubricants, and specialty additives and components.
SADAF, a 50:50 joint venture between Group companies and Saudi Basic Industries Corporation (SABIC) produces base and intermediate chemicals for international markets.


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Operating and Financial Review – Chemicals
 
CSPCL, a 50:50 joint venture between Group companies and CNOOC Petrochemicals Investment Ltd., will produce a range of petrochemicals, intended primarily for the Chinese markets. The construction of the $4.3 billion Nanhai petrochemicals complex in southern China is complete and progress with startup is well underway.
In August 2005, Group companies sold their interests in Basell, a 50:50 joint venture with BASF. Following the sale, Basell remains a major customer for the Group’s downstream businesses. In December 2005, Shell Pétrochimie Méditerranée (SPM) sold to Basell its 50% share in Société du Craqueur de l’Aubette (SCA). SCA, now wholly-owned by Basell, owns the ethylene cracker at Berre. As part of this transaction, Basell also acquired the butadiene business and assets of Shell at Berre and the logistics assets associated with the cracker operation. SPM continues to operate the cracker, logistics assets and butadiene plant under operating agreements with Basell.
Sales
Sales volumes by main product categorya
                                         
 
thousand tonnes  
    2005     2004     2003     2002     2001  
 
Base chemicals
    13,710       14,184       13,165       10,031       8,760  
 
First-line derivatives
    8,891       9,499       9,779       9,595       8,849  
 
Other
    225       477       164       1,767       1,269  
 
 
    22,826       24,160       23,108       21,393       18,878  
 
Sales volumes by region
                                         
 
thousand tonnes  
    2005     2004     2003     2002     2001  
 
Europe
    10,018       10,159       9,902       9,077       8,408  
 
Other Eastern Hemisphere
    5,252       5,526       5,397       4,672       3,732  
 
USA
    6,893       7,819       7,108       6,970       6,239  
 
Other Western Hemisphere
    663       656       701       674       499  
 
Total chemical products sales volume
    22,826       24,160       23,108       21,393       18,878  
 
Revenue by geographical areab
                                         
 
$ million  
    2005     2004     2003     2002     2001  
 
Europe
    8,981       7,873       5,617       3,994       3,734  
 
Other Eastern Hemisphere
    4,640       4,530       3,092       2,324       1,642  
 
USA
    6,564       6,159       4,369       3,548       3,419  
 
Other Western Hemisphere
    735       616       486       379       283  
 
Total chemical products revenue
    20,920       19,178       13,564       10,245       9,078  
 
Non-chemical products
    2,998       2,311       1,622       1,245       1,538  
 
Total Revenue
    23,918       21,489       15,186       11,490       10,616  
 
Ethylene capacity – Group and equity accounted investmentsc
                                         
 
    2005     2004     2003     2002     2001  
 
Nominal capacity (thousand tonnes/year)
    6,414       6,701       6,203       6,023       5,586  
Utilisation (%)
    86       87       90       92       87  
 
a   Excluding volumes sold by equity accounted investments, chemical feedstock trading and by-products.
 
b   Excluding proceeds from equity accounted investments and chemical feedstock trading.
 
c   Data includes Group share of capacity entitlement (offtake rights) that may be different from nominal Group equity interest.

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At December 31, 2005, Group companies had major interests in chemical manufacturing plants, as described below.
Europe
Belgium CRI Catalyst Co Belgium N.V. (Group interest 100%) manufactures catalysts at its Ghent, Belgium facility.
France At Berre l’Etang, Shell Pétrochimie Méditerranée S.A.S. (SPM) (Group interest 100%), owns and operates a refinery as well as petrochemicals units, manufacturing oil products, solvents, and di-isobutylene. SPM also operates at Berre additives units on behalf of Infineum, several polymer units on behalf of third party companies, and Basell’s ethylene cracker, logistics assets and butadiene plant.
Germany Shell Deutschland Oil GmbH (SDO, Group interest 100%) operates manufacturing plants in Harburg (hydrocarbon solvents), Godorf (benzene, toluene), Wesseling (ethylene, propylene, benzene, toluene, xylenes, methanol), and Heide (ethylene, propylene, benzene, toluene, xylenes, hydrocarbon solvents and chemical solvents). By virtue of our share interest (32.25%) in the relevant manufacturing company, Shell Chemicals Europe B.V. (SCE) is entitled to a proportion of the production of propylene and methyl tertiary butyl ether from plants in Karlsruhe. Due to the Group’s share interest (37.5%) in a company in Schwedt, SCE receives propylene, benzene, toluene and xylenes. Kataleuna GmbH Catalysts, a CRIC company, manufactures catalyst at its Leuna, Germany plant.
The Netherlands Shell Nederland Chemie B.V. (SNC, Group interest 100%) manufactures solvents, methyl tertiary butyl ether, brake fluids, glycol ethers and urethanes (polyols) at the Pernis facility. SNC operates at Pernis a polypropylene plant owned by Basell and several derivatives plants on behalf of third party companies. SNC manufactures lower olefins, benzene, ethyl benzene, ethylene oxide, and styrene monomer/propylene oxide (SM/PO) at the Moerdijk facility. SNC also operates a SM/PO plant owned by Ellba CV, a 50:50 joint venture between Group companies and BASF producing styrene monomer, primarily used in the production of polystyrene and propylene oxide. Shell Chemicals Europe B.V. (SCE) is responsible for all chemicals sales, supply chain management and the procurement of feedstocks and process chemicals for chemical products across Western Europe other than in respect of chemicals joint ventures in which Group companies have an interest.
UK Shell U.K. Oil Products Ltd. (as an agent for Shell U.K. Ltd.) operates the plants of Shell Chemicals U.K. Ltd. (SCUK, Group interest 100%) at Stanlow, which produce propylene, benzene, toluene, and higher olefins and derivatives. In Carrington, SCUK owns plants producing derivatives from ethylene oxide (ethoxylates) and propylene oxide (polyols), which are operated by Basell. SCUK has announced that these plants will close in 2007. The production of the polyols will then transfer to SNC’s polyols facility at Pernis, Rotterdam, which will be upgraded to take on the additional capacity. SCUK also owns NEODOL® ethoxylates assets operated by Uniqema at Wilton, to which the ethoxylates production at Carrington will be transferred in 2007. SCE has indirect rights to an ethylene oxide supply from Dow’s Wilton facility. At Fife in Scotland, ExxonMobil owns and operates an ethylene plant from which, under a processing rights agreement, SCE is entitled to 50% of the output.
Other Eastern Hemisphere
China CNOOC and Shell Petrochemicals Company Ltd. (CSPCL) is a 50:50 joint venture between Group companies and CNOOC Petrochemicals Investment Ltd. (CPIL). CPIL shareholders include China National Offshore Oil Corporation (CNOOC) and the Guangdong Investment & Development Company. CSPCL will produce a range of petrochemicals, including ethylene, propylene, styrene monomer, propylene oxide, polyols, propylene glycol, mono-ethylene glycol, polypropylene, high-density polyethylene, low-density polyethylene and butadiene. Construction of CSPCL’s Nanhai petrochemicals complex in China’s Guangdong Province is complete and progress with startup is well underway. In addition, several products have reached “on specification” status. The complex is expected to produce 2.3mtpa of petrochemical products. Pre-marketing activities are currently coordinated by CNOOC and Shell Petrochemicals Marketing Company Ltd. (CSPMCL), also a 50:50 joint venture between a Group company and CPIL.
Saudi Arabia The Saudi Petrochemical Company (SADAF), a 50:50 joint venture between Group companies and Saudi Basic Industries Corporation (SABIC), owns and operates a 1 million tonnes per year ethylene cracker and downstream plant capable of producing 3.6mtpa of crude industrial ethanol, ethylene dichloride, caustic soda, styrene, and methyl tertiary butyl ether. The marketing arms of both partners handle the local and international marketing of SADAF products. Our marketing effort is coordinated by Shell Trading (M.E.) Private Ltd. (Group interest 100%) located in Dubai, United Arab Emirates.
Singapore Group companies’ own a 50% and 30% equity interest in two Sumitomo-managed joint ventures, Petrochemical Corporation of Singapore (Private) Ltd. (PCS) and The Polyolefin Company (Singapore) Pte. Ltd. (TPC), respectively. PCS owns and operates two ethylene crackers with a total capacity of 1 million tonnes per year of ethylene and 500,000 tonnes per year of propylene. Ethylene Glycols (Singapore) Pte. Ltd. (Group interest 70%) owns and operates an ethylene oxide/glycols plant. Seraya Chemicals (Singapore) Pte. Ltd. (SCSL, Group interest 100%) owns and operates a SM/PO plant, and operates a SM/PO plant owned by Ellba Eastern Pte Ltd., a 50:50 joint venture between the Group and BASF. SCSL also operates two propylene oxide derivatives (POD) plants and one mono-propylene glycol (MPG) plant owned by Shell Eastern Petroleum (Pte) Ltd.
USA
Shell Chemical LP (SCLP) and other associated entities have manufacturing facilities located at Mobile, Alabama; Martinez, California; St. Rose, Geismar and Norco, Louisiana; and Deer Park, Texas. Chemical products include lower olefins, aromatics, phenol, solvents, ethylene oxide/glycols, higher olefins and their derivatives, propanediol, styrene monomers, propylene oxide, additives and catalysts. These chemical products are used in many consumer and industrial products and processes, primarily in the United States.
Infineum, a 50:50 joint venture between Group companies and ExxonMobil, has manufacturing facilities at Argo, Illinois; Baytown, Texas; Bayway, New Jersey and Belpre, Ohio.
CRIC catalyst manufacturing locations are at Martinez, Pittsburg and Azusa, California; Michigan City, Indiana and Willow Island, West Virginia.
Sabina Petrochemicals LLC, a joint venture owned by SCLP (62%), BASF Corporation (23%) and Total Petrochemicals USA, Inc. (15%), produces butadiene at Port Arthur, Texas.


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Operating and Financial Review – Chemicals

Other Western Hemisphere
Canada Shell Chemicals Canada Limited (SCCL, Group interest 100%) produces styrene, isopropyl alcohol, and ethylene glycol. Manufacturing locations are at Sarnia, Ontario and near Fort Saskatchewan, Alberta. SCCL sells its products to Shell Chemicals Americas Inc. (SCAI, Group interest 100%). SCAI is the marketing company for (i) all Canadian domestic sales of chemical products, (ii) all exports of Canadian made chemical products, and (iii) exports of US made chemical products where a Shell entity arranges transportation. PTT Poly Canada, L.P., a 50:50 joint venture (limited partnership pursuant to the Civil Code of Quebec, Canada) between SCCL and Investissements Petrochimie (2080) Inc., a subsidiary of the Société Générale de Financement du Québec, owns and operates a world-scale polytrimethylene terephthalate (PTT) plant near Montreal, Quebec, Canada. The joint venture markets PTT under the trademark CORTERRA, Polymers, with its main use in carpet and textile fibres.
Basell operates the isopropyl alcohol plant at Sarnia on behalf of Shell Chemicals Canada Ltd.
Criterion Catalysts & Technologies Canada Inc, a CRI/Criterion company, manufactures catalyst at its Medicine Hat, Alberta plant.
Puerto Rico Shell Chemical Yabucoa Inc. (SCYI, Group interest 100%) owns and operates a 77,000 barrel per day refinery producing feedstock for the Deer Park, Texas and Norco, Louisiana chemical plants. The facility also produces gasoline, diesel, jet fuel and residual fuels, primarily for use in Puerto Rico.
Research and development (R&D)
R&D and other technical services continue to improve key products and technologies that provide Shell chemical companies with sustainable leadership positions in selected products. Improvements in manufacturing processes – achieved by means of increased feedstock flexibility, product yield, energy efficiency or plant throughput – are leading to lower production costs at existing facilities and lower investment cost of new facilities. Customer relationships and market positions are being enhanced through close technical links with important industrial customers. Longer term, R&D intends to create sustainable cost advantaged technology that leverages upstream technology and hydrocarbon positions.


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OTHER INDUSTRY SEGMENTS
AND CORPORATE

Other industry segments include Renewables and Hydrogen. Renewables develop businesses based on renewable sources of energy, including wind and solar power. Hydrogen develop business opportunities in hydrogen and fuel cell technology. Corporate represents the functional activities supporting the Group.
 
Contents
  Earnings
 
  Renewables and Hydrogen
 
  Business and property
 
  Corporate

 

Overview
Shell’s other industry segments seek to enhance longer-term prospects for Shell’s growth and profitability, increase energy security, and reduce the environmental impact of developing hydrocarbon resources through the offset of greenhouse gases.
Shell Renewables is developing our options in renewable energy, focusing on solar and wind energy. The combined operations of Shell Renewables is expected to play an increasingly important role in managing our greenhouse gas emissions in the future.


 
Earnings
                                 
 
$ millions  
    2005     2004  
    Other             Other        
    industry             industry        
    segments     Corporate     segments     Corporate  
 
Segment earnings from continuing operations
    (202 )     (321 )     (145 )     (946 )
Income/(loss) from discontinued operations
                      (35 )
 
Segment earnings
    (202 )     (321 )     (145 )     (981 )
 
2005 compared to 2004
Earnings
Other industry segments consist of the combined results of our renewables and hydrogen businesses. Corporate is a non-operating segment consisting primarily of interest expense on debt and certain other non-allocated costs.
Renewables and Hydrogen
Shell aims to develop at least one alternative energy source such as wind, hydrogen or advanced solar technology into a substantial business.
We see wind as one of the most promising sources of renewable energy and we currently have interests in wind projects around the world with a capacity of 350 megawatts (based on Group interest).
In 2005, we signed final contracts for the NoordzeeWind project and expect construction to start during 2006. This will be the first Dutch offshore wind project with 36 turbines and an overall capacity of 108MW and is a joint venture between Shell and Nuon (Group interest 50%). We also made progress with the London Array wind project. This project, in the outer Thames Estuary, if approved, would have up to 271 turbines and would generate up to 1,000MW of electricity (Group interest 33%).
We are also one of the largest wind energy developers in the US and we are extending our presence in this market by pursuing the acquisition of the development rights for the Mount Storm wind park in West Virginia. We have also made progress in securing the appropriate permits for the Cotterel Mountain wind project in Idaho.
In Solar we have revised our approach to focus on advanced solar panel technology, including CIS “thin film”, rather than traditional silicon-based materials.


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(OTHER INDUSTRY SEGMENTS MAP)

In February 2006, Shell announced signing of a Memorandum of Understanding with Saint-Gobain to further explore the Shell CIS technology and consider joint development.
Shell reached agreement via a share purchase agreement to divest its crystalline silicon business activities to SolarWorld AG in early 2006. Shell’s silicon-based business has an annual production of approximately 80MW. Manufacturing facilities, sales and marketing, and silicon research and development activities in Germany and the United States will transfer to SolarWorld.
During the year, Shell Hydrogen continued its work to promote and support the development of the infrastructure and technology that will help hydrogen play its part in meeting future energy needs. New projects agreed included an agreement with the Tokyo Gas Company to conduct a pre-feasibility study for a combined LNG/Liquid Hydrogen/CO2 terminal in Tokyo and with Tongji University to build a hydrogen station in Shanghai.
Business and property
Renewables and Hydrogen
Shell’s activities seek to enhance longer term prospects for Shell’s growth and profitability, increase energy security, and reduce the environmental impact of developing hydrocarbon resources through the offset of greenhouse gases.
Shell Renewables is developing our options in renewable energy, focusing on wind, solar and hydrogen energy projects. The combined operations of Shell Renewables is expected to play an increasingly important role in managing our greenhouse gas emissions in the future.
Shell WindEnergy continues to focus on developing and operating wind farms and selling green electricity, building on its strengths in project management, financing and engineering design. Business development activity is concentrated in Europe and North America.
Shell Solar focuses on advanced solar panel technology, including CIS “thin film”.
Shell Hydrogen is developing projects with the aim of introducing hydrogen as a commercial product into relevant transportation and stationary markets.
Corporate
The Corporate segment is a non-operating segment consisting primarily of interest expense on debt and certain other non-allocated costs. Corporate net costs were $321 million in 2005 compared with $981 million in 2004, due to a decrease in net interest expense and shareholder costs coupled with an increase in tax recoveries, which were offset by additional insurance costs and exchange losses.


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Operating and Financial Review – Liquidity and capital resources

2005 compared to 2004
Overview
In general, the most significant factors affecting year-to-year comparisons of cash flow provided by operating activities are changes in realised prices for crude oil and natural gas, crude oil and natural gas production levels, and refining and marketing margins. These factors are also the most significant affecting income. Acquisitions and divestments can affect the comparability of cash flows in the year of the transaction. On a longer term basis, the ability to replace proved reserves that are produced affects cash provided by operating activities, as well as income.
Because the contribution of Exploration & Production to earnings is larger than our other businesses, changes affecting Exploration & Production, particularly changes in realised crude oil and natural gas prices and production levels, have a significant impact on the overall Group results. While Exploration & Production benefits from higher realised crude oil and natural gas prices, the extent of such benefit (and the extent of a detriment from a decline in these prices) is dependent on the extent to which the prices of individual types of crude oil follow the Brent benchmark, the dynamics of production sharing contracts, the existence of agreements with governments or national oil companies that have limited sensitivity to crude oil price, tax impacts, the extent to which changes in crude oil price flow through into operating costs and the impacts of natural gas prices. Therefore, changes in benchmark prices for crude oil and natural gas only provide a broad indicator of changes in the earnings experienced in any particular period by Exploration & Production.
In Oil Products, our second largest business, changes in any one of a range of factors derived from either within or beyond the industry can influence margins in the short or long term. The precise impact of any such change at a given point in time is dependent upon other prevailing conditions and the elasticity of the oil markets. For example, a sudden decrease in crude oil and/or natural gas prices would in the very short term lead to an increase in combined refining and marketing margins until responding downward price corrections materialise in the international oil products markets. The converse arises for sudden crude or natural gas price increases. The duration and impact of these dynamics is in turn a function of a number of factors determining the market response, including whether a change in crude price affects all crude types or only a specific grade; regional and global crude oil and refined products stocks; and the collective speed of response of the industry refiners and product marketers in adjusting their operations. It should be noted that commonly agreed benchmarks for refinery and marketing margins do not exist in the way that Brent crude oil prices and Henry Hub natural gas prices in the US serve as benchmarks in the Exploration & Production business.
In the longer term, reserve replacement will affect the ability of the Group to continue to maintain or increase production levels in Exploration & Production, which in turn will affect our cash flow provided by operating activities and income. We will need to take measures to maintain or increase production levels and cash flows in future periods, which measures may include developing new fields, continuing to develop and apply new technologies and recovery processes to existing fields, and making selective focused acquisitions. Our goal is to offset declines from production and increase reserve replacements. However, volume increases are subject to a variety of risks and other factors, including the uncertainties
of exploration, project execution, operational interruptions, reservoir performance and regulatory changes. We currently expect overall production to increase beginning in 2006 as additional production from new projects begins to come on stream.
The Group has a diverse portfolio of development projects and exploration opportunities, which helps mitigate the overall political and technical risks of Exploration & Production and the associated cash flow provided by operating activities.
It is our intention to continue to divest and, where appropriate, make selective focused acquisitions as part of active portfolio management. The number of divestments will depend on market opportunities and are recorded as assets held for sale where appropriate.
We manage our portfolio of businesses to balance cash flow provided by operating activities against uses of cash over time based on conservative assumptions relating to crude oil prices relative to average historic crude oil prices.
Statement of cash flows
Cash flow provided by operating activities reached a record level of $30.1 billion in 2005 compared with $26.5 billion in 2004. Income increased to $26.3 billion in 2005 from $19.3 billion in 2004, reflecting higher realised prices in Exploration & Production and higher refining margins in Oil Products. Additionally, $2.3 billion of cash flows were realised in 2005 through sales of assets (2004: $5.1 billion). Proceeds from sales of equity accounted investments amounted to $4.3 billion. Cash flow in 2005 has mainly been deployed for capital expenditure ($15.9 billion), debt repayment ($2.7 billion) and dividends paid to shareholders ($10.6 billion). In 2005, Royal Dutch Shell, Royal Dutch and Shell Transport paid dividends of $3.8 billion, $4.0 billion and $2.8 billion respectively (2004: Shell Transport – $2.8 billion, Royal Dutch – $4.6 billion).
Cash flows from oil trading activities are primarily driven by income and movements in working capital. In 2005, net income and reductions in working capital created strong cash generation.
Cash flows in Gas & Power trading are also principally a function of income and working capital movements. In 2005, a cash deficit from operating activities was the result of increased levels of working capital.
At the end of 2005, the gross levels of current assets and current liabilities in trading had materially increased, driven by strong upward price moves particularly in the Gas & Power markets in the second half of the year. The net current assets have increased to a significantly lesser extent.
Financial condition and liquidity
The Group’s financial position is robust, and we returned over $17 billion to our shareholders through dividends, buybacks and payment to Royal Dutch minority shareholders in 2005.
Cash and cash equivalents amounted to $11.7 billion at the end of 2005 (2004: $9.2 billion). Total short and long-term debt fell $1.7 billion between 2004 and 2005.
Total debt at the end of 2005 amounted to $12.9 billion and the Group’s total debt ratioa decreased from 13.8% in 2004 to 11.7% in 2005. The current level of the debt ratio falls below the medium-term gearing objective of the Group, which establishes a target gearingb of between 20% and


a   The total debt ratio is defined as short-term plus long-term debt as a percentage of capital employed. Capital employed is Group total assets minus total liabilities, plus short-term and long-term debt.
b   Target gearing differs from the total debt ratio as it includes certain off-balance sheet obligations of a financing nature.

 

 

 
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25% (inclusive of certain off-balance sheet obligations of a financing nature). The total debt outstanding (excluding leases) at December 31, 2005 will mature as follows: 57% in 2006, 24% in 2007, 8% in 2008, 6% in 2009 and 5% in 2010 and beyond.
The Group currently satisfies its funding requirements from the substantial cash generated within its business and through external debt. Our external debt is principally financed through two commercial paper programmes, which are issued on a short-term basis (generally for up to six months), and a euro medium-term note programme, each guaranteed by Royal Dutch Shell plc. Each of the two commercial paper programmes and the medium-term note programme are for up to $10 billion in value.
In 2005, the Group established a US universal shelf registration enabling it to offer up to $10 billion of securities. The debt programmes now consist of:
a)   a Global Commercial Paper Programme, exempt from registration under section 3(a)(3) of the U.S. Securities Act 1933, which funds current transactions, with maturities not exceeding 364 days;
 
b)   a section 4(2) Commercial Paper Programme which can be used to finance non-current transactions. The maximum maturity of commercial paper issued under the programme has been limited to 397 days;
 
c)   a euro medium-term note programme; and
 
d)   a US universal shelf registration.
Other than described below, these programmes do not have committed support from banks as the Group considers the costs involved in securing such support are unnecessary given the Group’s current credit rating.
The Group currently maintains $2.5 billion of committed bank facilities, as well as internally available liquidity (some $1 billion), to provide back-up coverage for commercial paper maturing within 30 days. Aside from this facility and certain borrowing in local subsidiaries, the Group does not have committed bank facilities as this is not considered to be a cost-effective form of financing for the company given its size, credit rating and cash generative nature.
The maturity profile of the Group’s outstanding commercial paper is actively managed to ensure that the amount of commercial paper maturing within 30 days remains consistent with the level of supporting liquidity. The committed facilities, which are with a number of international banks, will expire in 2010, with options to extend to 2012. The Group expects to be able to renew these facilities on commercially acceptable terms.
While the Group is subject to restrictions, such as foreign withholding taxes, on the ability of subsidiaries to transfer funds in the form of cash dividends, loans or advances, such restrictions are not expected to have a material impact on the ability of the Group to meet its cash obligations.
Credit ratings
On February 4, 2005, Standard & Poor’s Ratings Services (S&P) downgraded to “AA” from “AA+” its long-term ratings on the Group (through a downgrade of the Group Holding Companies, The Shell Petroleum Company Limited and Shell Petroleum N.V. and its subsidiary Shell Oil Company).
Moody’s Investors Service (Moody’s) continues to rate the guaranteed long-term debt of Shell Finance (Netherlands) B.V. and Shell Finance (U.K.) P.L.C,
as “Aa1”. In July, 2005, following implementation of the Unification Transaction, S&P and Moody’s each extended the same ratings to debt programmes guaranteed by Royal Dutch Shell. All long-term debt programmes which formerly operated under the guarantee of the Shell Petroleum N.V. and The Shell Petroleum Co. Ltd, now operate under the guarantee of Royal Dutch Shell plc. The credit ratings given to the commercial paper programmes guaranteed by Royal Dutch Shell plc have been confirmed by S&P and Moody’s at their original levels of “A-1+” and “Prime-1”, respectively. Since the Unification Transaction, new insurance has been undertaken through a new borrowing vehicle, Shell International Finance B.V.
Capital investment and dividends
Group companies’ capital expenditure, exploration expense and new investments in equity accounted investments increased by $2.1 billion to $17.4 billion in 2005.
Capital investment (excluding the contribution of the Group’s minority partners in Sakhalin) in 2006 is estimated to be $19 billion, with Exploration & Production continuing to account for the majority of this amount. Royal Dutch Shell currently expects to return up to $5 billion to shareholders via buyback of shares for cancellation in 2006. Share buyback plans will be reviewed periodically, and are subject to market conditions and the capital requirements of the company. In line with the financial framework, the target for gearing over time in the 20-25% range remains unchanged, including other commitments such as operating leases, contingent liabilities, retirement benefits and operating cash requirements.
Exploration & Production expenditures of $12.0 billion (2004: $9.7 billion) accounted for more than half the total capital investment. Gas & Power accounted for $1.6 billion (2004: $1.7 billion). Oil Products investment amounted to $2.8 billion (2004: $2.8 billion). Chemicals investment was $0.6 billion (2004: $0.9 billion). Investment in other industry segments was $0.3 billion (2004: $0.2 billion).
Our first priority for applying our cash is our dividend, which is declared in euro. We intend to pay quarterly dividends and provide per share increases in dividend at least in line with European inflation over time. After dividends and capital investment, the priority for using cash generated is to maintain a prudent balance sheet. Both the medium and long-term focus will remain on improving the underlying operational performance in order to continue to deliver consistently strong cash flows.
Guarantees and other off-balance sheet obligations
Guarantees at December 31, 2005 were $2.9 billion (2004: $2.9 billion). At December 31, 2005, $1.7 billion were guarantees of debt of equity accounted investments, $0.3 billion were guarantees for customs duties and other tax liabilities and $0.9 billion were other guarantees. Guarantees of debt of equity accounted investments mainly related to Nanhai ($1.1 billion).


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Operating and Financial Review – Liquidity and capital resources
 
Financial framework
The Group manages its business to deliver strong cash flows to fund investment and growth based on cautious assumptions relating to crude oil prices. Our strong cash position in 2005, with operational cash flow of $30 billion, gives us the financial flexibility both to fund capital investment and to return cash to shareholders.
Royal Dutch Shell has announced it will seek to increase dividends at least in line with European inflation over time. The base for the 2005 financial year was the dividend paid by Royal Dutch and Shell Transport in respect of the financial year ending December 31, 2004. With the adoption of quarterly dividends in 2005, Royal Dutch Shell, together with Royal Dutch and Shell Transport prior to the Unification Transaction, returned $10.7 billion to shareholders in dividends during 2005.
Share repurchases
The table below provides an overview of the share repurchases that occurred in 2005. Prior to the Unification Transaction, these transactions involved Royal Dutch and Shell Transport shares, and after the Unification Transaction, they have involved Royal Dutch Shell Class A shares. Although the transactions were executed in different currencies depending on the market and shares involved, all purchases have been converted to the functional currency of the issuer: euro in the case of Royal Dutch; sterling in the case of Shell Transport; and dollars in the case of Royal Dutch Shell, (based on the average monthly exchange rate). The table omits certain Royal Dutch shares that were repurchased for immediate redelivery under share plans and not held as treasury shares.
                                 
 
                    Total number     Maximum number (or  
                    of shares (or units)     approximate dollar value)  
            Average price     purchased as part     of shares (or units) that may  
    Total number of shares     paid per share     of publicly announced     yet be purchased under  
Purchase Perioda   (or units purchased)     (or units)     plans or programmes     the plans or programmes  
 
January 1 to 31
                          $5.0 billion
 
February 1 to 29
                               
Royal Dutch Shares
    1,500,000       46.16       1,500,000          
Shell Transport Shares
    6,800,000       £4.84       6,800,000     $4.8 billion
 
March 1 to 31
                               
Royal Dutch Shares
    3,380,000       47.31       3,380,000          
Shell Transport Shares
    14,750,000       £4.89       14,750,000     $4.5 billion
 
April 1 to 30
                    $4.5 billion
 
May 1 to 31
                    $4.5 billion
 
June 1 to 30
                    $4.5 billion
 
July 1 to 31
                    $4.5 billion
 
Royal Dutch Shell Shares
                               
 
August 1 to 31
    18,962,250       $32.79       18,962,250     $3.9 billion
 
September 1 to 30
    40,132,636       $32.75       40,132,636     $2.6 billion
 
October 1 to 31
    23,025,000       $30.94       23,025,000     $1.9 billion
 
November 1 to 30
    39,540,000       $31.10       39,540,000     $0.6 billion
 
December 1 to 31
    19,475,000       $31.84       19,475,000        
 
a   See page 6 for further disclosure on the Unification.
The above table does not include shares of Royal Dutch or Shell Transport acquired or extinguished as part of the Unification Transaction or the Restructuring (see “Unification of Royal Dutch and Shell Transport”).

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Contractual obligations
The table below summarises Group companies’ principal contractual obligations at December 31, 2005, by expected settlement period. The amounts presented have not been offset by any committed third party revenues in relation to these obligations.
                                         
 
$ billion  
                                    After  
            Within     2/3     4/5     5 years  
            1 year     years     years     (2011 and  
    Total     (2006)     (2007/2008)     (2009/2010)     2012)  
 
Long-term debta
    9.2       5.2       2.9       0.8       0.3  
Finance leasesb
    7.8       0.5       0.9       0.9       5.5  
Operating leasesc
    11.7       2.2       3.5       2.0       4.0  
Purchase obligationsd
    248.1       96.7       47.5       30.2       73.7  
Other long-term contractual liabilitiese
    0.7       0.1       0.4       0.1       0.1  
 
Total
    277.5       104.7       55.2       34.0       83.6  
 
a   The total figure is comprised of $4 billion of long-term debt (debentures and other loans, and amounts due to banks and other credit instruments), plus $5.2 billion of long-term debt due within one year. The total figure excludes $3.7 billion of long-term finance lease obligations. See Note 20(c) to the Consolidated Financial Statements.
b   Includes executory costs and interest. See Note 20(c) to the Consolidated Financial Statements.
c   See Note 20(c) to the Consolidated Financial Statements.
d   Includes any agreement to purchase goods and services that is enforceable, legally binding and specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the purchase. The amounts include $4.3 billion of purchase obligations associated with financing arrangements, which are disclosed in Note 34 to the Consolidated Financial Statements. Raw materials and finished products account for 93% of total purchase obligations.
e   Includes all obligations included in “Non-current liabilities – Other” in the Consolidated Balance Sheet that are contractually fixed as to timing and amount. In addition to these amounts, the Group has certain obligations that are not contractually fixed as to timing and amount, including contributions to defined benefit pension plans estimated to be $1.4 billion (see Note 22 to the Consolidated Financial Statements) and obligations associated with asset retirements (see Note 23 to the Consolidated Financial Statements).
The table above excludes interest expense related to long term debt estimated to be $0.5 billion in 2006, $0.2 billion in 2007/2008 and $0.1 billion in 2009/2010 (assuming interest rates with respect to variable interest rate long-term debt remain constant and there is no change in aggregate principal amount of long-term debt other than repayment at scheduled maturity as reflected in the table).
Dividend Access Trust
The movements in cash and cash equivalents of the Dividend Access Trust consist primarily of dividends received (£869 million) and distributions made on behalf of the Group to shareholders (£869 million) and changes in net working capital (£Nil). See “Supplementary Information – control of registrant – Rights attaching to shares” for an explanation of the Royal Dutch Shell Dividend Access Trust.

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Operating and Financial Review – Social and environmental

One of the main challenges in responding to society’s rapidly growing need for energy is to work in environmentally and socially responsible ways. This means addressing carbon dioxide impacts – both from our own operations as well as the use of our products. It also means reducing the negative environmental and social impacts of the large projects which we need to undertake. This section examines our objectives and strategies, the risks and issues we face and our performance in these important areas.
Social and environmental objectives and strategies
The Group is committed to playing its part in meeting the world’s growing demand for energy in environmentally and socially responsible ways. We are governed by applicable laws as well as the Shell General Business Principles which include a commitment to contribute to sustainable development. This requires balancing short and long-term interests and integrating economic, environmental and social considerations into business decision making. This includes giving proper regard to health, safety, security and the environment and working to achieve continuous performance improvements towards our aspirations of no harm to people and protecting the environment. We also seek to manage the social impact of our business on the communities in which we work.
The Group’s business strategy of “more upstream, profitable downstream” will mean that we will need to undertake more very large upstream projects and these will present a range of environmental and social challenges. To remain a preferred partner for such projects we will need to demonstrate that we can operate major energy facilities in a safe and environmentally responsible way and be a good neighbour to local communities. We will also need to show that we consistently live by our business principles, including our commitment to contribute to sustainable development. Meeting these requirements effectively is a pre-requisite both for obtaining financing and successful project implementation. However, we cannot meet these challenges on our own. We will need to continue to develop our relationships with external organisations that can bring added value and credibility through the provision of scientific data and competences that we do not have.
Management of environmental and social activities
All Shell companies and joint ventures over which we have operational control apply the Shell General Business Principles. We also require contractors to follow the principles and strongly promote their application or their equivalent to ventures where we do not have operational control, as well as to our suppliers. We also have a series of Shell-wide standards that set consistent global requirements for dealing with the main environmental and social issues we face. They include standards for environment, security, biodiversity, animal testing, ship quality, health management, reputation, and diversity and inclusiveness. New in 2005 is the launch of our Golden Rules,which emphasise compliance with the law and company procedures, and require intervention in unsafe situations and respect for our neighbours. Three simple, easy-to-remember rules which are designed to raise awareness and increase personal accountability.
Our standards and commitments are integrated into our own business processes in many different ways. They are included in the criteria we use for assessing investment proposals and in the planning and design of all major new projects. An integrated environmental and social impact assessment is required before we undertake significant work and the actions identified must be included in the project’s design and operation. Social performance plans have been implemented at 30 refineries and chemicals facilities and are being implemented at upstream operations where social impacts could be high.
Shell companies have a systematic approach to health, safety and environmental (HSE) management to comply with relevant laws and regulations and to drive continuous improvement in performance. Every company is responsible for the identification and assessment of hazards and the implementation of control and recovery measures.
Sustainable development, including HSE, is part of the Chief Executive’s responsibilities. Compliance with the Business Principles and HSE standards is monitored through an annual assurance letter process in which the relevant senior manager is required to report back to the Chief Executive on the performance of their business area or country of operation against the Business Principles.
Sustainable development makes up 20% of the overall Group scorecard. The principal Key Performance Indicator (KPI) for this element of the scorecard is Total Reportable Case Frequency (TRCF), a measure of the number of injuries sustained by our staff and contractors as a function of the hours worked. The Chief Executive exercises judgment in the final determination of this score based on his perception of our overall sustainable development performance. Full details of all of the components of the scorecard can be found on page 87.
The Board’s Social Responsibility Committee reviews our policies and performance with respect to the Shell General Business Principles, HSE standards and major issues of public concern on behalf of the Board. This committee is composed of three independent Directors.
Risk and issues
Selection of issues
A systematic assessment was made to identify the risks which may have a potential impact on our social and environmental performance.
Climate change
Meeting growing demand for energy while mitigating the effect of carbon emissions on the environment is a key challenge for the energy industry and Shell recognises the importance of the need to take action on climate change. Since 1997, Shell has taken a number of initiatives both to reduce and manage carbon emissions from our own activities and to reduce emissions by our customers from the products we supply. This included setting voluntary targets to reduce greenhouse gas emissions from our own operations. We met the first target in 2002 and reconfirmed the second, which requires our greenhouse gas emissions in 2010 to be 5% below 1990 levels. We are working to achieve this through a continued focus on energy efficiency projects at our major downstream operations and by ending continuous flaring of natural gas at oil production facilities. We have also supported the development of CO2 management market mechanisms and are an active participant in the EU Emissions Trading Scheme. A senior level position has been created to ensure that we take an integrated approach to the management of carbon and drive carbon abatement technologies consistently across the Group.
We recognise that there are particular challenges ahead in producing oil and gas to meet future demand. More energy is required to produce oil from older fields, and developing unconventional resources such as oil sands. Our leading position in clean-burning natural gas helps reduce emissions but LNG and GTL facilities are energy intensive. We are working to develop the technology such as carbon capture and storage that will help reduce and manage these emissions. We are also developing alternative energies in wind, advanced solar, hydrogen and biofuels.


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Perhaps the greatest challenge is the fast-growing transportation sector, where we are helping customers reduce their emissions through a differentiated fuels strategy, providing premium quality transport fuels that reduce local air pollution and fuel consumption.
Operating in ecologically sensitive areas
There is growing concern about the potential harmful effects of the loss of the world’s biodiversity. This was underlined by the Millennium Ecosystem Assessment, carried out in 2005 by 1,300 scientists around the world, which highlighted the extent to which world’s ecosystems are being degraded. The challenge we face is to establish an appropriate balance between the need for development and the conservation of nature.
Shell is responding to that challenge in a number of ways. We have a Group Biodiversity Standard, which ensures that the potential impact on biodiversity of any projects is identified at an early stage. It requires plans to be developed to manage that impact including work with experts and relevant stakeholders. We have also made a commitment not to operate in natural World Natural Heritage sites. We have embedded biodiversity into the management of our projects and are now developing Biodiversity Action Plans (BAPs) for areas where we operate in IUCN (World Conservation Union) category I-IV protected areas in Brunei, the Netherlands, Nigeria and the US. We are identifying other areas of high biodiversity value and we aim to have BAPs in place for these areas by the end of 2007.
We have already developed considerable practical experience in protecting biodiversity and one of the challenges will be to apply what we have learned in new projects. We have worked for five years with the Smithsonian Institution to understand the impact of our business on the tropical rainforests of Gabon. Elsewhere staff working on the Sakhalin project have shared their work on mitigating the impact on the Western Gray Whale population with the team preparing to acquire seismic data in the Beaufort Sea north of Alaska.
We are also working with over 100 scientific and conservation organisations worldwide to help us manage local biodiversity issues and are now embarking on the next step to develop a select number of global partnerships to take this work further.
Managing the risk of a significant HSE incident
One of the major risks the Group faces is the possibility of a significant HSE incident involving the loss of life, environmental impact or asset damage. Each of our sites is responsible for the identification and assessment of hazards and effects, and the maintenance of a documented demonstration that major risks have been reduced to As Low As Reasonably Practicable (ALARP). The risk management process includes audits of the HSSE management system every three years, certification of environmental aspects to international standards such as ISO 14001 technical/HSE reviews and asset integrity processes. There is also a need to show that there is a framework in place to ensure that staff in HSSE-critical positions are competent to carry out their duties; a focus on the management of contractors; and an emphasis on the need for staff to comply with procedures and intervene in unsafe situations. The documentation also requires there to be processes in place for all serious incidents to be discussed with senior management, relevant lessons disseminated and for the Shell Group crisis management system to be applied should any serious incident occur.
Protecting our people and facilities
Our security procedures are governed by the Shell Group Security Standard. It applies to all Shell companies and requires full compliance with
applicable legal requirements, international standards and the Shell General Business Principles. Under the Standard, armed security can only be used when required by law, or where there is no other way to manage the risk, and only then in ways that comply with the United Nations Guidelines on the Use of Force. We also support the Voluntary Principles on Security and Human Rights and, in 2005, made progress in integrating these into our security practices. In response to the increased risk of terrorism, we also appointed a network of regional security advisers to work with governments and security authorities and provide local expertise and advice.
Human rights and political risks
An important element of our business principles is supporting fundamental human rights. This means protecting the rights of our employees and contractors, for example by providing grievance procedures and offering access to unions or staff councils, not using child labour and providing a safe and healthy work environment. It also includes addressing the challenges of operating in countries with a poor record on human rights and we use independent country assessments from The Danish Institute of Human Rights to help us develop our plans for dealing with human rights in specific countries.
This approach to human rights is part of our wider effort to manage political risks, which also include civil unrest, international sanctions and governments nationalising our assets. To manage these risks, we set clear rules and apply them using local knowledge. All of our operations are required to follow our business principles, which we also promote in joint ventures and with host governments. Our operations must also follow our security standard and comply with all applicable laws.
Behaving with integrity
Our business principles also make a very clear statement that we will not, under any circumstances, make or accept bribes or facilitation payments. Ensuring compliance with these rules requires ongoing training programmes and effective monitoring and detection. We have introduced a single global whistle-blower hotline and website allowing staff to report concerns anonymously.
Community relations
Shell works to establish good relations with the communities living near our operations. We try to do this through good environmental and safety performance, open and inclusive dialogue, and joint efforts to address issues of most concern.
We develop social performance plans to help us understand the many different points of view in the community, and to work with local representatives, often through a panel, on the issues that matter most to the community. The plans also involve monitoring our performance, for example through independent surveys. Our social performance management unit also provides expertise and support to individual facilities.
Making a contribution
Taxes and royalties represent our biggest economic contribution to the countries where we operate. In 2005 we collected on behalf of governmental authorities more than $72 billion in sales taxes and excise duties and paid almost $19 billion in corporate taxes and $2 billion in royalties to governments. In energy consuming countries, energy taxes are often the largest source of government revenues after income taxes. To help ensure these revenues benefit local communities, we continue to support initiatives such as the UK government’s Extractive Industries Transparency Initiative under which energy and mining companies publicly declare the payments they make to governments. In 2005, we published our payments to the Nigerian government and to the Russian government for our project on Sakhalin Island.


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Operating and Financial Review – Social and environmental

We also work to promote the use of local suppliers and contractors and, in 2005, we spent an estimated $9.2 billion on goods and services from locally owned companies in low and medium income countries, up from $6.3 billion in 2004. In 2005, we spent $127 million on social investment projects, up from $106 million in 2004. Our largest programmes are in Nigeria and the US.
Performance
Reporting environmental and social data
Reporting environmental and social data differs from financial data in a number of important ways (see our Group Performance Monitoring and Reporting Guide – www.shell.com/envandsociety). Safety and environmental data carry inherent limitations, which include the event nature of incident data and the need for estimation. Culture, individual behaviour and judgment can affect whether events are reported. We are confident in the overall reliability of our data, but we continue to improve data integrity by strengthening internal controls.
Safety and environmental data are aggregated from those entities under operational control (meaning we can require all our HSE standards to be applied) and certain companies to which we provide operational services. Data are reported on a 100% basis regardless of our equity share in the company. Other social data are either drawn from external sources or aggregated from all entities under operational control. Data from companies that were disposed of or acquired during the year are included only for the period that they were under operational control. During 2002, acquisitions made a material difference to the data we reported.
We set one year performance improvement targets for some of our key HSE parameters (injuries, flaring, energy efficiency and spills). We have also set longer term targets to eliminate the disposal of gas by continuous flaring and reduce greenhouse gas emissions.
Social
Safety
Fatal Accident Rate
Employees and contractors per 100 million working hours
(ACCIDENT RATE CHART)
We are deeply saddened that three employees and 33 contractors lost their lives at work in 2005, of which 10 were road accidents. We have reduced our Fatal Accident Rate by about 15% since 2001. This has mainly been achieved by a steady drop in the number of deaths from road accidents, helped by our driver safety programmes and by the introduction of stricter driving standards in 2005. It has proved harder to reduce fatalities due to other causes, both at our existing operations and on our new construction projects. Many of these deaths, nine in 2005, come from workers falling. We are strengthening our guidance for working safely at heights.
Injuries – TRCF (Total Recordable Case Frequency)
Employees and contractors per million working hours
(INJURY RATE CHART)
Our injury rate, measured by the TRCF, has come down over time, improving approximately 14% since 2001. In 2005 our reported TRCF was in line with our target. However, unlike the reduction in the number of fatalities, the improvement in TRCF has stalled in recent years. This partly reflects an increase in construction projects in challenging areas, which bring a higher risk of injury than ongoing operations. It also results from the need to improve the safety performance of some acquisitions, for example in our lubricants business in the US.
Continuing the trend and improving our safety performance further remains an important priority. Our fatality target remains zero. The failure to reduce TRCF further also reflects the challenge of changing behaviour and strengthening the safety culture in the Group, which the “Hearts and Minds”, HSE competence and Golden Rules programmes are designed to address. Making TRCF the lead indicator in the Sustainable Development section of Shell’s company scorecard in 2005 and 2006 underlines the importance we place on improving our safety performance. Our TRCF target for 2006 remains unchanged at 2.5, mainly due to portfolio changes.
Safety data are subject to uncertainty due to difficulties in underlying data capture of incidents and control weaknesses in reporting the hours worked.
Favourability
In 2005 we improved our indicator for tracking how society views us. For the fourth year in a row, the Reputation Tracker Survey was conducted on our behalf by a polling agency. It polls the general public, the financial community and media, non-governmental organisations (NGOs), the government, academics and the business community, in 13 major Shell markets. We looked not only at the share of favourable opinions of us, as in the past, but also at the unfavourable, subtracting one from the other to get a sense of the overall balance or “net favourability” and compared it to the next most favourably viewed energy company in each market.
According to this survey, we have been the most favourably viewed energy company with the general public in these markets every year since the survey began. In 2005, we retained that position, though the gap with our competitors narrowed slightly. Among special publics, where we were also ahead in past years, competitors have closed the gap. However, we are making progress in repairing the damage to our reputation that was done with this group by the 2004 reserves restatement and related issues.
Integrity
We track our performance in living up to our policy of zero tolerance for bribes, facilitation payments and illegal acts, in two ways.
First, we ask all our staff, confidentially, in the Shell People Survey, what their own experience has been. In 2004, the last year the survey was done, 79% said that their part of Shell was dealing with the outside world with integrity and does not tolerate bribery or other breaches of our business


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principles. Approximately 5% did not. Scores have improved steadily. We will check progress again in the 2006 Shell People Survey.
Second, we track the number of proven incidents of bribery and fraud gathered by our internal incident reporting system and reported to the Audit Committee of the Board of Royal Dutch Shell. In 2005, we dismissed 175 staff and contractors for violating our principles. This is a significant drop from 2004. We believe this is partly a result of well-publicised dismissals in 2004, particularly in Nigeria. We continued to improve detection of bribery, facilitation and other incidents of fraud, including introducing whistle-blowing facilities for staff to report concerns anonymously.
Environmental
Greenhouse gas emissions
CO2 equivalent in million tonnes
(GREENHOUSE GAS CHART)
About three quarters of the greenhouse gas emissions from our own operations result from fuel combustion, with most of the rest due to the flaring of gas associated with oil production. The volumes emitted in 2005 reversed their slow six year rise, falling by 7 million tonnes. Most of the reduction came from upstream operations, partly because we reduced flaring at a major oil field in Nigeria and partly because of lower production. Downstream emissions, approximately half our total, were down slightly in 2005, as improvements in energy efficiency at our refineries, particularly at US facilities, and the divestment of the Bakersfield refinery more than compensated for the extra energy needed to refine cleaner, lower sulphur fuels.
We remain on track to meet our 2010 target of having 5% lower greenhouse gas emissions than in 1990, through a combination of improved energy efficiency and ending the continuous flaring of natural gas at oil production facilities during 2009. These major efforts will be needed to offset business growth to 2010 and the extra energy needed to produce from fields that are ageing or have heavier hydrocarbons.
Flaring
Flaring in Exploration & Production (million tonnes)
(FLARING CHART)
The amount of natural gas from oil wells that we flare has been declining since 2001 thanks to a major programme to install equipment to collect this gas and bring it to market. The SPDC joint venture in Nigeria, responsible for approximately two thirds of our total, has invested more than $2 billion and
reduced its flaring by a third over five years. The 13% reduction from 2004 to 2005 in our total flaring was due partly to lower production, partly to the increased availability of compressors, which allowed us to run the gas gathering equipment at existing facilities more, and partly to the ending of continuous flaring at Nigeria’s Cawthorne Channel field. Uncertainties arise because some data from Nigeria are calculated without standardised procedures in place.
The SPDC joint venture programme remains on track to meet its revised deadline of ending continuous flaring during 2009. New facilities are being built to avoid continuous flaring, in line with our Group-wide environmental standards.
Energy efficiency
Refineries – Energy Intensity Index (EII)
(ENERGY EFFICIENCY CHART)
In 2005 we switched to using the Solomon and Associates Energy Intensity Index (EII) to measure and report the energy efficiency of our refineries. This makes us consistent with general practice in our industry and allows us to compare our performance with other operators. Our energy efficiency has continuously improved since we began the annual measurement of EII in 2002, due to having shorter and fewer planned shut downs, running refineries closer to their full production capacity, and to energy efficiency programmes. Despite our improvement programmes, we missed our 2005 target due to:
  ambitious energy efficiency targets for several of our refineries in Asia that were not fully realised; and
 
  a number of unplanned events that required the total shutdown and startup of a few of our larger energy contributing sites, including the effects of the hurricanes in the US Gulf Coast.
Chemicals – Chemicals Energy Index (CEI)
(CHEMICALS ENERGY INDEX CHART)
In our chemicals plants, the Chemical Energy Index (CEI), which compares the energy used to make a tonne of product to a 2000 baseline of 100, worsened in 2005, after three years of steady improvement. This was largely due to unplanned shutdowns as a result of the Gulf Coast hurricanes and a number of technical issues. Shutdowns consume additional energy as the plants are safely brought down and subsequently restarted. Chemicals remains on track to meet its 2007 target of lowering its CEI by 10% compared to 2001, through having fewer shut downs, investment projects


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Operating and Financial Review – Social and environmental

and operational changes resulting from energy efficiency programmes.
Exploration & Production – Gigajoule/tonne of production
(EXPLORATION AND PRODUCTION CHART)
In Exploration & Production, the trend of needing more energy to produce each unit of oil and natural gas continued in 2005, having increased by over 40% since 2001. This is mainly the result of producing from maturing fields, which require more energy to produce resources and of increasing production of heavier oil in Oman and oil sands in Canada. Given the strategy of the company and the current portfolio, we expect the current trend to continue.
Spills volume
Thousand tonnes
(SPILLS VOLUME CHART)
*   Data restated due to recovery of 564 tonnes of oil contained in a pipeline damaged by hurricane Ivan.
We have seen a gradual downward trend in the volumes of spills caused by corrosion or operational failures over time, but not the number of incidents. Part of this has been due to our programme to improve pipeline monitoring and maintenance in Nigeria over the last few years, investments in Oman, and to greater focus in our downstream distribution network. However, the impact of two other important sources of spills meant that we did not meet our target in 2005. In Nigeria, the volume of spills resulting from sabotage was higher, although we have increased community patrols and the protection of vulnerable pipeline sections. Damage to onshore pipelines from hurricanes in the US and Gulf of Mexico caused several spills, the largest were at Nairn and Pilottown in Louisiana in September. A total of 3,900 tonnes of oil were spilled as a result of the hurricanes.
External perception of environmental performance
The Group scored highest in the industry for “environmental responsibility” for the fourth year in a row, in the 2005 Reputation Tracker Survey (see favourability on page 68 for details). A quarter of respondents from the general public ranked Shell as “the best” or “one of the best” in acting responsibly towards the environment; so did a third of respondents from the media, non-governmental organisations (NGOs) and government.


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Operating and Financial Review – People

People
Our ability to effectively recruit new talent, and develop and engage approximately 109,000 employees in more than 140 countries is critical to the sustained success of Shell.
During 2005, we focused our people strategy in support of the Group’s strategy of more upstream and profitable downstream. This included targeted recruitment of key technical staff, greater investment in technical professionalism, and driving the benefits of the simpler corporate structure (one Company – one Chief Executive) deeply into the organisation.
Resourcing for the future
In 2005, we recruited more than 700 graduates and almost 2,000 experienced people from over 70 different nationalities, underlining our focus on recruiting from a wider range of countries and regions, especially Asia Pacific and the Middle East.
We have made good progress in securing the required technical talent. Our successful, large-scale recruitment drive for experienced Exploration & Production professionals in 2005 means that Shell is well positioned to deliver on the increased level of investment in our upstream business. The recent appointment of Chief Scientists also demonstrates our continued commitment to technology and innovation, and confirms the strength of Shell’s career and development opportunities for technical staff.
Our capacity to deploy skilled professionals to priority work around the globe is matched by our strong emphasis on local careers and employee development with 49 nationalities represented among our senior leaders.
Strengthening leadership and deepening professionalism
Shell’s ability to capitalise on growth opportunities in emerging markets relies on the skills and professionalism of our employees.
To maximise the potential of our existing staff, we continue to invest in training and development through a balance of on and off-the-job learning. The establishment of Project and Commercial Academies will provide new opportunities for staff to develop expertise in these areas.
Just as important is the ability to manage change effectively, and in 2005 we increased both resources and capability in support of business critical change initiatives.
In addition, we are committed to the development of leadership capability through the integrated cross-business Shell Leadership Development programmes. These are delivered through strong partnerships with major international academic institutions and in 2005, more than 7,000 people with leadership potential participated in these programmes.
Communication and involvement
The success of our business depends on the full commitment of all employees. We encourage the involvement of employees in the planning and direction of their work, and provide them with safe and confidential channels to report concerns.
Employees in all countries where we operate have access to staff forums, grievance procedures or other support systems. A global Ethics and Compliance Helpline was introduced during December 2005, offering an independent, confidential and anonymous facility for reporting non-compliance and resolving dilemmas and concerns.
A wide range of methods is employed globally to communicate and consult with employees on matters of concern to them and to raise their awareness generally about the performance of Shell. These methods range from face-to-face communication, through targeted e-mails and intranet sites, to focus groups and webcasts.
The Shell People Survey is conducted every two years, and asks employees for their opinions on a number of topics relating to how they feel about working at Shell. The last survey in 2004 had a 78% response rate and showed an overall satisfaction rate of 64%. The next survey will take place in 2006.
We seek to establish and maintain high-quality, direct and open dialogue with employees. Our staff are represented by collective labour agreements, unions and staff councils in many countries in which the Group has operations.
Diversity and inclusiveness
Shell has had a long-standing commitment to the integration of diversity and inclusiveness into every aspect of our operations and culture. This is pursued through explicit expectations for all employees and leaders, underpinned by clear plans and targets. There are three global objectives: improving the representation of women in senior leadership positions to a minimum of 20% in the long term, improving the representation of local people in senior positions in their own countries; and improving the positive perceptions of inclusiveness in the workplace.
At the end of 2005, women in senior leadership positions had increased to 9.9%, compared with 9.6% in 2004. In 36% of countries, local nationals fill more than half of senior leadership positions. The Shell People Survey (2004) reported that 64% of employees perceived workplace inclusiveness favourably. Overall, these results represent good progress, but further improvement is needed to meet our aspirations.
We endeavour to ensure equal opportunity in recruitment, career development, promotion, training and reward for all employees, including those with disabilities. All applicants and employees are assessed against clear and objective criteria.


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Operating and Financial Review – People
People
Employees by segment (average numbers)
 
thousands  
    2005     2004     2003a     2002     2001  
 
Exploration & Production
    18       16       17       17       14  
Gas & Power
    2       2       2       2       2  
Oil Products
    71       78       82       75       58  
Chemicals
    8       8       9       9       9  
Other industry segments and Corporate
    10       9       9       8       7  
 
Total
    109       113       119       111       90  
 
Employees by geographical area (average numbers)
 
thousands  
    2005     2004     2003a     2002     2001  
 
Europe
                                       
The Netherlands
    10       10       11       11       10  
UK
    7       8       8       9       10  
Others
    22       25       27       26       18  
 
 
    39       43       46       46       38  
Other Eastern Hemisphere
    33       30       28       27       24  
USA
    24       26       30       23       12  
Other Western Hemisphere
    13       14       15       15       16  
 
Total
    109       113       119       111       90  
 
Employee emoluments
 
$ million  
    2005     2004     2003a     2002     2001  
 
Remuneration
    8,286       8,037       7,477       6,096       4,651  
Social law taxes
    681       691       660       518       395  
Retirement benefits
    768       782       538       (201 )     (580 )
Share-based compensation
    376       285                          
 
Total
    10,111       9,795       8,675       6,413       4,466  
 
a   In connection with the adoption of IFRS as of January 1, 2004, an entity in Europe that had previously been accounted for as a Group company on a proportionate basis, has instead been accounted for as an equity accounted investment. As a result of this change, information as of December 31, 2003 shown for Group companies is, as of January 1, 2004, shown as part of the Group share of equity accounted investments.

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Operating and Financial Review – Other matters

Key accounting estimates and judgments
Please refer to Note 4 to the Consolidated Financial Statements for a discussion of key accounting estimates and judgments.
Legal proceedings
Please refer to Note 33 to the Consolidated Financial Statements for a discussion of legal proceedings.
Audit Fees
Please refer to Note 35 to the Consolidated Financial Statements for a discussion of auditors’ fees and services.
Share-based plans and treasury shares
There are a number of share-based plans for senior staff and other employees of the Shell Group. Following the Unification Transaction, the underlying shares for all the continuing share-based plans are shares of Royal Dutch Shell and awards and rights under the plans in existence at the time of the Unification Transaction have been converted into awards and rights over Royal Dutch Shell shares. In 2005 the share option plans were replaced with an amended Long-Term Incentive Plan. Plans of Shell Canada (Shell Canada attached stock appreciation rights to the options in the fourth quarter of 2004, see Note 29 to the Consolidated Financial Statements) continue unchanged. Details of the principal plans, both old plans with continuing outstanding awards and the Long-Term Incentive Plan / Performance Share Plan are given below.
Share option plans
The options that were granted under the Shell Group’s share option plans were share options over shares of Royal Dutch or Shell Transport (now converted into options over shares of Royal Dutch Shell), at a price not less than the fair market value of the shares at the date the options were granted. This was calculated as the average of the stock exchange opening and closing prices over the five business days ending on the date of grant, except for the US plans where the grant price was the New York Stock Exchange closing price on the date of grant. Options under the Shell Group option plans are generally exercisable three years from grant except for those granted under the separate US plans that vest one-third per year for three years. Share options lapse 10 years after grant; however, leaving Group employment may cause options to lapse earlier. No further grants will be made under the share option plans (with the exception of the plans of Shell Canada).
Details of the shares under option at March 1, 2006 in connection with these plans (excluding Shell Canada) are as follows:
                         
 
Royal Dutch Shell  
    Class A Shares     Class B Shares     Class A ADRs  
 
Options outstanding
    63,963,452       45,572,062       21,468,486  
 
Average price per share
    24.95     £15.75     $50.15  
 
Total price
    1,596,164,200     £717,901,824     $1,084,230,116  
 
Term
    10/12/07-       10/12/07-       01/03/10-  
(Expiration dates)
    06/05/14       06/05/14       07/05/14  
 
Long-Term Incentive Plan and Performance Share Plan
In July 2005 Royal Dutch Shell adopted an amended Long-Term Incentive Plan (LTIP). When awards are made under the LTIP other than to the Executive Directors the plan is called the Performance Share Plan (PSP). On the award date conditional awards are made of Royal Dutch Shell shares. The actual amount of shares that may vest, which can be between 0 – 200% of the conditional award, depends on the Total Shareholder Return of Royal Dutch Shell versus four of its main competitors over a three year performance period. For the conditional shares awarded in 2005, the performance measurement period is three years, starting at January 1, 2005 until December 31, 2007. In 2005 the awards under the LTIP and PSP were made after the Royal Dutch Shell merger process. In coming years it is anticipated that awards will be made in the second quarter of each year with the performance measurement period being the full calendar year of grant and the two consecutive calendar years. None of the shares will result in beneficiary ownership until they are released.
The total number of outstanding shares of Royal Dutch Shell conditionally awarded under these plans as at March 1, 2006 is 5,430,065 (Class A), 3,075,196 (Class B) and 1,785,890 (Class A ADRs) of which 50,145 (Class A) , 28,631 (Class B) and 15,219 (Class A ADRs) relate to dividend shares to date.
Restricted share plan
Under the restricted share plan, awards are made on a highly selective basis to senior staff. Executive Directors may not receive awards under the restricted share plan. In 2005 the existing restricted share plan was replaced with a new restricted share plan consistent with amendment of the Long-Term Incentive Plan and Performance Share Plan. Shares are awarded subject to a three year restriction period. The shares, together with additional shares equivalent to the value of the dividends payable over the restriction period, are released to the individual at the end of the three year period. The total number of outstanding shares of Royal Dutch Shell under these plans as at March 1, 2006 is 221,402 (Class A), 218,594 (Class B) and 22,410 (Class A ADRs) of which 10,560 (Class A) , 11,449 (Class B) and 194 (Class A ADRs) relate to dividend shares to date.
Deferred Bonus Plan
Executive Directors who participate in the Deferred Bonus Plan can elect to defer up to 50% of their annual bonus for an award of Royal Dutch Shell Shares (“Deferred Bonus Shares”) which is released after three years. From 2006, Executive Directors will be required to defer 25% of their annual bonuses. Subject to remaining in employment with the Shell Group for three years following the year in which the bonus was earned, the participant may also be granted an additional award of matching Royal Dutch Shell Shares (“Matching Shares”) equal to the number of Deferred Bonus Shares awarded together with Royal Dutch Shell shares representing the value of dividends payable on the Deferred Bonus Shares. A maximum of four Matching Shares will be awarded for every four Deferred Bonus Shares. Vesting of three out of every four Matching Shares awarded to Executive Directors will be subject to satisfaction of a performance target with the remaining Matching Shares vesting over time.
The total number of outstanding shares (excluding Matching Shares) of Royal Dutch Shell under these plans as at March 1, 2006 is 26,576 (Class A) and, 17,386 (Class B) of which 230 (Class A) and 145 (Class B) relate to dividend shares to date.


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Operating and Financial Review – Other matters

Global Employee Share Purchase Plan
This plan enables employees to make contributions, which are applied quarterly, to purchase Royal Dutch Shell plc Class A shares, Class A ADRs or Class B shares at current market value. If the acquired shares are retained in the plan until the end of the twelve month savings cycle the employee receives an additional 15% share allocation. In the US a variant of this plan is operated, where the main difference is that the purchase price is the lower of the market price on the first or last trading day of the cycle, reduced by 15%. Executive Directors are not eligible to participate in the Global Employee Share Purchase Plan.
At March 1, 2006 the number of shares of Royal Dutch Shell which were held in employee benefit trusts in connection with this plan was 0 Class A, 0 Class B and 760 Class A ADRs.
UK Sharesave Scheme
Employees of participating companies in the UK may participate in the UK Sharesave Scheme. Options are granted over Royal Dutch Shell plc Class B shares at prices not less than the market value on a date not more than 30 days before the grant date of the grant of the option. These options are normally exercisable after completion of a three year or five year contractual savings period.
At March 1, 2006 there were 3,230,230 issued and outstanding Royal Dutch Shell Class B ordinary shares under option to such employees pursuant to the rules of those schemes at prices between £12.9466 and £19.8028.
No issue of new shares is involved under any of the plans or schemes mentioned above.
Group share plans
Please refer to Note 29 to the Consolidated Financial Statements for a further discussion of the principal Group share plans.


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Report of the Directors

The share capital of Royal Dutch Shell was listed on the official list of the United Kingdom Listing Authority and was admitted to trading on the London Stock Exchange, Euronext Amsterdam and (in the form of ADRs) on the New York Stock Exchange on July 20, 2005. Prior to July 20, 2005, the share capital of Royal Dutch Shell was not listed nor admitted to trading in London or elsewhere and Royal Dutch Shell had no operations.
This Report of the Directors gives information about Royal Dutch Shell as from the date of its listing on July 20, 2005 although the Consolidated Financial Statements of Royal Dutch Shell set out on pages 104 to 155 and the Parent Company Financial Statement