20-F 1 u50376e20vf.htm FORM 20-F e20vf
Table of Contents

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, 2006
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
 
   
5.625% Guaranteed Notes due 2011
  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, 2006:
3,585,194,588 RDS Class A ordinary shares of the nominal value of 0.07 each.
2,713,568,281 RDS 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

(4 SHELLS GRAPHIC)
Delivery and growth
Royal Dutch Shell plc
Annual Report and Form 20-F for the year ended December 31, 2006
(SHELL LOGO)

 


Table of Contents

Royal Dutch Shell
Our purpose
The objectives of the Shell Group are to engage safely, responsibly, efficiently and profitably in oil, gas, oil products, 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 in environmentally and socially responsible ways, safely and profitably.
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 stakeholders to advance more efficient and sustainable use of energy and natural resources.







 


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       4-6, 220
 
  B.   Capitalisation and indebtedness       N/A
 
  C.   Reasons for the offer and use of proceeds       N/A
 
  D.   Risk factors       13-14
Item 4.   Information on the Company        
 
  A.   History and development of the company       4-5, 10, 17, 20, 23, 27-31, 33-37, 39-41, 49-53, 108,184
 
  B.   Business overview       10-12, 16-55, 62-67, 161-167
 
  C.   Organisational structure       4, 204-207
 
  D.   Property, plant and equipment       10-12, 16-53, 62-64
Item 4A.   Unresolved Staff Comments       N/A
Item 5.   Operating and Financial Review and Prospects        
 
  A.   Operating results       4-7, 10-12, 16-64, 68-69
 
  B.   Liquidity and capital resources       56-57
 
  C.   Research and development, patents and licences, etc.       20, 34, 40, 49, 53, 74, 112
 
  D.   Trend information       10-14, 16-21, 32-34, 38-41, 48-49, 52-55
 
  E.   Off-balance sheet arrangements       57
 
  F.   Tabular disclosure of contractual obligations       59
 
  G.   Safe harbour       N/A
Item 6.   Directors, Senior Management and Employees        
 
  A.   Directors and senior management       72-73, 185
 
  B.   Compensation       84-99
 
  C.   Board practices       78-83
 
  D.   Employees       60-61, 77
 
  E.   Share ownership       76,183
Item 7.   Major Shareholders and Related Party Transactions        
 
  A.   Major shareholders       76,183,188
 
  B.   Related party transactions       75, 190, 203, 216
 
  C.   Interests of experts and counsel       N/A
Item 8.   Financial Information        
 
  A.   Consolidated Statements and Other Financial Information       44-46, 57, 74, 100-160, 191-207, 217-219
 
  B.   Significant Changes       74, 204
Item 9.   The Offer and Listing        
 
  A.   Offer and listing details       183, 217
 
  B.   Plan of distribution       N/A
 
  C.   Markets       183
 
  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       78, 98-99, 184-190
 
  C.   Material contracts       75, 93-96
 
  D.   Exchange controls       189
 
  E.   Taxation       189-190
 
  F.   Dividends and paying agents       N/A
 
  G.   Statement by experts       N/A
 
  H.   Documents on display       v
 
  I.   Subsidiary Information       N/A
Item 11.   Quantitative and Qualitative Disclosures About Market Risk       82, 111, 168-182
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       81-83
Item 16.   [Reserved]        
Item 16A.   Audit committee financial expert       79
Item 16B.   Code of Ethics       78
Item 16C.   Principal Accountant Fees and Services       69, 80, 148
Item 16D.   Exemptions from the Listing Standards for Audit Committees       78
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers       58
Part III
          Pages
Item 17.   Financial Statements       N/A
Item 18.   Financial Statements       100-160, 191-207
Item 19.   Exhibits       221
iv   Royal Dutch Shell plc

 


Table of Contents

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, 2006, for Royal Dutch Shell plc (“Royal Dutch Shell”) and its subsidiaries. It presents the Consolidated Financial Statements of Royal Dutch Shell (pages 103–160) and the parent company-only Financial Statements of Royal Dutch Shell (pages 191–207). This Report complies with all applicable UK regulations. This Report also includes the disclosure included in the Annual Report on Form 20-F for the year ended December 31, 2006 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 equity accounted investments 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 the provisions of the Companies Act 1985, Article 4 of the International Accounting Standards (IAS) Regulation 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. Prior to the Shell Group’s date of transition to IFRS of January 1, 2004 it prepared Consolidated Financial Statements in accordance with US Generally Accepted Accounting Principles (“US GAAP”). Tables and disclosure that provide data over a five year period show 2006, 2005 and 2004 on an IFRS basis and 2003 and 2002 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 (see page 4) 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 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. 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 also available, free of charge, at www.shell.com/annualreport or at the offices of Royal Dutch Shell in The Hague, The Netherlands and London, UK. You may also obtain copies of this Report, free of charge, by mail.


Royal Dutch Shell plc   v

 


Table of Contents

Abbreviations
Listed below are the most common abbreviations used throughout this Report.
     
 
units of measurement    
acre (approximately 0.4 hectares)
  acre
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
carbon dioxide
  CO2
corporate social responsibility
  CSR
engineering, procurement and construction
  EPC
front-end engineering design
  FEED
greenhouse gas
  GHG
health, safety and environment
  HSE
health, safety, security and environment
  HSSE
International Financial Reporting Interpretations Committee
  IFRIC
International Financial Reporting Standards
  IFRS
non-governmental organisation
  NGO
Operating and Financial Review
  OFR
production sharing agreement
  PSA
production sharing contract
  PSC
Remuneration Committee
  REMCO
Research and development
  R&D
Total Recordable Case Frequency
  TRCF
United States Generally Accepted Accounting Principles
  US GAAP
United States Securities and Exchange Commission
  SEC
United States Gulf Coast
  USGC
vi   Royal Dutch Shell plc

 


 

                     
Royal Dutch Shell
                     
 
                   
 
                   
 
                             
REVIEW OF THE YEAR
    2     Chairman’s message                
 
    3     Chief Executive’s review                
 
    4     Unification of Royal Dutch and Shell Transport    
 
    4     Selected financial data                
 
OPERATING AND FINANCIAL REVIEW
    10     Business and market overview     53     Research and development    
 
    13     Risk factors     54     Key performance indicators  
 
    16     Summary of Group results     56     Liquidity and capital resources    
 
    18     Upstream – Exploration & Production   60     Our people    
 
    32     Upstream – Gas & Power     62     Environment and society    
 
    38     Downstream – Oil Products     65     Environmental data    
 
    48     Downstream – Chemicals     67     Social data    
 
    52     Other industry segments and Corporate     68     Share plans and other matters    
 
                           
 
REPORT OF THE DIRECTORS
    72     The Board of Royal Dutch Shell plc                
 
    74     Report of the Directors              
 
                         
 
CORPORATE GOVERNANCE
    78     Corporate governance              
 
                         
 
DIRECTORS’ REMUNERATION REPORT
    84     Directors’ Remuneration Report              
 
                         
 
REPORT OF THE INDEPENDENT AUDITORS
    100     Reports of the Independent Auditors                
CONSOLIDATED FINANCIAL STATEMENTS
    103     Consolidated Financial Statements                
 
    108     Notes to the Consolidated Financial Statements    
 
                           
 
SUPPLEMENTARY INFORMATION
    161     Oil and gas (unaudited)    
 
    168     Derivatives and other financial instruments and derivative commodity instruments (unaudited)    
 
    183     Control of registrant (unaudited)    
 
                           
 
PARENT COMPANY
    191     Parent Company Financial Statements    
FINANCIAL STATEMENTS
    196     Notes to the Parent Company Financial Statements    
 
                           
 
REPORT OF THE INDEPENDENT AUDITORS
    208     Report of the Independent Auditors                
ROYAL DUTCH SHELL GROUP
    210     Royal Dutch Shell Group Dividend Access Trust Financial Statements    
DIVIDEND ACCESS TRUST
    215     Notes to the Royal Dutch Shell Group Dividend Access Trust Financial Statements    
FINANCIAL STATEMENTS
               
 
                           
 
ADDITIONAL SHAREHOLDER INFORMATION
    217     Additional Shareholder Information (unaudited)        
& EXHIBITS
    221     Exhibits                
 
                           
 DIVIDEND ACCESS TRUST DEED
 FORM OF LETTER OF APPOINTMENT FOR JORMA OLLILA
 FORM OF LETTER OF APPOINTMENT FOR JEROEN VAN DER VEER, AS EXECUTIVE DIRECTOR
 FORM OF LETTER OF APPOINTMENT FOR FOR PETER VOSER, AS EXECUTIVE DIRECTOR
 FORM OF LETTER OF APPOINTMENT FOR MALCOLM BRINDED, AS EXECUTIVE DIRECTOR
 FORM OF LETTER OF APPOINTMENT FOR LINDA COOK, AS EXECUTIVE DIRECTOR
 FORM OF LETTER OF APPOINTMENT FOR ROB ROUTS, AS EXECUTIVE DIRECTOR
 FORM OF LETTER OF APPOINTMENT FOR NON-EXECUTIVE DIRECTORS
 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
 SIGNIFICANT GROUP COMPANIES AS AT DEC 31, 2006
 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 ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST
Royal Dutch Shell plc 1


Table of Contents

(PICTURE OF JORMA OLLILA)

Chairman’s message
As Shell marks its centenary year, I hope shareholders share my excitement at being part of a business that is successfully playing its part in meeting the world’s energy needs.
 
 
In this, my first message to shareholders, I would like to share with you some of the impressions I have gained since I became Chairman of Royal Dutch Shell plc in 2006.
The energy business, as I am seeing first-hand, is at the heart of some of the most important economic, environmental and social issues facing the world. Reliable and affordable supplies of energy are essential for economic growth and for raising living standards amongst the world’s poorest people. Equally, as the growing concern over climate change shows, providing those energy supplies in a way that minimises the impact on the environment is one of the greatest challenges we all face.
Shell is playing its part in addressing those challenges. Our business strategy is focused on finding and producing the resources to help meet the world’s growing demand for energy, and doing so in a responsible way. This includes researching and developing projects to reduce carbon dioxide emissions and ensuring that the operations at individual Shell facilities meet the highest environmental standards. The Board’s Social Responsibility Committee has a very direct role in overseeing the company’s approach to these issues and makes regular visits to Shell locations to see how environmental and social challenges are being met.
I see the Board’s role as providing both support and challenge to the Chief Executive and his team in their work; and ensuring that Shell continues to provide shareholders with the returns they expect. I believe that the structures put in place since our 2005 unification provide an effective framework for the Board to fulfil that role. I would like to pay a particular tribute to my predecessor as Chairman, Aad Jacobs, for his role in seeing the company through a challenging period.
Across Shell I have met dedicated and committed people working in a productive corporate culture with very strong values. I have been particularly impressed with the way they are responding to the pace of change in the energy industry; how they are delivering strong results; and how they are putting in place plans to secure the future growth of Shell’s business.
As Shell marks its centenary year, I hope shareholders share my excitement at being part of a business that is successfully playing its part in meeting the world’s energy needs.
Jorma Ollila
Chairman


 


Table of Contents

  (PICTURE OF JEROEN VAN DER VEER)

Shell performed well in 2006. Our financial position is strong and we posted record income of $26.3 billion, returning $16.3 billion to shareholders. We built on our achievements of 2005 by focusing on delivery and growth, laying solid foundations for our future.
Our strategy of more upstream, profitable downstream is on track. We made good progress in rejuvenating our diverse portfolio. Our upstream exploration efforts are paying off. We invested large stakes in major integrated long-life projects that will generate cash for decades to come. Downstream, we added to our growth portfolio, especially in China.
The security situation in Nigeria – which has shut significant production in the Delta region – remains a serious concern and we do not know when production will resume. Our deep water projects in Nigeria really delivered in 2006, partially offsetting lost production onshore. In Sakhalin, we cleared the way forward by agreeing to partner with Gazprom on what is the world’s largest integrated oil and gas project under construction.
Our Exploration & Production business performed well. Earnings were up 7% from 2005 at $15.2 billion. We added approximately 2 billion barrels of oil equivalent to our proved oil and gas reserves and proven mining reserves. The bid for the minority shares in Shell Canada and expansion of the Athabasca Oil Sands Project reaffirm our commitment to maintaining a leading position in unconventional oil.
Our Gas & Power division delivered particularly strong earnings growth of 68% at $2.7 billion. We are proceeding with construction of the Pearl Gas to Liquids (GTL) plant in Qatar, the largest such plant in the world. Sales of liquefied natural gas (LNG) grew 14%, strengthening our leading position in the LNG markets of North America, Asia Pacific and Europe.
Downstream we are investing in major manufacturing projects, particularly in Asia. The expansion of our petrochemicals complex in Singapore and a successful start-up of the Nanhai complex in China strengthen our position in Asia’s dynamic markets. We acquired a 75% interest in China’s leading lubricants manufacturer and marketer, making Shell the leading lubricants company in China. Plans to expand our Port Arthur facilities would create the largest refinery in the USA.
As we operate in ever more demanding environments, safety becomes a bigger challenge. We continue to place great emphasis on training to support safety’s role as a key component of operational excellence. Our safety performance in 2006 was mixed, however, with an increase in fatalities. We have responded by reinforcing our safety focus through a dedicated global safety function that will improve compliance with standards and procedures worldwide.
We remain committed to developing one substantial business in alternative energy. We launched our first offshore wind farm in the North Sea off the Netherlands. We continue to make progress on projects in hydrogen, advanced solar technology and second-generation biofuels.
I am convinced that technology is key to delivering our business strategy and the complex projects of the future. In 2006 we appointed a Chief Technology Officer to head our technology drive with seven Chief Scientists and thousands of technical staff at our worldwide technology centres, including our new one in Bangalore, India. We also published Shell’s first Technology Report.
Technology is central to managing carbon dioxide (CO2) emissions. Within Shell we are pursuing a range of activities to address the challenge of CO2, including improving efficiency, reducing flaring and exploring opportunities for CO2 capture and storage.
None of this would be possible without the efforts of our people, who I would like to thank. Our strong performance in 2006 prepares us well for the increasingly fierce competition in the energy industry and confirms our ability to deliver results to both shareholders and our partners. In 2007 we will strive to maintain our momentum by continuing to focus on delivery and growth.
Jeroen van der Veer
Chief Executive
Our strong performance in 2006 confirms
our ability to deliver results. This is the basis
for our growth.
 


 


Table of Contents

Unification of Royal Dutch and Shell Transport
In 2005, Royal Dutch Shell plc (Royal Dutch Shell) became the single parent company of Royal Dutch Petroleum Company (“Royal Dutch”) and of The “Shell” Transport and Trading Company, p.l.c. (“Shell Transport”) the two former public parent companies of the Group (the “Unification”).
Immediately after the Unification each former Royal Dutch and Shell Transport shareholder who participated in the Unification held the same economic interest in Royal Dutch Shell as the shareholder held in the Group immediately prior to implementation of the Unification. Accordingly, the Unification 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.
4   Royal Dutch Shell plc
 
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[A]     $ million  
    2006     2005     2004  
Revenue
    318,845       306,731       266,386  
Income from continuing operations
    26,311       26,568       19,491  
Income/(loss) from discontinued operations
          (307 )     (234 )
 
Income for the period
    26,311       26,261       19,257  
 
Income attributable to minority interest
    869       950       717  
 
Income attributable to shareholders of Royal Dutch Shell plc
    25,442       25,311       18,540  
 
 
                       
EARNINGS PER SHARE
                    $  
Basic earnings per 0.07 ordinary share
    3.97       3.79       2.74  
– from continuing operations
    3.97       3.84       2.77  
– from discontinued operations
          (0.05 )     (0.03 )
Diluted earnings per 0.07 ordinary share
    3.95       3.78       2.74  
– from continuing operations
    3.95       3.83       2.77  
– from discontinued operations
          (0.05 )     (0.03 )
[A]   Prior to 2004, financial statements prepared in accordance with IFRS are not available. Going forward, additional years will be presented until the usual five years of data is provided.


 


Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

                         
CONSOLIDATED BALANCE SHEET DATA
  $ million
    2006     2005     2004  
Total assets
    235,276       219,516       187,446  
Share capital
    545       571       604  
Equity attributable to shareholders of Royal Dutch Shell plc
    105,726       90,924       86,070  
Minority interest
    9,219       7,000       5,313  
                         
CAPITAL INVESTMENT
  $ million
    2006     2005     2004  
Capital expenditure[A]:
                       
– Exploration & Production
    16,638       10,858       8,699  
– Gas & Power
    1,977       1,568       1,357  
– Oil Products
    3,363       2,810       2,761  
– Chemicals
    821       387       529  
– Other industry segments and Corporate
    297       293       220  
 
 
    23,096       15,916       13,566  
Exploration expenses (excluding depreciation and release of currency translation differences)
    949       815       651  
New equity in equity accounted investments
    598       390       681  
New loans to equity accounted investments
    253       315       377  
 
Total capital investment*
    24,896       17,436       15,275  
 
*comprising
                       
Exploration & Production
    17,944       12,046       9,708  
Gas & Power
    2,200       1,602       1,633  
Oil Products
    3,457       2,844       2,823  
Chemicals
    877       599       868  
Other industry segments and Corporate
    418       345       243  
 
 
    24,896       17,436       15,275  
 
[A]   The difference between capital expenditure in this table and capital expenditure in the adjacent table (other consolidated data) relates to non-cash effects from new finance leases, the acquisition of assets with non-cash consideration and the pre-funding of working capital within jointly controlled assets.
                         
OTHER CONSOLIDATED DATA
  $ million
    2006     2005     2004  
Cash flow provided by operating activities
    31,696       30,113       26,537  
Capital expenditure
    22,922       15,904       13,566  
Cash flow used in investing activities
    20,861       8,761       5,964  
Dividends paid
    8,431       10,849       7,655  
Cash flow used in financing activities
    13,741       18,573       13,592  
Increase/(decrease) in cash and cash equivalents
    (2,728 )     2,529       7,094  
 
Income by industry segment
                       
– Exploration & Production
    15,195       14,238       9,823  
– Gas & Power
    2,650       1,573       1,815  
– Oil Products
    7,125       9,982       7,597  
– Chemicals
    1,064       991       1,148  
– Other industry segments and Corporate
    277       (523 )     (1,126 )
– Minority interest
    (869 )     (950 )     (717 )
 
 
    25,442       25,311       18,540  
 
Gearing ratio[A]
    14.8 %     13.6 %     17.5 %
 
Dividends declared – /share
    1.00       0.92 [B]     0.86 [C]
Dividends – equivalent $/share
    1.27       1.13 [B]     1.07 [C]
[A]   See Note 19D to Consolidated Financial Statements on page 130.
[B]   See Note 13 to the Parent Company Financial Statements on page 202.
[C]   Comprises Royal Dutch interim dividend of 0.75 made payable in September 2004 and a second interim dividend of 1.04 made payable in March 2005 as well as a Shell Transport interim dividend of 6.25 pence and a second interim dividend of 10.7 pence that are used to calculate the equivalent dividend on a Royal Dutch Shell basis.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                 
QUARTERLY INCOME DATA (unaudited)
  $ million
                                    2006                                     2005  
    Quarter 1     Quarter 2     Quarter 3     Quarter 4     Year     Quarter 1     Quarter 2     Quarter 3     Quarter 4     Year  
Revenue
    75,964       83,127       84,254       75,500       318,845       72,156       82,644       76,435       75,496       306,731  
Cost of sales
    61,922       67,838       70,383       62,846       262,989       58,565       69,464       60,704       63,889       252,622  
 
Gross profit
    14,042       15,289       13,871       12,654       55,856       13,591       13,180       15,731       11,607       54,109  
 
Selling, distribution and administrative expenses
    3,413       4,429       4,126       4,648       16,616       3,539       3,917       3,763       4,263       15,482  
Exploration
    281       250       401       630       1,562       261       248       275       502       1,286  
Share of profit of equity accounted investments
    1,823       1,829       1,358       1,661       6,671       1,573       1,080       3,081       1,389       7,123  
Interest and other income
    441       228       346       413       1,428       198       247       521       205       1,171  
Interest expense
    286       275       286       302       1,149       268       286       253       261       1,068  
 
Income before taxation
    12,326       12,392       10,762       9,148       44,628       11,294       10,056       15,042       8,175       44,567  
Taxation
    5,310       4,865       4,507       3,635       18,317       4,274       4,595       5,558       3,572       17,999  
 
Income from continuing operations
    7,016       7,527       6,255       5,513       26,311       7,020       5,461       9,484       4,603       26,568  
Income/(loss) from discontinued operations
                                  (214 )           (93 )           (307 )
 
Income for the period
    7,016       7,527       6,255       5,513       26,311       6,806       5,461       9,391       4,603       26,261  
 
Income attributable to minority interest
    123       203       313       230       869       131       225       359       235       950  
 
Income attributable to shareholders
    6,893       7,324       5,942       5,283       25,442       6,675       5,236       9,032       4,368       25,311  
 
Royal Dutch Shell plc   5


Table of Contents

                                         
CONSOLIDATED STATEMENT OF INCOME DATA (US GAAP)
$ million  
    2006     2005     2004     2003     2002  
Revenue
    312,323       300,565       260,229       195,236       160,797  
Income attributable to minority interest
    883       1,010       626       353       174  
Income from continuing operations
    24,692       24,443       16,440       12,055       9,549  
Income/(loss) from discontinued operations
    105       691       1,742       12       122  
Cumulative effect of a change in accounting principle, net of tax
          554             255        
 
Income attributable to shareholders of Royal Dutch Shell plc
    24,797       25,688       18,182       12,322       9,671  
 
                                         
EARNINGS PER SHARE (US GAAP)
                $  
    2006     2005     2004     2003     2002  
Basic earnings per €0.07 ordinary share [A][B]
    3.87       3.84       2.69       1.81       1.41  
– from continuing operations
    3.85       3.66       2.43       1.77       1.39  
– from discontinued operations
    0.02       0.10       0.26             0.02  
– cumulative effect of a change in accounting principle, net of tax
          0.08             0.04        
Diluted earnings per €0.07 ordinary share [A][B]
    3.85       3.83       2.69       1.81       1.41  
– from continuing operations
    3.83       3.65       2.43       1.77       1.39  
– from discontinued operations
    0.02       0.10       0.26             0.02  
– 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 2006 calculation uses a weighted-average number of shares of 6,413,384,207 (2005: 6,674,179,767; 2004: 6,770,458,950; 2003: 6,811,314,175; 2002: 6,876,188,213). 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. 2006: 6,439,977,316; 2005: 6,694,427,705; 2004: 6,776,396,429; 2003: 6,813,444,740; 2002: 6,878,412,716. The difference between the basic and diluted number of shares relates to share-based compensation plans.
                                         
CONSOLIDATED BALANCE SHEET DATA (US GAAP)
              $ million  
    2006     2005     2004     2003     2002  
Total assets
    240,085       223,646       193,625       169,766       153,320  
Equity attributable to shareholders of Royal Dutch Shell plc
    108,018       94,103       90,545       78,251       66,195  
Minority interest
    9,197       7,006       5,309       3,415       3,568  
                 
CAPITALISATION TABLE (US GAAP)
$ million  
    Dec 31, 2006     Dec 31, 2005  
 
Total equity
    108,018       94,103  
 
Short-term debt
    6,017       5,328  
Long-term debt [A]
    6,880       4,589  
 
Total debt [B]
    12,897       9,917  
 
Total capitalisation
    120,915       104,020  
[A]   Long-term debt excludes $2.7 billion of certain tolling commitments (2005: $2.8 billion).
[B]   As of December 31, 2006, the Shell Group had outstanding guarantees of $2.8 billion (2005: $2.8 billion), of which $2.0 billion (2005: $1.7 billion) related to project financing.
Royal Dutch Shell plc


Table of Contents

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, 2005 and 2006 and on a US GAAP basis for the years ended December 31, 2002, 2003, 2004, 2005 and 2006.
                                         
RATIO OF EARNINGS TO FIXED CHARGES (IFRS and US GAAP)     %  
    2006     2005     2004     2003     2002  
Ratio of Earnings to Fixed Charges (IFRS)
    19.99       23.33       19.17                  
Ratio of Earnings to Fixed Charges (US GAAP)
    23.31       26.84       17.13       15.67       11.69  
For the purposes of this table, earnings consists of pre-tax income from continuing operations before adjustment for minority interest 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 7.1 for details concerning the calculation of the Ratio of Earnings to Fixed Charges.
Royal Dutch Shell plc 7
 


 


Table of Contents

(PICTURE)

 


Table of Contents

(PICTURE)
Operating and Financial Review
 
 
 
 
 
 
 
 
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 management. It describes the activities, properties and performance and also discusses the risks and environmental and social challenges facing the Group.
The OFR set out on pages 9 to 69 fulfils the requirements of the Business Review, which forms part of the Report of the Directors set out on pages 71 to 77 of this Report.
The Nanhai petrochemicals complex
in southern China
Royal Dutch Shell plc 9
 

 


Table of Contents

OPERATING AND FINANCIAL REVIEW
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 alternative energy sources including Renewables and Hydrogen.
We are active in more than 130 countries and territories worldwide. We are exploring for oil and gas in well-established regions such as the Gulf of Mexico and in frontier territories such as the Beaufort Sea. Key producing areas today are the USA, Europe and our operations in Africa and the Middle East. New supplies are being brought onstream from major projects in challenging frontier environments such as Sakhalin and Athabasca. We are a world leader in liquefied natural gas (LNG) and are pioneering new uses of gas including Gas to Liquids (GTL). We have a diverse and well balanced downstream portfolio and are one of the world’s largest distributors of biofuels.
10 Royal Dutch Shell plc
 
 
ROYAL DUTCH SHELL STRATEGY
A key challenge facing the global oil and gas industry is to find and develop sufficient resources to help meet growing world demand for energy. Over time and across the commodity cycle the Group has achieved higher earnings and returns on investment in the upstream compared with its other businesses and sees significant growth potential for oil and natural gas. Our upstream business will therefore be the focus for future growth. In the downstream the emphasis will be on sustained cash generation and on continuing to reshape our portfolio with a focus on the growing markets of Asia Pacific.
Our strategy of more upstream and profitable downstream will reinforce our position as a leader in the industry and provide investors with a competitive and sustained total shareholder return. We plan net capital spending [A] of $22 to $23 billion in 2007, of which around 80% will be invested in upstream projects. This investment will help create an upstream portfolio of assets that will have long, productive lives. These investments will be in both conventional and unconventional hydrocarbon projects. Our capital programme will also maintain and enhance our competitive position in the downstream by improving the quality, integrity and competitiveness of our refinery portfolio and by developing our presence in growth markets.
Meeting growing world demand for energy in ways that minimise the impact on the environment is a major challenge for the global energy industry. We are pursuing a range of potential opportunities to develop businesses based on alternative energies. We also recognise the importance of CO2 management to our business and the opportunities it represents. We are playing a key role in developing responsible ways to manage carbon dioxide. These include CO2 sequestration projects, energy efficiency and investment in CO2 mitigation technology.
A commitment to technology and innovation continues to be at the heart of our business strategy. We believe our technological expertise will be a key factor in the growth of our business as energy projects become more complex and more technically demanding. The Group’s core strengths include the development and application of technology, and the financial and project management skills that allow us to undertake large oil and gas projects. We also benefit from having a diverse international business portfolio and customer-focused businesses built around the strength of the Shell brand. Our ability to manage large and challenging projects in conventional and unconventional oil and gas; to find ways of managing CO2 emissions; and to provide alternative energy solutions means we are well placed to be preferred partners for governments and other resource holders, now and in the future.
MARKET OVERVIEW
The global economy expanded by a robust 5.4% in 2006, up from 4.8% in 2005, supported by strong activity in China, India and Russia. While growth in the USA also entered the year on a firm note, the economy slowed in the course of the year. In contrast, growth in key developing countries strengthened and surpassed expectations by the year’s end.
In the USA, the key development was the sharp slowdown in the housing sector in the second half of the year. However, consumer spending and business investment remained firm and underpinned growth. Employment and consumer confidence was relatively immune to the downturn in housing, while business investment was supported by high corporate profit. For 2007, the housing downturn is likely to continue to weigh on the economy, but growth is expected to pick up as the drag from housing diminishes, according to the Federal Reserve Bank.
[A]   Net capital spending represents the expected capital expenditure after including cash received from divestments as well as cash utilised in relation to acquisitions.


 


Table of Contents

The European economy strengthened significantly in 2006: what was initially an export led recovery became increasingly driven by domestic demand. Business investment was particularly robust, buoyed by high corporate profits and looking ahead, the European economy is set to grow solidly according to the European Central Bank.
In contrast to the European economy, the Japanese economy hit an unexpected soft patch in 2006 as consumer spending waned. Nevertheless, exports and business investment remained strong and this points to a stronger 2007, particularly if employment and wages remain firm.
China and India saw particularly robust growth in 2006. In China, business investments and exports were the drivers of growth while in India it was domestic demand and the services sector. For 2007, growth in these two countries is expected to ease back from their recent heights, but to continue apace.
While global growth is likely to slow towards its longer-term trend rate in 2007, risks to the outlook are evenly balanced on the upside and downside, in contrast to 2006 when risks were slanted towards downside by the impending turn in the US cycle. The main downside risk remains the potential for a wider slowdown in the US domestic demand. The main upside potential is in Europe and in the major developing countries. Both have scope for above trend growth, as they showed in 2006.
OIL AND NATURAL GAS PRICES
Brent crude oil prices averaged $65.10 per barrel in 2006 compared with $54.55 in 2005, while West Texas Intermediate (WTI) averaged $66.04 per barrel compared with $56.60 a year earlier. Oil prices increased in 2006 due to a combination of strong world economic growth, supply disruptions in countries including Nigeria and Alaska, geopolitical tensions in the Middle East, and limited OPEC spare production capacity. Prices started the year with Brent and WTI at $58 and $61 a barrel respectively, reaching highs of just under $79 per barrel for Brent and $77 per barrel WTI in early August before declining to around $56 per barrel for Brent and $57 per barrel WTI in October due to rising oil stocks in the USA. Prices recovered marginally in late fourth quarter on OPEC’s decision to curtail supply, but were tempered again by a mild winter in the northern hemisphere. Brent and WTI crude oil prices ended 2006 at $59 and $61 per barrel respectively.
We expect oil prices, on balance, to remain robust in 2007 with ongoing geopolitical tensions, but – in the absence of major supply disruptions – may trend lower than in 2006 against the prospect of potentially slower economic growth, stronger non-OPEC supply growth and higher OPEC spare capacity levels. 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 a higher price environment and OPEC spare capacity is being rebuilt.
Henry Hub gas prices in the USA averaged $6.76 per million British thermal units (Btu) in 2006 compared with $8.80 in 2005. Prices moderated as far down as $4.00 per million Btu in early October, due to high inventory levels caused by a relatively warm winter and the absence of weather related supply disruptions during the hurricane season, before recovering to $8.3 per million Btu by the end of November with the onset of the winter season. Henry Hub closed at $5.48 per million Btu at year-end.
Henry Hub prices are expected to remain at present levels in 2007, supported by anticipated modest demand growth, mainly in the electricity generation sector, and balanced by modest growth in domestic supply and LNG imports.
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, and regulatory circumstances and therefore pricing structures. Natural gas prices in continental Europe and Asia Pacific are predominantly indexed to oil prices. In Europe prices have risen reflecting higher oil prices and strong demand. In the UK prices at the National Balancing Point averaged $41.93 pence/therm compared with $40.61 pence/therm in 2005.
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 2006, the Group used a grid based on low, medium and high oil and gas prices to test the economic performance of long-term projects at different prices or margin levels. The prices utilised were significantly lower than the average market industry prices for 2006. As part of normal business practice, the range of prices used for this purpose continues to be under review and may change.
DOWNSTREAM MARKET TRENDS
Refining margins remained well supported in 2006, with robust product demand and constraints on supply due to unusually intense industry refinery turnaround activity on the US Gulf Coast following the extensive hurricane-related damages in 2005. In the absence of any major disruptions, refining margins are expected to trend lower in 2007 than 2006 with new conversion capacities coming on-stream and the prospect for potentially slower global economic growth. However, the eventual levels are uncertain and will be strongly influenced by the pace of global economic growth, the effect of persistently high oil prices on product demand and start-up timing of expected refinery expansions.
The demand for petrochemicals in 2007 is expected to increase in line with the growth in the global economy, mainly in Asia Pacific. Globally, new expected industry capacity additions coupled with the prospect of continued high feedstock and energy costs may limit the opportunities for improving margins.
ACTIVITIES, INTERESTS AND PROPERTY
Our various activities are conducted in more than 130 countries and territories. The Group constitutes 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 nearly 90% of revenue in 2006. 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
Royal Dutch Shell plc 11
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
throughout the world. The Group also ranks among the world’s major chemical companies (by sales); in 2006, the Chemicals segment accounted for just over 10% of the revenue of the Group. In downstream, we intend to continue to 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 summary of revenue of the Group by business segment and by geographical region for the years 2004, 2005 and 2006 is set out below:
                         
REVENUE BY BUSINESS SEGMENT (including intersegment sales)     $ million  
    2006     2005     2004  
EXPLORATION & PRODUCTION
                       
Third parties
    17,909       23,970       18,400  
Intersegment
    37,047       21,704       18,895  
 
 
    54,956       45,674       37,295  
 
GAS & POWER
                       
Third parties
    15,887       13,766       9,625  
Intersegment
    1,303       1,858       1,210  
 
 
    17,190       15,624       10,835  
 
OIL PRODUCTS
                       
Third parties [A]
    248,581       237,210       210,424  
Intersegment
    2,728       16,643       11,924  
 
 
    251,309       253,853       222,348  
 
CHEMICALS
                       
Third parties [B]
    36,306       31,018       26,877  
Intersegment
    4,444       3,978       2,620  
 
 
    40,750       34,996       29,497  
 
OTHER INDUSTRY SEGMENTS AND CORPORATE
                       
Third parties
    162       767       1,060  
Intersegment
                10  
 
 
    162       767       1,070  
 
 
                                                 
REVENUE BY GEOGRAPHICAL AREA (excluding intersegment sales)     $ million  
    2006     %     2005     %     2004     %  
Europe
    136,307       42.8 %     122,684       40.0 %     94,206       35.4 %
Other Eastern Hemisphere
    76,898       24.1 %     61,388       20.0 %     50,652       19.0 %
USA
    80,974       25.4 %     101,308       33.0 %     103,429       38.8 %
Other Western Hemisphere
    24,666       7.7 %     21,351       7.0 %     18,099       6.8 %
 
 
    318,845       100.0 %     306,731       100.0 %     266,386       100.0 %
 
[A]   The figures in this table, which include crude oil sales and non-fuel revenue, are different from the table shown on page 46, which excludes these sales and revenues.
 
[B]   The figures in this table, which includes chemical feedstock trading, are different from the table shown on page 50, which excludes chemical feedstock trading.
12 Royal Dutch Shell plc

 


Table of Contents

Royal Dutch Shell has a single risk based control framework – the Shell Control Framework – to identify and manage risks (see page 82).
The Group’s operations and earnings are subject to various key risks, described below, involving changing competitive, economic, political, legal, social, industry, business and financial conditions. Investors should carefully consider these risks. These risks could have a material adverse effect on the Group’s results from operations and/or financial condition.
FLUCTUATING PRICES FOR OIL, NATURAL GAS, OIL
PRODUCTS AND CHEMICALS
Oil, natural gas, oil products and chemical prices rise and fall for various reasons involving supply and demand. These include natural disasters, weather, political instability or conflicts, economic conditions or actions by major oil-exporting countries. Price fluctuations can test our business assumptions, and can affect the Group’s investment decisions, operational performance and financial position.
PROJECT DELIVERY AND THE ABILITY TO REPLACE OIL AND GAS RESERVES
The Group’s future oil and gas production depends on the success of very large projects. In developing these projects we are faced with numerous challenges such as uncertain geology, frontier conditions, availability of new technology and engineering capacity, availability of skilled resources, project delays and potential cost overruns, as well as technical, fiscal, regulatory and other conditions. Such potential obstacles may impair our delivery of these projects and, in turn, our operational performance and financial position. Future oil and gas production will depend on our access to new reserves through exploration, negotiation with countries and other owners of known reserves, and acquisitions. Failures in exploration or in identifying and finalising transactions to access potential reserves could slow the Group’s oil and gas production and replacement of reserves. This could weaken the Group’s future operational performance and financial position.
COMPETITION
The Group faces competition within the energy industry and from other industries for land and reserves, developing innovative products and solutions, and developing and applying new technology. Failure to clearly understand or effectively respond to competition could affect our financial position. Furthermore, Shell is increasingly in competition with state run oil companies with access to significant resources.
LOSS OF BUSINESS REPUTATION
The Shell brand is one of the world’s leading energy brands. We have a strong corporate reputation, which is important to maintaining our licence to operate. The Shell General Business Principles govern how the Group and our individual companies conduct our affairs. The Shell Code of Conduct describes how the Business Principles apply to individual employees of Shell. Failure – real or perceived – to follow these principles could harm our reputation, which could reduce our licence to operate, damage our brand and affect our operational performance and financial position.
IMPACT OF CLIMATE CHANGE
Concerns over climate change and any resulting challenges from society and governments could lead to project delays and compliance risks for existing assets. As such, delivery of future projects may be at risk. There is also a compliance risk if existing facilities cannot show that they are managing emissions in line with changing laws and regulations. These risks, if realised, could affect the Group’s operational performance and financial position.
HEALTH, SAFETY, SECURITY AND ENVIRONMENT
Given the range and complexity of the daily operations undertaken by the Group, the potential HSSE risks faced cover a wide spectrum. These risks include major process safety incidents, failure to comply with approved policies, effects of natural disasters and pandemics, social unrest, civil war and terrorism, exposure to general operational hazards, personal health and safety and crime. The consequences of such risk events can be injuries, loss of life, environmental harm and disruption to business activities and can affect the Group’s reputation, operational performance and financial position.
POLITICALLY SENSITIVE OR UNSTABLE COUNTRIES
Developments in politics, laws and regulations can affect the Group’s operations and earnings. These include forced divestment of assets, limits on production, imports and exports, international conflicts, including war, 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. It is difficult to predict the timing or severity of these occurrences or their effect upon the Group and when such risks materialise they could affect our employees, reputation, operational performance and financial positions of the Group and Group companies located in the country concerned.
PARTNERS AND VENTURES
Many of our major projects and operations are conducted with partners or in joint ventures. Our investment with partners and in joint ventures decreases our ability to manage risks and costs. As a result, the Group could have limited influence over and control of the operations, behaviours and performance of these operations with whom the Group is engaged in business. This could affect the Group’s operational performance and financial position.
INFORMATION TECHNOLOGY (IT)
Growing standardisation, more reliance on global systems, relocation of information technology services and increased regulations lead to a risk that the Group’s IT systems may fail to deliver products, services and solutions in a compliant, secure and efficient manner. This could affect the Group’s operational performance and financial position.
TECHNOLOGY AND INNOVATION
Technology and innovation are essential to the delivery of the Group’s strategy. If the Group does not develop or does not have access to the right technology, it may affect delivery of the strategy and affect the Group’s operational performance and financial position.
RESOURCING CHALLENGES
Skilled employees are essential to the successful delivery of the Group strategy. Top quality talent is a scarce resource and we sometimes experience recruitment shortfalls. Such shortfalls could affect the Group’s operational performance and financial position.
CHANGES IN LEGISLATION AND FISCAL AND REGULATORY POLICIES
Changes in legislation, taxation (tax rate or policy), regulation and to policies on renationalisation and the seizure of property all pose a risk to our operations and can affect the operational performance and financial position of the Group or Group companies concerned. In the upstream these matters affect land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange.
CURRENCY FLUCTUATIONS AND EXCHANGE CONTROLS
As a global group, changes in currency values and exchange controls could affect our operational performance and financial position.
Royal Dutch Shell plc 13
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
 

ECONOMIC AND FINANCIAL MARKET CONDITIONS
Group companies are subject to differing economic and financial market conditions throughout the world. Political or economic instability pose a risk to such markets. If such a risk materialises it could affect the operational performance and financial position of the Group companies operating in the country or region concerned.
ESTIMATION OF RESERVES
The estimation of oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. It is not an exact calculation. It may change because of new information from production or drilling activities or changes in economic factors. It may also alter because of acquisitions and dispositions, new discoveries and extensions of existing fields, as well as the application of improved recovery techniques. Published reserves estimates may also be subject to correction in the application of published rules and guidance.
LIMITATIONS ON SHAREHOLDER REMEDIES
Our Articles of Association generally require that all disputes between our shareholders in such capacity and us or our subsidiaries (or our directors or former Directors) or between us and our directors or former directors be exclusively resolved by arbitration in The Hague, the Netherlands under the Rules of Arbitration of the International Chamber of Commerce. Our Articles of Association also provide that if this provision is for any reason determined to be invalid or unenforceable, the dispute may only be brought in the courts of England and Wales. This provision may affect the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims. See “Supplementary information – Control of registrant (unaudited)”.
ANTITRUST AND COMPETITION LAW
Antitrust and competition law apply to Group companies in the vast majority of countries in which we do business. In 2006 the Group was fined over $200 million by the European Commission Directorate-General for Competition. Due to the European Commission Directorate-General for Competition’s 2006 fining guidelines any future conviction by Group companies could result in significant fines. In addition, it is becoming increasingly more common for plaintiffs to seek payment of damages for anti-trust violations. Both these factors could have a material adverse effect on the Group’s results.
US GOVERNMENT SANCTIONS
The Group has investments in Iran and Syria and certain operations in Sudan. US laws and regulations identify certain countries, including Iran, Syria and Sudan, as state sponsors of terrorism and currently impose economic sanctions against these countries. Certain activities and transactions in these countries are banned. Breaking these bans can trigger penalties including criminal and civil fines and imprisonment. For Iran, US law sets a limit of $20 million in any 12-month period on certain investments knowingly made in that country, prohibits the transfer of goods or services made with the knowledge that they will contribute materially to that country’s weapons capabilities and authorises sanctions against any company violating these rules (including 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, which means the statutes conflict with each other in some respects. The Group has exceeded and expects to exceed in the future the US imposed investment limits in Iran. While we seek to comply with 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.
PROPERTY AND LIABILITY
The Group’s operating companies are exposed to property and liability risks that could affect its operational performance and financial position. The Group insures itself against most of these risks through its 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 $550 million.
TRADING AND TREASURY
In the course of normal business activities the Group is subject to trading and treasury risks. These include inter alia exposure to movements in commodity prices, interest rates, and foreign exchange rates, counter party default and various operational risks.
PENSION FUNDS
The risk with respect to pensions is the ability of the pension assets to meet future liabilities and fund defined benefit plans going forward. Note 21 to the Consolidated Financial Statements provides further disclosure on retirement benefits.
Liabilities associated with and cash funding of pensions can be significant. Should the Group inappropriately value, provide for and/or fund these obligations, there could be a significant impact on its financial performance.
Local trustees manage the pension funds and set the required contributions from Group companies based on independent actuarial valuation rather than the IFRS measures. These valuations are sensitive to changes in the assumptions made regarding future outcomes, the principal ones being in respect of increases in remuneration and pension benefits, demography (including mortality), the discount rate used to convert future cash flows to current values and the long-term return on plan assets. Substantial judgement is required in determining the assumptions.
For further information regarding the judgement applied in these assumptions and the relation to the financial position and performance of the company, see Note 21 to the Consolidated Financial Statements.
The Group’s pension risk response has been developed based on a comprehensive risk review. The following framework reflects the key responses to the identified sponsor risks:
  A Joint HR/Finance Pensions Forum is responsible for the retirement benefit strategy and risk responses.
  Controls are established over retirement benefit and plan (re)–design.
  Controls are established over pension plan investments, liabilities and funding.
  Centres of excellence have been established to deliver support services to Sponsor Companies and Pension Funds.
  Controls are established over pension reporting.


14 Royal Dutch Shell plc

 


Table of Contents

(DRILL RIG PHOTO)

 


Table of Contents

(PETER VOSER PHOTO)
OPERATING AND FINANCIAL REVIEW
OVERVIEW
Our strategy of more upstream and profitable downstream is well on track to reinforce our position in the industry while providing competitive and sustainable shareholder return.
HIGHLIGHTS
  Earnings per share increased 4.7%.
  Return on average capital employed of 23.4%.
  Cash flow from operations improved by over 5% reaching $31.7 billion.
  Cash returned to shareholders of $16.3 billion, representing an increase of 5%, excluding the minority shareholder buy out in 2005.
  Dividends to shareholders increased by 9% compared with 2005.

Our strong cash generation and
capital discipline continued to
support our objectives of making
significant investments to support
long-term growth while increasing
cash returned to
shareholders.
                         
EARNINGS   $ million  
    2006     2005     2004  
Income from continuing operations
    26,311       26,568       19,491  
Income/(loss) from discontinued operations
          (307 )     (234 )
 
Income for the period
    26,311       26,261       19,257  
 
 
                         
SEGMENT EARNINGS [A]   $ million  
    2006     2005     2004  
 
                       
Exploration & Production
    15,195       14,238       9,823  
Gas & Power
    2,650       1,573       1,815  
Oil Products
    7,125       9,982       7,597  
Chemicals
    1,064       991       1,148  
Other industry segments and Corporate
    277       (523 )     (1,126 )
 
Total
    26,311       26,261       19,257  
 
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
EARNINGS
The Group’s businesses delivered strong operational and financial performance in 2006, resulting in earnings of $26.3 billion. The Group’s healthy financial position allowed it to return $16.3 billion to shareholders, through dividends and share repurchases, while capital investment reached $24.9 billion.
The 2006 earnings were in line with 2005 which were up 36% from 2004. The increase in 2005 reflected higher realised oil and gas prices as well as higher LNG volumes and prices.
Exploration & Production earnings were $15,195 million in 2006 compared with $14,238 million in 2005, up 7%. Earnings reflected higher oil prices, partly offset by lower production volumes, higher operating costs reflecting industry conditions, increased pre-development activity levels and lower US gas prices. In 2005, earnings increased by 45% compared with 2004 as hydrocarbon prices increased by nearly the same amount (e.g. Brent increased by 42%) over the same period. Production in 2006 was 2% higher than 2005, excluding the impact of security concerns in Nigeria, price effects and hurricanes in the Gulf of Mexico and one-off contractual settlements. This represented an improvement over 2005 where volumes had declined by 1% compared with 2004 volumes, when calculated on a similar basis.
Hydrocarbon prices were higher in 2006 compared with 2005 and 2004, Brent crude prices averaged $65.10 per barrel in 2006 compared with $54.55 in 2005 and $38.30 in 2004. West Texas Intermediate prices averaged $66.04 per barrel in 2006 compared with $56.60 in 2005 and $41.50 in 2004.



















 


Table of Contents



Gas & Power earnings were up 68% in 2006 reaching $2,650 million, compared with $1,573 million in 2005 and $1,815 million in 2004. The earnings decline in 2005 compared with 2004 was driven by non-operational gains and losses related to divestments. Excluding these non-recurring items, earnings were 21% higher in 2005.
LNG sales volumes in 2006 of 12.1 million tonnes showed an increase of 14% compared to 2005 due to the capacity growth in Nigeria and Oman. Income from LNG cargo optimisation in 2006 increased reflecting market conditions and success in accessing high value markets. Marketing and trading earnings reflected gas storage optimisation in the USA and overall strong marketing performance across North America and Europe.
Oil Products earnings in 2006 were $7,125 million, 29% lower than 2005. Refining earnings in 2006 were lower than 2005 reflecting reduced refining margins. Marketing earnings in 2006 were higher than 2005, mainly due to higher earnings in Lubricants offsetting lower earnings in Retail and Business to Business (B2B). Trading earnings increased from 2005 to 2006 as a result of capitalising on the global downstream portfolio and the attractive trading conditions, which stemmed from high price volatility and market structure. The impact of price volatility on inventory had favourable effects on 2006 earnings of approximately $0.1 billion compared with approximately $2.5 billion in 2005. Earnings in 2005 grew 31% compared with 2004 reflecting high refining margins, improved operational performance and increased trading results and higher inventory gains.
Chemicals earnings were $1,064 million compared with $991 million in 2005 and $1,148 million in 2004. Earnings in 2006 included $113 million of net charges, including legal costs and pension costs partly offset by tax effects. Earnings in 2005 included charges of $565 million mainly from the divestment of the polyolefins joint venture, Basell, and legal provisions. Excluding these effects, 2006 earnings were 24% lower than a year ago reflecting lower margins partly offset by higher earnings from equity accounted investments, including Nanhai petrochemicals complex in China. Earnings in 2005 were 14% lower than 2004 due to the impact of discontinued operations as well as lower volumes and higher costs.
BALANCE SHEET AND CAPITAL INVESTMENT
The most significant changes to the balance sheet in 2006 reflect the Group’s strategy to invest in the development of long-term growth projects, primarily in the upstream businesses. Property, plant and equipment and equity accounted investments increased by over $17 billion in 2006 as capital investment increased by over 40% in 2006 compared with 2005 reaching $24.9 billion. This was partly offset by depreciation, depletion and amortisation of nearly $13 billion. Over $20 billion of the capital investment was dedicated to projects in upstream that will primarily deliver organic growth over the long term. These projects include several multi-billion, integrated facilities that should provide significant cash flow for the coming decades.
The capital investment programme in 2006 was primarily funded internally, either from cash from operations of $31.7 billion or with proceeds from divestments of $1.7 billion, with net debt (defined as total debt, including tolling arrangements, minus cash) increasing by $5.6 billion to a year-end balance of $6.8 billion. Total equity increased by $17 billion in 2006 resulting in a year-end balance of $115 billion.
Gearing increased from 13.6% at year-end 2005 to 14.8% at year-end 2006. See Note 19D to the Consolidated Financial Statements for a further discussion on gearing.
PORTFOLIO ACTIONS
In January 2007 the Group made an offer to the shareholders of Shell Canada Limited to acquire all of the outstanding common shares not owned by the Group at a cash price of C$45 per share. The offer would value Shell Canada’s fully diluted minority share capital at approximately C$8.7 billion (approximately $7.5 billion).
In December 2006 the Group, Gazprom, Mitsui & Co., and Mitsubishi Corporation signed a protocol to bring Gazprom into the Sakhalin Energy Investment Company Ltd. (SEIC) as the leading shareholder. Under the terms of the protocol, Gazprom will acquire a 50% interest plus one share in SEIC for a total cash purchase price of $7.45 billion of which Shell is expected to receive approximately $4.1 billion. The current SEIC partners will each dilute their interests by 50% to accommodate this transaction, with a proportionate share of the purchase price. Shell will retain a 27.5% interest, with Mitsui and Mitsubishi holding 12.5% and 10% interests, respectively.
PERFORMANCE AND CAPITAL
Please refer to page 54 and 56 for a discussion of key performance indicators and liquidity and capital resources.
Royal Dutch Shell plc 17
 


 


Table of Contents

(PHOTO OF MALCOLM BRINDED)
OPERATING AND FINANCIAL REVIEW
OVERVIEW
Exploration & Production explores for and extracts oil and gas. Together with Gas & Power it builds and operates the infrastructure necessary to deliver these hydrocarbons to market.
Most of our Exploration & Production activities are carried out with a wide range of joint venture partners. Our business is active in 39 countries and we are investing strongly for future growth, with some $16.5 billion of capital investment in 2006.
HIGHLIGHTS
  Achieved record segment earnings which increased 7% from 2005.
 
  Production in line with 2005 production of 3.5 million barrels of oil equivalent (boe) per day, despite security issues in Nigeria.
 
  Added approximately 2 billion boe of proved oil and gas reserves and proven oil sands mining reserves.
 
  Added some 45 thousand square kilometres of exploration acreage.
 
  Commenced execution of several major long-life projects, including Athabasca oil sands expansion, Pearl Gas to Liquids (GTL) in Qatar and two major ultra-deep water developments in the USA and Brazil.
In 2006 we delivered record earnings,
again met our production targets,
continued our exploration success and
decided to proceed with new projects
which will create major new legacy assets.
Our focus is on delivery and long-term
growth through technology, integration
and scale.
 
 
                         
EARNINGS [A]   $ million  
    2006     2005     2004  
Revenue (including intersegment sales)
    54,956       45,674       37,295  
Purchases (including change in inventories)
    (3,451 )     (1,673 )     (2,669 )
Exploration
    (1,562 )     (1,286 )     (1,809 )
Depreciation
    (8,844 )     (8,152 )     (7,015 )
Operating expenses
    (11,722 )     (9,295 )     (8,467 )
Share of profit of equity accounted investments
    3,075       4,112       2,463  
Other income/(expense)
    (317 )     (272 )     (95 )
Taxation
    (16,940 )     (14,870 )     (9,880 )
 
Segment earnings from continuing operations
    15,195       14,238       9,823  
Income/(loss) from discontinued operations
                 
 
SEGMENT EARNINGS
    15,195       14,238       9,823  
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
EARNINGS
Segment earnings in 2006 were $15,195 million, 7% higher than in 2005 and 55% higher than in 2004. The increase in 2006 from 2005 reflected higher realised oil prices, partly offset by the impact of lower US gas prices, marginally lower production volumes and higher operating costs reflecting industry conditions, increased pre-development activity levels and higher maintenance costs (including increased technical integrity spend). 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.
Earnings in 2006 included net gains of $641 million compared with net gains of $1,727 million in 2005 and net charges of $4 million in 2004. The net gains in 2006 mainly related to the mark-to-market valuation of certain UK gas contracts and divestment gains. The net gains in 2005 were almost entirely related to the divestment of pipeline assets in the Netherlands, as various taxation credits and other divestments were almost offset by a net charge relating to mark-to-market gas contracts in the UK. The net charges in 2004 comprised mainly divestment gains of $699 million and impairment reversals of $469 million, offset by mark-to-market losses and impairments.
OUTLOOK AND STRATEGY
The environment for the exploration and production industry has continued to be characterised by higher oil prices, high activity levels, tightness in the supply of oilfield goods and services, cost escalation and strong competition for new opportunities. We anticipate that the environment in 2007 will be similar. We believe that crude oil prices in the near future will continue to be influenced by OPEC supply policy and the industry’s limited ability to generate significant additional near-term production capacity, the rate of global economic expansion, particularly in the USA, India and the Asia Pacific region and, to a lesser extent, the severity of the northern hemisphere winter.
The Exploration & Production strategy pursued consistently for the last three years is unchanged and delivery remains on track. Our strategy has four portfolio themes: sustaining our heartlands, focusing on new oil and gas plays where technology is a differentiator, integrated gas opportunities and unlocking unconventional resources. We will continue to pursue an aggressive exploration programme to add more acreage in support of these themes. We will also invest in organic growth, open up new positions and make selective acquisitions, divestments and asset swaps as a means to expand and high-grade





















 


Table of Contents

our asset portfolio. In terms of our existing portfolio, we will focus on production and project delivery, cost performance and operational excellence.
The Group will seek to sustain long-term production from our existing heartlands, i.e. our core countries that have the available infrastructure, expertise and remaining growth potential for the Group to sustain top quartile operations and support continued investment. We will look for further and stronger integrated gas positions such as onshore USA and through projects like Ormen Lange in Norway. We will extend our leadership position in LNG, leveraging our presence across the natural gas value chain from exploration to production and markets to maximise the value from our integrated gas projects. Examples of key project activity in this area include Sakhalin in Russia, Nigeria, the North West Shelf in Australia and Qatar. We intend to build on our existing strengths in unconventional oil and gas technologies. We have taken investment decisions on the Pearl GTL project in Qatar and are building on the success of the Athabasca Oil Sands Project in Canada where we have already started to expand. We intend to maintain our emphasis on developing and applying technology as a key differentiator in securing access to good upstream opportunities and then delivering more value from them. Such areas of focus include deep water, enhanced oil recovery, tight gas, contaminated gas and heavy oil. Leveraging technology is central to our strategy. We have tripled our R&D budget and shifted our emphasis further to subsurface and unconventionals.
Our focus on the reduction of costs will be sustained through optimised management of the supply chain and standardising processes globally. We will continue to strengthen our capabilities in project delivery. Having people in place with the requisite skills is vital to the successful delivery of our strategy: in 2006 we have increased our establishment of technical professionals by over 1,500 people and we will continue to build our capacity through redeployment and external recruitment.
PRODUCTION
In 2006, total hydrocarbon production (including oil sands) was 3,473 thousand boe per day. This was 1% lower than in 2005 and 8% lower than in 2004. Contractual settlements benefited production by 27 thousand boe per day. The underlying production trend was up 2% (excluding the impacts of security issues in Nigeria, hurricane damage in the Gulf of Mexico, PSC price impacts and one-off contractual settlements).
Field declines affecting oil production were seen in the USA, Oman, UK, Norway and Brunei during 2006. Operational shutdowns in the UK and Canada also impacted production levels. Similarly, natural gas production was impacted by declining fields in the USA and the UK, as well as by lower seasonal demand in Northwest Europe.
The effect of declining fields was more than offset by production from new fields such as Erha in Nigeria, E8 in Malaysia, Champion West Phase III in Brunei and Pohokura in New Zealand, and by increased production from Bonga in Nigeria and West Salym in Russia. Total new production added was 207 thousand boe per day in 2006. Production was boosted by the re-start of operations at the Mars platform in the Gulf of Mexico which achieved daily production levels over 20% above those prior to the shut down due to hurricanes.
The Group’s production for 2007 is expected to be around 3.3-3.5 million boe per day. Community disturbances in the Nigeria Western Delta have significantly increased in 2006 and remain an ongoing risk to our business in Nigeria, not only affecting our current production levels but also our ability to grow production in the future because of damage to existing facilities and lack
                 
COUNTRIES IN WHICH EXPLORATION & PRODUCTION OPERATE
USA

Other Western
Hemisphere

Argentina
Brazil
Canada
Venezuela
  Europe
Austria
Denmark
Germany
Ireland
Italy
The
   Netherlands
Norway
Ukraine
UK
  Africa
Algeria
Angola
Cameroon
Gabon
Libya
Nigeria
Tunisia
  Middle East,
Russia, CIS
[A] Abu Dhabi
Azerbaijan
Egypt
Iran
Kazakhstan
Oman
Pakistan
Qatar
Russia
Saudi Arabia
Syria
  Asia Pacific
Australia
Brunei
China
Indonesia
Malaysia
New Zealand
Philippines
[A]   Commonwealth of Independent States
of drilling and construction activity. This situation will be closely monitored throughout 2007. We expect production growth for the Group to be modest over the coming years, around 1-2% per annum from 2007 to the end of the decade, as a result of the impact of the Nigeria security issues and the portfolio management actions we intend to take. Following this, the Group has a strong resource base with the potential to support 2-3% per annum average growth. Actual growth each year will depend on project start-ups, portfolio management action and the tightness of the market. Our investment decision making will focus on value generation rather than specific reserves or volumes targets.
Several new fields came onstream delivering additional production volumes in 2006. In Brunei, oil production started from the first well of Phase III of the Champion West field (Group interest 50%) using Shell’s Smart Fields® technology. This makes use of a network of down-hole and surface sensors to create a real-time picture of reservoir dynamics and production which integrates with data from production facilities allowing optimisation of the entire production system. Unique snake wells were drilled which follow complex trajectories allowing them to pass through multiple reservoirs. The additional production helped Brunei Shell Petroleum (BSP) achieve a 25-year production record. Over time almost a quarter of BSP’s production is expected to come from Champion West.
First gas was delivered from the offshore E8 field (Group interest 50%) in Malaysia, which is a key component of the E11 Hub integrated gas project which aims to rejuvenate existing E11 facilities and develop several offshore gas fields over the next years. The E11 hub has a design capacity of 1.6 billion cubic feet (bcf) of gas per day.
First gas was also delivered from the Pohokura field (Group interest 48%) in New Zealand, which is expected to produce around 40 thousand boe a day at its peak.
In Nigeria, the deep water Erha field (Group interest 43.75%) started up in April 2006 and the deep water Bonga field (Group interest 55%) which started production in late 2005 continued to ramp up. Both fields achieved their nameplate capacity in 2006 which on a combined basis is some 220 thousand boe per day (Group interest).
PRICES
Oil prices increased in 2006 with Brent and West Texas Intermediate crude prices 19% and 17% higher than in 2005, respectively. The Group’s overall realised oil and natural gas liquids (NGL) prices were $60.13 a barrel, compared with $50.36 in 2005 and $35.61 in 2004. In the USA, realised oil and NGL prices averaged $58.53 a barrel, compared with $48.94 in 2005 and $36.15 in 2004. Outside the USA, realised oil and NGL prices averaged $60.37 a barrel compared with $50.56 in 2005 and $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 investments) in
Royal Dutch Shell plc 19
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW

Exploration & Production averaged $5.08 per thousand standard cubic feet (scf) in 2006 compared with $4.77 in 2005 and $3.59 in 2004. In the USA, realised gas prices averaged $7.74 per thousand standard cubic feet (scf), compared with $8.43 in 2005 and $6.33 in 2004. Outside the USA, realised gas prices averaged $4.41 compared with $3.84 in 2005 and $2.81 in 2004.
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
Capital investment in 2006 increased 53% to $16.5 billion (excluding the contribution of our minority partners in Sakhalin of $1.4 billion). This included exploration expenditure of $5.1 billion of which $2.4 billion was related to acquisitions. Overall, the costs of the acquisitions totalled $2.9 billion. In 2005, capital investment was $10.8 billion and was $8.8 billion in 2004 (excluding the contribution of our minority partners in Sakhalin of $1.3 billion and $1.1 billion respectively).
Decisions were made to proceed with a number of major projects in 2006. We announced the go ahead of the development of the BC-10 deepwater block offshore Brazil following an earlier declaration of commerciality. The BC-10 development consists of multiple subsea wells and manifolds, tied back to a floating production, storage and offloading vessel with a capacity of 100 thousand barrels per day. First production is expected around the turn of the decade. Earlier in the year, Shell exercised its pre-emption option for an additional 30% participating interest in the BC-10 block and subsequently sold half of the additional stake acquired to the Indian National Oil Company, ONGC Videsh Ltd (OVL) resulting in a 50% interest in this block together with Petrobras (35%) and OVL (15%).
Shell announced the development of the Great White (Group interest 33.34%), Tobago (Group interest 32.5%) and Silvertip fields (Group interest 40%), via the Perdido development host (Group interest 35%), located in Alaminos Canyon, offshore Gulf of Mexico. The facility will be designed to handle 130 thousand boe per day. Also in the USA, major multi-year investment programmes were approved to further develop our onshore gas projects at Pinedale in Wyoming and in South Texas.
In 2006, Shell Canada received the regulatory approvals needed to proceed with Athabasca Oil Sands Project Expansion 1 (Shell Canada interest 60%), a fully integrated 100 thousand barrels per day expansion of oil sands mining and upgrading facilities. Shell Canada acquired 100% of BlackRock Ventures Inc (BlackRock). The integration of the acquired assets and operations into Shell Canada has now been completed.
Also in Canada, the wholly-owned Shell subsidiary, SURE Northern Energy Ltd., acquired 19 parcels of land in Northern Alberta to evaluate and potentially develop heavy oil resources.
Royal Dutch Shell plc announced in January 2007 that it has reached agreement with and obtained the recommendation of the Board of Directors of Shell Canada on a revised offer to acquire all of the outstanding common shares of Shell Canada not owned by Royal Dutch Shell at a cash price of C$45 per share. This offer would value Shell Canada’s fully diluted minority share capital at around C$8.7 billion. Royal Dutch Shell currently owns 78% of the common shares of Shell Canada.
Shell acquired acreage in the Carnarvon Basin in Australia through the offshore block WA-374-P in the Greater Gorgon Area (Group interest 25%) and in the Browse Basin through the permit area WA-371-P in the Caswell Sub-basin.
In Russia, Shell, Gazprom, Mitsui and Mitsubishi signed a protocol to bring Gazprom into the Sakhalin Energy Investment Company Ltd. (SEIC) as the
leading shareholder. Under the terms of the protocol, Gazprom will acquire a 50% interest plus one share in SEIC for a total cash purchase price of $7.45 billion. The current SEIC partners will each dilute their interest by 50% to accommodate this transaction, with a proportionate share of the purchase price. Shell will retain a 27.5% interest, with Mitsui and Mitsubishi holding 12.5% and 10% interest, respectively. Gazprom and existing SEIC shareholders will enter into an Area of Mutual Interest arrangement, which will cover both future Sakhalin oil and gas exploration and production opportunities, and building of Sakhalin II into a regional oil and LNG hub. Furthermore, agreement has been reached with the Ministry of Industry and Energy, regarding the amended budget of Sakhalin II and cost recovery. The Production Sharing Agreement for the project will continue and the amended project budget for phase 2 is expected to be approved by the Supervisory Board of SEIC.
A number of divestments were completed in 2006. In the UK, Shell completed the sale of its 50% holding in the Auk and 43% holding in the Fulmar fields and associated infrastructure, while in Norway, the divestment of the Jotun field (Group interest 45%) was also completed. In the Netherlands, Energie Beheer Nederland B.V. has agreed to take a 40% financial interest from NAM (Group interest 50%) in the possible redevelopment of a part of the Schoonebeek oilfield.
In Norway, Shell and Statoil signed an agreement to work towards developing the world’s largest project using carbon dioxide (CO2) for enhanced oil recovery offshore. If technical and economic challenges can be overcome, the Halten project would involve capturing CO2 from power generation and using it to enhance oil recovery initially at the Shell-operated Draugen field and later at the Statoil-operated Heidrun field.
A Joint Activity Agreement was signed in Ukraine, with Ukrgazvydobuvannya, a subsidiary of Naftogaz Ukrainy. Shell has farmed into eight licences in the Dniepr Donets Basin and exploration work commenced in 2006.
EXPLORATION
During 2006, we participated in 198 successful exploratory wells (wells drilled outside proved area). These included exploration discoveries in Australia, Brunei, Cameroon, Egypt, Malaysia, Netherlands, Nigeria, Oman, Syria and the USA. Discoveries will be evaluated in order to establish the extent of the volumes they contain.
The Group made significant additions to its overall acreage position with new exploration licences in Australia, Canada, Denmark, Ireland, Norway, Philippines, Tunisia, Ukraine and the USA (Gulf of Mexico and Onshore). In 2006, some 45 thousand square kilometres of additional exploration acreage was added in the above-mentioned countries. Globally, we maintained our acreage position to the same level in comparison to last year.
RESEARCH AND DEVELOPMENT
The Shell Exploration & Production Technology organisation is responsible for the research, development and application of integrated technology solutions for Group operating businesses and assets around the world. The primary 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 continuous improvement in cost-efficiency and performance; to increase operational safety and to reduce environmental impact.
Exploration & Production R&D is carried out in two main laboratory locations: Rijswijk (the Netherlands) and Houston (Texas, USA). Additional technology facilities are in Oman, Qatar, Stavanger (Norway) and Calgary (Canada). In-house teams and facilities are used in the research and


20 Royal Dutch Shell plc

 


Table of Contents

development of proprietary exploration and production technologies along with service industry and/or academic capabilities where applicable.
The primary focus of the research and development work is in the following areas: enhanced subsurface imaging; reservoir surveillance and characterisation; smart reservoir management; improving hydrocarbon recovery efficiency; reducing the cost of wells and facilities; enabling the development of ultra-deep water fields; separation and utilisation of contaminated gas; recovery of unconventional hydrocarbons; upgrading recovered unconventional hydrocarbons; and developing solutions for capture and sequestration of CO2.
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 generally, 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 on a per field basis. Additionally, as the price of oil or gas increases above certain pre-determined levels, the Group’s entitlement share of production would normally decrease.
Group companies’ exploration and production interests, including acreage holdings and statistics on wells drilled and drilling, are shown on pages 22 to 26.
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 161 to 167. Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgement. 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 2006, a total of 1,638 million boe was added to proved developed and undeveloped reserves by Group companies, consisting of 367 million barrels of oil and natural gas liquids and 7,373 thousand million scf of natural gas (in each case before taking account of production). The addition to proved developed and undeveloped reserves consisted of additions of 7 million boe from revisions, 27 million boe from improved recovery and 1,539 million boe from extensions and discoveries, and 65 million boe from acquisitions and divestments. There was a net addition of 463 million boe to proved developed reserves and a net addition of 1,175 million boe to proved undeveloped reserves (before taking account of production).
During the same period, the Group share of proved developed and undeveloped reserves additions by equity accounted investments, that are in addition to the additions to the reserves by Group companies described above, represented a reduction of 59 million boe, consisting of a reduction of 95 million barrels of oil and natural gas liquids and an increase of 208 thousand million scf of natural gas (in each case before taking account of production). The Group share of changes to proved developed and undeveloped reserves by equity accounted investments consisted of a reduction of 89 million boe from revisions and an increase of 30 million boe from extensions and discoveries. There were no changes to reserves as a result of acquisitions and divestments. There was a net addition of 101 million boe to proved developed reserves and a net reduction of 160 million boe to proved undeveloped reserves (before taking account of production).
Details of the main proved reserves changes during 2006 are provided in the section entitled “Supplementary information – Oil and gas (unaudited)”.
At December 31, 2006, after taking account of Group companies’ 2006 net additions to proved developed and undeveloped reserves and production, total proved reserves for Group companies was 9% higher than at December 31, 2005. 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 9% lower than at December 31, 2005.
In December 2006, Shell signed a protocol with Gazprom, which results in a reduction in Shell’s 55% interest in Sakhalin II, in Russia, to a 27.5% interest. At the end of 2006, Sakhalin II was recorded in Shell’s reserves on a fully consolidated basis, with net reserves of 0.8 billion barrel of oil equivalent (boe), consisting of approximately 1.5 billion boe for Group companies, partly offset by 0.7 billion boe attributable to minority interests. On successful completion of this transaction, Shell’s net share of these reserves would be reduced by approximately 0.4 billion boe and the remaining reserves of approximately 0.4 billion boe on a 2006 basis would be reclassified to Group share of equity accounted investments. This transaction is expected to close in 2007 and to reduce Shell’s reserves from 2007.
In addition to proved conventional liquids and natural gas reserves, the Group has significant interests in proven oil sands reserves in Canada associated with the Athabasca Oil Sands Project. The Group views these reserves and their development as an integral part of the company’s total upstream operations. However, since SEC regulations define these reserves as mining-related and not part of conventional oil and gas reserves, these are presented separately to
Royal Dutch Shell plc 21
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
the conventional oil and gas reserves. Net proven oil sands reserves were 1,134 million barrels at December 31, 2006, a net addition of 418 million barrels compared to 2005 (before taking account of production). The oil sands reserves are not included in the standardised measure of discounted cash flows for conventional oil and gas reserves presented on pages 166 to 167.
 
PROVED DEVELOPED AND UNDEVELOPED RESERVES [A][F] (At December 31)   million barrels of oil equivalent [B]
                         
    2006     2005     2004  
Group companies
    8,452       7,761       8,064  
Group share of equity accounted investments
    3,355       3,705       3,818  
 
PROVED DEVELOPED AND UNDEVELOPED RESERVES 2006   million barrels of oil equivalent [B]
                                                               
      Eastern Hemisphere       Western Hemisphere          
                              Middle East,                          
                      Asia     Russia,                          
      Europe     Africa[C]     Pacific[D]     CIS[E]     USA     Other       Total  
 
                                                             
Proved developed and undeveloped reserves [A]
                                                             
Group companies
                                                             
At January 1
      1,848       1,257       1,142       2,240         878       396         7,761  
At December 31
      1,565       1,135       1,102       3,424         851       375         8,452  
Group share of equity accounted investments
                                                             
At January 1
      2,078             709       490         428               3,705  
At December 31
      2,064             558       387         313       33         3,355  
                   
Proved developed reserves [A]
                                                             
Group companies
                                                             
At January 1
      1,270       667       481       476         507       242         3,643  
At December 31
      1,089       478       482       409         463       238         3,159  
Group share of equity accounted investments
                                                             
At January 1
      1,755             412       360         348               2,875  
At December 31
      1,705             349       350         257       24         2,685  
 
    million barrels
                         
OIL SANDS [F]   2006     2005     2004  
Group companies
                       
At January 1
    746       615       572  
At December 31
    1,134       746       615  
[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] For this purpose natural gas has been converted to barrels of oil equivalent using a factor of 5,800 standard cubic feet per barrel.
 
[C] Excludes Egypt.
 
[D] Excludes Sakhalin.
 
[E] Includes Caspian region, Egypt and Sakhalin.
 
[F] Although presented separately, management regards reserves obtained from equity accounted investments on an equal basis to those obtained from Group companies. Proved developed and undeveloped reserves of Group companies and Group share of equity accounted investments equalled 11,807 million boe at December 31, 2006 (2005: 11,466 million boe and 2004: 11,882 million boe). Additionally, management considers proven mining reserves (oil sands) on an equal basis to oil and gas reserves.
22 Royal Dutch Shell plc

 


Table of Contents

CAPITAL EXPENDITURE AND EXPLORATION EXPENSE OF GROUP COMPANIES BY GEOGRAPHICAL AREA[A]   $ million
                         
    2006     2005[E]     2004[E]  
Europe
    2,684       1,991       1,625  
Africa [B]
    1,840       1,937       1,982  
Asia Pacific [C]
    1,264       1,067       525  
Middle East, Russia, CIS [D]
    4,528       3,844       3,210  
USA
    2,306       1,486       1,282  
Other Western Hemisphere
    4,100       1,074       588  
 
Total
    16,722       11,399       9,212  
 
[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 placed in service. 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] Excludes Egypt.
[C] Excludes Sakhalin.
[D] Includes Caspian region, Egypt and Sakhalin.
 
[E] 2004 and 2005 comparative figures have been reclassified in line with 2006 to reflect the move of Pakistan from Asia Pacific to the Middle East, Russia and CIS region for reporting purposes.
 
AVERAGE PRODUCTION COSTS OF GROUP COMPANIES BY GEOGRAPHICAL AREA [A] [B] [G]   $/barrel of oil equivalent
                         
    2006     2005[F]     2004[F]  
Europe
    7.56       6.03       4.80  
Africa [C]
    5.60       4.13       3.23  
Asia Pacific [D]
    3.35       2.94       2.94  
Middle East, Russia, CIS [E]
    7.83       6.21       3.19  
USA
    8.08       6.57       4.19  
Other Western Hemisphere
    11.03       8.45       6.38  
 
Total
    6.95       5.54       4.02  
 
[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] Includes Caspian region, Egypt and Sakhalin.
 
[F] 2004 and 2005 comparative figures have been reclassified in line with 2006 to reflect the move of Pakistan from Asia Pacific to the Middle East, Russia and CIS region for reporting purposes.
 
[G] Production costs exclude royalty payments of $1,569 million in 2006, $1,940 million in 2005 and $2,007 million in 2004.
Royal Dutch Shell plc 23
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW

CRUDE OIL AND NATURAL GAS LIQUIDS PRODUCTION [A]   thousand barrels/day
                         
    2006     2005     2004  
Europe
                       
UK
    223       250       275  
Norway
    85       107       129  
Denmark
    134       143       142  
Italy
    44       30       21  
Netherlands
    6       7       8  
Germany
    4       4       5  
Others
      [B]       [B]       [B]
 
Total Europe
    496       541       580  
 
Other Eastern Hemisphere
                       
Africa
                       
Nigeria
    293       324       349  
Gabon
    32       36       35  
Cameroon
    14       13       15  
 
Total Africa
    339       373       399  
 
Asia Pacific
                       
Brunei
    104       95       98  
Australia
    57       53       60  
Malaysia
    42       41       47  
China
    20       20       20  
New Zealand
    14       15       15  
Others
    5       4       3  
 
Total Asia Pacific
    242       228       243  
 
Middle East, Russia, CIS
                       
Oman
    202       214       246  
Abu Dhabi
    147       134       133  
Syria
    30       36       35  
Russia
    52       35       32  
Egypt
    11       14       10  
Others
    13       10       15  
 
Total Middle East, Russia, CIS
    455       443       471  
 
Total Other Eastern Hemisphere
    1,036       1,044       1,113  
 
USA
    322       333       375  
 
Other Western Hemisphere
                       
Canada
    38       39       40  
Venezuela
    31       14       22  
Brazil
    25       26       43  
Others
      [B]     1         [B]
 
Total Other Western Hemisphere
    94       80       105  
 
Grand total
    1,948       1,998       2,173  
 
 
    million tonnes a year
                         
 
                       
Metric equivalent
    97       100       109  
[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]   Fewer than 1,000 barrels daily.
NATURAL GAS PRODUCTION AVAILABLE FOR SALE [A]   million standard cubic feet/day
                         
    2006     2005 [B][C]     2004[B][C]  
Europe
                       
Netherlands
    1,525       1,562       1,667  
UK
    775       925       984  
Germany
    421       428       411  
Denmark
    416       410       383  
Norway
    325       298       260  
Others
    61       36       34  
 
Total Europe
    3,523       3,659       3,739  
 
Other Eastern Hemisphere
                       
Africa
                       
Nigeria
    455       377       375  
 
Total Africa
    455       377       375  
 
Asia Pacific
                       
Malaysia
    956       858       739  
China
    36              
Brunei
    574       544       554  
Australia
    529       525       436  
 
New Zealand
    241       234       258  
Others
    85       89       72  
 
Total Asia Pacific
    2,421       2,250       2,059  
 
Middle East, Russia, CIS
                       
Oman
                471  
Egypt
    201       238       211  
Pakistan
    79       75       73  
Syria
    11       15       9  
 
Total Middle East, Russia, CIS
    291       328       764  
 
Total Other Eastern Hemisphere
    3,167       2,955       3,198  
 
USA
    1,163       1,150       1,332  
 
Other Western Hemisphere
                       
Canada
    425       413       449  
Others
    90       86       90  
 
Total Other Western Hemisphere
    515       499       539  
 
Grand total
    8,368       8,263       8,808  
 
[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.
 
[B]   2004 and 2005 comparative figures for gas production volumes have been reclassified in line with 2006 to reflect the move of Pakistan from Asia Pacific to the Middle East Russia, CIS region for reporting purposes.
 
[C]   2004 production for the Troll field, Norway was presented on an entitlement basis, whilst reserves data for this field (pages 164 and 165) were presented on the basis of actual production. The total difference in 2004 production between the two methodologies was approximately 45 million standard cubic feet per day. Production data was aligned at the end of quarter 1 of 2005.


24 Royal Dutch Shell plc

 


Table of Contents

                         
 LOCATION OF ACTIVITIES AND DEVELOPMENTS [A][B] (At December 31, 2006)
Location   Exploration   Development and/or production   Shell Operator [C]
 
                       
Europe
                       
 
Austria
                   
 
Denmark
                   
 
Germany
                   
 
Ireland
                 
 
Italy
                     
 
The Netherlands
                 
 
Norway
                 
 
UK
                 
 
Ukraine
                   
 
Africa
                       
 
Algeria
                   
 
Angola
                     
 
Cameroon
                 
 
Gabon
                 
 
Libya
                   
 
Nigeria
                 
 
Tunisia
                     
 
Asia Pacific
                       
 
Australia
                 
 
Brunei
                 
 
China
                   
 
Indonesia
                     
 
Malaysia
                 
 
New Zealand
                 
 
Philippines
                 
 
Middle East, Russia, CIS
                       
 
Abu Dhabi
                   
 
Azerbaijan
                     
 
Egypt
                 
 
Iran
                     
 
Kazakhstan
                 
 
Oman
                 
 
Pakistan
                 
 
Qatar
                   
 
Russia
                 
 
Saudi Arabia
                   
 
Syria
                 
 
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]   In several countries where “Shell Operator” is indicated, a Group company is operator of some but not all exploration and/or production ventures.
 
 
Royal Dutch Shell plc 25
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
 
                                                                                                 
 OIL AND GAS ACREAGE [A][B][C][D][H] (At December 31)             thousand acres  
    2006     2005     2004  
    Developed     Undeveloped     Developed     Undeveloped     Developed     Undeveloped  
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net  
 
                                                                                               
Europe
    9,850       3,225       12,860       4,025       9,852       3,110       14,507       4,415       8,449       3,200       14,024       4,904  
Africa [E]
    7,159       2,318       24,396       15,351       7,175       2,382       27,206       14,806       6,597       2,058       15,584       8,398  
Asia Pacific [F]
    7,228       3,277       125,421       34,290       7,292       3,313       123,829       34,455       7,032       3,266       104,443       28,504  
Middle East, Russia, CIS [G]
    32,238       10,284       66,579       30,321       32,125       10,302       66,839       30,467       34,815       11,169       65,352       30,766  
USA
    1,234       665       3,962       3,280       1,250       563       4,359       3,069       961       531       3,998       2,864  
Other Western Hemisphere
    945       569       30,413       20,328       872       551       30,097       20,314       855       529       27,236       20,421  
 
 
    58,654       20,338       263,631       107,595       58,566       20,221       266,837       107,526       58,709       20,753       230,637       95,857  
 
                                                                                                 
 NUMBER OF PRODUCTIVE WELLS [A][B][H] (At December 31)  
    2006     2005     2004  
    Oil     Gas     Oil     Gas     Oil     Gas  
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net  
 
                                                                                               
Europe
    1,647       475       1,487       461       1,762       491       1,355       448       1,786       478       1,445       491  
Africa [E]
    945       333       40       13       1,234       413       36       12       1,215       396       36       12  
Asia Pacific [F]
    1,095       520       259       109       1,076       480       264       100       1,191       551       230       88  
Middle East, Russia, CIS [G]
    4,333       1,364       50       44       4,128       1,279       45       40       3,795       1,198       47       40  
USA
    15,977       8,077       1,069       830       16,159       8,270       873       636       16,131       8,163       719       520  
Other Western Hemisphere
    355       264       326       250       122       117       303       284       117       112       284       270  
 
 
    24,352       11,033       3,231       1,707       24,481       11,050       2,876       1,520       24,235       10,898       2,761       1,421  
 
                                                 
 NUMBER OF NET PRODUCTIVE WELLS AND DRY HOLES DRILLED [A][B][D][H] (At December 31)  
    2006     2005     2004  
    Productive     Dry     Productive     Dry     Productive     Dry  
 
                                               
Exploratory
                                               
Europe
    7       7       5       3       6       2  
Africa [E]
    7       1       9       1       3       1  
Asia Pacific [F]
    8       4       6       3       5       5  
Middle East, Russia, CIS [G]
    18       7       5       3       7       2  
USA
    30       3       9       3       2       3  
Other Western Hemisphere
    41       3       3       4       1       2  
 
 
    111       25       37       17       24       15  
 
Development
                                               
Europe
    32       1       25             27        
Africa [E]
    15             13             11        
Asia Pacific [F]
    27             20       1       22       1  
Middle East, Russia, CIS [G]
    155       2       173       4       150       6  
USA
    478             446             504       1  
Other Western Hemisphere
    118       1       26             10       1  
 
 
    825       4       703       5       724       9  
 
   
[A] Including equity accounted investments.
[B] The term “gross” relates to the total activity in which Group companies 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] Includes Caspian region, Egypt and Sakhalin.
[H] 2004 and 2005 comparative figures have been reclassified in line with 2006 to reflect the move of Pakistan from Asia Pacific to the Middle East, Russia and CIS region for reporting purposes.
26 Royal Dutch Shell plc

 


Table of Contents

OIL AND GAS INTERESTS
A selection of oil and gas interests, as well as recent developments in countries where Group or equity accounted investments have exploration and production interests, are summarised on the following pages. The summary includes aspects of the legislation, regulations or agreements affecting the activities of significant companies. None of the below-mentioned properties or interests is individually significant to the Group.
EUROPE
Denmark A Group company has a 46% non-operator interest in a producing concession until mid 2012, after which it will reduce to 36.8% when the state takes a 20% interest in the concession. In late 2003 this licence was extended until mid 2042. The Shell company also holds interests in four (non-operated) exploration licences.
Germany A Group company holds a 50% interest in the Brigitta & Elwerath Betriebsfuehrungsgesellschaft (BEB) 50:50 joint venture. BEB is involved in some 30 concessions with varying interests and is the main operator in Germany. Further German interests include the 43.9% Group share in the non-operated Deutsche Offshore Konsortium. Royalties are determined by the individual German states each year and differ for the production of natural gas and oil. Royalty incentives, for example, are given for the development of tight gas reservoirs. Activities include production, gas storage, the operation of two large sour gas treatment plants, numerous compression stations and some 3,000 kilometres of pipelines.
Ireland Shell E&P Ireland Ltd. (Group interest 100%) is the operator for the Corrib Gas Project (Shell 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. Also in 2006, the company gained additional exploration licences and acreage.
Most construction work onshore was suspended in 2005 and resumed in October 2006 following an Independent Safety Review and a mediation process. Shell E&P Ireland have agreed to modify the route of the onshore pipeline and community consultation began in late 2006. A new route is not expected to be identified until the end of 2007. Offshore well completion work was carried out successfully in 2006 and will continue through 2007.
Italy Shell Italia E&P S.p.A. (Group interest 100%) was formed following the Group’s 2002 acquisition of Enterprise Oil. The main assets are onshore in southern Italy and include various interests in producing assets (Val d’Agri, which includes the Monte Alpi, Monte Enoc and Cerro Falcone highs, operated by Eni on behalf of the joint venture partners), development projects (including Tempa Rossa), nearby exploration prospects, as well as an oil transport and storage company (Società Oleodotti Meridionali – Group interest 30%), jointly owned with Eni. A unification/unitisation and settlement heads of agreement was completed in December 2006 with Eni, which provides for new equity of the Val d’Agri accumulation (Group share 39.23%) and settlement of past costs and production volumes.
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 is 40% or 50%
mainly depending on the legislation applicable at the time licences were granted. This applies to all licences except one offshore and a number of older onshore production licences.
Norway A/S Norske Shell holds an interest in a number of production licences, seven of which involve 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. This development involves an onshore plant/terminal and pipelines for transportation to the markets in the UK and continental Europe. During 2005, Shell swapped its interest in both Norne and Snorre fields in exchange for an increased interest in the Kvitebjorn field. Shell International Pipelines Inc. (Group interest 100%) holds interests in gas transportation and processing systems, pipelines and terminals. The licence period for these fields is due to expire between 2010 and 2020.
Ukraine Ukrgazvydobuvannya (UGV) and Shell Exploration & Production (Shell) signed a wide-ranging oil and gas exploration joint activity agreement (JAA) in June 2006.
The agreement covers licences, agreed work programme levels and the terms of joint activities. UGV is a subsidiary of NaftogazUkrainy (NAK) and this JAA represents a further important milestone in co-operation between NAK and Shell following an agreement in May 2005 to carry out joint studies in the Dniepr Donets Basin, in central-eastern Ukraine.
Under the terms of the JAA, Shell has farmed into eight UGV-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 the JAA 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 period. Work started in 2006.
United Kingdom Shell UK Limited (Group interest 100%) is one of the largest integrated oil and gas exploration and production companies operating in the UK (by production volumes). It operates a significant number of its interests in the UK Continental Shelf (UKCS) on behalf of a 50:50 joint venture with ExxonMobil.
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. In the Atlantic Margin area, Shell also has interests as a non-operating partner principally in the West of Shetlands area including the Schiehallion, Clair and Loyal fields.
The UKCS is a mature area and although Shell has invested significantly over the past decade to extend field lives, organic growth has been more of a challenge with new field discoveries smaller than discoveries 15-20 years ago.
In 2006, Shell completed the sale of its 50% holding in Auk and 42.9% holding in the Fulmar fields and associated infrastructure.
As of January 1, 2006, the supplementary change to corporation tax rate on UK exploration and production activities was increased from 10% to 20%.
Royal Dutch Shell plc 27
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
 

AFRICA
Algeria During 2006 Shell Erdgas Beteiligungsgesellschaft mbH (SEB, Group interest 100%) assigned its interests in the permits Reggane Djebel Hirane and Zerafa to Shell Algeria Reggane GmbH and Shell Algeria Zerafa GmbH (SARG and SAZG, Group interest 100%). SARG and SAZG are conducting an exploration programme in Algeria under a PSC with Algeria-based Sonatrach. The first phase of the PSC extends to September 2008. Toward the end of 2006, a farm out of 20% of Shell interests in the two blocks had been agreed with Liwa, a subsidiary of Mubudala Development Company, an Abu Dhabi Investment Company. Approval of the farm outs is required from Sonatrach and Competent Authorities, which is expected in 2007. In February 2006, Shell and Sonatrach, the Algerian national energy company, signed a Memorandum of Understanding covering multiple business initiatives, both in Algeria and internationally.
Cameroon Pecten Cameroon Company (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 licence Dissoni (PSC), which can reduce to 37.5% depending on state participation after a commercial discovery.
Gabon Shell Gabon (Group interest 75%) has interests in eight onshore mining concessions/exploitation permits, five of which (Rabi/Kounga, Gamba/Ivinga, Toucan Totou and Bende) are operated by the company. The Rabi/Kounga PSC expires in 2022 and includes an option for a five-year extension. The Gamba/Ivinga concession expires in 2042. The Toucan PSC expires in 2023 while the Totou/Bende PSC expires in 2020. The other three concessions/PSC (Avocette, Coucal and Atora) expire between 2010 and 2018 and are operated by Total Gabon. Production in Gabon is dominated by the Rabi field, operated by Shell Gabon, which holds 42.5% equity in the field. Shell Gabon’s portfolio includes two more fields near the Rabi, Toucan and Avocette (Awoun and Ozigo). A Group company, Shell Offshore North Gabon BV (SONG), holds the Igoumou Marin permit in ultra-deep water offshore Gabon. The same company relinquished the Ighengue licence in 2005.
Libya In May 2005, a Group company and the 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 in Libya’s major oil and gas producing Sirte Basin. During 2006, the Group company continued its exploration activities under the LNG development agreement in those five areas.
Nigeria The Shell Petroleum Development Company of Nigeria Ltd. (SPDC) (Group interest 100%) is operator of a joint venture (Group interest 30%) with the Nigerian National Petroleum Corporation and two other companies, Total (10%) and Agip (5%). The venture’s onshore oil mining leases expire in 2019 and the shallow water offshore leases expire in 2008. Currently SPDC is operator of the SPDC JV.
Shell Nigeria Exploration and Production Company Ltd. (SNEPCO) (Group interest 100%) operates under a PSC with a 55% working interest in deep water blocks OML 118 and OML 135 in partnership with ExxonMobil, Total and Agip. SNEPCO also has a 49.81% interest in deep water blocks OML-125 and Oil Prospecting Licence (OPL)-211 (Agip operated), a 43.75% interest in deep water block OML 133 (ExxonMobil operated), and a 40% 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 OPL 250 (PSC, 50% Chevron operated,
8.625% Petrobras, 6.375% ConocoPhillips) which is in the process of being relinquished.
Shell Nigeria Ultra Deep Limited (SNUD) (Group interest 100%) has a 100% interest in block OPL 245 (PSC).
Shell Nigeria Upstream Ventures (SNUV) (Group interest 100%) has a disputed 40% equity interest in OML 122 (co-venturer Peak Petroleum).
Shell Nigeria Exploration Properties Alpha Ltd. (SNEPA) (Group interest 100%) operates under a 100% working interest in deep water block OPL322 (40% Shell equity, 50% PSC with NNPC, 10% PSC with indigenous operator Dajo Oil).
Shell Nigeria Exploration Properties Beta Ltd. (SNEPB), (Group interest 100%) has a 27% working interest in deep water block OPL318 (PSC, ConocoPhillips operated with 35%, ChevronTexaco with 18%, NPDC with 20%).
ASIA PACIFIC
Australia Shell Development (Australia) Pty Ltd (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) and Greater Gorgon fields, as well as exploration licences in the Browse Basin and Timor Sea area. The interests are held directly and/or indirectly through a shareholding (34%) in Woodside Petroleum Ltd., 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. 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 (25%) 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 2006, Shell was awarded 100% interest in Block WA-371-P in the Browse Basin, marking a return for Shell as an operator in Australia. Drilling of the first of 12 commitment wells in Block WA-371-P commenced in December 2006.
Brunei A Group company is a 50% shareholder in Brunei Shell Petroleum Company Sendirian Berhad (BSP) (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. In 2006, oil production started from the first well from Phase III of the Champion West field (Group interest 50%) using Shell’s Smart Fields® technology. Over time almost a quarter of BSP’s production is expected to come from Champion West.
China Group companies hold some 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 PetroChina Company Limited, to develop the Changbei gas field in the Ordos Basin, onshore China. Group companies also hold a 61% interest in the Jilin Shell Oil Shale Development Company Limited for minerals exploration, exploitation and development of oil shale resources.
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 nine non-associated producing


28 Royal Dutch Shell plc

 


Table of Contents

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 stake in the non-operated Baram Delta PSC and exploration interests ranging from 50% to 60% in the deep water SK-E block and inboard blocks SK-307 and SK-308. Shell operates four producing fields in Sabah. Group companies also have PSCs for exploration and development 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.
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 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. The Maui and Kapuni interests are operated by Shell Todd Oil Services Ltd, a service company (Group interest 50%), with the Pohokura field operated by Shell Exploration New Zealand Limited (Group interest 100%).
Philippines Group companies hold a 45% interest in the deep water 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 north-west of the island of Palawan. Shell also holds a 55% interest (and is operator) in SC-60, converted from the geophysical survey and exploration contract GSEC-99, covering a relatively unexplored area offshore north-east Palawan.
MIDDLE EAST, RUSSIA AND CIS
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 associated wet natural gas produced by Abu Dhabi Petroleum Company.
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 is the operator.
Iran In early 2007, Shell and Repsol entered into a service contract with respect to development of the South Pars fields for the Persian LNG project. However, the parties will not reach a final decision on whether to proceed with the project until the remaining significant commercial and engineering work is complete.
A Group company (Group interest 100%) has a 70% interest in an agreement with the National Iranian Oil Company (NIOC), who is the operator of the
Soroosh/Nowrooz offshore fields. The term of the agreement expires when all petroleum costs and the remuneration fee have been recovered, which is expected to occur by 2012.
Kazakhstan A Group company (Group interest 100%) holds an 18.52% interest in the North Caspian PSC in respect of some 6,000 square kilometres in the Kazakhstan sector of the Caspian Sea. Development of the giant Kashagan field is continuing. Oil and gas discoveries at Kalamkas, Aktote, Kairan and Kashagan SW are being further appraised. Shell holds a 50% interest in the Arman joint venture, a small onshore producing company.
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 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.
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.
Qatar In July 2006, Qatar Petroleum (QP) and the Group took the final investment decision on the integrated Pearl GTL project, which is being developed under a development and production sharing agreement with the government of the State of Qatar. Shell provides 100% of project funding. The fully integrated project includes upstream production of some 1.6 billion cubic feet per day of wellhead gas from Qatar’s North Field, transport and processing of the gas to produce around 120 thousand boe per day of natural gas liquids and ethane; and the construction of a new onshore GTL complex to convert the remaining gas into 140 thousand boe per day of clean liquid hydrocarbon products.
In February 2005, the Group and Qatar Petroleum 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 of natural gas, including an average of around 70 thousand boe per day of associated natural gas liquids (NGL) from Qatar’s North field, a single LNG train yielding around 7.8mtpa of LNG and shipping of the LNG to the intended markets. The final investment decision was taken in December, 2005. At the same time the engineering, procurement and construction (EPC) contract for the onshore facilities was awarded.
Russia Shell Sakhalin Holdings, B.V. (Group interest 100%) currently holds a 55% interest in Sakhalin Energy Investment Company Ltd. (SEIC). However on December 21, 2006 OAO Gazprom (Gazprom), Shell, Mitsui & Co., Ltd (Mitsui) and Mitsubishi Corporation (Mitsubishi) signed a protocol to bring Gazprom into SEIC. Under the terms of this protocol, Gazprom will acquire a 50% interest plus one share in SEIC. The current SEIC partners will each dilute their interest by 50% to accommodate this transaction, with a proportionate share of the purchase price. When effective Shell will retain a 27.5% interest, with Mitsui and Mitsubishi holding 12.5% and 10% interest, respectively. SEIC will continue to be the operator of the Sakhalin II project. Gazprom and existing SEIC shareholders will enter into an Area of Mutual Interest arrangement, which will cover both future Sakhalin area oil and gas
Royal Dutch Shell plc 29
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW

exploration and production opportunities, and building of Sakhalin II into a regional oil and LNG hub. Furthermore, the Sakhalin II shareholders reached agreement with the Ministry of Industry and Energy as the authorised state body for the supervision of Production Sharing Agreements of the Government of the Russian Federation, regarding the amended budget of Sakhalin II and cost recovery. The Production Sharing Agreement for the Sakhalin II project will continue. The Sakhalin II amended project budget for phase 2 is expected to be approved by the SEIC Supervisory Board. Seasonal oil production continues from the Molikpaq facility on the Piltun-Astokhskoye field, offshore Sakhalin Island. Full development of the Piltun-Astokhskoye oil field and Lunskoye gas field, including a LNG plant in the south of Sakhalin Island, continued during 2006.
Salym Petroleum Development (Group interest 50%) continued to increase production from its Salym fields in Western Siberia while pursuing their development.
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. A Group company entered into two production sharing contracts, effective from February 2007, for Block 13 and 15 in the South of Syria. Work on the first 4-year exploration period is expected to start in 2007.
USA
Shell Exploration & Production Company (SEPCo, Group interest 100%) produces crude oil, natural gas and NGL principally in the Gulf of Mexico, California (AERA), Texas (South Texas and Fort Worth Basin), and Wyoming (Pinedale). 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).
In 2006, SEPCo acquired exploration interests in acreage located in Alaska, North Dakota, Utah, Arkansas, 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 in South Texas.
In the Gulf of Mexico, SEPCo took the final investment decision to develop the Perdido Regional host, where it holds a 35% interest. Moored in 8,000 feet of water, this will be the deepest spar production facility in the world. First production is expected around the end of the decade.
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.
Shell Frontier Oil & Gas Inc (Group interest 100%) was awarded three leases in 2006 by the US Bureau of Land Management to allow it to conduct oil shale research, development and demonstration activities in the Piceance Basin in north-west Colorado.
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% interest. Shell Brasil also has interests in 14 offshore exploration blocks (five operated by Shell and nine non-operated) in the Campos, Santos and Espirito Santo basins. Group interest in these blocks ranges from 20% to 100%. In 2006 Shell started to award contracts for the development of the fields Ostra, Abalone and Argonauta on the BC-10 block, in the Campos Basin.
These heavy oil fields will tie back to an FPSO moored in around 5,000 feet of water. In 2006 Shell Brasil also increased its interest in the BC-10 project from 35% to 50% by exercising its pre-emption right. Shell Brasil is the operator of the development. Production is expected to start by the turn of the decade. Shell Brasil also declared commerciality of two fields in block BS-4, in the Santos Basin, late 2006.
Through Pecten Victoria Inc (Group interest 100%), the Group retains an economic interest via a service contract in the producing Merluza gas field, operated by Petrobras, in the offshore Santos Basin.
Canada Shell Canada Limited (Group interest 78%) is a producer of natural gas, NGL, bitumen, synthetic crude and sulphur. Around 75% of Shell Canada’s gas production comes from the Foothills region of Alberta. Shell Canada also owns and operates four natural gas processing and sulphur extraction plants in southern and south-central Alberta, and is among the world’s largest producers and marketers of sulphur. In addition, it holds a 31.3% interest in the Sable Offshore Energy Project, a natural gas complex offshore eastern Canada. In 2006, Shell Canada progressed its unconventional gas development efforts in central Alberta through continued land acquisition, its drilling programme, as well as investment in infrastructure facilitating new production. It has expanded its land inventory with varying interest percentages in conventional exploration prospects, in Alberta, north-eastern British Columbia and the Beaufort Sea. It is also the largest landholder offshore West Coast, which remains under a governmental moratorium. Exploration rights in Canada are generally granted for varying terms depending upon the provincial jurisdiction and applicable regulations. 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’s oil sands business has operations in each of Canada’s three main oil sands deposits: Athabasca, Peace River and Cold Lake, Alberta. It holds a 60% interest in the Athabasca Oil Sands Project (AOSP) in Northern Alberta under a joint venture agreement to develop and produce synthetic crude from Shell’s Athabasca oil sands leases and a 100% interest in in-situ bitumen production from the Peace River and Cold Lake regions. The AOSP comprises the Muskeg River mine, 75 kilometres north of Fort McMurray, Alberta, and the Scotford Upgrader, next to Shell Canada’s Scotford refinery north of Fort Saskatchewan, Alberta. In 2006, Shell Canada announced its


30 Royal Dutch Shell plc

 


Table of Contents

EXPLORATION & PRODUCTION
 

plan to proceed with the AOSP Expansion 1, which will add 100 thousand boe per day total project production capacity at the mine and the upgrader. This is the first of multiple expansion opportunities in the oil sands mining area.
Shell Canada produces heavy oil through cold (primary) production and thermal recovery in the Peace River area of Alberta (Shell Canada’s interest is 100%). In 2006, the company increased its heavy oil production and acreage through the acquisition of BlackRock Ventures Inc., Shell Canada also plans the completion and start-up of a 10 thousand boe per day steam assisted gravity drainage project (Phase 1) near Cold Lake, Alberta.
Shell Unconventional Resources Energy Northern Energy Ltd (SURE Northern Ltd, Group interest 100%) has acquired 19 land parcels in Alberta in 2006 to evaluate and potentially develop heavy oil resources. The parcels represent some 290 thousand acres of land.
Venezuela Shell Exploration and Production Investments B.V. (Group interest 100%) holds a 40% interest in Empresa Mixta (Joint Venture) with a state oil company, Petroleos de Venezuela (PDVSA), to develop and produce the Urdaneta West Field in Lake Maracaibo. The Empresa Mixta entity is called Petroregional Del Lago, S.A. (PERLA). The Empresa Mixta took effect in 2006, and replaced the existing operating services agreement.
 
 
Royal Dutch Shell plc 31
 


 


Table of Contents

(PICTURE OF LINDA COOK)
OPERATING AND FINANCIAL REVIEW
OVERVIEW
Gas & Power is part of Upstream, which includes Exploration & Production. Our Gas & Power business liquefies and transports natural gas and develops natural gas markets and related infrastructure. It is also involved in Gas to Liquids (GTL) and coal conversion technologies. Gas & Power operates in 33 countries around the world and employed on average 2,500 employees including contractors during 2006. Its revenue was $17 billion with segment earnings of $2.7 billion in 2006.
HIGHLIGHTS
  Segment earnings up 68%.
 
  Record Liquefied Natural Gas (LNG) equity sales volume, up 14%.
 
  Strong marketing and trading performance in Europe, North America and in global LNG.
 
  Progress on major LNG projects under construction or development in which Shell either holds a direct or indirect interest (Sakhalin II; Qatargas 4; Gorgon, North West Shelf Train 5 and Pluto in Australia; Nigeria LNG Trains 6 and 7 and Olokola in Nigeria; and Persian LNG in Iran).
 
  Altamira (Mexico) LNG regasification terminal commissioned.
 
  First LNG cargoes delivered to China and Mexico.
 
  Pearl GTL project construction launched.
 
  First equity coal gasification plant (China) began operations.
In 2006, we delivered record earnings, cash
flows and LNG volumes. We also achieved
significant progress on the development of our
major projects. We are on track to grow our
position as one of the largest natural gas
producers and suppliers of LNG.
     
EARNINGS [A]   $ million
                         
    2006     2005     2004  
 
                       
Revenue (including intersegment sales)
    17,190       15,624       10,835  
Purchases (including change in inventories)
    (12,636 )     (12,855 )     (8,680 )
Depreciation
    (289 )     (290 )     (903 )
Operating expenses
    (3,023 )     (2,087 )     (1,452 )
Share of profit of equity accounted investments
    1,515       999       1,142  
Other income/(expense)
    231       223       733  
Taxation
    (338 )     (41 )     140  
 
Segment earnings from continuing operations
    2,650       1,573       1,815  
Income/(loss) from discontinued operations
                 
 
SEGMENT EARNINGS
    2,650       1,573       1,815  
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
EARNINGS
Segment earnings in 2006 were $2,650 million, a 68% increase over $1,573 million in 2005. The earnings in 2005 included net charges of $84 million, mainly related to the divestment of the joint venture, InterGen. Excluding these items, earnings increased by 60% from 2005. The earnings increase was mainly due to record LNG equity sales volumes, product prices reflecting high crude oil and natural gas prices, LNG supply optimisation, a strong performance from marketing and trading activities in Europe and North America, and higher dividends from our investments. Although clean coal makes up only a very limited portion of earnings, its earnings grew through the granting of new coal gasification technology licences.
Segment earnings in 2005 ($1,573 million) were lower than in 2004 ($1,815 million) mainly due to the impact of asset divestments. Results in 2005 included net charges of $84 million whereas 2004 included net gains of $444 million. These items were mainly related to asset divestments and impairment, without which earnings in 2005 increased by 21% over 2004. The increase was driven by higher LNG volumes and prices, and favourable marketing and trading conditions.
LNG equity sales volumes in 2006 of 12.12 million tonnes were a record, increasing 14% from 2005 (10.65 million tonnes). The volume increase was driven mainly by the start-up of the fourth and fifth trains at Nigeria LNG (Shell interest 26%), and Qalhat LNG in Oman (Shell indirect interest 11%). This was complemented by high LNG plant reliability across all joint ventures.
LNG equity sales volumes in 2005 were up 5% from 2004 driven by the ramp up of the fourth train at the North West Shelf project (Shell direct and indirect interest 22%) in Australia.
With our joint venture partners, we continue to deliver LNG into various Asia Pacific, European and North American markets. Through our European and North American marketing organisations, we supplied some of this gas, in addition to local Shell and third party gas production, to a broad range of customers. LNG volumes to India increased in 2006, using the Hazira (Shell interest 74%) regasification terminal completed in 2005. Together with our joint venture partners we delivered the first LNG cargo into China. We also delivered the first LNG cargo into Mexico following the successful commissioning of the Altamira regasification terminal (Shell ownership 50%, with rights to 75% of the terminal capacity).



















 


Table of Contents

OUTLOOK AND STRATEGY
The business environment for natural gas remains robust. We expect natural gas demand growth to remain at around 2-3% per annum over the medium term, reflecting moderate economic growth. Demand weakness, if it occurred, would likely be the result of a severe economic downturn. LNG demand is expected to continue to grow at around 10% per annum for the next few years with growth in all major natural gas markets.
We anticipate continued high levels of industry investment in engineering, design, construction, materials and services for major natural gas projects. Competition for access to natural gas resources and for commercially and technically skilled people will continue.
Concerns over security and diversity of energy supply will continue to drive increasing interest in alternative sources of energy, including clean coal. New opportunities for applying Shell’s proprietary coal gasification technology are expected to continue to emerge, particularly in countries with high levels of coal reserves.
Our strategy remains unchanged. We seek to build 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 skills. We will also use these skills to pursue opportunities related to our clean coal technology.
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
Capital investment in 2006 of $2.2 billion, including the minority interest share of capital investment in Sakhalin II of $400 million, was 37% higher than the $1.6 billion capital investment in 2005. Investment continued to focus on integrated gas projects involving LNG liquefaction plants at Sakhalin II, Qatargas 4, North West Shelf Train 5, and Nigeria LNG Train 6, as well as the Altamira, Mexico regasification terminal and the Qatar Pearl (GTL) project. We also completed the construction of our first coal gasification plant located in Dongting, China. The capital investment increase from 2005 is mainly due to the increased spending on the Qatar Pearl GTL project following final investment decision in July 2006.
Capital investment in 2005 of $1,602 million was similar to $1,633 million in 2004. Increased investment in 2005 mainly related to LNG projects offset by investments in InterGen power assets in 2004 that are now divested.
There was no major divestment activity in 2006, whereas 2005 saw major divestment activities relating to the joint venture company InterGen’s power generation assets and Gasunie’s gas transportation assets (gains recorded in Exploration & Production earnings).
NEW BUSINESS DEVELOPMENT
In Qatar, following approval from Qatar Petroleum, the integrated Pearl GTL project was launched in July 2006. A number of contracts were subsequently awarded to begin site preparation and construction. The Pearl GTL project includes the development of offshore natural gas resources from Qatar’s North Field, transporting and processing the gas onshore to extract liquids, and the conversion of gas into clean liquid hydrocarbon products for export through the use of proprietary GTL technology. The plant, when fully onstream, is expected to have a daily output of 140,000 barrels of oil equivalent per day GTL products with a further 120,000 barrels of oil equivalent per day of natural gas liquids and ethane extracted for sale.
COUNTRIES IN WHICH GAS & POWER OPERATE    
                 
 
               
USA

Canada

Latin/Central
America

Bolivia
Brazil
Mexico
  Europe
Denmark
Germany
Greece
Italy
The
   Netherlands
Norway
Spain
Turkey
UK
Ukraine
  Africa
Algeria
Ghana
Libya
Nigeria
Middle East
Egypt
Iran
Oman
Qatar
United Arab
   Emirates
  Commonwealth of Independent States
Russia
  Asia Pacific
Australia
Brunei
China
India
Japan
Malaysia
Singapore
South Korea
Also in Qatar, construction continued during 2006 on the Qatargas 4 LNG project (Shell interest 30%). This integrated project includes upstream gas and liquids production and a LNG liquefaction plant with a capacity of 7.8 million tonnes of LNG per annum.
In Nigeria, construction continued on Nigeria LNG (NLNG) liquefaction train 6 (Shell interest 26%) which will have a capacity of 4 million tonnes per annum. In parallel, NLNG is also progressing development activities for a seventh (8.5 mtpa) LNG train. In February 2006, Shell signed a project development agreement with the Nigerian National Petroleum Corporation and other partners for the joint development of the new Olokola LNG project (Shell interest 18.5%).
In Australia, the North West Shelf venture (Shell direct and indirect interest, 22%) delivered the first LNG cargo to China in May 2006 at the Guangdong LNG import terminal under a 25 year, 3.3 million tonnes per annum sales and purchase agreement.
Also in the North West Shelf venture, construction continued on LNG train 5 which, when completed, will increase the overall plant capacity to 16.3 million tonnes per annum. A number of Japanese customers renewed their supply contracts from the North West Shelf venture during the year.
The Greater Gorgon joint venture (Shell interest 25%) is considering development of an LNG liquefaction plant on Barrow Island off Western Australia, to be supplied with natural gas from the offshore Gorgon and Jansz/Io gas fields. Shell also has an indirect interest in Woodside Petroleum Ltd.’s (Woodside) proposed Pluto LNG project located in the Carnarvon Basin in Western Australia through the 34.3% Shell shareholding in Woodside. This project entered the front-end engineering design phase during 2006 and progressed with site preparation and ordering of long lead items in the first quarter of 2007, ahead of a final investment decision.
In Russia, further contracts were signed with customers for LNG supply from the Sakhalin II project (Shell interest 55%). Total firm sales over the plateau period amount to 9.37 mtpa, representing some 98% of the nameplate capacity of the plant. In 2006, a protocol was signed with Gazprom to acquire an interest in Sakhalin II. Shell’s interest will reduce to 27.5% when the protocol becomes effective, which is expected to take place in 2007.
In Mexico, the Altamira regasification terminal (Shell ownership 50%, with 75% of the initial capacity of 4.4 million tonnes of LNG per annum) was commissioned in August 2006 with the first LNG cargo to be delivered to the country. The State power company in Mexico, Comisión Federal de Electricidad (CFE), has contracted to purchase 5.2 billion cubic metres of regasified LNG per annum from the facility (equivalent to 3.9 million tonnes of LNG per year).
In the USA, permitting activities are progressing for the Broadwater LNG regasification terminal (Shell ownership 50%) in the Long Island Sound
Royal Dutch Shell plc 33
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW

region of New York and Connecticut. Shell will hold 100% of the terminal’s capacity of 7.7 million tonnes of LNG per annum.
In Europe, Shell was successful in a gas contract release tender organised by BOTAS, the Turkish natural gas and pipeline company, as part of the liberalisation of the gas market in Turkey. We started natural gas marketing in Ukraine, entering into a gas supply contract with JKX and a number of gas sales agreements with various industrial customers. A licence to use clean coal technology was granted to Nuon, a Dutch utility company.
In China, Hubei Shuanghuan Ltd started production of synthesis gas in May 2006 from the first plant in China to use Shell’s coal gasification technology. We completed the construction of the Dongting coal gasification plant (Shell equity share 50%), producing synthesis gas for a Sinopec fertiliser production plant. We granted two additional licences in China for the use of our proprietary coal gasification technology, taking the total number of licences granted globally to date to 17.
Shell and Shenhua Ningxia Coal Industry Ltd announced an agreement in July 2006 for a multi-year study on the feasibility of developing a plant to convert coal into liquids using Shell technology in China. In Australia, Shell and Anglo American signed a joint development agreement to further evaluate the Monash Energy coal-to-liquids project. This potential development involves the gasification of Anglo American’s brown coal from Victoria’s Latrobe Valley for conversion into transportation fuels, including virtually sulphur-free synthetic diesel, using Shell’s proprietary coal gasification and GTL technologies.
RESEARCH AND DEVELOPMENT
The focus of research and development (R&D) is on technical, environmental 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, environmental impact, transport and storage. Shell is further developing its strong position in GTL conversion through R&D programmes aimed at improving catalysts and process technology to reduce capital costs and improve process efficiency and environmental performance. GTL product development is also an important focus of work. In support of its clean coal energy business Shell has expanded its coal gasification and coal-to-liquids (CTL) technology activities, with an emphasis on reducing capital costs, increasing the scale and efficiency of plants and on environmental performance.
BUSINESS AND PROPERTY
Our Gas & Power business liquefies, transports and delivers natural gas to our customers, 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. New opportunities are also emerging for application of our proprietary coal gasification process. Most of these activities, in particular involving LNG, are carried out by equity accounted investments. None of the below mentioned properties or interests is individually significant to the Group.
 
SHELL EQUITY INTEREST, DIRECT AND INDIRECT, IN LNG LIQUEFACTION
PLANT CAPACITY (At December 31, 2006)
   
                     
        Shell equity interest,     100% capacity million  
        direct and indirect (%)  [A]   tonnes per annum [B]  
 
                   
Australia NWS
  Karratha     22       11.9  
Brunei LNG
  Lumut     25       7.2  
Malaysia LNG (Dua and Tiga)
  Bintulu     15       14.6  
Nigeria LNG
  Bonny     26       17.6  
Oman LNG
  Sur     30       7.1  
Qalhat (Oman)
  Sur     11       3.7  
[A]   Percentage rounded to nearest whole percentage point where appropriate.
 
[B]   As reported by the joint venture partner.
 
SHELL EQUITY SHARE OF LNG SALES VOLUME (million tonnes)    
                                         
    2006     2005     2004     2003     2002  
 
                                       
Australia
    2.6       2.6       2.0       1.8       1.7  
Brunei
    1.9       1.7       1.8       1.8       1.7  
Malaysia [A]
    2.1       2.0       1.9       1.5       2.3  
Nigeria
    3.3       2.3       2.4       2.1       1.5  
Oman
    2.2       2.1       2.1       2.1       1.9  
 
Total
    12.1       10.7       10.2       9.3       9.1  
 
[A]   Malaysia includes Dua and Tiga for all years shown and Satu only in 2002.


34 Royal Dutch Shell plc

 


Table of Contents

LNG REGASIFICATION TERMINAL CAPACITY (At December 31, 2006)    
                                             
        Regas capacity     Capacity rights   Capacity right              
Project name   Location   (100% million tonnes per annum)     (Shell share %)   period     Status   Start-up date  
 
                                           
Huelva
  Huelva, Spain     8.0       3 % [A]   2001-2008     In operation     1988  
Barcelona
  Barcelona, Spain     8.3       11 % [A]   2005-2020     In operation     1969  
Cartagena
  Cartagena, Spain     8.0       4 % [A]   2002-2034  [A]   In operation     1989  
Hazira
  Gujarat, India     2.0       74 %   2005 open ended     In operation     2005  
Altamira
  Altamira, Mexico     4.4       75 %   2006 open ended     In operation     2006  
Cove Point
  Lusby, MD, USA     5.5       33 %     2003-2023     In operation     2003  
Elba Island
  Elba Island, GA, USA     6.2       45 %     2006-2036  [B]   In operation     2006  
Elba Expansion
  Elba Island, GA, USA     10.0  [C]     45 % [C]   2010-2035     Permitting     2010  
Baja
  Baja California, Mexico     7.5       50 %     2008-2028     In construction     2008  
[A]   Capacity right as at end of 2006, which will change over the capacity right period.
 
[B]   Capacity leased to third party until mid-2007.
 
[C]   Assumes completion of third party announced Elba expansion.
 
LNG GAS CARRIERS (At December 31, 2006)    
                                                                                   
            number of ships       thousand cubic metres  
Contract   2006     2005     2004     2003     2002       2006     2005     2004     2003     2002  
                                                                                 
Owned/demise-hire (LNG)
    6       6       6       5       4         797       797       797       662       522  
Time-Charter (LNG)
    4  [B]     1       1                     573       145       145              
       
Total
    10       7       7       5       4         1370       942       942       662       522  
       
Owned/demise-hire (LNG) under
construction or on order [A]
                            1       2                                 135       275  
[A]   Excludes LNG ships owned or chartered by LNG joint ventures.
 
[B]   Three of these were on flexible charter based on market demand.
GTL PLANTS (At December 31, 2006)
                         
    Location     Group interest %     100% capacity bbl/day  
 
                       
Malaysia
  Bintulu     72       14,700  
Pearl GTL [A]
  Qatar     100       140,000  
[A]   Under construction
EUROPE
Shell Energy Europe B.V., a wholly-owned Shell 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, Ukraine, Turkey and other countries within Europe.
Other specific activities are summarised as follows:
Germany BEB Erdgas und Erdöl GmbH, a joint venture in which a Shell 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, Shell companies have indirect minority shareholdings in gas transmission and distribution companies in Germany.
Greece A Shell company holds a 24% interest in Attiki Gas Supply Company S.A., a local gas distribution company currently with some 42,000 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 Athens area.
Italy Work continues to develop the LNG regasification terminal in Italy based on the joint venture agreement (Shell interest 50%) entered into with ERG Power and Gas S.p.A. in June 2005. The terminal is planned to have an initial capacity of around 5.8 million tonnes per annum of LNG.
The Netherlands A Shell company holds a 25% interest in GasTerra B.V., a marketer of Dutch natural gas. GasTerra was previously operating under the name of Gasunie Trade & Supply.
AFRICA
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 co-operation 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.
Libya In May 2005, Shell 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.
Nigeria Shell has a 26% interest in Nigeria LNG Ltd (NLNG), which had an LNG capacity at year-end 2005 of 13.6 million tonnes per annum (100%) from four trains. A fifth train began production in January 2006, increasing

Royal Dutch Shell plc 35
 

 


Table of Contents

OPERATING AND FINANCIAL REVIEW

capacity by a further 4 million tonnes per annum (100%). A sixth train is under construction and, when complete, will add an additional 4 million tonnes per annum (100%) of LNG capacity. NLNG is also progressing development for a seventh (8.5 mtpa; 100%) LNG train. NLNG currently has operational control of 20 LNG vessels.
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, Shell interest 18.5%) in Nigeria. This project, which is expected to include up to four LNG trains, is currently in the front-end engineering and design phase of maturation.
Shell has an 18% interest in the West Africa Gas Pipeline Project. This project is under construction and is planned to supply gas from Nigeria to the neighbouring countries of Ghana, Benin and Togo.
Within Nigeria, we operate a gas sales and distribution company, Shell Nigeria Gas (Shell interest 100%), to supply gas to a number of industrial and commercial customers in the south of the country.
Also in Nigeria, Shell and its joint venture partners (Shell interest 30%) signed various agreements with Nigerian state companies for the operation and development of two power plants (Afam V and VI) in the Niger Delta.
ASIA PACIFIC
Australia Shell has a combined 22% direct and indirect (via Woodside) interest in the LNG export phase and a 25% interest in the domestic gas phase of a joint venture formed to develop and produce the gas fields of the North West Shelf (NWS). Current capacity (100%) of the LNG plant at year-end 2006 was 11.9 million tonnes per annum. The LNG is sold mainly to customers in Japan. Shell directly and indirectly has a 22% interest in seven LNG vessels used to deliver LNG from the NWS.
The construction of a fifth NWS LNG train began in 2005. This will raise total capacity of the plant to 16.3 million tonnes per annum (100%). Shell has a 5% interest in two LNG vessels under construction in China that will be used to deliver LNG from NWS under a long-term contract.
Shell has a 25% interest in the Greater Gorgon joint venture that is considering development of a LNG liquefaction plant on Barrow Island off Western Australia, to be supplied with natural gas from the offshore Gorgon and Jansz/Io gas fields.
Shell has an indirect interest in Woodside’s proposed Pluto LNG project located in the Carnavon Basin in Western Australia through its 34.3% shareholding in Woodside.
A wholly-owned Shell company is also involved in a number of exploration licences in the Browse Basin and in the Timor Sea which include opportunities for LNG export.
Brunei Shell has a 25% interest in Brunei LNG Sendirian Berhad. This company liquefies and sells gas to customers in Japan and Korea. Current LNG capacity is 7.2 million tonnes per annum (100%). The LNG continues to be delivered in a fleet of seven LNG vessels owned by Brunei Shell Tankers Sendirian Berhad (Shell interest 25%), and an additional LNG vessel owned by Brunei Gas Carriers Sendirian Berhad (Shell interest 10%).
China In a 50:50 joint venture with China Petroleum and Chemical Corporation (Sinopec), we developed our first coal gasification plant. The
plant will supply synthesis gas to Sinopec downstream business units in Yueyang (Dongting). The project completed construction at the end of 2006. Shell’s proprietary coal gasification technology had been licensed to a total of 15 projects in China by the end of 2006.
In 2005 we entered into a joint venture with the Hangzhou Gas Group and Hong Kong China Gas for the supply of natural gas to industrial and commercial customers in Hangzhou, China. Shell companies’ interest in the City Ring joint venture, Hangzhou Natural Gas Company Limited, is currently 39%.
India Shell holds 74% interest in three legal entities in Hazira, located in the State of Gujarat, covering the LNG regasification and storage terminal, port facilities, and marketing activities. The terminal facilities, commissioned in 2005, are being used to import LNG and market natural gas to customers in Gujarat and North West India.
Malaysia Shell companies hold a 15% interest in each of the Malaysia LNG Dua Sendirian Berhad and Malaysia LNG Tiga Sendirian Berhad projects. Current total LNG capacity is 14.6 million tonnes per annum. Our interest in the Dua plant is due to expire in 2015.
Next to the LNG facilities is a GTL plant, operated by Shell MDS (Malaysia) Sendirian Berhad (Shell interest 72%). This 14,700 barrels per day capacity plant converts around three million cubic metres per day of natural gas into high-quality middle distillates and other products using Shell-developed technology. A full range of liquid and wax products is being sold into markets around the world.
MIDDLE EAST, RUSSIA AND CIS
Egypt At the end of 2006, Shell held a controlling interest (47%) in Fayum Gas Company and an 18% interest in Natgas, local gas distribution companies in Egypt. In February 2007, Shell divested its interest (47%) in Fayum Gas Company.
Iran A project framework agreement for the Persian LNG project (Shell interest 25%) was signed in 2004 with Repsol and the National Iranian Oil Co. to take forward the Persian LNG project to the next stage of design. Under this agreement, it is envisaged that Shell would acquire 50% interest in an agreement to develop phases of the South Pars fields in the Northern Gulf, as contractor, and a 25% interest in the midstream liquefaction company. Front-end engineering design work for the offshore facilities and for the liquefaction plant has commenced and in early 2007 a service contract with respect to development of the phases of the South Pars fields by Shell and Repsol as contractor was entered into. However, the parties will not reach a final decision on whether to proceed with the project until the remaining significant commercial and engineering work is complete.
Oman Shell has 30% interest in Oman LNG L.L.C. (Oman LNG). This company has an annual capacity of 7.1 million tonnes per annum. 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.
The Qalhat LNG S.A.O.C. project (in which Oman LNG has a 36.8% equity interest, giving Shell an 11% indirect interest) was commissioned in 2005.
Qatar In 2006, following approval from Qatar Petroleum, Shell made the final investment decision and began construction on the integrated Pearl GTL project, which is being developed under a development and production sharing agreement with the government of the State of Qatar. Shell provides 100% of project funding. The fully integrated project includes upstream


36 Royal Dutch Shell plc

 


Table of Contents

production of some 1.6 billion cubic feet per day of wellhead gas from Qatar’s North Field, transport and processing of the gas to produce around 120,000 barrels of oil equivalent per day of natural gas liquids and ethane and the construction of a new onshore GTL complex to convert the remaining gas into 140,000 barrels per day of clean liquid hydrocarbon products.
Construction of the Qatargas 4 LNG project continues (Shell interest 30%). The project comprises the integrated development of upstream gas production facilities to produce 1.4 billion cubic feet per day of natural gas, including an average of approximately 70,000 barrels per day of associated natural gas liquids from Qatar’s North field, a single LNG train yielding around 7.8 mtpa of LNG and shipping of the LNG to the intended markets, primarily North America. The final investment decision was taken in December 2005. At the same time the engineering, procurement and construction (EPC) contract for the onshore facilities was awarded.
Russia  Shell has a 55% interest in Sakhalin Energy Investment Company Ltd. (SEIC). Activities for the Phase 2 development of the offshore fields continued during 2006. The development includes a two-train LNG liquefaction plant with a 9.6 million tonnes per annum capacity. Further LNG supply contracts were signed from the Sakhalin II project in 2006. Binding contracts amount to 9.37 mtpa and represents some 98% of the plant’s capacity. Sales commitments are for deliveries to customers in Asia Pacific and North American markets.
In December 2006, Shell and its partners, Mitsui & Co., Ltd (Mitsui) and Mitsubishi Corporation (Mitsubishi), signed a protocol with OAO Gazprom (Gazprom), for Gazprom to acquire a 50% interest plus one share in SEIC for a total cash purchase price of $7,450 million. The current SEIC partners will each dilute their interests by 50% to accommodate this transaction for a proportionate share of the purchase price. When effective, Shell will retain a 27.5% interest, with Mitsui and Mitsubishi holding 12.5% and 10% interests, respectively.
USA AND CANADA
During 2006, the Gas & Power business portfolio in North America 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; long-term power tolling contracts and energy management services.
The scope 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 LNG import capabilities.
OTHER WESTERN HEMISPHERE
Bolivia  Shell has a 25% interest in Transredes Transporte De Hidrocarburos S.A., an oil and gas pipeline company that owns over 3,500 miles of pipeline network. The Group also buys and exports natural gas to Brazil through a pipeline owned by Gas Transboliviano S.A. (combined Shell interests 30%), and interconnected to Transredes.
On May 1, 2006, the Bolivian Government issued a nationalisation decree for hydrocarbon natural resources and related processing and transportation elements. Shell is in discussion with the Government on this decree and its impact on Shell investments in the country.
Brazil  Companhia de Gas de São Paulo (Comgás) is a Brazilian natural gas distribution company in the state of São Paulo. Shell holds 18% through a joint venture.
Transportadora Brasileira Bolivia Brasil S.A. (Br), (combined Shell interests 7%), connected to Gas Transboliviano S.A. (Bol), constitutes the Brazilian side of the Bolivia-Brazil pipeline with around 1,400 miles of 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 480 MW power station project in Cuiabá. The pipeline also crosses through eastern Bolivia.
Mexico  Shell has 50% equity interest in an LNG regasification terminal located in the port of Altamira, Tamaulipas, on Mexico’s Gulf coast. The facility started commercial operations in September 2006 and has an initial peak capacity of 4.4 million tonnes per annum. A separate marketing company (Shell interest 75%) holds the capacity rights in the terminal and will supply up to the equivalent of 3.9 million tonnes per annum natural gas for 15 years to CFE (state power company). Shell also holds capacity rights (3.75 million tonnes per annum) to the Costa Azul LNG import terminal under construction in Baja California on Mexico’s west coast.
LNG SUPPLY AND SHIPPING
Three operations, Shell Western LNG (SWLNG), Shell Eastern LNG (SELNG) and Shell North American LNG (SNALNG), aim to secure LNG supplies for downstream natural gas markets that we are developing. SWLNG sources LNG in the West and supplies our outlets in the Atlantic Basin (currently Spain, Mexico and through SNALNG the USA; SNALNG is the exclusive buyer for the US terminals). 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 primarily use ships, currently a fleet totalling ten, which have been acquired, leased or chartered by Shell Tankers Singapore Limited, Shell Tankers (UK) Ltd, Shell Bermuda (Overseas) Ltd., and SWLNG.
Royal Dutch Shell plc 37
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
OVERVIEW
Oil Products is part of Shell’s downstream organisation. The downstream businesses turn crude oil into a range of refined products including fuels, lubricants and petrochemicals, which they also deliver to market. Oil Products has a presence in more than a hundred countries and employed on average 67,000 people in 2006, generating in 2006 some $251 billion of revenue and earnings of $7.1 billion.
HIGHLIGHTS
  Segment earnings of $7.1 billion.
  China – Lubricants and Bitumen acquisitions completed.
  Turkey retail venture established.
  Disposals generated gross proceeds of $1.4 billion.
We achieved excellent financial
performance in 2006 and our strategy is
on track. We will continue to ensure that
our operations are safe, reliable and cost
competitive. We have made steady
progress with our portfolio development as
we strengthened our position in key
markets. We will continue to leverage the
Shell brand with strong customer focus and
the development of leading edge technologies.
(ROB ROUTS PICTURE)
 
 
 
                         
EARNINGS [A] $ million  
    2006     2005     2004  
 
                       
Revenue (including intersegment sales)
    251,309       253,853       222,348  
Purchases (including change in inventories)
    (222,962 )     (223,482 )     (195,270 )
Depreciation
    (2,580 )     (2,622 )     (3,357 )
Operating expenses
    (18,389 )     (16,141 )     (15,022 )
Share of profit of equity accounted investments
    1,712       1,713       1,277  
Other income/(expense)
    7       69       61  
Taxation
    (1,972 )     (3,408 )     (2,440 )
 
Segment earnings from continuing operations
    7,125       9,982       7,597  
Income/(loss) from discontinued operations
                 
 
SEGMENT EARNINGS
    7,125       9,982       7,597  
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
EARNINGS
Segment earnings in 2006 were $7,125 million, 29% lower than 2005 and 6% lower than 2004. Refining earnings in 2006 were lower than 2005 reflecting reduced refining margins. Marketing earnings in 2006 were higher than 2005, mainly due to higher earnings in Lubricants offsetting lower earnings in Retail and Business to Business (B2B). In 2005, earnings were higher than 2004 mainly due to high refining margins and improved operational performance. Marketing earnings declined in 2005 compared to 2004. Trading earnings increased from 2004 to 2005 and again from 2005 to 2006 as a result of capitalising on the global downstream portfolio and the attractive trading conditions, which stemmed from high price volatility and market structure. The impact of price volatility on inventory had favourable effects on 2004 earnings of approximately $1.0 billion on 2005 earnings of approximately $2.5 billion and of approximately $0.1 billion on 2006 earnings.
Earnings in 2006 included non-operational net gains of $38 million. Benefits relating to reductions in deferred taxes in the Netherlands and Canada were largely offset by pension and employee benefits charges in the USA and France. In 2005, earnings included net gains of $427 million mainly related to divestments; in 2004 earnings were positively affected by gains of $540 million, mainly relating to the net effect of divestments and impairments. In 2006 revenue declined $2,544 million from 2005. The positive effect of higher average crude prices in 2006 was more than offset by the netting of certain trading sales (effective from the third quarter 2005). In 2005 revenue increased compared to 2004 largely as a result of increased crude prices.
Gross margin (calculated as revenue less purchases) in 2006 declined $2,024 million from 2005 levels. Refining margins in Europe and Asia Pacific were down while refining margins in the USA increased. In 2005, gross margin increased $3,293 million from 2004 with higher refining margins in all regions.
Depreciation was $42 million lower in 2006 than 2005 mainly due to divestments partly offset by the impact of foreign exchange translation. Lower depreciation in 2005 compared to 2004 was due to divestments and the recognition in 2004 of impairment provisions on certain refining and marketing assets.
Operating expenses, which include divestment gains, increased during the period 2004 to 2006. Compared to 2005, 2006 was affected by lower gains


 


Table of Contents

from divestments, increased refinery maintenance costs, higher trading expenses, increased energy related costs and the effect of a weaker dollar on non-dollar denominated operating expenses. The increase in 2005 over 2004 was largely due to lower gains from divestments.
Refinery processing intake in 2006 declined 3.0% from 2005, the result of lower utilisation rates particularly in Europe and Asia Pacific. In 2005 intake volumes were lower in comparison to 2004 due to divestments in the USA and Asia Pacific and hurricane related downtime in the USA. Total 2006 product sales volumes were 8.1% lower than 2005, with 6.0% of this decline resulting from the net reporting of certain contracts that are held for trading purposes as from the third quarter 2005. Furthermore, volumes in 2006 were affected by divestments, and rationalised volumes in B2B. In 2005 volumes declined 7.1% compared to 2004. The netting effect of the held for trading volumes accounted for 5.6% of the decline. Moreover, volumes were affected by divested marketing businesses in 2005 and 2004.
OUTLOOK AND STRATEGY
Refining margins remained well supported in 2006, with robust product demand growth and constraints on supply due to unusually intense industry refinery turnaround activity on the US Gulf Coast following the extensive hurricane-related damage in 2005. In the absence of any major disruptions, refining margins are expected to trend lower in 2007 than 2006 with new conversion capacities coming on-stream and the prospect for potentially slower global economic growth. However, the eventual levels are uncertain and will be strongly influenced by the pace of global economic growth, the effect of persistently high oil prices on product demand and start-up timing of expected refinery expansions.
Marketing margins will continue to be influenced by oil price volatility, exchange rates and intense competition.
We aim to lead in the downstream markets in which we choose to operate. Our strategy supports this. To improve downstream profitability we focus on six key areas:
  Keeping our operational performance safe, reliable and cost-competitive.
  Reshaping the portfolio by divesting underperforming assets, making selective investments in manufacturing and marketing to improve our competitive position and investing in high growth markets such as China and India.
  Continuing to seek opportunities to reinforce our position as the leading global brand across all the downstream businesses, including keeping our focus on differentiated fuels.
  Continuing to implement simpler standard global processes supported by a single common IT system for Oil Products businesses across the world.
  Continuing to maximise the value of our integrated hydrocarbon supply chain and work towards a tighter integration of the Oil Products and Chemicals businesses.
  Continuous focus on human resources, development of leadership and progress in diversity.
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
Capital investment was $3.5 billion in 2006, up from $2.8 billion in 2005. The main areas of investment were in our manufacturing and retail businesses. They included spending on refinery maintenance, fuel specification and environmental compliance, upgrading and growing the retail network and two acquisitions in China. During the period 2004-2006 approximately 65% of our capital expenditure was allocated to asset integrity and care and maintenance projects.
COUNTRIES IN WHICH OIL PRODUCTS OPERATE    
                     
 
                   
Canada

USA

Latin America
Argentina
Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
Peru
Surinam
Venezuela

The Caribbean
Antigua &
  Barbuda
Bahamas
Barbados
Dominican   Republic
  French
  Antilles &
  Guiana
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
Ireland
Italy
Latvia
Lithuania
Luxembourg
  Montenegro
The Netherlands Norway
Poland
Portugal
Romania
Serbia
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
UK

Africa
Algeria
Benin
Botswana
Burkina Faso
Cape Verde
  Islands
Cote d’Ivoire
Democratic
  Republic of
  Congo
Djibouti
Egypt
  Ethiopia
Gabon
The Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Mali
Morocco
Mozambique
Namibia
Nigeria
La Réunion
Senegal
South Africa
Sudan
Swaziland
Tanzania
Togo
Tunisia
Uganda
Zimbabwe

Middle East
Iran
Oman
Qatar
  Saudi Arabia
United Arab
  Emirates
Yemen

Commonwealth of Independent States
Russia
Ukraine

Asia Pacific
Australia
Brunei
China (including   Hong Kong)
Fiji
Guam
India
Indonesia
Japan
Laos
Malaysia
Mauritius
New Zealand
Pakistan
Philippines
Singapore
  South Korea
Sri Lanka
Taiwan
Thailand
Vietnam
We continued to focus on investment in high growth markets in Asia and Turkey, on consolidation in Africa and retrenchment in Latin America.
Shell completed the sale of its Oil Products businesses in Jamaica, Bahamas, Paraguay and Rwanda in the first quarter of 2006. An agreement was signed in March 2006 to acquire Koch Materials China (Hong Kong) Limited, a bitumen manufacturing and marketing business in China. The deal increases Shell’s bitumen production – more than doubling it in China to 6,600 tonnes per day, which represents around 20% of Shell Bitumen global volume.
In the second quarter of 2006, Shell announced that Motiva Enterprises (Shell share 50%) was continuing progress towards a decision to expand the Port Arthur Refinery in the USA, which would add up to 325 thousand barrels per day crude to the refinery’s throughput and take its daily total to more than 600 thousand barrels. Depending on commercial conditions and regulatory approvals, Motiva expects to begin construction in 2007 with brownfield expansion to come on line after 2010.
The divestments of marketing and distribution assets in Colombia, Uruguay and Cameroon were completed in the second quarter of 2006.
In Turkey, the venture between Shell and Turcas Petrol A.S. involving more than 1,200 service stations (Shell share 70%) began operating on July 1, 2006. In July 2006, we announced the divestments of our marketing and distribution businesses in various Pacific Islands (completed in the fourth quarter).
In the third quarter 2006, Shell acquired a 75% share in Beijing Tongyi Petroleum Chemical Company Limited and Xianyang Tongyi Petroleum Chemical Company Limited, which produce and market China’s leading independent lubricants brand. This transaction put Shell ahead of other international energy companies in China’s lubricants market and increased Shell’s global finished lubricants volume by 8%. Sales of Shell’s retail and lubricants marketing assets in Puerto Rico and distribution and marketing assets in Bermuda were completed. In the USA the sale of a residential and small commercial natural gas marketing business was completed.
In the fourth quarter, agreement was signed for the sale of Shell’s retail, commercial fuels and aviation businesses in Cambodia.
Early in 2007, as part of ongoing active investment and portfolio management, Shell announced a strategic review of a number of refining and
Royal Dutch Shell plc 39
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
petrochemicals feedstock assets. This review will include, amongst other assets, Petit-Couronne and Reichstett-Vendenheim refineries and the Berre-l’Etang refinery site complex in France, with a combined capacity of around 300,000 barrels per day (Shell share 100%). Shell had previously announced that it is also reviewing its portfolio in the Dominican Republic, where the Company has a 30,000 barrels per day interest in the Refidomsa refinery and storage terminal. At the end of January 2007, Shell signed an agreement to sell its Los Angeles Refinery, Wilmington Products Terminal and around 250 service stations and supply agreements in and around Los Angeles and San Diego.
RESEARCH AND DEVELOPMENT
Research and development (R&D) programmes continue to focus on the improvement of liquid fuels, lubricants, and bitumen products and their applications together with advancement of process technologies that provide a competitive advantage.
For the fuels business, top tier differentiated fuels have been launched in more than 40 countries. Benefits, such as performance and fuel economy together with environmental performance are key drivers in the development of new products, while opportunities to reduce costs are pursued in current formulations. Product stewardship considerations, especially in areas of health and the environment, continue to be given high priority in all areas.
The need to conserve energy, protect the environment, and meet customer requirements continues to drive new technology development in lubricants. Key R&D themes are the development of energy efficient lubricant technologies, new technologies enabling reduced maintenance and longer equipment life and formulation technologies compatible with new emission systems. Programmes focused on novel base oil and additive technologies, lubricants for advanced coatings and lightweight materials, self-healing lubricated surfaces and predictive models continue to be central to our lubricants R&D.
In refinery process research we seek to achieve the highest standards of reliability and availability, supply chain optimisation, cost reduction, feedstock flexibility, and continuous reduction in energy consumption and CO2 emissions. Catalyst development has contributed to increased margins generation. Programmes focused on health, safety, and environment provide solutions ranging from soil remediation techniques to explosion hazard assessments.
Additional R&D investments are made to achieve breakthrough options in sustainable energy and mobility. Shell is partnering several leading companies to develop second-generation biofuels from non-food sources, such as wood and straw. The companies include Iogen Corporation of Canada, which uses enzymes to convert straw into cellulose ethanol that can be blended with gasolines, and CHOREN Industries of Germany which converts a woody feedstock to a high-quality synthetic diesel fuel.
BUSINESS AND PROPERTY
The Oil Products organisation is made up of a number of different businesses, which include Manufacturing, Supply and Distribution, Retail, 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 interest in more than 40 refineries with a Shell equity capacity in excess of 4 million barrels per day. Our presence is truly global, with some 44% of Shell’s equity capacity in Europe, 25% in North America, 25% in Asia Pacific, and 6% in Latin America and Africa. Our refineries make 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. As referred to on page 54 our unplanned downtime in 2006 was 4.9% compared to 4.0% in 2005. This is due to extended turnarounds at some of our larger refineries.
SUPPLY AND DISTRIBUTION
Supply and Distribution optimises the refineries’ hydrocarbon margin, drives cross-business integration, and plays a large role in Shell’s hydrocarbon supply chain strategies. The business acquires and delivers feedstock to Shell refineries and chemical plants, and transports and delivers finished products to Shell’s downstream marketing businesses and customers. It handles around 6 million barrels of inland fuel sales per day. The distribution network includes 5,000 miles (over 8,000 km) of pipeline in the USA. It also includes some 20,000 trucks worldwide making 10,000 deliveries a day.
RETAIL
Shell branded sites constitute the world’s largest single branded retailer with more than 45,000 service stations. Our research indicates that Shell is the leading global differential fuels retailer with a portfolio that includes Shell V-Power and Shell V-Power Diesel. These are tailored to meet growing customer needs for improved engine and environmental performance.
Shell continually seeks to make the most of its innovative and technical knowledge and its partnerships in technology. In April 2006, using a standard Volkswagen Golf model, Shell set a new Guinness world record for the most fuel-efficient circumnavigation of the globe ever undertaken in a standard car. It was completed using only 24 tanks (1,303 litres) of fuel containing the innovative Shell Fuel Economy Formula. The end of the journey marked the launch of our new Formula in several markets. In June, a special blend of Shell V-Power Diesel and GTL fuel powered an Audi R10 TDI to victory in the 24 Heures du Mans race (Le Mans), to become the first diesel-powered winner of the legendary endurance event. The Audi remained unbeaten in its first season.
LUBRICANTS
Shell Lubricants companies are the global leaders in finished lubricants, marketing Shell Lubricants products in around 120 countries. Shell’s product portfolio comprises some of the most recognised (by market share) lubricants brands in both global and individual markets, including Shell Helix, Pennzoil, Shell Rotella, Shell Rimula, Quaker State and the recently-acquired Tongyi in China. 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, metal-working, food processing, mining, power generation and agriculture industries. In addition, through the Jiffy Lube fast lube network, Shell Lubricants provides oil change and service to some 27 million customers in North America and is building a presence in developing markets such as China.
BUSINESS TO BUSINESS (B2B)
B2B sells fuels and special products to a broad range of commercial customers and 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, supplying over 87 million litres of


40 Royal Dutch Shell plc

 


Table of Contents

fuels and lubricants every day. Shell regained the top spot in the Armbrust Award for the World’s Best Jet Fuel Marketer in 2006.
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, 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 from large ocean-going tankers to small fishing boats in more than 730 ports in around 90 countries.
Shell Gas (LPG) Liquefied petroleum gas (LPG) fits well into Shell’s range of product offerings as a cleaner-burning and convenient fuel. Shell Gas (LPG) is one of the largest players in the LPG market, supplying LPG to over 30 million domestic, commercial and industrial customers. The business works with 3,500 distributors and has around 100,000 points of sale, in more than 30 countries and territories, around the world.
Commercial Fuels provides high-quality heating, transport and industrial fuels to more than 4 million customers worldwide. The bulk fuels business, in close co-operation with the refineries, plays a key role in optimising the value for the integrated supply chain. The domestic heating oil business provides oil to heat more than 1.5 million homes. The Road Transport business provides fuels and services to transporters around the world through a network of well-located sites with payment-through-card systems.
Shell Bitumen is a global business. Every day it supplies around 12,000 million tonnes of bitumen to 1,600 customers, through 250 applications, in 35 countries. Shell Bitumen resurfaces the equivalent of 450 kilometres of road a day and our market share throughout the world is growing. Most recently, we doubled our presence in China through Shell Road Solutions and we are now a market leader in premium binders in that region.
SHELL GLOBAL SOLUTIONS
Shell Global Solutions provides business and operational consultancy, catalysts, technical services and research and development expertise to Shell and the energy and processing industries worldwide. It has an extensive network of offices around the world, with primary commercial centres operating in the USA, Europe and Asia Pacific.
Royal Dutch Shell plc 41
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
REFINING
COST OF CRUDE OIL PROCESSED OR CONSUMED   $  per barrel  
                                         
Cost of crude oil processed or consumed (including upstream margin on crude supplied by Group and equity accounted investment exploration and production companies)   2006     2005     2004     2003 [A]   2002 [A]
 
Total
    60.46       48.24       37.22       26.75       24.35  
 
OPERABLE CRUDE OIL DISTILLATION CAPACITY [B]   thousand barrels/calendar day [C][D]  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Europe
    1,823       1,822       1,835       1,808       1,809  
Other Eastern Hemisphere
    923       899       1,050       1,072       1,108  
USA
    946       955       1,032       1,073       1,075  
Other Western Hemisphere
    348       350       350       361       395  
 
Total
    4,040       4,026       4,267       4,314       4,387  
 
CRUDE OIL PROCESSED [E]   thousand barrels daily [C]  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Europe
    1,641       1,701       1,688       1,712       1,701  
Other Eastern Hemisphere
    751       802       943       916       870  
USA
    874       855       951       974       996  
Other Western Hemisphere
    303       315       319       323       314  
 
Total
    3,569       3,673       3,901       3,925       3,881  
 
Group share of equity accounted investments
    417       455       451       515       473  
 
REFINERY PROCESSING INTAKE [F]   thousand barrels daily [C]  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Crude oil
    3,617       3,722       3,946       3,949       3,881  
Feedstocks
    245       259       216       218       203  
 
 
    3,862       3,981       4,162       4,167       4,084  
 
Europe
    1,732       1,804       1,770       1,776       1,761  
Other Eastern Hemisphere
    808       849       962       956       941  
USA
    956       953       1,055       1,079       1,064  
Other Western Hemisphere
    366       375       375       356       318  
 
Total
    3,862       3,981       4,162       4,167       4,084  
 
42 Royal Dutch Shell plc

 


Table of Contents

REFINERY PROCESSING INTAKE   million tonnes per year  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Metric equivalent
    189       195       204       204       201  
REFINERY PROCESSING OUTTURN [G]   thousand barrels daily [C]  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Gasolines
    1,444       1,492       1,542       1,575       1,537  
Kerosines
    368       382       424       418       400  
Gas/Diesel oils
    1,215       1,256       1,297       1,312       1,287  
Fuel oil
    346       391       414       378       355  
Other products
    597       567       557       550       546  
 
Total
    3,970       4,088       4,234       4,233       4,125  
 
[A]   Figures for 2003 and 2002 are provided on a US GAAP basis.
 
[B]   Group average operating capacity for the year and excluding mothballed capacity.
 
[C]   One barrel daily is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
 
[D]   Operable capacity is the calendar day capacity minus capacity loss due to normal unit downtime.
 
[E]   Including natural gas liquids; includes processing for others and excludes processing by others.
 
[F]   Including crude oil and natural gas liquids plus feedstocks processed in crude oil distillation units and in secondary conversion units.
 
[G]   Excluding “own use” and products acquired for blending purposes.
Royal Dutch Shell plc 43
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
OIL SALES [A]   thousand barrels per day  
                                         
Product volumes   2006     2005     2004     2003     2002  
 
                                       
Europe
                                       
Gasolines
    563       569       576       616       647  
Kerosines
    207       223       220       194       190  
Gas/Diesel oils
    859       920       934       936       950  
Fuel oil
    153       196       179       184       177  
Other products
    191       185       203       207       209  
 
 
    1,973       2,093       2,112       2,137       2,173  
 
Other Eastern Hemisphere [B][C]
                                       
Gasolines
    356       318       337       315       332  
Kerosines
    167       174       168       166       142  
Gas/Diesel oils
    450       470       511       489       476  
Fuel oil
    140       151       168       180       188  
Other products
    114       119       136       138       149  
 
 
    1,227       1,232       1,320       1,288       1,287  
 
USA [D]
                                       
Gasolines
    845       1,068       1,372       1,343       1,239  
Kerosines
    168       236       258       212       221  
Gas/Diesel oils
    232       368       430       430       401  
Fuel oil
    51       107       209       189       105  
Other products
    175       234       247       218       173  
 
 
    1,471       2,013       2,516       2,392       2,139  
 
Other Western Hemisphere
                                       
Gasolines
    247       263       293       296       317  
Kerosines
    71       74       73       72       74  
Gas/Diesel oils
    237       251       249       243       246  
Fuel oil
    65       77       85       86       92  
Other products
    37       43       44       52       49  
 
 
    657       708       744       749       778  
 
Export sales [E]
                                       
Gasolines
    195       186       182       193       251  
Kerosines
    136       104       114       154       155  
Gas/Diesel oils
    328       287       274       213       222  
Fuel oil
    338       313       208       181       196  
Other products
    160       121       130       138       198  
 
 
    1,157       1,011       908       879       1,022  
 
Total product sales
                                       
Gasolines
    2,206       2,404       2,760       2,763       2,786  
Kerosines
    749       811       833       798       782  
Gas/Diesel oils
    2,106       2,296       2,398       2,311       2,295  
Fuel oil
    747       844       849       820       758  
Other products
    677       702       760       753       778  
 
 
    6,485       7,057       7,600       7,445       7,399  
 
[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 61.55% 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]   Certain contracts are held for trading purposes and reported net rather than gross was effect from Q3 2005. The effect in 2006 is a reduction in oil product sales of approximately 844 thousand b/d and in 2005 424 thousand b/d.
 
[E]   Export sales as a percentage of total oil sales amount to 17.8% in 2006, 14.3% in 2005, 11.9% in 2004, 11.8% in 2003 and 13.8% in 2002.
44 Royal Dutch Shell plc

 


Table of Contents

SALES BY PRODUCT AS PERCENTAGE OF TOTAL PRODUCT SALES   %  
                                         
    2006     2005     2004     2003     2002  
 
                                       
Gasolines
    34.0       34.1       36.3       37.1       37.7  
Kerosines
    11.6       11.5       10.9       10.7       10.6  
Gas/Diesel oils
    32.5       32.5       31.6       31.1       31.0  
Fuel oil
    11.5       12.0       11.2       11.0       10.2  
Other products
    10.4       9.9       10.0       10.1       10.5  
 
 
    100.0       100.0       100.0       100.0       100.0  
 
TOTAL OIL SALES VOLUMES [A]   thousand barrels per day  
                                         
Oil products by geographical area   2006     2005     2004     2003     2002  
 
                                       
Europe
                                       
Germany
    732       771       772       785       789  
UK and Republic of Ireland
    252       323       311       313       317  
France
    280       268       275       283       299  
the Netherlands
    183       199       191       180       191  
Others
    526       532       563       576       577  
 
 
    1,973       2,093       2,112       2,137       2,173  
 
Other Eastern Hemisphere
                                       
Australia
    221       222       215       190       194  
Others
    1,006       1,010       1,105       1,098       1,093  
 
 
    1,227       1,232       1,320       1,288       1,287  
 
USA [A]
    1,471       2,013       2,516       2,392       2,139  
 
Other Western Hemisphere
                                       
Canada
    288       300       287       276       263  
Brazil
    180       179       170       168       191  
Others
    189       229       287       305       324  
 
 
    657       708       744       749       778  
 
Export sales [B]
    1,157       1,011       908       879       1,022  
 
Total oil products
    6,485       7,057       7,600       7,445       7,399  
Crude oil [A]
    2,472       3,695       5,160       4,769       5,025  
 
Total oil sales
    8,957       10,752       12,760       12,214       12,424  
 
    million tonnes per year  
                                         
 
                                       
Metric equivalent
    439       527       627       611       621  
[A]   Certain contracts are held for trading purposes and reported net rather than gross with effect from Q3 2005. The effect in 2006 is a reduction in oil product sales of approximately 844 thousand b/d and a reduction in crude oil sales of approximately 1,943 thousand b/d, in 2005 424 thousand b/d and 879 thousand b/d respectively.
 
[B]   Export sales as a percentage of total oil sales volumes amount to 12.9% in 2006, 9.4% in 2005, 7.1% in 2004, 7.2% in 2003 and 8.2% in 2002.
Royal Dutch Shell plc 45
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
REVENUE   $ million  
                                         
    2006     2005     2004     2003[A]     2002[A]  
 
                                       
by product
                                       
Gasolines
    65,910       62,189       55,594       44,830       38,861  
Kerosines
    23,485       21,775       16,308       10,826       9,170  
Gas/Diesel oils
    68,899       63,357       48,304       35,344       28,077  
Fuel oil
    13,948       13,218       9,688       8,424       6,591  
Other products
    20,182       17,505       15,279       13,834       11,420  
 
Total oil products
    192,424       178,044       145,173       113,258       94,119  
 
by geographical area[B]
                                       
Europe
    60,755       55,968       44,010       35,618       30,228  
Other Eastern Hemisphere
    37,869       31,705       25,725       19,957       16,801  
USA
    44,370       49,574       46,500       34,533       26,200  
Other Western Hemisphere
    21,465       19,957       15,116       12,751       10,836  
Export sales [B]
    27,965       20,840       13,822       10,399       10,054  
 
Total oil products
    192,424       178,044       145,173       113,258       94,119  
 
[A]   Figures for 2003 and 2002 are provided on a US GAAP basis.
 
[B]   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.
AVERAGE PRODUCT REVENUE   $  per barrel  
                                         
    2006     2005     2004     2003[A]     2002[A]  
 
                                       
by product
                                       
Gasolines
    81.85       70.88       55.03       44.46       38.22  
Kerosines
    85.97       73.52       53.52       37.18       32.12  
Gas/Diesel oils
    89.61       75.61       55.04       41.90       33.52  
Fuel oil
    51.20       42.91       31.17       28.14       23.82  
Other products
    81.64       68.29       54.95       50.30       40.21  
 
Total oil products
    81.30       69.12       52.19       41.68       34.85  
 
by geographical area
                                       
Europe
    84.36       73.21       56.93       45.67       38.11  
Other Eastern Hemisphere
    84.55       70.52       53.30       42.45       35.77  
USA
    82.65       67.48       50.48       39.56       33.55  
Other Western Hemisphere
    89.47       77.28       55.51       46.64       38.18  
Export sales
    66.25       56.48       41.57       32.41       26.95  
 
Total oil products
    81.30       69.12       52.19       41.68       34.85  
 
[A]   Figures for 2003 and 2002 are provided on a US GAAP basis.
TRADING
Shell Trading is a global network of companies that are engaged in trading and shipping. The trading portfolio includes natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products. Companies within the Shell Trading network (main locations include Houston, London, Dubai, Moscow and Singapore) are separate entities responsible for running their own businesses. Shell Trading trades about 13 million barrels of crude oil equivalent per day. The Group’s trading and shipping activities primarily occur in support of the Group’s business activities.
46 Royal Dutch Shell plc

 


Table of Contents

SHIPPING
During 2006, shipping portfolio changes included the redelivery from bareboat charter of three large range product tankers (45,000 to 160,000dwt) and the entering into service of one large range product tanker contracted in 2005. Two very large crude carriers over 160,000dwt (VLCCs) were redelivered from bareboat charter and two others converted from bareboat charter to time charter. A further two VLCCs were contracted on time charter. The bareboat charter of one general purpose tanker (10,000 to 25,000dwt) was extended from 2007 and one additional general purpose product tanker was contracted on bareboat charter for delivery in 2007. One liquefied petroleum gas (LPG) carrier (82,500 cubic metres) was contracted on time charter and one LPG carrier (80,600 cubic metres) redelivered from time charter. These changes together with other new charters, charter renewals and redeliveries from charter are summarised in the table below.
OIL TANKERS [A] (At December 31)    
                                                                                 
    number of ships     million deadweight tonnes  
    2006     2005     2004     2003     2002     2006     2005     2004     2003     2002  
 
                                                                               
Owned/demise-hired
VLCCs (over 160,000dwt)
          4       5       7       7             1.2       1.5       2.1       2.1  
Large range (45,000 to 160,000dwt)
    11       13       11       13       16       0.9       0.8       0.7       0.9       1.3  
Medium range (25,000 to 45,000dwt)
    5       5       5       5       5       0.2       0.2       0.2       0.2       0.2  
General purpose (10,000 to 25,000dwt)/ Specialist
    5       5       2       3       2       0.1       0.1       0.1       0.1       0.1  
 
Total
    21       27       23       28       30       1.2       2.3       2.5       3.3       3.7  
 
Time-chartered [B][C]
                                                                               
VLCCs (over 160,000dwt) [D]
    7       1       1       1       1       2.1       0.3       0.3       0.3       0.3  
Large range (45,000 to 160,000dwt)
    22       18       19       15       18       1.9       1.6       1.7       1.3       1.5  
Medium range (25,000 to 45,000dwt)
    14       14       8       13       15       0.5       0.5       0.3       0.5       0.6  
General purpose (10,000 to 25,000dwt)/ Specialist
    24       13       12       10       6       0.4       0.3       0.2       0.2       0.1  
 
Total
    67       46       40       39       40       4.9       2.7       2.5       2.3       2.5  
 
Total oil tankers
    88       73       63       67       70       6.1       5.0       5.0       5.6       6.2  
 
Owned/demise-hired under construction or on order (oil) [E]
    1       1       3                         0.1       0.3              
GAS CARRIERS [A] (At December 31)    
                                                                                 
    number of ships     thousand cubic metres  
    2006     2005     2004     2003     2002     2006     2005     2004     2003     2002  
 
                                                                               
Owned/demise-hired (LPG)
                1       1       1                   60       59       59  
Time-chartered (LPG)
    2       2       2       2       3       166       136       136       136       145  
 
Total
    2       2       3       3       4       166       136       196       195       204  
 
[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]   Four of the time-chartered VLCCs are directly manned and managed by Group companies.
 
[E]   Owned/demise hired new building contracts not in service but due for delivery post December 31, 2006.
Royal Dutch Shell plc 47
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
Chemicals
OVERVIEW
Chemicals is part of Shell’s downstream organisation.
The downstream businesses turn crude oil into a range of refined products including fuels, lubricants and petrochemicals, which they also deliver to market. Chemicals produces and sells petrochemicals to industrial customers worldwide. The products are widely used in plastics, coatings and detergents found in items such as textiles, medical supplies and computers.
HIGHLIGHTS
  Good financial performance with segment earnings of $1.1 billion and cash flow from operations of $1.9 billion.
  Nanhai petrochemical complex – successful commercialisation, world class operation.
  Final investment decision taken on new world scale ethylene cracker and mono-ethylene glycol plant in Singapore.
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
48 Royal Dutch Shell plc
EARNINGS [A]   $ million
                         
    2006     2005     2004  
Revenue (including intersegment sales)
    40,750       34,996       29,497  
Purchases (including change in inventories)
    (35,765 )     (29,565 )     (24,362 )
Depreciation
    (668 )     (599 )     (695 )
Operating expenses
    (3,615 )     (3,613 )     (3,205 )
Share of profit of equity accounted investments
    494       423       437  
Other income/(expense)
    (13 )     (9 )     (25 )
Taxation
    (119 )     (335 )     (300 )
 
Segment earnings from continuing operations
    1,064       1,298       1,347  
Income/(loss) from discontinued operations
          (307 )     (199 )
 
SEGMENT EARNINGS
    1,064       991       1,148  
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
EARNINGS
Segment earnings in 2006 were $1,064 million, compared to $991 million in 2005, which included $307 million of losses from discontinued operations; and 2004 earnings of $1,148 million, which included $199 million of net losses from discontinued operations. 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.
Setting aside the effect of discontinued operations, earnings in 2006 were $234 million lower than 2005. This was due to lower margins and higher depreciation, partly offset by better earnings from equity accounted investments and lower taxation. 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).
In 2006, sales volumes of chemical products grew by 1% from 2005 mainly due to increased aromatics trading volumes in base chemicals. Unit proceeds increased by 11% from 2005. However the increase in feedstock prices was greater, resulting in lower margins (proceeds less cost of feedstock and energy). Asset utilisation declined by 1% and reflected a heavy planned maintenance programme in 2006. This involved scheduled maintenance turnarounds of major production plants in Europe and in the USA. Depreciation was $69 million higher due to a $50 million increase in charges for asset impairments. The impairments reflect changes in the assessment of future returns in relation to the value of our assets. Operating expenses in 2006 were similar to those of 2005. Lower charges for legal provisions and costs associated with portfolio activity, such as business exits and divestments, were offset by higher manufacturing plant expenditure. Reduced taxation reflected benefits from tax rate changes in Canada and in the Netherlands as well as a settlement of tax exposures in the Netherlands.
Earnings in 2005 benefited from more favourable margins than seen in 2004, as well as 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


 


Table of Contents

the impact of hurricanes on operations in the USA. Depreciation decreased by $96 million from 2004 due to lower asset impairments. Higher costs reflected charges for legal provisions, costs associated with increased portfolio activity, such as project development, business exits and divestments, as well as higher manufacturing plant expenditure.
OUTLOOK AND STRATEGY
The demand for petrochemicals in 2007 is expected to increase in line with the growth in the global economy, mainly in Asia Pacific. Globally, new expected industry capacity additions coupled with the prospect of continued high feedstock and energy costs may limit the opportunities for improving margins.
The Chemicals strategy continues to focus on our portfolio of crackers and selected first-line derivatives, which supply bulk petrochemicals to large industrial customers. Our strategy is to strengthen the existing asset base in the Americas and Europe, and to achieve profitable growth in Asia Pacific/Middle East.
Chemicals will continue to fully commercialise the Nanhai petrochemical complex joint venture in China and progress a new world scale petrochemical facility in Singapore. Work continues on developing more advantaged-feedstock investment opportunities in the Middle East.
The emphasis will be on exploiting Oil Products and Chemicals synergies to increase advantaged cracker feed, on driving global standards and processes, on fully leveraging technology investment and on optimising global market positions.
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
In 2006, capital investment was $877 million up from $599 million in 2005. Capital expenditure increased by $434 million from last year driven by an increase in investment in portfolio growth projects, particularly a cracker and mono-ethylene glycol (MEG) plant project in Singapore for which Shell took the final investment decision, along with higher capitalised expenditure for planned major plant maintenance and asset integrity programmes. The MEG facility will include a new world-scale 800,000 tonnes per annum ethylene cracker on Bukom Island and a 750,000 tonnes per annum MEG plant on Jurong Island using Shell’s proprietary technology. Construction began in the fourth quarter of 2006. Completion and start-up of the new and modified facilities is expected in 2009/2010. When complete, the cracker and the new MEG plant will create a site fully integrated with the 464,000 barrels per day Pulau Bukom refinery (Shell share 100%), providing feedstock and operating benefits. Additions to equity accounted investments were $156 million less than those last year due to the completion of construction and start-up of the Nanhai petrochemicals complex in southern China at the end of 2005.
The CNOOC and Shell Petrochemicals Company Limited joint venture (Shell share 50%) started operation of the Nanhai petrochemicals complex in China. Construction of the complex was completed on time and on budget. By the end of the first quarter of 2006 all plants were manufacturing product in accordance with specification and commercial operations began. From start-up the joint venture made excellent progress operationally and commercially. Production and sales volumes increased in the course of the year and a total of 1.9 million tonnes of chemicals products were sold to more than 800 customers in more than 20 provinces in China by the end of 2006. 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.
In order to stay competitive in the longer term we actively review our portfolio of businesses and assets. As part of our ongoing strategy, we are
COUNTRIES IN WHICH CHEMICALS OPERATE    
                 
 
               
Canada
  Europe   Africa   Middle East   Asia Pacific
 
  Denmark   Kenya   Saudi Arabia   Australia
USA
  France   South   United Arab   China
 
  Germany     Africa     Emirates   Japan
Latin America
  Greece           Malaysia
Argentina
  Italy           New Zealand
Brazil
  The Netherlands           Philippines
Chile
  Poland           Singapore
Colombia
  Spain           South Korea
Mexico
  Switzerland           Taiwan
Venezuela
  Turkey           Thailand
 
  UK           Vietnam
The Caribbean
               
Puerto Rico
               
reviewing whether to sell the Yabucoa petrochemical feedstock plant in Puerto Rico.
RESEARCH AND DEVELOPMENT
Research and development (R&D) and other technical services continue to improve products and process technologies that provide Shell with sustainable leadership positions in selected chemical products and intermediates. Improvements in manufacturing processes – achieved by means of increased feedstock flexibility, product yield, energy efficiency and plant throughput – are leading to lower production costs at existing facilities and lower investment cost for new facilities. Customer relationships and market positions are being enhanced through close technical links with important industrial customers. Current process technologies and assets benefit from integration with oil refining operations. Longer term R&D focuses on advantaged chemical process technologies which integrate with upstream conversion technologies and which leverage the Group’s hydrocarbon positions.
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 several joint ventures: Infineum, Saudi Petrochemical Company (SADAF), CNOOC and Shell Petrochemicals Company Ltd. (CSPCL) (each as described below).
Infineum, a 50:50 joint venture between Group companies and ExxonMobil with manufacturing locations in seven countries (USA, Mexico, Brazil, Germany, France, Italy, and Singapore), 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.
CSPCL, a 50:50 joint venture between Group companies and CNOOC Petrochemicals Investment Ltd., produces a range of petrochemicals, intended primarily for the Chinese markets. The construction of the Nanhai petrochemicals complex in southern China was completed end 2005 and a successful start-up in early 2006 has brought the joint venture into full commercial operation.
Royal Dutch Shell plc 49
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
SALES VOLUMES BY MAIN PRODUCT CATEGORY [A]   thousand tonnes  
    2006     2005     2004     2003     2002  
 
                                       
Base chemicals
    14,146       13,710       14,184       13,165       10,031  
First-line derivatives
    8,964       8,891       9,499       9,779       9,595  
Other
    27       225       477       164       1,767  
 
Total
    23,137       22,826       24,160       23,108       21,393  
 
 
SALES VOLUMES BY REGION   thousand tonnes  
    2006     2005     2004     2003     2002  
 
                                       
Europe
    9,361       10,018       10,159       9,902       9,077  
Other Eastern Hemisphere
    5,673       5,252       5,526       5,397       4,672  
USA
    7,464       6,893       7,819       7,108       6,970  
Other Western Hemisphere
    639       663       656       701       674  
 
Total
    23,137       22,826       24,160       23,108       21,393  
 
 
REVENUE BY GEOGRAPHICAL AREA [B]   $ million  
    2006     2005     2004     2003     2002  
 
                                       
Europe
    9,642       8,981       7,873       5,617       3,994  
Other Eastern Hemisphere
    5,538       4,640       4,530       3,092       2,324  
USA
    7,669       6,564       6,159       4,369       3,548  
Other Western Hemisphere
    758       735       616       486       379  
 
Total chemical products revenue
    23,607       20,920       19,178       13,564       10,245  
Non-chemical products
    4,124       2,998       2,311       1,622       1,245  
 
Total
    27,731       23,918       21,489       15,186       11,490  
 
 
ETHYLENE CAPACITY – GROUP AND EQUITY ACCOUNTED INVESTMENTS[C]      
    2006     2005     2004     2003     2002  
 
                                       
Nominal capacity (thousand tonnes/year)
    6,178       6,414       6,701       6,203       6,023  
Utilisation (%)
    82       86       87       90       92  
[A]   Excluding volumes sold by equity accounted investments, chemical feedstock trading and by-products.
 
[B]   Excluding revenue from equity accounted investments, chemical feedstock trading and intersegment revenue.
 
[C]   Data includes Group share of capacity entitlement (offtake rights) that may be different from nominal Group equity interest.
At December 31, 2006, Group companies had major interests in chemical manufacturing plants, as described below.
EUROPE
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 diisobutylene. 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 the Group’s 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.
The Netherlands Shell Nederland Chemie B.V. (SNC) (Group interest 100%) manufactures solvents, methyl tertiary butyl ether, brake fluids, glycol ethers, urethanes (polyols), isoprenes and butene-1 at the Pernis facility. SNC operates at Pernis a polypropylene plant (Basell) and an Elastomers (Kraton) plant on behalf of third party companies. SNC manufactures lower olefins, benzene, butadiene, ethyl benzene, ethylene glycols, ethylene oxide, and styrene monomer/propylene oxide (MSPO/1 plant) at the Moerdijk facility. SNC operates at Moerdijk a VEOVA (Hexion) plant and styrene/propylene (MSPO/2, Ellba) plant on behalf of third party companies. 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
50 Royal Dutch Shell plc

 


Table of Contents

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 are China National Offshore Oil Corporation (CNOOC) and the Guangdong Investment & Development Company. Construction of the world scale production facilities designed to produce 2.3 million metric tonnes of petrochemical products per annum was completed end 2005. The complex is located in the Daya Bay Economic and Technological Development Zone in the Huizhou Municipality of Guangdong Province. Following a successful start-up in early 2006, the joint venture is now fully operational. CSPCL produces and markets 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. These products are primarily marketed domestically to meet the demand in the Chinese market for petrochemicals.
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 plants capable of producing 3.6 mtpa of crude industrial ethanol, ethylene dichloride, caustic soda, styrene, and methyl tertiary butyl ether. The marketing arms of both partners handle the international marketing of SADAF products, except for MTBE, which is marketed by SABIC. Our marketing effort is co-ordinated 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 metric tonnes per annum of ethylene and 500,000 metric tonnes per annum of propylene. Ethylene Glycols (Singapore) Pte. Ltd. (Group interest 70%) owns and operates an ethylene oxide/glycols plant. Shell Chemicals Seraya 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 (SEPL). SEPL received Group approval to build a world-scale ethylene cracker and MEG plant in Singapore in July 2006 with plant production expected to come on-stream in 2009/2010.
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, RM17 catalyst, propanediol, and additives. These chemical products are used in many consumer and industrial products and processes, primarily in the USA.
Shell’s major chemicals’ joint ventures in the USA are: Infineum, a 50:50 joint venture between Group companies and ExxonMobil, which formulates, manufactures, and markets high-quality additives for use in fuels, lubricants, and specialty additives and components; and Sabina Petrochemicals LLC, a joint venture owned by SCLP (62%), BASF Corporation (23%) and Total Petrochemicals USA, Inc. (15%) which produces butadiene at their facility at Port Arthur, Texas.
OTHER WESTERN HEMISPHERE
Canada Shell Chemicals Canada Ltd. (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.
A third party, Basell Canada Inc., operates the isopropyl alcohol plant at Sarnia on behalf of Shell Chemicals Canada Ltd.
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 chemical plant. The facility also produces gasoline, diesel, jet fuel and residual fuels, primarily for use in Puerto Rico.
Royal Dutch Shell plc 51
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
Other industry segments
and Corporate
OVERVIEW
Other industry segments include Renewables, Hydrogen and CO2 co-ordination activities. Renewables develops business opportunities based on renewable sources of energy including wind and solar while Hydrogen works towards the introduction of hydrogen as a commercial fuel. The CO2 group co-ordinates efforts to address carbon dioxide emissions across Shell’s businesses and our research in technology to capture and store such emissions. Corporate represents the functional activities supporting the Group.
Shell Renewables aims to develop at least one material alternative energy business for Shell. Its activities include growth in the more mature wind energy business, and developing emerging opportunities such as new solar technology and hydrogen. Shell Wind Energy develops and operates onshore and offshore wind farms with activities in the USA, the UK, Germany, France, Spain, the Netherlands and China. In 2006, it brought its first significant offshore wind farm into operation. Shell Solar focuses mainly on advanced solar panel technology and is developing a CIS thin-film solar plant in Germany with joint venture partner Saint-Gobain. Shell Hydrogen is developing projects with the aim of introducing hydrogen as a commercial product into the road transportation and industrial sectors. It has developed demonstration projects in the USA, Japan, Iceland, Luxembourg, the Netherlands and China.
HIGHLIGHTS
  108 megawatt (MW) Offshore Windpark Egmond aan Zee in operation in the Netherlands.
  New thin-film solar joint venture established with Saint-Gobain.
  Partnership initiated with Connexxion and MAN to develop world’s largest hydrogen public transport operation in Rotterdam, the Netherlands.
  Halten project: A potential carbon dioxide capture and storage project in Norway with Statoil.
52 Royal Dutch Shell plc
                                                 
EARNINGS [A] $ million  
    2006     2005     2004  
    Other             Other             Other        
    industry             industry             industry        
    segments     Corporate     segments     Corporate     segments     Corporate  
 
                                               
Segment earnings from continuing operations
    (37 )     314       (202 )     (321 )     (145 )     (946 )
 
Income/(loss) from discontinued operations
                                  (35 )
 
SEGMENT EARNINGS
    (37 )     314       (202 )     (321 )     (145 )     (981 )
[A]   Segment earnings as disclosed in the table above differ from the segment results disclosed in Note 10 beginning on page 117. Segment earnings include share of profit of equity accounted investments, other income/expense and taxation attributable to the segment.
2006 COMPARED TO 2005 AND 2004
Other industry segments (OIS) covers the combined results of our Renewables and Hydrogen businesses and CO2 co-ordination activities. Corporate is a non-operating segment consisting primarily of interest expense on debt and certain other non-allocated costs.
OIS and Corporate results were a gain of $277 million compared to a loss of $523 million a year ago. Net interest income, currency exchange results and corporate tax improved during the year 2006. Included in 2006 were net charges of $206 million related to a legal provision partly offset by corporate tax credits versus net charges of $148 million in 2005 mainly in OIS. While income from operating assets is improving, the level of business development costs associated with growing the portfolio increased, contributing to an overall loss in 2006 in OIS.
The 2005 and 2004 earnings of OIS included one-off charges of $151 million and $42 million respectively. Compared to 2004, corporate charges dropped due to a decrease in net interest expense and shareholder costs, coupled with an increase in tax recoveries, which were partly offset by additional insurance costs and exchange losses.
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
Shell aims to develop at least one alternative energy source such as wind, hydrogen or advanced solar technology, into a substantial business. To that end, we invested in new projects across our broad portfolio of activities.
On October 5, 2006, Offshore Windpark Egmond aan Zee delivered its first kilowatt-hours of clean electricity to households in the Netherlands. This, the first Dutch offshore wind project, has 36 turbines with an overall capacity of 108 MW. It is a 50:50 joint venture between Shell and Nuon. We also made progress with the London Array wind project in the outer Thames Estuary. If approved, this project will have up to 271 turbines and could generate up to 1,000 MW of electricity (Shell share 33%).
We are one of the largest wind energy developers in the USA. We extended our presence in this market during 2006 by making an investment decision in the fourth quarter on the 164 MW Mount Storm wind park in Virginia (Shell share 50%).
In solar we have revised our approach to focus on advanced copper indium diselenide (CIS) thin-film technology. In October 2006, Shell formed a joint venture with Saint-Gobain to develop a 20 MW CIS thin film technology plant in Germany.
Shell divested its crystalline silicon business activities to SolarWorld AG in mid-2006. Manufacturing facilities, sales and marketing, and silicon research


 


Table of Contents

and development activities in Germany, Singapore, South Africa and the USA have transferred to SolarWorld.
Shell Hydrogen continued its work to promote the development of the infrastructure and technology that will help hydrogen play its part in meeting future energy needs. Towards this goal, Shell Hydrogen announced its plan to advance hydrogen as a future road transport fuel jointly with Total France, BMW Group, DaimlerChrysler AG, Ford Motor Company, General Motors Europe AG, MAN Nutzfahrzeuge AG and Volkswagen AG.
Shell Hydrogen, in partnership with Connexxion Holding N.V. and MAN Truck & Bus Company N.V., announced a project to create the world’s largest hydrogen-fuelled public transport operation in Rotterdam, the Netherlands. Shell Hydrogen continued development of demonstration projects in the USA, and with Tongji University in China.
Our hydrogen filling stations are present in Asia, Europe and the USA.
Shell CO2 seeks to develop solutions to address Shell’s CO2 emissions. In the Halten Project, in agreement with Statoil, Shell is working towards the potential use of CO2 for enhanced oil recovery offshore. The concept involves capturing CO2 from power generation, piping it offshore and injecting it in the Shell-operated Draugen and the Statoil-operated Heidrun fields, resulting in increased energy production with minimised CO2 impact. In a partnership with Stanwell Corporation, a project was initiated in Queensland Australia, to produce near zero-emission electricity from coal by applying Shell’s coal gasification technology together with re-injecting the CO2 in saline aquifers (project ZeroGen). Both of these projects are in the early feasibility study phase.
         
COUNTRIES IN WHICH OTHER INDUSTRY SEGMENTS OPERATE
USA
  Europe   Asia Pacific
 
  France   China
Canada
  Germany   India
 
  Iceland   Indonesia
 
  Luxembourg   Japan
 
  The Netherlands   Philippines
 
  Spain   Singapore
 
  UK   Sri Lanka
BUSINESS AND PROPERTY
Shell WindEnergy continues to focus on developing and operating wind farms, with a focus on Europe and North America. Shell currently has interest in wind projects around the world with a capacity of 850 MW (415 MW based on Shell equity interest).
Shell Solar focuses on advanced solar panel technology, including CIS thin-film. In 2006 we formed a joint venture with glassmaker Saint-Gobain, AVANCIS, to develop the next generation of this technology. In November AVANCIS began construction of a 20 MW plant to manufacture CIS solar panels.
Shell Hydrogen is developing projects with the aim of introducing hydrogen as a commercial product into road transportation and continues to participate in selected demonstration projects in the USA, Europe and Asia. Shell is also exploring the development of stationary hydrogen power and integrated manufacturing projects.
Shell’s research and development (R&D) activities are central to a technology programme designed to discover, develop, demonstrate and deploy new technology in its upstream and downstream businesses as well as Renewables, Hydrogen and CO2. In 2006, the Group’s R&D costs (including depreciation) were $885 million. This is up from $588 million in 2005 and $553 million in 2004. If field tests and involvement in third party technology are included, the total investment in 2006 increases to approximately $1.2 billion.
Shell’s R&D programmes focus primarily on creating technological solutions to increase access to hydrocarbon resources, develop differentiated products and improve capital, operating and health, safety and environmental performance of all of its businesses and assets. Exploration & Production, Gas & Power, Oil Products, Chemicals and Renewables, Hydrogen and CO2 share these objectives as the Group seeks to optimise its R&D investments to meet the energy demands of the future efficiently and responsibly.
Group R&D programmes operate through a worldwide network of laboratories, with major efforts concentrated in the Netherlands and the USA. Other laboratories and/or technology centres are located in the UK, Belgium, Canada, France, Germany, India, Japan, Norway, Oman, Qatar and Singapore.
Note that the reporting of the Group’s R&D activities are included in the OFR sections of the businesses.
Royal Dutch Shell plc 53
 


 


Table of Contents

Key performance indicators

OVERALL PERFORMANCE – SCORECARD
The Group measures its performance through a number of key performance indicators that intend to evaluate the overall performance of the Group from a financial, efficiency, social and sustainable development perspective. In addition to a number of key performance indicators the Group monitors and manages the businesses by means of detailed parameters.
The Group’s future oil and gas production depends on the success of very large projects that require significant human and capital resources over longer periods of up to 10 to 30 years.
The key performance indicators and parameters do not necessarily reflect the long-term performance of the Group although these might provide an impression of performance.
The Group Scorecard highlights four key performance factors which together provide a summarised overview of the Group’s performance. The four key performance indicators are measured on a quarterly basis.
As explained on page 87 of the Directors’ Remuneration Report the Scorecard is also used to determine remuneration for staff, Senior Management and Executive Directors.
                 
GROUP SCORECARD   2006     2005  
 
               
1) Total Shareholder Return
    10.9 %     19.2 %
2) Cash flow from operations ($ billion)
    31.7       30.1  
3) Operational efficiency:
               
– Oil and Gas production (thousands boe/day)
    3,473       3,518  
– LNG sales (million tonnes)
    12.12       10.65  
– Refining unplanned downtime
    4.9 %     4.0 %
– Chemical plant availability
    90.2 %     82.2 %
4) Sustainable development (TRCF) [A]
    2.3       2.5  
[A]   Please see page 67 for a description of TRCF.
TOTAL SHAREHOLDER RETURN (25% SCORECARD WEIGHTING)
Total Shareholder Return (TSR) is measured as the sum of the difference between the share price at the start of the year and the share price at the end of the year plus the cash value of dividends paid during the calendar year (gross and reinvested quarterly). The TSR is compared against other major integrated oil companies and provides therefore a benchmark of how the company is performing against its industry peers.
CASH FLOW FROM OPERATING ACTIVITIES (25% SCORECARD WEIGHTING)
Cash flow from operating activities is considered a measure that reflects the Group’s ability to generate funding from operations for its investing and financing activities and is representative of the realisation of value for shareholders from the Group operations. The Consolidated Statement of Cash Flows on page 107 shows the components of cash flow.
OPERATIONAL EFFICIENCY (30% SCORECARD WEIGHTING)
Within each of the different businesses, operational performance is measured by means of detailed parameters that are combined into a business dashboard. Operational excellence of Exploration & Production, Gas & Power, Oil Products and Chemicals is measured quarterly. The four key indicators for the businesses are production for Exploration & Production, LNG sales for Gas & Power, unplanned downtime for Oil Products and technical plant availability for Chemicals.
SUSTAINABLE DEVELOPMENT (20% SCORECARD WEIGHTING)
As well as measuring financial performance and efficiency, the Group uses various indicators to evaluate the Group’s contribution to Sustainable Development. This Report discusses on pages 62-66 the Group’s priorities with regards to staff and highlights key performance indicators such as greenhouse gas emissions, use of flaring and energy use in its businesses and assets.
Safety remains a key topic in the Group and is measured by the number of injuries and fatal accidents, as discussed on page 67. It is the aim of the Group to work closely with customers, partners and policymakers to advance more efficient and sustainable use of energy and natural resources.
In addition to the four key performance indicators that determine the Group’s Scorecard, additional financial indicators are used to evaluate the Group’s performance including:
                         
FINANCIAL INDICATORS   2006     2005     2004  
 
                       
Income for the period ($ million)
    26,311       26,261       19,257  
Return on average capital employed [A]
    23.4 %     25.6 %     20.1 %
Gearing at December 31
    14.8 %     13.6 %     17.5 %
[A]   Capital employed consists of total equity, current debt and non-current debt.
INCOME FOR THE PERIOD
The Consolidated Statement of Income on page 104 provides further information on income for the period. The “Summary of Group results” on pages 16-17 of the Operating and Financial Review as well as the discussion of segment results on pages 18-53 provide further information on the contribution of the businesses to income.
RETURN ON AVERAGE CAPITAL EMPLOYED (ROACE)
ROACE measures the efficiency of the Group’s utilisation of the capital that it employs. In this calculation, ROACE equals the income attributable to shareholders plus interest expense, less tax and minority interest share, as a percentage of the average of Royal Dutch Shell’s share of closing capital employed [A] and the opening capital employed one year earlier. The tax rate and the minority interest components are derived from calculations at the published segment level. Between 2004 and 2006, ROACE has moved within a 20-25% range, mainly caused by strong income generation. A significant increase in capital employed of 18% between 2005 and 2006 resulted in a reduction in ROACE compared to 2005.


54 Royal Dutch Shell plc

 


Table of Contents

COMPONENTS OF ROACE CALCULATION   $ million
                         
    2006     2005     2004  
 
                       
Income attributable to shareholders
    25,442       25,311       18,540  
Interest expense after tax and minority interest
    662       602       751  
ROACE numerator
    26,104       25,913       19,291  
Capital employed – opening [A]
    102,917       99,815       92,505  
Capital employed – closing [A]
    120,235       102,917       99,815  
Capital employed – average
    111,576       101,366       96,160  
 
ROACE
    23.4 %     25.6 %     20.1 %
 
GEARING
The gearing ratio is a measure of the Group’s financial leverage reflecting the degree to which the operations of the Group are financed by debt and certain other off-balance sheet obligations (see Note 19D on page 130). The amount of debt that the Group will commit to depends on cash inflow from operations, divestment proceeds and cash outflow in the form of capital investment[A] (including acquisitions), dividend payments and share repurchases. As described in the section “Liquidity and capital resources” (on pages 56-58), the Group has a central financing and debt programme currently containing four different debt instruments. The Group aims to maintain an efficient balance sheet to be able to finance investment and growth, after the funding of dividends.
During 2005 the gearing ratio decreased from 17.5% to 13.6% and increased in 2006 to 14.8%. Higher oil prices in 2005 compared with 2004 caused reduced debt levels and as a result a lower gearing ratio.
[A]   Capital investment consists of capital expenditure plus exploration expense and new equity in equity accounted investments. Capital expenditure and exploration expense are further defined on page 23.
Royal Dutch Shell plc 55
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
2006 COMPARED TO 2005 AND 2004
OVERVIEW
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, divestments and other portfolio changes can affect the comparability of cash flows in the year of the transaction.
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 cash flow of the Group. 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 impact of natural gas prices. Changes, therefore, 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 USA serve as benchmarks in the Exploration & Production business.
In the longer term, reserve replacement of conventional oil and gas and unconventional mining reserves 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.
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 historical crude oil prices.
STATEMENT OF CASH FLOWS
Cash flow provided by operating activities reached a record level of $31.7 billion in 2006 compared with $30.1 billion in 2005 and $26.5 billion in 2004. Income in 2006 compared to 2005 remained the same at $26.3 billion up from $19.3 billion in 2004, reflecting continuing high realised prices in Exploration & Production and high refining margins in Oil Products.
                         
EXTRACT FROM CASH FLOW STATEMENT $ billion  
    2006     2005     2004  
 
                       
Cash flow from operations
    31.7       30.1       26.5  
Proceeds from sales of assets
    1.6       2.3       5.1  
Proceeds from sales of equity accounted investments
    0.3       4.3       1.3  
Cash flow utilised for:
                       
– Capital expenditure
    22.9       15.9       13.6  
– Debt repayment
    2.2       2.7       6.4  
– Dividends paid to shareholders
    8.1       10.6 [A]     7.4 [A]
– Repurchases of shares
    8.2       5.0       0.8  
[A]   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: Royal Dutch – $4.6 billion, Shell Transport – $2.8 billion).
FINANCIAL CONDITION AND LIQUIDITY
The Group’s financial position is robust, and we returned over $16 billion to our shareholders through dividends and buybacks in 2006.
Cash and cash equivalents amounted to $9.0 billion at the end of 2006 (2005: $11.7 billion). Total short and long-term debt rose $2.9 billion in the year. Total debt at the end of 2006 amounted to $15.8 billion. The total debt outstanding (excluding leases) at December 31, 2006 will mature as follows: 51% in 2007, 18% in 2008, 8% in 2009, 9% in 2010 and 14% in 2011 and beyond.
The Group currently satisfies its funding requirements from the substantial cash generated within its business and through issuance of external debt. Our external debt is principally financed from the international debt capital markets – through two commercial paper programmes (“CP programmes”), a euro medium-term note programme (“EMTN programme”) and a US universal shelf registration (“US shelf”), each guaranteed by Royal Dutch Shell plc.
The central debt programmes and facilities now consist of:
  a $10 billion 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 270 days;
  a $10 billion 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 is limited to 397 days;


56 Royal Dutch Shell plc

 


Table of Contents

  a $10 billion euro medium-term note programme; and
 
  a $10 billion US universal shelf registration statement.
Under the debt programmes mentioned above, the Group made the following issuances. In 2006 some $3.7 billion of new term debt was issued with maturities ranging from 18 months to 5.5 years more than offsetting some $1.2 billion of maturing term debt. Term debt issuance included a 5 year $1 billion inaugural drawdown from the US shelf and some $2.7 billion issued from the EMTN Programme. All CP, EMTN and US shelf issuance was undertaken by Shell International Finance B.V. (SIF BV), and guaranteed by Royal Dutch Shell plc. Fuller disclosure on debt issued – including maturity profile and fixed/floating rate characteristics – is included in Note 19. Certain joint venture operations and subsidiary undertakings with minority interests are separately financed.
The Group currently maintains $2.5 billion of committed bank facilities, as well as internally available liquidity primarily, 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 necessary or 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 2011, with an option to extend to 2012. The Group expects to be able to renew or increase 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 June 12, 2006, Moody’s Investors Services (Moody’s) affirmed the Aa1 long term issuer rating of Royal Dutch Shell plc, and of the guaranteed programmes/outstanding debt securities of its issuance subsidiaries Shell International Finance B.V., Shell Finance (Netherlands) B.V. and Shell Finance (U.K.) P.L.C., and changed its outlook on the credit from negative to stable. Standard & Poor’s Ratings Services (S&P) continues to rate the Group “AA” and to maintain a stable outlook on the credit. Short term credit ratings of the commercial paper programmes remain unchanged at “Prime-1”, and “A-1+” from Moody’s and S&P respectively.
All central debt programmes and facilities continue to operate under the guarantee of Royal Dutch Shell plc, with all debt issuance in 2006 undertaken by SIF BV.
CAPITAL INVESTMENT AND DIVIDENDS
After servicing outstanding debt, the Group’s first priority for applying our cash is the dividend. Up to and including the fourth quarter 2006 interim dividend, the dividend was declared in euro, and per share increases in dividend were aligned with European inflation over time.
On February 1, 2007 the Group announced that, effective from the first quarter 2007, dividends will be declared in US dollars and it expects that the first quarter 2007 interim dividend will be $0.36 per share, an increase of 14% over the US dollar dividend for the same period in 2006. The first quarter 2007 interim dividend will be declared on May 3, 2007.
Royal Dutch Shell’s dividend policy of growing dividend at least in line with inflation over a number of years has not changed. Going forward the inflation level will be based on inflation levels in global, developed, economies, rather than a blend of European inflation rates. Dividend growth in future will be measured in US dollars.
Group companies’ capital expenditure, exploration expense and new investments in equity accounted investments increased by $7.5 billion to $24.9 billion in 2006.
Exploration & Production expenditures of $17.9 billion (2005: $12.0 billion) accounted for more than half the total capital investment. Gas & Power accounted for $2.2 billion (2005: $1.6 billion). Oil Products investment amounted to $3.5 billion (2005: $2.8 billion). Chemicals investment was $0.9 billion (2005: $0.6 billion). Investment in other industry segments was $0.4 billion (2005: $0.3 billion).
After dividends and capital investment, the priority for using cash generated is to maintain a strong and flexible 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.
Share buyback plans will be reviewed periodically, and are subject to market conditions and the capital requirements of the company. A resolution will be submitted to the 2007 AGM to seek shareholder approval for the company to make such market purchases of its ordinary shares, together with an explanation that shares so repurchased may, at the company’s discretion, be either held in treasury or cancelled.
The Group announced on February 9, 2007 that it has filed its formal offer to acquire all the issued and outstanding common shares of Shell Canada Limited other than common shares already held by the Group or its affiliates, with securities regulators in Canada.
In January 2007 the Group made an offer to the shareholders of Shell Canada Limited to acquire all of the outstanding common shares not owned by the Group at a cash price of C$45 per share. The offer would value Shell Canada’s fully diluted minority share capital at approximately C$8.7 billion (approximately $7.5 billion).
In December 2006 the Group, Gazprom, Mitsui & Co. and Mitsubishi Corporation signed a protocol to bring Gazprom into the Sakhalin Energy Investment Company Ltd. (SEIC) as the leading shareholder. Under the terms of the protocol, Gazprom will acquire a 50% interest plus one share in SEIC for a total cash purchase price of $7.45 billion of which Shell is expected to receive approximately $4.1 billion. The current SEIC partners will each dilute their interests by 50% to accommodate this transaction, with a proportionate share of the purchase price. Shell will retain a 27.5% interest, with Mitsui and Mitsubishi holding 12.5% and 10% interests, respectively.
GUARANTEES AND OTHER OFF-BALANCE SHEET OBLIGATIONS
Guarantees at December 31, 2006 were $2.8 billion (2005: $2.9 billion). At December 31, 2006, $2.0 billion were guarantees of debt of associated companies, $0.1 billion were guarantees for customs duties and $0.7 billion were other guarantees. Guarantees of debt of equity accounted investments mainly related to Nanhai ($1.2 billion) and wind farms in the US and the Netherlands ($0.5 billion).
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.
Royal Dutch Shell plc 57
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW
Our strong cash position in 2006, with operational cash flow of $31.7 billion, provided us the financial flexibility both to fund capital investment and to return cash to shareholders.
The dividends paid by Royal Dutch Shell in respect of the financial year ending December 31, 2005 were the basis for determining the dividends for 2006. On a dividend per share basis the 2006 dividend (1.00 per Class A and Class B share) represented an increase of 9% over 2005 (0.92 per Class A and Class B share). In total, Royal Dutch Shell returned $8.1 billion to shareholders in quarterly dividends in 2006 (2005: $10.6 billion was paid following the change in 2005 to a quarterly dividend cycle).
SHARE REPURCHASES
During 2006, Royal Dutch Shell purchased approximately 245 million shares of its common stock for cancellation at a gross cost of $8.2 billion. These purchases were to reduce the number of shares outstanding. Shares outstanding have reduced 5.6% since the commencement of share repurchases following the Unification into Royal Dutch Shell and successful completion of the Royal Dutch minority tender (August 2005).
The table provides an overview of the share repurchases that occurred in 2006 and the first two months of 2007. Only Royal Dutch Shell Class A shares have been repurchased. Although the transactions were executed in different currencies depending on the market involved, all purchases have been converted to the dollar functional currency of Royal Dutch Shell (based on the average monthly exchange rate). The table omits certain Royal Dutch Shell Class A and B shares that were repurchased by ESOP Trusts and trust-like entities holding the shares pending delivery under share plans and not held as treasury shares.
                                 
ISSUER PURCHASES OF EQUITY SECURITIES volume  
                    Total        
                    number of        
                    shares     Maximum number  
                    purchased as     of shares that  
                    part of publicly     may yet be  
    Total number     Average     announced     purchased under  
    of shares     price paid     plans or     the plans or  
    purchased [A]     per share     programmes     programmes[B]  
 
                               
Purchase period
                           
January
    13,645,000       $32.88       13,645,000          
February
    12,482,974       $31.68       12,482,974          
March
    21,075,000       $31.03       21,075,000          
April
    13,100,000       $33.72       13,100,000          
May
    30,687,000       $33.72       30,687,000          
June
    32,373,000       $32.02       32,373,000          
July
    30,145,000       $34.20       30,145,000          
August
    26,945,000       $35.61       26,945,000          
September
    24,250,000       $33.38       24,250,000          
October
    14,390,000       $33.39       14,390,000          
November
    16,900,000       $35.51       16,900,000          
December
    8,680,000       $35.51       8,680,000          
 
2006 total
    244,672,974       $33.51       244,672,974          
 
January
    13,760,000       $34.17       13,760,000          
February
    460,000       $34.54       46,000          
 
2007 (year to date)
14,220,000       $34.18       14,220,000          
 
[A]   All shares purchased were open market transactions.
 
[B]   At the AGM on the May 15, 2006 authorisation was given to repurchase up to 667 million ordinary shares in the period until the next AGM, or until August 15, 2007. This authorisation is reviewed annually at the AGM.


58 Royal Dutch Shell plc

 


Table of Contents

CONTRACTUAL OBLIGATIONS
The table below summarises Group companies’ principal contractual obligations at December 31, 2006, 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 years     4/5 years     5 years  
            1 year     (2008/     (2010/     (2012 and  
    Total     (2007)     2009)     2011)     after)  
 
                                       
Long-term debt [A]
    11.6       5.9       3.0       2.3       0.4  
Finance leases [B]
    8.7       0.6       1.1       1.0       6.0  
Operating leases [C]
    13.5       3.1       4.2       2.3       3.9  
Purchase obligations [D]
254.9       87.9       49.0       34.3       83.7  
Other long-term contractual liabilities [E]
1.2       0.2       0.7       0.3        
 
Total
    289.9       97.7       58.0       40.2       94.0  
 
[A]   The total figure is comprised of $5.7 billion of non-current debt (debentures and other loans, and amounts due to banks and other credit institutions), plus $2.3 billion of long-term debt due within one year. The total figure excludes $4.2 billion of long-term finance lease obligations.
 
    See Note 19C to the Consolidated Financial Statements.
 
[B]   Includes executory costs and interest. See Note 19C to the Consolidated Financial Statements.
 
[C]   See Note 19C 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 $3.1 billion of purchase obligations associated with financing arrangements, which are disclosed in Note 33 to the Consolidated Financial Statements. Raw materials and finished products account for 89% 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 $1.3 billion (see Note 21 to the Consolidated Financial Statements) and obligations associated with asset retirements (see Note 22 to the Consolidated Financial Statements).
The table above excludes interest expense related to long-term debt estimated to be $0.5 billion in 2007, $0.4 billion in 2008/2009 and $0.2 billion in 2010/2011 (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).
FINANCIAL INFORMATION RELATING TO THE ROYAL DUTCH SHELL GROUP DIVIDEND ACCESS TRUST
The results of operations and financial position of the Dividend Access Trust are included in the consolidated results of operations and financial position of Royal Dutch Shell. Set out below is certain condensed financial information in respect of the Dividend Access Trust.
Separate Financial Statements for the Dividend Access Trust are also included in this Report.
For the year 2006 and the period May 19, 2005 to December 31, 2005, the Dividend Access Trust recorded income before tax of £1,837 million and £869 million respectively. In each period this reflected the amount of dividends received on the dividend access share less immaterial finance costs attributable to foreign exchange differences.
At December 31, 2006, the Dividend Access Trust recorded total equity of £ nil, reflecting cash of £27,465, less unclaimed dividends of £27,465. At December 31, 2005 these amounts were nil respectively, because all funds distributed were represented by outstanding cheques.
The movements in cash and cash equivalents of the Dividend Access Trust consist primarily of dividends received of £1,837 million in 2006 (2005: £869 million) and distributions made on behalf of the Group to shareholders of £1,837 million in 2006 (2005: £869 million) and changes in net working capital (£ nil). See “Supplementary information – Control of registrant (unaudited) – Rights attaching to shares” for an explanation of the Dividend Access Trust.
Royal Dutch Shell plc 59
 


 


Table of Contents

OPERATING AND FINANCIAL REVIEW

INTRODUCTION
Shell employs 108,000 people in its companies worldwide. We made progress on all fronts in our global people strategy in 2006, in support of the Group strategy of more upstream and profitable downstream. Common policies and processes, delivered through an improved global information technology platform, have helped towards faster and better decision-making.
RESOURCING FOR