02		Chairman’s Message
03		Chief Executive’s Message
04		The Board of Royal Dutch Shell plc
06		Unification of Royal Dutch and Shell Transport
07		Selected Financial Data
11		Index to the Operating and Financial Review (OFR)
12		Business and market overview
15		Risk factors and control
20		Summary of Group results
22		Upstream – Exploration & Production
38		Upstream – Gas & Power
44		Downstream – Oil Products
54		Downstream – Chemicals
60		Other industry segments and Corporate
62		Liquidity and capital resources
66		Social and environmental
71		People
73		Other matters
75		Report of the Directors
79		Corporate Governance
84		Directors’ Remuneration Report

102		Report of the Independent Auditors
104		Index to the Consolidated Financial Statements
105		Consolidated Financial Statements
109		Notes to the Consolidated Financial Statements
157		Supplementary Information – Unaudited
157		Supplementary Information – Oil and gas (unaudited)
164		Supplementary Information – Derivatives and other financial instruments and derivative commodity instruments (unaudited)
178		Supplementary Information – Control of registrant (unaudited)
187		Index to the Parent Company Financial Statements
188		Parent Company Financial Statements
192		Notes to the Parent Company Financial Statements
201		Index to the Royal Dutch Shell Group Dividend Access Trust Financial Statements
203		Royal Dutch Shell Dividend Access Trust Financial Statements
207		Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
209		Additional Shareholder Information (unaudited)
213		Exhibits
Form of Director Indemnity Agreement.
Calculation of Ratio of Earnings to Fixed Charges.
Significant Group companies as at December 31, 2005.
Section 302 Certification of Royal Dutch Shell plc.
Section 302 Certification of Royal Dutch Shell plc.
Section 906 Certification of Royal Dutch Shell plc.
Consent of PricewaterhouseCoopers LLP, London.
Consent of PricewaterhouseCoopers LLP, London relating to the Royal Dutch Shell Group Dividend Access Trust.

In 2005 shareholders approved the Unification Transaction of our parent companies under Royal Dutch Shell plc. This far-reaching change is already bringing benefits. Our new clearer, simpler governance structure is helping to reduce duplication, speed up decision making and increase accountability. The single smaller Board and its committees are working well and their reports can be found on pages 75 to 101. I am also pleased that the clearer lines of accountability in the new structure have been widely welcomed by shareholders.

The Board believes that our organisation is now better placed to build and develop our business for the future and meet the challenges ahead. At the heart of those challenges is the need to find and develop the resources to meet the growth in global energy demand. We will also need to produce those

resources in a way that minimises the effect on the environment. The Chief Executive and his team have been successfully driving forward Shell’s work both in securing and producing more oil and gas and in developing energy solutions for the longer term. This will ensure that Shell can play its part in meeting the world’s future energy needs.

There were many business challenges in 2005, some of which were linked to the natural disasters that struck many parts of the world. The effects of the tsunami in Asia, hurricanes in the Gulf of Mexico and the earthquake in India and Pakistan, were felt across Shell and in the communities in which we work. The Board is proud of the response of Shell staff to these tragedies and their tireless work both to support the affected communities and to restore our business as quickly as possible.

It has been a great privilege for me to be the first Chairman of Royal Dutch Shell plc and to see it make such a successful start. I am confident that we can build on that success and that, with the proposed appointment of Jorma Ollila as my successor, the future of the company is in good hands.

Aad Jacobs Chairman

Thanks to the great efforts of many Shell people, 2005 was a year of recovery. We achieved a great deal, but there is more to be done to ensure that recovery continues. We delivered record earnings and cash generation; we were successful in securing significant new resources; and we reinforced our leading positions in liquefied natural gas (LNG) and Oil Products. Our strong financial position has allowed us to return over $17 billion to our shareholders. We also made capital investments of $15.6 billion (excluding the minority share in Sakhalin). Our strategy continues to be more upstream and profitable downstream. This is reflected in our capital investment programme, which will increase to $19 billion in 2006, keeping pace with our earnings, and will be targeted at the upstream.

In Exploration & Production a number of important new fields came on stream and we met our production target, despite the damage to our facilities caused by hurricanes in the Gulf of Mexico. There were, however, large cost overruns on our Sakhalin II project and we are ensuring that we learn the lessons from these. We believe that gas demand will continue to grow rapidly and, in 2005 our Gas & Power business strengthened its leading positions in the key markets of Asia, Europe and North America, with a number of new LNG projects starting operation or construction.

In the downstream, Oil Products earnings were up 31%, reflecting strong refining margins and good operational performance. By standardising and simplifying our processes we have reduced costs and improved customer service. We also continued to provide customers with an increasing range of fuels that can improve engine performance and reduce environmental impact. At the same time, we strengthened our position as the world’s leading marketer of biofuels. Chemicals also had good earnings in 2005 and, with the completion of the Nanhai petrochemicals complex in southern China, made an important step in securing a position in this rapidly growing market. Much of the increase in energy demand is coming from emerging economies in the Asia Pacific region and we are ensuring that we extend our presence in those growth markets.

I believe that Shell’s commitment to technology and innovation, combined with the dedication and skill of our employees, will enable us to play a leading and competitive role in meeting the world’s future energy needs. This includes taking on bigger and more demanding projects and ensuring we integrate economic, and social and environmental considerations into our management of those projects. Our Project and Commercial Academies, which have made a good start, will be at the heart of our work to acquire and to develop projects successfully in the future. In our operations we aim to be a “first-quartile” performer. We

continue to focus on Health, Safety, Security and Environment (HSSE).

We also realise the importance of managing the carbon dioxide emissions from oil and gas resources. This offers opportunities to develop our business and we are investing in a range of research into carbon capture and storage that can help us to develop greener fossil fuels. At the same time, Shell aims to develop at least one substantial business in alternative energy. In the past year we have made good progress on projects in wind, hydrogen and advanced solar technology that will help us move towards that aim.

All of us in Shell are pleased with the progress we have made in 2005 in improving our operational performance; in developing projects; and in securing new resources. I believe we now have a strong foundation to build for the future to deliver the leading performance and competitive returns that our shareholders want to see. So this means 2006 will be the year of delivery and growth for Shell.

Jeroen van der Veer Chief Executive

Royal Dutch Shell has a single tier Board of Directors chaired by a Non-executive Chairman, Aad Jacobs. The executive management is led by the Chief Executive, Jeroen van der Veer. The members of the Board of Royal Dutch Shell plc meet regularly to discuss reviews and reports on the business and plans of Royal Dutch Shell. In 2005, the Nomination and Succession Committee recommended to the Board the appointment of Jorma Ollila, currently Chairman and CEO of Nokia Corporation, to succeed Aad Jacobs as Non-executive Chairman of Royal Dutch Shell. The Board adopted this proposal. A resolution has been proposed to be put to the Annual General Meeting of shareholders of Royal Dutch Shell, to be held on May 16, 2006, for the election of Mr Ollila as a Director of Royal Dutch Shell, with effect from June 1, 2006.

1 Aad Jacobs ○
Non-executive Chairman

Born May 28, 1936. A Dutch national, appointed Non-executive Chairman of Royal Dutch Shell in October 2004. He became a member of the Royal Dutch supervisory board in 1998 and Chairman in 2002 and was a Board member¹ of Royal Dutch until the merger of the company on December 21, 2005. He was previously Chairman of the Board of Management of ING Groep N.V. He is Chairman of the supervisory boards of Joh. Enschedé B.V., Imtech N.V. and VNU N.V.; Vice-Chairman of the supervisory boards of Buhrmann N.V. and SBM Offshore N.V.; and a member of the supervisory board of ING Groep N.V.

2 Lord Kerr of Kinlochard GCMG + ○
Deputy Chairman and Senior Independent Non-executive Director

Born February 22, 1942. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a Non-executive Director of Shell Transport from 2002 to 2005. A member of the UK Diplomatic Service from 1966 to 2002 (and its Head from 1997 to 2002), he was successively UK Permanent Representative to the EU, British Ambassador to the USA, Foreign Office Permanent Under Secretary of State and Secretary-General of the European Convention. He is a Non-executive Director of Rio Tinto plc and Rio Tinto Limited and Scottish American Investment Company plc and Chairman of Court/Council of Imperial College. Trustee of the National Gallery and of the Rhodes Trust.

3 Jeroen van der Veer
Chief Executive

Born October 27, 1947. A Dutch national, appointed Chief Executive of Royal Dutch Shell in October 2004. He was appointed President of Royal Dutch in 2000, having been a Managing Director of Royal Dutch since 1997 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. He was a Director of Shell Canada Limited from April 24, 2003 until April 29, 2005. He joined the Group in 1971 in refinery process design and held a number of senior management positions around the world. He is a Non-executive Director of Unilever (which includes Unilever N.V., Unilever plc and Unilever Holdings Ltd.).

4 Peter Voser
Chief Financial Officer

Born August 29, 1958. A Swiss national, appointed Chief Financial Officer of Royal Dutch Shell in October 2004. He was appointed a Managing Director of Shell Transport and Chief Financial Officer (CFO) in October 2004. In 2002, joined the Asea Brown Boveri (ABB) Group of Companies, based in Switzerland as CFO and Member of the Group Executive Committee. Also responsible for ABB’s Group IT and the Oil, Gas and Petrochemicals business. Originally joined the Group in 1982 where he held a variety of finance and business roles in Switzerland, UK, Argentina and Chile, including CFO of Oil

Products. He is a member of the supervisory board of Aegon N.V. (he will retire April 25, 2006) and a member of the supervisory board of UBS AG.

5 Malcolm Brinded CBE FREng
Executive Director, Exploration & Production

Born March 18, 1953. A British national, appointed an Executive Director of Royal Dutch Shell in October 2004. He was previously a Managing Director of Shell Transport since March 2004 and prior to that a Managing Director of Royal Dutch since 2002. Joined the Group in 1974 and has held various positions around the world including Country Chair for Shell in the UK, and Director of Planning, Environment and External Affairs at Shell International Ltd.

6 Linda Cook
Executive Director, Gas & Power

Born June 4, 1958. A US national, appointed an Executive Director of Royal Dutch Shell in October 2004. She was appointed a Managing Director of Royal Dutch in August 2004 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. She was President and Chief Executive Officer and a member of the Board of Directors of Shell Canada Limited from August 2003 to July 2004. Joined Shell Oil Company in Houston in 1980, and worked for Shell Oil Company in Houston and California in a variety of technical and managerial positions. Member of the Society of Petroleum Engineers and a Non-executive director of The Boeing Company.

7 Rob Routs
Executive Director, Oil Products and Chemicals

Born September 10, 1946. A Dutch national, appointed Executive Director of Royal Dutch Shell in October 2004. He was a Managing Director of Royal Dutch from 2003 to July 4, 2005. Joined the Group in 1971. Held various positions in the Netherlands, Canada and the USA. Previously President and Chief Executive Officer of Shell Oil Products USA, President of Shell Oil Company and Country Chair for Shell in the USA and Chief Executive of Equilon. He is a member of the Board of Directors of Shell Canada Limited since April 29, 2005 and director of INSEAD.

8 Maarten van den Bergh #
Non-executive Director

Born April 19, 1942. A Dutch national, appointed Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 2000 to July 4, 2005. Managing Director of Royal Dutch from 1992 to 2000 and President from 1998 to 2000. Chairman of the Board of Directors of Lloyds TSB (he will retire at the AGM of Lloyds in May 2006) and, member of the Boards of Directors of BT Group plc and British Airways plc and a member of the supervisory board of Akzo Nobel N.V.

9 Sir Peter Burt FRSE ■
Non-executive Director

Born March 6, 1944. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. Non-executive Director of Shell Transport from 2002 to 2005. He was Chief General Manager and Chairman of the Management Board and subsequently Group Chief Executive, Bank of Scotland. Executive Deputy Chairman HBOS plc. Governor of Bank of Scotland from 2001. Retired 2003. He is a Chairman of ITV plc and Promethean plc.

10 Mary R. (Nina) Henderson ■ #
Non-executive Director

Born July 6, 1950. A US national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. She was a Non-executive Director of Shell Transport from 2001 to 2005. Previously President of a major division and Corporate Vice-President of Bestfoods, a major US foods company, responsible for worldwide core business development. Non-executive Director of Pactiv Corporation, AXA Financial Inc., Del Monte Foods Company and Visiting Nurse Service of New York.

11 Sir Peter Job KBE +
Non-executive Director

Born July 13, 1941. A British national, appointed a Non-executive Director of Royal Dutch Shell in October 2004.

He was a Non-executive Director of Shell Transport from 2001 to 2005. Previously he was Chief Executive of Reuters Group plc. He is a Non-executive Director of Schroders plc, TIBCO Software Inc., Instinet Group Inc., and a member of the supervisory board of Deutsche Bank AG.

12 Wim Kok #
Non-executive Director

Born September 29, 1938. A Dutch national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 2003 to July 4, 2005. Chaired the Confederation of Dutch trade unions (FNV) before becoming a member of the Lower House of Parliament and parliamentary leader of the Partij van de Arbeid (Labour Party). Appointed Minister of Finance in 1989 and Prime Minister in 1994, serving for two periods of government up to July 2002. Member of the supervisory boards of ING Groep N.V., KLM N.V. and TNT N.V.

13 Jonkheer Aarnout Loudon + ○
Non-executive Director

Born December 10, 1936. A Dutch national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was a member of the Royal Dutch supervisory board from 1997 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. He was a member of the Board of Management of Akzo from 1977 to 1994 (Akzo Nobel as from 1994) and its Chairman from 1982 to 1994. He is Chairman of the supervisory boards of ABN AMRO Holding N.V. and Akzo Nobel N.V. (he will retire per May 1, 2006) and a member of the International Advisory Board of Allianz AG.

14 Christine Morin-Postel ■
Non-executive Director

Born October 6, 1946. A French national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. She was a member of the Royal Dutch supervisory board from July 2004 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. Formerly she was Chief Executive of Société Générale de Belgique and Executive Vice-President and member of the Executive Committee of Suez S.A. She is Non-executive director of Alcan Inc., 3i Group plc and Pilkington plc.

15 Lawrence Ricciardi ■
Non-executive Director

Born August 14, 1940. A US national, appointed a Non-executive Director of Royal Dutch Shell in October 2004. He was appointed a member of the Royal Dutch supervisory board in 2001 and was a Board member of Royal Dutch until the merger of the company on December 21, 2005. Previously he was President of RJR Nabisco, Inc. and subsequently Senior Vice-President and General Counsel of IBM. He is Senior Advisor to the law firm Jones Day and to Lazard Frères & Co and member of the Board of Directors of The Reader’s Digest Association, Inc.

Beat Hess
Group Legal Director

Born July 6, 1949. A Swiss national, appointed as Shell Group Legal Director in June 2003. Previously General Counsel of ABB Group. Non-executive board member of Ciba Specialty Chemicals.

Michiel Brandjes
Company Secretary

Born December 14, 1954. A Dutch national, appointed as Company Secretary of Royal Dutch Shell in February 2005. Previously Company Secretary of Royal Dutch Petroleum Company and Group general counsel corporate. Joined the Group in 1980 as a Legal Adviser.

■		Audit Committee
+		Remuneration Committee
#		Social Responsibility Committee
○		Nomination and Succession Committee
1		As from July 4, 2005 Royal Dutch had a one tier board instead of a two tier board. This one tier board existed until the company merged into Shell Petroleum N.V. per December 21, 2005.

In 2005, Royal Dutch Shell became the single 100% parent company of Royal Dutch Petroleum Company (“Royal Dutch”) and of Shell Transport and Trading Company Limited (previously known as The “Shell” Transport and Trading Company, p.l.c.) (“Shell Transport”) the two former public parent companies of the Group. These transactions include:

>

the scheme of arrangement of Shell Transport under the applicable laws of England and Wales (“the Scheme”) on July 20, 2005, pursuant to which Royal Dutch Shell acquired all the outstanding capital stock of Shell Transport;

>		the exchange offer (“the Exchange Offer”, and together with the Scheme, “the Unification Transaction”) for all of the ordinary shares of Royal Dutch, commenced on May 19, 2005, which became unconditional (gestanddoening) on July 20, 2005, and, including the subsequent offer acceptance period which expired on August 9, 2005, through which Royal Dutch Shell acquired a total of 98.49% of the outstanding capital stock of Royal Dutch; and
>		the series of restructuring transactions of the Group (“the Restructuring” and together with the Unification Transaction the “Unification”), which included the merger under Dutch law of Royal Dutch with its wholly-owned subsidiary, Shell Petroleum N.V. (“Shell Petroleum”), which became effective on December 21, 2005 (“the Merger”). Pursuant to the terms of the Merger exchange ratio, the remaining public shareholders of Royal Dutch, who collectively held 1.51% of the outstanding shares, received €52.21 per share in cash (or for certain eligible shareholders an equivalent principal amount of loan notes) and Royal Dutch Shell received shares of the surviving company, Shell Petroleum. As a result of the Merger, former holders of Royal Dutch shares received an aggregate of $1.9 billion equivalent in cash and loan notes. The loan notes were exchanged by Royal Dutch Shell for an aggregate of 4,827,974 Class A ordinary shares on January 6, 2006. As a result of the Merger, Royal Dutch and the Royal Dutch shares have ceased to exist and Shell Petroleum, the surviving company in the Merger, became a 100% owned subsidiary of Royal Dutch Shell.

The diagram at the bottom of this page illustrates the structure of the Group following completion of the Unification. Operating and service company subsidiaries are not shown.

Pursuant to the terms of the Unification Transaction, holders of ordinary shares of Royal Dutch (“Royal Dutch ordinary shares”), holders of Shell Transport Ordinary Shares (“the Shell Transport Ordinary Shares”), holders of Shell Transport bearer warrants and holders of American Depositary Receipts representing Shell Transport Ordinary Shares (“the Shell Transport ADRs”) received, respectively:

>

for each Royal Dutch ordinary share held in New York registry form tendered: 1 Royal Dutch Shell Class A American Depositary Receipta

>

for each Royal Dutch ordinary share held in bearer or Hague registry form tendered: 2 Royal Dutch Shell Class A ordinary shares

>

for each Shell Transport Ordinary Share (including Shell Transport Ordinary Shares to which holders of Shell Transport bearer warrants were entitled): 0.287333066 Royal Dutch Shell Class B ordinary shares

>

for each Shell Transport ADR: 0.861999198 Royal Dutch Shell Class B American Depositary Receiptsb

Royal Dutch Shell Class A ordinary shares (“Class A shares”) and Royal Dutch Shell Class B ordinary shares (“Class B shares”) have identical rights as set out in the Royal Dutch Shell Articles, except in relation to the dividend access mechanism applicable to the Royal Dutch Shell Class B ordinary shares. The dividend access mechanism is described more fully in “Supplementary Information – Control of registrant – Rights attaching to shares”.

The Unification Transaction did not result in the formation of a new reporting entity. Immediately after the Unification Transaction each former Royal Dutch and Shell Transport shareholder who participated in the Unification Transaction held the same economic interest in Royal Dutch Shell as the shareholder held in the Group immediately prior to implementation of the Unification Transaction. Accordingly, the Unification Transaction has been accounted for using a carry-over basis of the historical costs of the assets and liabilities of Royal Dutch, Shell Transport and the other companies comprising the Group.

Royal Dutch and Shell Transport entered into a scheme of amalgamation dated September 12, 1906 and agreements from 1907 by which the scheme of amalgamation was implemented and pursuant to which they “amalgamated” their interests in the oil industry in a transaction that would have been accounted for as a business combination under current accounting standards. From that time until the Restructuring, Royal Dutch owned 60% of the other companies comprising the Group and Shell Transport owned 40% of the other companies comprising the Group. All operating activities have been conducted through the subsidiaries of Royal Dutch and Shell Transport which have operated as a single economic enterprise. Prior to the consummation of the Unification Transaction, economic interests of the Royal Dutch and Shell Transport shareholders in the other companies comprising the Group reflected the 60:40 economic interests of Royal Dutch and Shell Transport in these companies. The Unification Transaction had little impact on the economic rights and exposures of shareholders of Royal Dutch and Shell Transport, as the separate assets and liabilities of Royal Dutch and Shell Transport are not material in relation to their interests in the rest of the Group, and the Unification Transaction did not result in the acquisition of any new businesses or operating assets and liabilities. In addition, the Unification Transaction did not affect the proved oil and gas reserve information reported by Royal Dutch Shell, Royal Dutch and Shell Transport or the other companies comprising the Group.

Business and market overview

The Operating and Financial Review (OFR) provides a business, market and strategic overview of the operations and financial situation of the Group, as seen by Group management. It describes the activities, properties and performance of the Group and also discusses the risks and social and environmental challenges facing the Group.

Business overview

Royal Dutch Shell consists of the upstream businesses of Exploration & Production and Gas & Power and the downstream businesses of Oil Products and Chemicals. We also have interests in other industry segments such as Renewables and Hydrogen.

Over time and across the commodity cycle the Group has achieved higher earnings and returns on investment in the upstream compared with the other businesses, and sees significant growth potential in demand for natural gas. The downstream businesses continue to offer attractive returns, cash flow and growth potential in the growth markets of Asia Pacific and the Middle East and the portfolio is being restructured to capture that potential. The Group’s core strengths include the application of technology, financial and project management skills to develop large oil and gas projects; the ability to develop and manage a diverse and international business portfolio; and the development of customer-focused businesses built around the strength of the Shell brand.

Royal Dutch Shell strategy

Our strategy of more upstream and profitable downstream aims to reinforce our position as a leader in the industry, which aims to provide investors with a competitive and sustained total shareholder return.

We have announced an increase in capital investment to support that strategy and in 2006 we plan to spend a total of $19 billion (excluding capital contribution of minority shareholders in Sakhalin), of which around $15 billion will be invested in upstream projects. This increased investment will be used to grow and mature our hydrocarbons resource base; increase production; build on our strong position in integrated gas and unconventionals and enhance our competitive leadership in the downstream.

More upstream Increased capital investment will enable more upstream oil and gas development. This will include a sustained high exploration activity level and significant projects such as Salym, Bonga, Erha, Kashagan, Sakhalin, Qatargas 4, Pearl GTL and Ormen Lange. Further work will continue to develop unconventional oil projects including the expansion of the Athabasca Oil Sands project and also to prolong profitable production from our existing producing areas.

Included in the planned upstream investment are projects in Gas & Power, predominantly in liquefied natural gas (LNG) such as Sakhalin II, Qatargas 4 and expansions of LNG projects in Nigeria and Australia. These projects are part of the continued development of our integrated gas business through selective investment in opportunities across the value chain. That strength along the whole gas value chain from exploration to marketing will continue to be a key factor in our ability to maintain our global leadership in natural gas. At the same time, we will continue to promote our interests in Gas to Liquids (GTL), coal gasification and new opportunities in carbon management.

Profitable downstream Our downstream strategy focuses on sustaining strong cash delivery while building profitable new positions in higher-growth markets, especially in Asia Pacific, and maintaining and strengthening established positions in attractive markets.

We continue to reshape the portfolio and, in 2005, generated proceeds from divestments from various markets of over $3 billion. We will continue to focus on differentiating our business through the provision of premium fuels such as Optimax and V-Power as well as working to make cleaner fuels such as biofuels more widely and competitively available. Capital investment in downstream in 2006 will be over $4 billion and $1.7 billion of investment will include areas of strong growth potential to deliver competitive returns.

Meeting growing global demand for energy in ways that minimise the effect on the environment is a key challenge for our future business and we are pursuing a range of opportunities to develop alternative energy that will both complement today’s core businesses and establish major new income streams over the long term.

Reshaping the portfolio The target of raising $12-15 billion in divestment proceeds for the period 2004-06 has been achieved one year ahead of schedule. The investment programme is based on our strategy of more upstream and profitable downstream and is intended to position the Group competitively in a future environment.

Operational excellence Improving operational performance across all of our activities is a priority. This means operating in a safe, reliable and cost competitive way and ensuring that we meet high standards of environmental and social performance. Performance is measured through comprehensive internal and external benchmarking to establish a measure of performance relative to competitors. Our aim is to achieve top quartile performance across all of our activities when measured against those competitors.

Effective project delivery has become increasingly important as we take on larger and more complex projects. We have allocated more resources to improving project planning and delivery including setting up a Project Academy. The Project Academy will provide focused training and development on all aspects of project management to those working on projects across our businesses.

Technology and innovation Developing and implementing new technology is important to our business activities and to be competitive in securing new business opportunities.

Technology plays a particularly important role in helping us to access new resources, maximise the recovery of oil and gas from existing resources, develop the potential of unconventional hydrocarbons and alternative energy and find ways of reducing and managing the CO₂ emissions related to energy production and use.

Creating the culture and organisation to deliver We have made significant progress in changing our organisation and shaping our culture to deliver our strategy and competitive returns to our shareholders over time. The Unification Transaction of the former parent companies under Royal Dutch Shell in 2005 has provided us with a clearer, simpler, more efficient and accountable form of governance. We continue to work to simplify our organisation and continue to make good progress in standardising processes across our businesses. The integration of the Oil Products and Chemicals businesses into one downstream organisation has been successful in creating a more dynamic, responsive and competitive downstream organisation.

Market overview

Global economic output expanded by around 4.5% in 2005, supported by strong activity in the US and Asia, down from 5.1% in 2004. The two key

drivers underpinning this growth were US consumer resilience to higher energy prices and interest rates, and generally moderate inflationary pressures in key industrialised economies. Economic expansion is expected to stay broadly on track for 2006, despite prospects of continued higher oil prices, monetary tightening and further easing of investment growth in China.

In the US, business investment, residential sector spending and robust manufacturing output all contributed to high economic growth levels in 2005. For 2006, the expected moderate slow down in personal consumption and easing of the housing market would bring GDP growth largely in line with potential output growth of around 3.4%. In Europe, economic growth in 2005 came from export growth, partially fuelled by a weaker than expected euro, and a moderate increase in personal consumption, leading to an expansion of roughly 1.4%. Assuming moderate monetary tightening, and a more substantial recovery in personal consumption, this could increase to 1.8% in 2006. The Japanese economy is continuing on a path of gradual recovery with both private consumption and non-residential business investments generating substantial momentum during the first half of 2005. Whether such momentum can be maintained over the next year remains uncertain, but the structural factors are in place for the economy to grow at around 2% in 2006. In China, 2005 was characterised by a change in the structure of growth, with the economy relying increasingly on exports, and to a lesser extent on domestic demand. For 2006, domestic demand growth is expected to slow and net exports to make a smaller contribution. GDP growth is expected to reduce moderately to around 8% in 2006.

Risks are slanted to the downside with sustained higher energy prices, uncertainty linked to the US consumer, possible dollar depreciation, unusual trends in the bond markets, and the expected cooling of the housing market. Given the present forward momentum of the global economy, the probability of a severe slowdown in 2006 seems low.

Oil and natural gas prices

Brent crude oil prices averaged $54.55 per barrel in 2005 compared with $38.30 in 2004, while West Texas Intermediate (WTI) averaged $56.60 per barrel compared with $41.50 a year earlier. 2005 saw a steady increase in crude oil prices mainly driven by limited spare OPEC crude oil production capacity, weather related demand and supply effects and geopolitical tensions in the Middle East. WTI reached a new record high of just under $70 per barrel at hurricane Rita’s landfall at the end of August, but prices were subsequently reduced by the International Energy Agency’s decision to release emergency stocks. Brent and WTI crude oil prices ended 2005 at $58 and $61 per barrel respectively.

Based on internal Group analysis, oil prices are expected to remain strong in 2006 against ongoing supply concerns, the projection of low OPEC spare capacity and projected strong world economic growth, in particular the US and China. In the medium to longer term, the Group anticipates prices to moderate from present levels, as both supply and demand are expected to respond to the present higher price environment and stocks and OPEC spare capacity is being rebuilt.

Henry Hub gas prices in the US averaged $8.80 per million British thermal units (Btu) in 2005 compared with $5.87 in 2004. Prices were driven up in the summer by record hot weather boosting electricity demand from gas-fired power stations to run air conditioning. Prices increased further from late

August to the end of the year as a result of extensive supply disruptions caused by Gulf of Mexico hurricanes. Henry Hub closed at $9.45 per million Btu at year end. In 2006 Henry Hub prices are expected to ease with recovery from the weather related supply disruptions in 2005 and an increase in LNG imports, but are expected to remain above historical levels as robust demand continues to challenge the growth in supply.

The drivers of natural gas prices are more regionalised than the relatively global nature of crude oil pricing. While the Henry Hub price is a recognised price benchmark in North America, the Group also produces and sells natural gas in other areas that have significantly different supply, demand, regulatory circumstances and therefore pricing structure. Natural gas prices in continental Europe and Asia Pacific are predominantly indexed to oil prices. In Europe prices have also risen reflecting higher oil prices and strong demand. In the UK prices at the National Balancing Point averaged $6.39 per million Btu versus $4.72 in 2004 and Germany border prices averaged around $5.81 per million Btu versus $4.30 in 2004.

Oil and natural gas prices for investment evaluation

The range of possible future crude oil and natural gas prices to be used in project and portfolio evaluations within the Group are determined after assessment of short, medium and long-term price drivers under different sets of assumptions. Historical analysis, trends and statistical volatility are part of this assessment, as well as analysis of global and regional economic conditions, geopolitics, OPEC actions, cost of future supply and the balance of supply and demand. Sensitivity analyses are used to test the impact of low price drivers, like economic weakness and high investment levels in new production, and high price drivers, like strong economic growth, and low investment levels in new production. Short-term events, such as relatively warm winters or cool summers, weather and (geo)political related supply disruptions and the resulting effects on demand and inventory levels, contribute to price volatility.

During 2005, the Group used prices ranging from around $20 to the mid $30s per barrel to test the economic performance of long term projects at different prices or margin levels. As part of normal business practice, the range of prices used for this purpose continues to be under review and may change.

Risk management and internal control

The Group takes a risk-based approach to internal control. Management in the Group is responsible for implementing, operating and monitoring the system of internal control, which is designed to provide reasonable, but not absolute, assurance of achieving business objectives. Related requirements are set out in a Statement on Risk Management, which describes the methodology to be followed to manage risks to objectives. Our control framework is supported by a set of risk-based standards; these establish rules and instructions on enterprise-wide risks that require common treatment across the Group.

We have a variety of processes for obtaining assurance on the adequacy of risk management and internal control.

The Group has a structured process to identify and review risks to the achievement of Group objectives. The Executive Committee and the Audit Committee regularly consider Group-level risks and associated control mechanisms.

A formalised self-appraisal and assurance letter process is in place. As part of this annual process concerns about business integrity or instances of bribery or illegal payments are reported and assurance is provided on compliance with Group standards. The assurance letters are reviewed by the Audit Committee and support representations made to the external auditors.

In addition to these structured self-appraisals, internal audit’s risk-based audits of Group operations provide the Audit Committee with an independent view on the effectiveness of risk and control management systems.

Internal audit operates a business control incident reporting procedure, the results of which are reported to the Executive Committee and to the Audit Committee. Additionally, incidents or compliance issues relating to other standards, for example on Health, Safety and Environmental (HSE) are identified, investigated and their learnings shared. They report significant non-compliance to senior executives and to the relevant function head.

An ethics and compliance programme also supports the risk management and internal control environment. The Chief Compliance Officer leads the programme and champions ethics and legal and regulatory compliance in the Group and reports regularly to the Audit Committee.

These established processes allow the Board, via the Audit Committee, to regularly consider the overall effectiveness of the system of internal control and to perform a full annual review of the system’s effectiveness. Taken together, these processes provide confirmation to the Board that relevant policies are adopted and procedures implemented with respect to risk management and internal control.

In the context of reserves estimation and reporting, the Group has improved controls and procedures following the reserves restatements in 2004 and the related investigation and report to the Audit Committee at the time. We are continuing to make improvements to the controls and procedures relating to the determination of proved reserves, among other things to address those areas where existing procedures or compliance need improvement.

Risk factors

The Group is subject to various risks relating to changing competitive, economic, political, legal, social, industry, business and financial conditions. These risks to Group objectives are described below.

The Group’s operations and earnings are subject to risk related to fluctuating prices for oil, natural gas, oil products and chemicals.

Oil, natural gas, oil products and chemical prices can vary as a result of various factors, including natural disasters, political instability or conflicts, economic conditions or action taken by major oil-exporting countries. Fluctuations in these prices could test our business assumptions, and could have an adverse impact on the Group’s investment decisions, operational performance and financial position.

The Group’s operations and earnings are subject to risks related to project delivery and the ability to replace oil and gas reserves

The Group’s future oil and gas production is to a significant extent dependent upon the successful implementation of large-scale projects. Several uncertainties exist in developing these projects including uncertain geology, effect of frontier conditions, availability of new technology and engineering capacity, availability of skilled resources, project delay, cost overruns, and technical, fiscal, regulatory and other conditions. If these uncertainties materialise they could have an adverse effect on our ability to deliver these projects, which in turn could have an adverse impact on our results of operations and financial position. In addition, future oil and gas production will depend on the Group’s ability to access new reserves through exploration, negotiation with countries and other owners of known reserves and acquisitions. Failures in exploration, and in identifying and consummating transactions to access suitable potential reserves, could adversely impact the Group’s oil and gas production and reserve replacement, which in turn could have an adverse impact on the Group’s results of operations and financial position in the future.

Loss of business reputation may adversely impact results of operations and financial position

The Group has a strong corporate reputation and the Shell brand is one of the world’s leading energy brands. The Shell General Business Principles govern how the Group and its individual companies conduct their affairs. Perceived failure to meet these principles could impact our reputation, which in turn could impact our licence to operate, damage our brand and have an adverse impact on our results of operations and financial position.

The Group’s operations and earnings are subject to security breaches which could disrupt our activities

A number of our staff and assets are exposed to the threats of crime, social unrest, civil war and terrorist attacks. If these threats to our staff and assets materialise they could cause severe disruption to our activities.

The Group’s operations and earnings are subject to strong competition which may affect the Group’s financial position

The Group is subject to competition from within the energy industry and other industries. We face competition in several areas including: securing access to acreage and reserves; developing innovative products and solutions; and developing and applying new technology. Failure to adequately understand or respond to the competitive landscape could have an adverse impact on our financial position.

The Group’s operations and earnings are subject to risks related to operational hazards, natural disasters, pandemics and breaches of technical integrity

The Group operates in more than 140 countries and territories and employs approximately 109,000 people. The scale, diversity and complexity of the Group’s activities place it at the risk of operational hazards, natural disasters, pandemics and breaches of technical integrity, which could result in loss of life, adverse impact on the environment and cause disruption to business activities. Realisation of these risks could have an adverse effect on the results of operations and financial position of the impacted Group company.

The Group’s operations and earnings are subject to risk of change in legislation and fiscal and regulatory policies

The Group’s operations are subject to risk of change in legislation, taxation and regulation and to expropriation of property. For exploration and production activities, these matters include land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. Changes in legislation, taxation, and regulations and expropriation of property could have an adverse effect on the results of operations and financial position of the impacted Group companies.

The Group’s operations and earnings are subject to risks related to currency fluctuations and exchange controls

The Group is present in more than 140 countries and territories throughout the world and is subject to risks from changes in currency values and exchange controls. Changes in currency values and exchange controls could have an adverse effect on our results of operations and financial position.

The Group’s operations and earnings are subject to resourcing inefficiencies which could impede delivery of the Group strategy

Successful delivery of the Group strategy depends on the availability of skilled employees. Changing global demographics, specifically declining numbers of science graduates in Europe and the US, add to the resourcing challenge and there is a risk of failing to resource critical aspects of the business, which could impede delivery of our strategy.

The Group’s operations and earnings are subject to information technology failures which could result in disruption to business activities and legal penalties

With an increasing focus on standardisation, reliance on global systems, relocation of IT services, and a dynamic regulatory landscape, the risk of the Group’s IT systems failing to deliver products, services and solutions in a compliant, secure and efficient manner, could result in disruption to business activities and legal penalties.

The Group’s operations and earnings are subject to the risk of doing business in politically sensitive or unstable countries

The Group’s operations and earnings throughout the world have been, and may in the future be, affected from time to time to varying degrees by political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of company facilities; price controls; tax increases and other retroactive tax claims; expropriation of property; cancellation of contract rights; and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the Group vary greatly from country to country and are not predictable. Realisation of these risks could have an adverse impact on the results of operations and financial position of the Group companies located in the affected country.

The Group’s operations and earnings are subject to risks related to effective governance of the Group

Successful delivery of the Group strategy requires effective governance. There is a risk of non-compliance with laws and regulations, and the risk of incorrect design and operation of internal controls, which may result in damage to the Group’s reputation, financial results and employees.

The Group’s operations and earnings are subject to risks related to failure of senior management

The Group’s leadership plays a critical role in the delivery of the strategy. There is the risk that leadership may make decisions, or take

actions, whose outcomes may cause damage to the Group’s reputation, results and employees.

The Group’s operations and earnings are subject to risks related to the lack of access to technology and inadequate innovation

Technology and innovation are critical for the successful delivery of the Group’s strategy. There is a risk that the Group does not develop or does not have access to the right technology, which may impede delivery of the strategy with a consequent impact on the Group’s financial results.

The Group’s operations and earnings are subject to risks
related to partners and ventures

There is a risk that the Group could lose the ability to influence and control the operations, behaviours and performance of business activities of other parties with whom the Group is engaged, This could result in the loss of access to hydrocarbons, damage to staff, assets and financial results.

The Group’s operations and earnings are subject to risks
related to economic and financial market conditions

Group companies are subject to differing economic and financial market conditions in countries and regions throughout the world. There are risks to such markets from political or economic instability. Realisation of one of these risks in a country or region could have an adverse impact on the results of operations and financial position of the Group companies operating in that country or region.

The Group’s operations and earnings are subject to risks
related to the estimation of reserves

The estimation of oil and gas reserves involves subjective judgments and determinations based on available geological, technical, contractual and economic information. They are not exact determinations. In addition, these judgments may change based on new information from production or drilling activities or changes in economic factors, as well as from developments such as acquisitions and dispositions, new discoveries and extensions of existing fields and the application of improved recovery techniques. Published reserve estimates can also be subject to correction for errors in the application of published rules and guidance.

The Group’s operations and earnings are subject to risks
related to US government sanctions

The Group currently has investments in Iran and Syria and certain operations in Sudan. US laws and regulations currently identify certain countries, including Iran, Syria and Sudan, as state supporters of terrorism and currently impose economic sanctions against Iran, Syria and Sudan. In the case of these countries, there are prohibitions on certain activities and transactions and penalties for violation of these prohibitions include criminal and civil fines and imprisonment. In addition, in the case of Iran, US legislation includes a limit of $20 million in any 12 month period on certain investments knowingly made in that country and authorises the imposition of sanctions (from a list that includes denial of financings by the US export/import bank, denial of certain export licences, denial of certain government contracts and limits of loans or credits from US financial institutions). However, compliance with this investment limit by European companies is prohibited by Council Regulation No. 2271/96 adopted by the Council of the European Union, so that the statutes conflict with each other in certain respects. The Group has exceeded and expects to exceed in the future the US imposed investment limits in Iran. While the Group seeks to comply with applicable legal requirements in its dealings in these countries, it is possible that the Group or persons employed by the Group could be found to be subject to sanctions or other penalties under this legislation in connection with their activities in these countries. Considering both the

likelihood of the imposition of sanctions on the Group and the possible effects thereof, the Group does not believe that there will be a material negative effect on its results of operations or financial condition resulting from its investments and activities in these countries.

The Group’s operations and earnings are subject to risks
related to the impact of climate change

Concern about climate change is leading to government action to manage emissions and societal challenge to future oil and gas developments. As such, there is a delivery risk to future projects and a compliance risk for existing facilities which cannot demonstrate adequate emissions management. Realisation of these risks could have an adverse impact on the Group’s operational performance and financial position.

Risk mitigation programmes

Property and liability risks

The Group’s operating companies insure against most major property and liability risks with our captive insurance companies. These companies reinsure part of their major catastrophe risks with a variety of international insurers. The effect of these arrangements is that uninsured losses for any one incident are unlikely to exceed $400 million.

Treasury and trading risks

Group companies, in the normal course of their business, use financial instruments of various kinds for the purposes of managing exposure to currency, commodity price and interest rate movements.

The Group has treasury guidelines applicable to all Group companies and each Group company is required to adopt a treasury policy consistent with these guidelines. These policies cover financing structure, foreign exchange and interest rate risk management, insurance, counterparty risk management and derivative instruments, as well as the treasury control framework. Wherever possible, treasury operations are operated through specialist Group regional organisations without removing from each Group company the responsibility to formulate and implement appropriate treasury policies.

Each Group company measures its foreign currency exposures against the underlying currency of its business (its functional currency), reports foreign exchange gains and losses against its functional currency and has hedging and treasury policies in place which are designed to manage foreign exchange exposure so defined. The functional currency for most upstream companies and for other companies with significant international business is the US dollar, but other companies usually have their local currency as their functional currency.

The financing of most operating companies is structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged.

Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most Group companies is not permitted by their treasury policy.

Specific Group companies have a mandate to operate as traders in crude oil, natural gas, oil products and other energy-related products, using commodity swaps, options and futures as a means of managing price, and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are minimised. The Group measures exposure to the market when trading. Exposure to substantial trading losses is considered limited with the Group’s approach to risk.

Other than in exceptional cases, the use of external derivative instruments is generally confined to specialist oil and gas trading and central treasury organisations which have appropriate skills, experience, supervision and control and reporting systems.

Supplementary information on derivatives and other financial instruments and derivative commodity instruments is provided on pages 164 to 177 of this Report.

Environmental and decommissioning costs

Group companies are present in over 140 countries and territories throughout the world and are subject to a number of different environmental laws, regulations and reporting requirements. It is the responsibility of each Group company to comply with Group HSE standards, including the implementation of an HSE management system.

The costs of prevention, control, abatement or elimination of releases into the air and water, as well as the disposal and handling of waste at operating facilities, are considered to be an ordinary part of business. As such, these amounts are included within operating expenses. An estimate of the order of magnitude of amounts incurred in 2005 for Group companies, based on allocations and managerial judgment, is $1.2 billion (2004: $1.4 billion).

Expenditures of a capital nature to limit or monitor hazardous substances or releases include both remedial measures on existing plants and integral features of new plants. While some environmental expenditures are discrete and readily identifiable, others must be reasonably estimated or allocated based on technical and financial judgments which develop over time. Consistent with this, estimated environmental capital expenditures made by companies with major capital programmes during 2005 were $0.8 billion (2004: $0.6 billion).

It is not possible to predict with certainty the magnitude of the effect of required investments in existing facilities on Group companies’ future earnings, since this will depend among other things on the ability to recover the higher costs from consumers and through fiscal incentives offered by governments. Nevertheless, it is anticipated that over time there will be no material impact on the total of Group companies’ earnings. These risks are comparable to those faced by other companies in similar businesses.

At the end of 2005, the total liabilities being carried for environmental clean-up were $878 million (2004: $817 million). In 2005, there were payments of $190 million and increases in provisions of $243 million. The fair value of the obligations being carried for expenditures on decommissioning and site restoration, including oil and gas platforms, at December 31, 2005 amounted to $5,925 million (2004: $5,397 million).

Pension funds

It is anticipated that the actuarial valuations of the Group’s four main pension funds in aggregate at the end of 2005 will show a surplus of assets over liabilities. These actuarial valuations, rather than the Group Consolidated Financial Statements measures in accordance with IAS 19 (Note 22 to the Consolidated Financial Statements), are the basis on which the fund’s trustees manage the funds and define the required contributions from the member companies.

Controls and procedures

As of the end of the period covered by this Report, the Chief Executive and Chief Financial Officer conducted an evaluation pursuant to Rule13a-15 promulgated under the Securities Exchange Act of 1934, as amended (‘‘the Exchange Act’’), of the effectiveness of the design and operation of the disclosure controls and procedures of the Group. Based on this evaluation, the Chief Executive and Chief Financial Officer concluded that, as of the end of the period covered by this Report, such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Royal Dutch Shell in reports it files or submits under the Exchange Act is recorded, processed, summarised and reported within the time periods specified in the rules and forms of the SEC.

There has not been any change in the internal controls over financial reporting of the Group or the Dividend Access Trust that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.

In 2005, the Royal Dutch Shell Group Dividend Access Trust was established in connection with the Unification Transaction. See “Supplementary Information – Control of registrant” for a discussion on the operation of, and controls relating to, the Trust.

 
 

 

 

 

 

 

 

 

 

2005 compared to 2004

Earnings

The Group’s income for 2005 was $26.3 billion, an increase of 36% from 2004. These earnings reflect higher realised oil and gas prices in Exploration & Production and higher liquefied natural gas (LNG) volumes and prices in Gas & Power, as well as increases in refining margins and trading profits in Oil Products and higher margins in Chemicals.

The Group’s financial position is solid, and we returned over $17 billion to our shareholders through dividends, buybacks and the payment to Royal Dutch minority shareholders in 2005.

Exploration & Production earnings were $14,238 million, 45% higher than in 2004. Production in 2005 was 1% lower compared to 2004, excluding the impact of divestments, price effects and hurricanes in the Gulf of Mexico. The decline in production in mature areas was largely offset by the start of production in new fields. Hydrocarbon prices were higher in 2005 compared with 2004 with Brent crude prices averaging $54.55 a barrel compared with $38.30 in 2004 and West Texas Intermediate prices averaging $56.60 a barrel in 2005 compared with $41.50 in 2004. Prices reflected the effect of strong US and Chinese demand, geopolitical uncertainty in a number of producer countries, disruptions to production as a result of the hurricanes in the Gulf of Mexico and lower OPEC spare production capacity. The benefits of higher oil and gas prices were partly offset by lower hydrocarbon production, higher costs and depreciation.

Earnings in Gas & Power were $1,573 million, 13% lower than in 2004. Earnings in 2005 included net charges of $84 million mainly relating to divestments (InterGen). Earnings in 2004 reflected net gains of $444 million also mainly

related to divestments. Excluding these non-operational items earnings were 21% higher, benefiting from higher LNG sales prices and volumes, and more favourable marketing and trading conditions. LNG volumes were up 5%.

Oil Products earnings increased by 31% compared with 2004 to $9,982 million, benefiting significantly from higher refining margins, improved operational performance and increased trading earnings. These results included divestment gains of $427 million.

Earnings in Chemicals were $991 million, after a loss from discontinued operations of $307 million from an impairment and charges associated with the divestment of the polyolefins joint venture Basell. In 2004, earnings of $1,148 million included a loss from discontinued operations of $199 million from an impairment of the investment in Basell of $353 million. The reduction in earnings from continuing operations relative to 2004 was attributable mainly to higher costs, partly offset by higher margins.

The results discussed above include a loss from discontinued operations of $307 million (2004: $234 million) including impairment charges as described in Note 10 to the Consolidated Financial Statements.

Capital investment

Capital investment^a in 2005 was $17.4 billion compared with $15.3 billion in 2004. Gross proceeds from divestments were $6.6 billion and cash flow from operating activities was $30.1 billion, an increase of 13% from 2004. At the end of 2005, the total debt ratio^b was 11.7% compared with 13.8% in 2004. Cash and cash equivalents were $11.7 billion compared with $9.2 billion in 2004.

a		Capital investment is capital expenditure, exploration expense and new investments in equity accounted investments.
b		The total debt ratio is defined as short-term plus long-term debt as a percentage of capital employed. Capital employed is Group total assets minus total liabilities before deduction of minority interests, plus short-term and long-term debt.

Research and development (R&D)

Group R&D programmes are carried out through a worldwide network of laboratories, with major efforts concentrated in the Netherlands, the UK and the US. Other laboratories are located in Belgium, Canada, France, Germany, Japan and Singapore. Group companies’ R&D expenses (including depreciation) were $588 million in 2005 (2004: $553 million, 2003: $584 million, 2002: $472 million and 2001: $387 million.)

International Financial Reporting Standards (IFRS)

With effect from the first quarter of 2005, the Group has released its quarterly (unaudited) results under IFRS, including comparative data for 2004, together with reconciliations to opening balance at January 1, 2004 and to 2004 data previously published in accordance with accounting principles generally accepted in the United States (US GAAP). The Consolidated Financial Statements have been prepared in accordance with the applicable laws in England and Wales and with IFRS as adopted by the European Union. As applied to Royal Dutch Shell, there are no material differences with IFRS as issued by the International Accounting Standards Board.

See Note 2 to the Consolidated Financial Statements for disclosure on elections made on transition to IFRS.

 

2005 compared to 2004

Earnings

Segment earnings in 2005 were $14,238 million, 45% higher than in 2004 due to the benefits of higher oil and gas prices, which were partly offset by lower hydrocarbon production and higher costs.

The higher costs in 2005 reflected increased market rates and commodity prices, the build up of new production in Nigeria, Malaysia, Russia, the UK and the US, the development of projects and the impact of hurricanes in the US.

Earnings included a net gain of $1,727 million compared with a net charge of $4 million a year ago. The net gain in 2005 comprised divestment gains of $2,027 million, largely from the Netherlands, Norway, the UK and Australia, offset by a loss of $492 million related to the mark-to-market valuation of certain UK gas contracts. The $4 million charge in 2004 comprised divestment gains of $699 million and impairment reversals of $469 million, offset by mark-to-market losses, impairments, elimination of unrealised profit in stock and tax items.

Prices

Oil prices increased significantly in 2005 with Brent and West Texas Intermediate crude prices 43% and 36% higher than in 2004, respectively.

The Group’s overall realised oil and natural gas liquids (NGL) prices were $50.36 a barrel, up from $35.61 in 2004. In the US, realised oil and NGL prices averaged $48.94 a barrel, compared with $36.15 a year earlier and outside the US, realised prices averaged $50.56 a barrel compared with $35.53 in 2004. Realised prices differ from published crude oil prices because the quality, and therefore price, of actual crude oil produced differs from the quoted blends. In general, the Group produces crude oil of a lower quality than the quoted blends. The Group’s overall realised gas prices (excluding equity accounted

investments) in Exploration & Production averaged $4.77 per thousand standard cubic feet (scf) compared with $3.59 in 2004.

Capital investment and portfolio actions
Capital investment in 2005 of $10.8 billion (excluding the contribution of our minority partners in Sakhalin of $1.3 billion) was 25% higher than 2004 and included exploration expenditure of $2.1 billion. The major centres of investment in 2005 included Russia, Canada, Nigeria and Norway.

Production started from the deepwater Bonga field, which is 120km off the Nigerian coast. The total investment to the startup of the field was $3.6 billion. Bonga field is expected to ramp up production to over 200 thousand barrels of oil per day in 2006. Shell Nigeria Exploration & Production Company has a 55% interest in the field, and operates the field on behalf of the Nigerian National Petroleum Corporation under a PSC.

Significant progress has been made with the Sakhalin project. The offshore concrete structures have been towed into position and by the end of 2005, construction of phase 2 of the project was 60% complete. During the year the Sakhalin Energy Investment Company announced that phase 2 project investment costs were now estimated at $20 billion. This represents very substantial cost overruns compared to earlier estimates. LNG deliveries are expected to start in 2008.

A Memorandum of Understanding was signed with Gazprom outlining the terms for an asset swap under which Gazprom could acquire a 25% interest plus 1 share in the Sakhalin II project and Shell could acquire a 50% interest in the Zapolyarnoye Neocomian field. The difference in value would be made up of a settlement of cash and other assets agreed by both parties.

In April 2005, the participants of the Gorgon LNG and domestic gas project (SDA, Chevron Australia and subsidiaries of ExxonMobil Corporation) announced the integration of their interests in these fields and the associated gas facilities, with Chevron holding 50% and Shell and ExxonMobil 25% each. The project has also now moved into the front-end engineering design (FEED) phase.

The Group’s equity interest was increased by 1.85% to 18.52% in the North Caspian Sea PSC, which includes the Kashagan project in Kazakhstan.

Agreement was reached to further develop the Changbei gas field in China in a joint venture with PetroChina. The development is expected to start delivering 1.5 billion cubic metres of gas a year (53 billion standard cubic feet) in 2007 and, when operating at full capacity, will produce 3 billion cubic metres of gas a year (106 billion standard cubic feet (scf)).

A Memorandum of Understanding was signed with Mubadala Development Company in Abu Dhabi forming a strategic alliance to seek areas of cooperation focusing initially on the Middle East and North Africa.

Extended production licences were secured in western Siberia for the Upper Salym field to 2032 and the West Salym field to 2034. The original licences had been due to expire in 2013. In November 2005, commercial production started at West Salym, the largest of the Salym fields. Total investment in developing the three Salym fields and associated infrastructure will be $1.25 billion.

In the US, the Group’s 17% interest in the Tahiti field, deepwater Gulf of Mexico was exchanged for Total’s 100% interest in four producing natural gas fields in South Texas with current production of 107 million scf per day. The swap was completed in the first quarter of 2006. The Group already operates fields close to those acquired.

First gas was delivered from the Shallow Clastics field in Malaysia which, once fully developed, is expected to produce 430 million scf per day to the E11 hub integrated gas project (Group interest 50%). The E11 hub will be further developed to reach a capacity of two billion scf per day (100%) from various new and existing fields.

We completed the divestment of the Laminaria and Corallina fields in Australia, and Schooner and Ketch in the UK. The sale of our interest in Gasunie’s gas transportation assets in the Netherlands was also completed (Group interest 25%).

Exploration
During 2005, we participated in 93 successful exploratory wells (including appraisal wells). These included discoveries in Australia, Brazil, Brunei, Egypt, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the US. All discoveries will now be appraised in order to establish the extent of the reserves they contain.

The Group made significant additions to its overall acreage position with new exploration licences in Algeria, Australia, Brazil, Canada, Cameroon, the Faroe Islands, Kazakhstan, Libya, Malaysia, Norway, Nigeria, the Republic of Ireland, the UK and the US (Alaska, Onshore and Gulf of Mexico). In 2005, 145 thousand square kilometres of additional exploration acreage was added in the above mentioned countries. Globally, the additional acreage was 160 thousand square kilometres.

Production
In 2005, total hydrocarbon production (including oil sands) was 3,518 thousand barrels of oil equivalent (boe) per day, in line with our target, despite the impact of hurricanes in the Gulf of Mexico. This was 7% lower than in 2004. Excluding the effects of the hurricanes, the end of a PSC in the Middle East, the impact of higher prices on our entitlements from PSCs, and divestments, production was 1% lower than 2004.

Oil production was also specifically affected by field declines in the US, Norway, the UK, Brazil, Oman and Nigeria, as well as lower production from fields in the UK and Nigeria due to operational shutdowns.

Similarly, natural gas production was impacted by field declines in the US and the UK as well as by lower demand in the Netherlands.

A number of new fields started production during the year, including Bonga in Nigeria, the E11 Shallow Clastics field in Malaysia, West Salym in Russia and Clair in the UK. There was also increased production over the year from the Goldeneye Field in the UK, Jintan in Malaysia and Holstein in the US. These increases, along with production from new fields, added 131 thousand boe per day of production. Both oil and gas field declines were offset by additional production from new fields.

Outlook and strategy
The overall context for the exploration and production industry is characterised by current high oil prices, high activity levels, tightness in the supply of oilfield goods and services, cost escalation and competition for new opportunities and we expect this to continue in 2006. We believe that crude prices in the near future will continue to be influenced by OPEC supply policy, the rate of global economic expansion, particularly in the US and China, and the severity of the northern hemisphere winter. We also believe that growing global energy demand and the increased upstream investment required to meet that demand means that the oil price shift to higher levels will continue for at least the medium term.

Our strategy has four portfolio themes: existing oil; new material oil; integrated gas and unconventional oil. We will pursue an exploration programme to add more new acreage in these areas. We will also invest in organic growth, open up new positions and make selective acquisitions, divestments and asset swaps. Within our new and existing assets, we will focus on operational excellence and project delivery.

To deliver this strategy, capital investment in Exploration & Production will be increased to some $13 billion in 2006 (excluding investment by our minority partners in Sakhalin).

The Group will seek to sustain long-term production from existing assets and invest in new material oil projects such as Kashagan in Kazakhstan and offshore Nigeria.

The Group believes that natural gas demand will continue to grow at a faster rate than oil demand. We will look for further integrated gas positions, extending our leadership position in LNG, with opportunities in GTL production such as Qatar GTL. The Group’s significant presence across the natural gas value chain from exploration to production and markets enables maximisation of the value from integrated gas projects such as Sakhalin.

We also intend to build on our existing strength in unconventional oil technology and the success of the Athabasca Oil Sands Project in Canada, and are looking to expanding our presence in this area.

The Group has a good record of developing and applying technology and we intend to strengthen these capabilities to maintain our competitiveness in

the future. This will include investing in technology to recover and process conventional oil and gas as well as unconventional resources.

Another important focus of our strategy is to reduce costs through improving management of the supply chain and standardising processes globally. We are taking action to ensure improved and consistent project delivery. Having the skilled professionals in place will be vital in delivering our strategy and we are increasing our capacity through redeployment and external recruitment.

The Group’s production forecast for 2006 is expected at the low end of the range of 3.5-3.8 million boe per day. We expect production to grow and reach between 3.8 and 4.0 million boe per day by 2009. The Group’s longer term production aspiration remains some 4.5-5.0 million boe per day by 2014.

Community disturbances remain an ongoing risk to our business in Nigeria. In early 2006 there was an increase in such incidents targeting our facilities and those of other oil companies. This situation will be closely monitored throughout 2006.

Business and property
The Group and its equity accounted investments are involved in the exploration for and production of crude oil and natural gas and operate under a broad range of laws and regulations that change over time. These cover virtually all aspects of exploration and production activities, including matters such as land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. The conditions of the leases, licences and contracts under which oil and gas interests are held vary from country to country. In almost all cases (outside North America), the legal agreements generally are granted by or entered into with a government, government entity or state oil company, and the exploration risk practically always rests with the oil company. In North America, these agreements may also be with private parties who own mineral interests. Of these agreements, the following are most relevant to Shell’s interests:

>		Licences (or concessions) which entitle the holder to explore for hydrocarbons and exploit any commercial discoveries. Under a licence, the holder bears the risk of exploration, development and production activities and of financing these activities. In principle, the licence holder is entitled to the totality of production minus any royalties in kind. The state or state oil company may sometimes enter as a joint venture partner sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the state oil company or agency has an option to purchase a certain share of production. The lease agreement, typical in North America, is generally the same except for treatment of royalties paid in cash.
>		PSCs entered into with a state or state oil company oblige the oil company, as contractor, to provide all the financing and bear the risk of exploration, development and production activities in exchange for a share of the production. Usually this share consists of a fixed or variable part, which is reserved for the recovery of contractor’s cost (cost oil); the remainder is split with the state or state oil company on a fixed or volume/revenue-dependent basis. In some cases, the state oil company will participate in the rights and obligations of the contractor and will share in the costs of development and production. Such participation can be across the venture or be on a per field basis.

Group companies’ exploration and production interests, including acreage holdings and statistics on wells drilled and drilling, are shown on pages 30 to 32.