FORM 20-F
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, 2008
 
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
4.95% Guaranteed Notes due 2012   New York Stock Exchange
5.2% Guaranteed Notes due 2017   New York Stock Exchange
6.375% Guaranteed Notes due 2038   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, 2008:
3,455,841,942 RDS Class A ordinary shares of the nominal value of € 0.07 each.
2,665,893,421 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 basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o  International Financial Reporting Standards as issued by the International Accounting Standards Board   þ   Other   o    
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant
has elected to follow.   Item 17   o   Item 18   o    
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

(REPORT COVER)
ROYaL DuTcH SHELL plc annuaL REPORT anD fORm 20-f fOR THE YEaR EnDED DEcEmbER 31, 2008 DELIVERY & GROWTH REPORT

 


Table of Contents

ANNUAL REPORT AND FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2008

OUR BUSINESS
 
With around 102,000 employees in more than 100 countries and territories, Shell helps to meet the world’s growing demand for energy in economically, environmentally and socially responsible ways.
UPSTREAM
Our Exploration & Production business searches for and recovers oil and natural gas around the world. Many of these activities are carried out as joint venture partnerships, often with national oil companies.
Our Gas & Power business liquefies natural gas and transports it to customers across the world. Its gas to liquids (GTL) process turns natural gas into cleaner-burning synthetic fuel and other products. It develops wind power to generate electricity and is involved in solar power technology. It also licenses our coal gasification technology, enabling coal to be used as a chemical feedstock and for more efficient generation of electricity.


DOWNSTREAM
Our Oil Sands business, the Athabasca Oil Sands Project, extracts bitumen — an especially thick, heavy oil — from oil sands in Alberta, western Canada, and converts it to synthetic crude oils that can be turned into a range of products.
Our Oil Products business makes, moves and sells a range of petroleum-based products around the world for domestic, industrial and transport use. Its Future Fuels and CO2 business unit develops biofuels and hydrogen and markets the synthetic fuel and products made from the GTL process. It also leads company-wide activities in CO2 management. With around 45,000 service stations, ours is the world’s largest single-branded fuel retail network.
Our Chemicals business produces petrochemicals for industrial customers. ey include the raw materials for plastics, coatings and detergents used in the manufacture of textiles, medical supplies and computers.


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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, 2008, for Royal Dutch Shell plc (Royal Dutch Shell, the Company) and its subsidiaries. It presents the Consolidated Financial Statements of Royal Dutch Shell (pages 113-159) and the Parent Company Financial Statements of Royal Dutch Shell (pages 187-191). This Report complies with all applicable UK regulations. This Report also includes the disclosure included in the Annual Report on Form 20-F, as filed with the U.S. Securities and Exchange Commission (SEC). Cross references to Form 20-F are set out on page 3 of this Report.
 
In this Report “Shell” and the “Shell group” are sometimes used for convenience where references are made to Royal Dutch Shell and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. “Subsidiaries”, “Shell subsidiaries” and “Shell companies” as used in this Report refer to companies over which Royal Dutch Shell, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. The Consolidated Financial Statements consolidate the financial statements of the Parent Company and all subsidiaries. The companies in which Shell has significant influence but not control are referred to as “associated companies” or “associates” and companies in which Shell has joint control are referred to as “jointly controlled entities”. Joint ventures are comprised of jointly controlled entities and jointly controlled assets. In this Report, associates and jointly controlled entities are also referred to as “equity-accounted investments”.
 
The term “Shell interest” is used for convenience to indicate the direct and/or indirect (for example, through our 34% shareholding in Woodside Petroleum Ltd.) ownership interest held by Shell in a venture, partnership or company, 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 subsidiaries only, without deduction of minority interest. 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 “Shell share” is used for convenience to indicate not only the volumes to which subsidiaries are entitled (without deduction in respect of minority interest in subsidiaries) but also the portion of the volumes of equity-accounted investments to which Shell is entitled or which is proportionate to the Shell interest in those companies.
 
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 both International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS as adopted by the European Union. IFRS as defined above includes International Financial Reporting Interpretations Committee (IFRIC) interpretations.
 
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 Business Review (BR) and other sections of this Report contain forward-looking statements concerning the financial condition, results of operations and businesses of 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 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 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 Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserve estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including potential litigation and regulatory effects arising from recategorisation of reserves; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. Also see “Risk factors” for additional risks and further discussion. 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 Shell 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.

 
 
2  Shell Annual Report and Form 20-F 2008


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   6-7, 75
    B. Capitalisation and indebtedness   N/A
    C. Reasons for the offer and use of proceeds   N/A
    D. Risk factors   14-16
Item 4.
  Information on the Company    
    A. History and development of the company   6-7, 11-12, 17-22, 24-29, 35-38, 40-42, 44-46, 50-52, 103-104
    B. Business overview   11-13, 17-57, 62-69, 160-171
    C. Organisational structure   11, E2-E6
    D. Property, plant and equipment   11-13, 17-52, 64-66
Item 4A.
  Unresolved Staff Comments   N/A
Item 5.
  Operating and Financial Review and Prospects    
    A. Operating results   6-7, 11-13, 17-57
    B. Liquidity and capital resources   58-61
    C. Research and development, patents and licences, etc.    54-55, 80, 121, 126
    D. Trend information   11-13, 17-22, 34-35, 40-41, 43-45, 49-50
    E. Off-balance sheet arrangements   60
    F. Tabular disclosure of contractual obligations   61
    G. Safe harbour   N/A
Item 6.
  Directors, Senior Management and Employees    
    A. Directors and senior management   77-82, 104
    B. Compensation   83, 85-95
    C. Board practices   80-82, 96-102
    D. Employees   62-63
    E. Share ownership   70-71, 81, 103
Item 7.
  Major Shareholders and Related Party Transactions    
    A. Major shareholders   82, 108
    B. Related party transactions   81, 110, 131-132, 183, 191
    C. Interests of experts and counsel   N/A
Item 8.
  Financial Information    
    A. Consolidated Statements and Other Financial Information   47-48, 58, 72-74, 111-159, 174-184, 185-191
    B. Significant Changes   80, 159, 183
Item 9.
  The Offer and Listing    
    A. Offer and listing details   72-73, 103
    B. Plan of distribution   N/A
    C. Markets   72-73, 103
    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   94-96, 103-110
    C. Material contracts   82, 91-92
    D. Exchange controls   109
    E. Taxation   109
    F. Dividends and paying agents   N/A
    G. Statement by experts   N/A
    H. Documents on display   ii
    I. Subsidiary Information   N/A
Item 11.
  Quantitative and Qualitative Disclosures About Market Risk   100-101, 118-122, 144-148, 172-173, 179, 191
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   100-102
Item 16.
  [Reserved]    
Item 16A.
  Audit committee financial expert   98
Item 16B.
  Code of Ethics   96
Item 16C.
  Principal Accountant Fees and Services   71, 98, 156, 184, 190
Item 16D.
  Exemptions from the Listing Standards for Audit Committees   96
Item 16E.
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers   60-61
Item 16F.
  Change in Registrant’s Certifying Accountant   N/A
Item 16G.
  Corporate Governance   110
     
PART III   PAGES
         
Item 17.
  Financial Statements   N/A
Item 18.
  Financial Statements   112-159, 186-191
Item 19.
  Exhibits   192

 
 
Shell Annual Report and Form 20-F 2008  3


Table of Contents

ABBREVIATIONS
 
     
CURRENCIES
   
     
$
  US dollar
£
  pound sterling
  euro
C$
  Canadian dollar
CHF
  Swiss franc
 
UNITS OF MEASUREMENT
     
acre
  approximately 0.4 hectares
bcf/d
  billion cubic feet per day
boe(/d)
  barrel of oil equivalent (per day); natural gas has been converted to
oil equivalent using a factor of 5,800 scf per barrel
b/d
  barrels per day
Btu
  British thermal units
(k)dwt
  (thousand) deadweight tonnes
mtpa
  million tonnes per annum
MW
  megawatts
per day
  volumes are converted to a daily basis using a calendar year
scf
  standard cubic feet
     
PRODUCTS
   
     
BTX
  benzene, toluene, xylene
GTL
  gas to liquids
LNG
  liquefied natural gas
LPG
  liquefied petroleum gas
NGL
  natural gas liquids
MEG
  mono-ethylene glycol
SM/PO
  styrene monomer/propylene oxide
     
MISCELLANEOUS
   
     
ADR
  American Depositary Receipt
AGM
  Annual General Meeting
CO2
  carbon dioxide
DBP
  deferred bonus plan
EOR
  enhanced oil recovery
EPC
  engineering, procurement and construction
GHG
  greenhouse gas
HSE
  health, safety and environment
HSSE
  health, safety, security and environment
IFRIC
  International Financial Reporting Interpretations Committee
IFRS
  International Financial Reporting Standards
LTIP
  long-term incentive plan
NGO
  non-governmental organisation
NOC
  national oil company
OML
  onshore oil mining lease
OPEC
  Organization of the Petroleum Exporting Countries
OPL
  oil prospecting licence
PSA
  production-sharing agreement
PSC
  production-sharing contract
R&D
  research and development
REMCO
  Remuneration Committee
RSP
  restricted share plan
SEC
  United States Securities and Exchange Commission
TRCF
  total recordable case frequency
USGC
  United States Gulf Coast
WTI
  West Texas Intermediate

 
 
4  Shell Annual Report and Form 20-F 2008


 

REVIEW OF THE YEAR
         
Selected financial data     6  
Chairman’s message     8  
Chief Executive’s review     9  
       
BUSINESS REVIEW        
         
Business and market overview     11  
Risk factors     14  
Summary of results     17  
Exploration & Production     19  
Gas & Power     34  
Oil Sands     40  
Oil Products     43  
Chemicals     49  
Corporate     53  
Research and development     54  
Key performance indicators     56  
Liquidity and capital resources     58  
Our people     62  
Environment and society     64  
Environmental data     67  
Social data     69  
Share plans and other matters     70  
Additional shareholder information     72  
       
REPORT OF THE DIRECTORS        
         
The Board of Royal Dutch Shell plc     77  
Report of the Directors     80  
       
DIRECTORS’ REMUNERATION REPORT        
         
Directors’ Remuneration Report     83  
       
CORPORATE GOVERNANCE AND CONTROL OF REGISTRANT        
         
Corporate governance     96  
Control of registrant     103  
         
REPORTS OF THE INDEPENDENT AUDITORS        
         
Reports of the Independent Auditors     111  
       
CONSOLIDATED FINANCIAL STATEMENTS        
         
Consolidated Financial Statements     113  
Notes to the Consolidated Financial Statements     118  
       
SUPPLEMENTARY INFORMATION        
         
Oil and gas (unaudited)     160  
Oil sands (unaudited)     171  
Derivatives and other financial instruments and derivative commodity instruments (unaudited)     172  
       
PARENT COMPANY FINANCIAL STATEMENTS        
         
Parent Company Financial Statements     174  
Notes to the Parent Company Financial Statements     177  
       
REPORTS OF THE INDEPENDENT AUDITORS        
         
Reports of the Independent Auditors     185  
       
ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS        
         
Royal Dutch Shell Dividend Access Trust Financial Statements     187  
Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements     190  
       
EXHIBITS        
         
Exhibits     192  
 EXHIBIT 7.1
 EXHIBIT 8
 EXHIBIT 12.1
 EXHIBIT 12.2
 EXHIBIT 13.1
 EXHIBIT 99.1
 EXHIBIT 99.2

 
 
Shell Annual Report and Form 20-F 2008  5


Table of Contents

REVIEW OF THE YEAR
 
 
 
 
 
 
 
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 Business Review in this Report.
 
The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standard Board (IASB).
 
                                             
CONSOLIDATED STATEMENT OF INCOME DATA     $ million      
    2008     2007     2006     2005     2004      
Revenue
    458,361       355,782       318,845       306,731       266,386      
Income from continuing operations
    26,476       31,926       26,311       26,568       19,491      
Income/(loss) from discontinued operations
                      (307 )     (234 )    
                                             
Income for the period
    26,476       31,926       26,311       26,261       19,257      
                                             
Income attributable to minority interest
    199       595       869       950       717      
                                             
Income attributable to Royal Dutch Shell plc shareholders
    26,277       31,331       25,442       25,311       18,540      
                                             
 
                                             
CONSOLIDATED BALANCE SHEET DATA     $ million      
    2008     2007     2006     2005     2004      
Total assets
    282,401       269,470       235,276       219,516       187,446      
Share capital
    527       536       545       571       604      
Equity attributable to Royal Dutch Shell plc shareholders
    127,285       123,960       105,726       90,924       86,070      
Minority interest
    1,581       2,008       9,219       7,000       5,313      
                                             
                                             
CAPITAL INVESTMENT                     $ million      
    2008     2007     2006     2005     2004      
Capital expenditure:
                                           
Exploration & Production
    21,932       13,723       15,773       10,584       8,559      
Gas & Power
    3,902       2,951       2,009       1,573       1,370      
Oil Sands
    3,124       1,931       865       274       140      
Oil Products
    3,828       3,671       3,363       2,810       2,761      
Chemicals
    2,085       1,415       821       387       529      
Corporate
    241       414       265       288       207      
                                             
Total
    35,112       24,105       23,096       15,916       13,566      
                                             
Exploration expense (excluding depreciation and release of currency translation differences)
    1,447       1,115       949       815       651      
New equity in equity-accounted investments
    1,294       1,472       598       390       681      
New loans to equity-accounted investments
    591       380       253       315       377      
                                             
Total capital investment*
    38,444       27,072       24,896       17,436       15,275      
                                             
*comprising
                                           
Exploration & Production
    24,718       15,919       17,079       11,772       9,568      
Gas & Power
    4,346       3,532       2,351       1,656       1,652      
Oil Sands
    3,124       1,931       865       274       140      
Oil Products
    3,917       3,856       3,457       2,844       2,823      
Chemicals
    2,097       1,419       877       599       868      
Corporate
    242       415       267       291       224      
                                             
Total
    38,444       27,072       24,896       17,436       15,275      
                                             

 
 
                                             
EARNINGS PER SHARE                           $      
    2008     2007     2006     2005     2004      
Basic earnings per €0.07 ordinary share
    4.27       5.00       3.97       3.79       2.74      
from continuing operations
    4.27       5.00       3.97       3.84       2.77      
from discontinued operations
                      (0.05 )     (0.03 )    
Diluted earnings per €0.07 ordinary share
    4.26       4.99       3.95       3.78       2.74      
from continuing operations
    4.26       4.99       3.95       3.83       2.77      
from discontinued operations
                      (0.05 )     (0.03 )    
                                             
                                             
                                      number      
                                             
                                             
Basic weighted average number of Class A and B shares
    6,159,102,114       6,263,762,972       6,413,384,207       6,674,179,767       6,770,458,950      
Diluted weighted average number of Class A and B shares
    6,171,489,652       6,283,759,171       6,439,977,316       6,694,427,705       6,776,396,429      
                                             

 
 
6  Shell Annual Report and Form 20-F 2008


Table of Contents

REVIEW OF THE YEAR
 

SELECTED FINANCIAL DATA
 
 
 
 

                                                                                     
QUARTERLY INCOME DATA (unaudited)                                                   $ million      
    2008     2007      
    Quarter 1     Quarter 2     Quarter 3     Quarter 4     Total     Quarter 1     Quarter 2     Quarter 3     Quarter 4     Total      
Revenue
    114,302       131,419       131,567       81,073       458,361       73,480       84,896       90,703       106,703       355,782      
Cost of sales
    96,780       109,261       113,249       76,349       395,639       60,666       68,715       76,713       90,603       296,697      
                                                                                     
Gross profit
    17,522       22,158       18,318       4,724       62,722       12,814       16,181       13,990       16,100       59,085      
Selling, distribution and administrative expenses
    3,969       4,444       4,139       4,476       17,028       3,778       4,120       3,843       4,880       16,621      
Exploration
    325       408       538       778       2,049       272       450       608       382       1,712      
Share of profit of equity-accounted investments
    2,425       2,671       2,000       350       7,446       1,808       2,138       1,912       2,376       8,234      
Interest and other income
    351       474       31       54       910       1,125       747       340       486       2,698      
Interest expense
    298       334       205       344       1,181       224       270       302       312       1,108      
                                                                                     
Income before taxation
    15,706       20,117       15,467       (470 )     50,820       11,473       14,226       11,489       13,388       50,576      
Taxation
    6,505       8,363       6,987       2,489       24,344       4,032       5,415       4,448       4,755       18,650      
                                                                                     
Income for the period
    9,201       11,754       8,480       (2,959 )     26,476       7,441       8,811       7,041       8,633       31,926      
                                                                                     
Income attributable to minority interest
    118       198       32       (149 )     199       160       144       125       166       595      
                                                                                     
Income attributable to Royal Dutch Shell plc shareholders
    9,083       11,556       8,448       (2,810 )     26,277       7,281       8,667       6,916       8,467       31,331      
                                                                                     
 
                                             
OTHER CONSOLIDATED DATA     $ million      
    2008     2007     2006     2005     2004      
Net cash from operating activities
    43,918       34,461       31,696       30,113       26,537      
Net cash used in investing activities
    28,915       14,570       20,861       8,761       5,964      
Dividends paid
    9,841       9,204       8,431       10,849       7,655      
Net cash used in financing activities
    9,394       19,393       13,741       18,573       13,592      
Increase/(decrease) in cash and cash equivalents
    5,532       654       (2,728 )     2,529       7,094      
                                             
Income by segment:
                                           
Exploration & Production
    20,235       14,686       14,544       13,577       9,522      
Gas & Power
    5,328       2,781       2,633       1,378       1,774      
Oil Sands
    941       582       651       661       301      
Oil Products
    446       10,439       7,125       9,982       7,597      
Chemicals
    (405 )     2,051       1,064       991       1,148      
Corporate
    (69 )     1,387       294       (328 )     (1,085 )    
Minority interest
    (199 )     (595 )     (869 )     (950 )     (717 )    
                                             
Income attributable to Royal Dutch Shell plc shareholders
    26,277       31,331       25,442       25,311       18,540      
                                             
Balance sheet gearing ratio (net debt as percentage of total capital)[A]
    5.9%       6.3%       5.6%       1.2%       5.6%      
Adjusted gearing ratio (adjusted net debt as percentage of adjusted total capital)[A]
    23.1%       16.6%       14.8%       14.9%       20.0%      
                                             
Dividends – declared $/share[B]
    1.60       1.44       1.27       1.13       1.07 [C]    
                                             
 
[A]  See Note 18[D] to the Consolidated Financial Statements on pages 136-137.
[B]  From 2007 onwards, dividends are declared in US dollars. 2005 and 2006 dividends were declared in euros and translated, for comparison purposes, to US dollars (based on the dollar dividend of American Depositary Receipts converted to ordinary shares in the applicable period).
[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.
                     
CAPITALISATION TABLE   $ million      
    Dec 31, 2008     Dec 31, 2007      
Equity attributable to Royal Dutch Shell plc shareholders
    127,285       123,960      
                     
Current debt
    9,497       5,736      
Non-current debt[A]
    11,259       9,659      
                     
Total debt[B]
    20,756       15,395      
                     
Total capitalisation
    148,041       139,355      
                     
 
[A]  Non-current debt excludes $2.5 billion of certain tolling commitments (2007: $2.7 billion).
[B]  As of December 31, 2008, Shell had outstanding guarantees of $3.7 billion (2007: $1.9 billion), of which $2.6 billion (2007: $0.6 billion) related to debt of equity-accounted investments. $18.6 billion (2007: $13.4 billion) of the finance debt of Shell was unsecured. A total of $4.6 billion (2007: $4.7 billion) outstanding debt of subsidiaries is secured.

 
 
Shell Annual Report and Form 20-F 2008  7


Table of Contents

REVIEW OF THE YEAR
 
 
 
 
 
 
 
CHAIRMAN’S MESSAGE

The past year was one of extraordinary global economic turbulence. The economic downturn is expected to bite deeper in the year ahead. It has already slowed consumer demand. The oil price plunged from a record high of around $145 a barrel to under $35. All this inevitably affects our income, and our outlook.
 
As Shell, we depend on making the right long-term investments against a range of business assumptions. Such market volatility tests our resolve – and our strategy.
 
It is for the Board and management to chart the right course. We rigorously assess every decision against cost. But we must also ensure that capital investment continues for core projects. Simultaneously, we need to pay particular attention to our great pool of human talent, making sure our people remain motivated and fully equipped for the future. When the global economy emerges from this downturn we must be strong enough to respond.
 
To achieve this, we must stay true to our beliefs. Our strategy of More Upstream, Profitable Downstream remains on track. Three hard truths still shape our approach: when the economic crisis passes, global demand for energy will continue upward as populations grow and living standards rise; supplies of easy-to-access oil will struggle to keep pace with demand; and an increasing use of fossil fuels will drive up emissions of carbon dioxide (CO2).
 
The global long-term challenge remains: how to produce more energy and less CO2. At Shell, we are working to improve energy efficiency at our refineries and chemicals plants, and we are developing more efficient fuels and lubricants.
Technology remains central to Shell’s efforts to produce more oil and gas and to turn them into everyday products. It helps us to access resources previously out of reach or too costly: in the deep waters of the Gulf of Mexico, sub-Arctic Russia and Canada’s oil sands, for example. Our Pearl GTL gas to liquids plant in Qatar, which I visited in 2008, is the kind of mega-project Shell excels at. It is large, complex, and uses advanced technology.
 
Our spending on research and development has again increased as we develop new technologies to unlock difficult resources, such as oil sands too deep to mine and gas heavily contaminated with sulphur. We are also looking at biofuels as a fuel for the future.
 
Sound leadership is essential to our long-term success. Appointing a successor to Jeroen van der Veer as Chief Executive was one of the most important decisions the Board has faced during my time as Chairman. The process gave me a deeper insight into the strength of leadership in Shell. I believe Peter Voser is exceptionally well-equipped to provide strong leadership, building on the excellent progress made by Jeroen. The Board looks forward to working with Peter to tackle the pressing issues at hand.
 
Indeed, the talent and hard work of all our people will count for much in the tough times to come. In the global economic storm, our focus must stay clear. By following a steady course we can continue to deliver results to our shareholders and ensure growth. And we can continue to provide our customers with the energy they need to thrive.
 
Jorma Ollila
Chairman

 
 
8  Shell Annual Report and Form 20-F 2008


Table of Contents

REVIEW OF THE YEAR
 
 
 
 
 
 
 
CHIEF EXECUTIVE’S REVIEW

In a difficult year for many, our focus on delivery and growth continued to yield results. Our financial performance in 2008 was satisfactory with income of $26.5 billion and the return of $13.1 billion to shareholders. I would like to express my gratitude to everyone at Shell for the hard work they have put in to achieve this.
 
In a volatile business environment, the need to cut costs is paramount. At the same time, we must continue to improve our performance and maintain our sharp focus on safety. In 2008, there were fewer recordable incidents than ever, but sadly fatalities among employees and contractors were up. We must redouble our efforts to further improve our safety performance and avoid such tragedy. Our goal of zero fatalities and serious injuries must remain firmly in our sights at all times.
 
Our strategy of More Upstream, Profitable Downstream stayed on track. We pressed forward with cash-generating mega-projects. Sakhalin II, one of the world’s largest integrated oil and gas projects, began year-round oil shipments and was preparing to start exports of liquefied natural gas (LNG) in 2009. Construction of our major gas to liquids plant, Pearl GTL in Qatar, made further good progress.
 
We postponed some investment decisions, including the second expansion phase of our oil sands operations in Canada. The current expansion goes on.
 
Nigeria remains a difficult challenge, especially in the areas of security and funding. Our installations were attacked and thefts from pipelines forced us to shut down the Soku gas plant temporarily. But achievements included the start-up of the Afam VI power plant that uses gas from the new Okoloma gas plant to provide electricity to millions.
 
Our Exploration & Production earnings were $20.2 billion, 38% up on the previous year. We made 11 notable discoveries of potential resources and secured rights to some 40,000 km2 of exploration acreage – an area around the size of the Netherlands – including 275 blocks in the Chukchi Sea off Alaska. We completed the acquisition of Duvernay Oil Corp. with its acreage containing significant gas resources in western Canada.
 
The Arctic’s resources could significantly boost global supplies and we will develop them safely and responsibly, recognising the need to protect the environment and work in partnership with local communities. During the year we continued to strengthen our commitment to biodiversity through partnerships with the International Union for Conservation of Nature (IUCN) and Wetlands International. Our relationship with the IUCN, for example, gives us the opportunity to discuss social and environmental issues for future projects in sensitive areas such as the Arctic.
 
Our Gas & Power earnings were $5.3 billion, 92% up on the previous year. LNG sales remained strong at 13.05 million tonnes. The fifth train
of the North West Shelf LNG project in Australia started production, while construction of the Qatargas 4 LNG project made good progress. We also signed two significant LNG supply agreements with PetroChina. In the USA, the 264 MW Mount Storm wind project began operations.
 
Our downstream businesses of Oil Products and Chemicals experienced a particularly tough latter part of the year with demand sliding as a result of the global economic crisis. Our Marketing business did well. Our Oil Sands business, also in downstream, achieved record earnings. Again, our Trading and Shipping organisations continued to provide essential support to our key businesses.
 
We also moved ahead with major downstream projects such as the 325,000 barrels per day expansion of the Motiva Port Arthur refinery in the USA, and the Shell Eastern Petrochemicals Complex in Singapore. We divested some assets in France and Africa. And there was expansion of our retail presence in Switzerland, Ukraine and Scandinavia.
 
In biofuels, we increased our stake to 50% in Iogen, the Canadian company that operates an advanced process using enzymes to make ethanol from straw. We also formed six new research partnerships with leading universities that complement our own research into the development of biofuels.
 
Despite the economic crisis, the focus on reducing CO2 remains important. We are involved in a number of demonstration projects helping to advance technology to capture CO2 and store it safely underground, and we are keen to be involved in more. We also continue to work with governments to establish the incentives and policies needed to make this technology viable.
 
As the business environment grows tougher, we cut costs and we continue to step up energy efficiency in our own operations. Technology, operational excellence and first-class project management will remain vital.
 
Our performance in 2008 again shows our ability to deliver results to our partners and shareholders, and leaves us in a strong position to face the challenges of the coming year. Our portfolio management continues to deliver strong results with significant proceeds from divestments made during 2008.
 
In mid-2009, after some five years as Chief Executive, I shall hand over to Peter Voser, currently our Chief Financial Officer. I wish Peter every success. I would also like to thank our people for the tremendous effort, dedication and passion they have shown. I am proud of them, and I look forward to seeing more delivery and growth in the future.
 
Jeroen van der Veer
Chief Executive

 
 
Shell Annual Report and Form 20-F 2008  9


 

 
INDEX TO THE BUSINESS REVIEW
         
 
Business and market overview     11  
Risk factors     14  
Summary of results     17  
Exploration & Production     19  
Gas & Power     34  
Oil Sands     40  
Oil Products     43  
Chemicals     49  
Corporate     53  
Research and development     54  
Key performance indicators     56  
Liquidity and capital resources     58  
Our people     62  
Environment and society     64  
Environmental data     67  
Social data     69  
Share plans and other matters     70  
Additional shareholder information     72  

 

 
 
10  Shell Annual Report and Form 20-F 2008


Table of Contents

BUSINESS REVIEW
 
 
 
 
 
 
 
BUSINESS AND MARKET OVERVIEW

From 1907 until 2005, Royal Dutch Petroleum Company (Royal Dutch) and The “Shell” Transport and Trading Company, p.l.c. (Shell Transport) were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group” (Group). Operating activities were conducted through the subsidiaries of Royal Dutch and Shell Transport. In 2005, Royal Dutch Shell plc (Royal Dutch Shell) became the single parent company of Royal Dutch and Shell Transport, the two former public parent companies of the Group (the Unification).
 
Today, Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. Our oil- and gas-producing heartlands are the core countries that have the available infrastructure, expertise and remaining growth potential for Shell to sustain strong operational performance and support continued investment. They are in countries such as Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA. We are exploring for oil and gas in prolific basins such as the Gulf of Mexico while new supplies will be brought on-stream from major projects in frontier environments, such as Sakhalin in Russia and the ultra deep-water development BC-10 in Brazil. We are investing in growing our leading liquefied natural gas (LNG) portfolio, and in the large-scale commercialisation of GTL technology (Qatar).
 
We have a diversified and balanced portfolio of refineries and chemicals plants and are a major distributor of biofuels.
 
ACTIVITIES, INTERESTS AND PROPERTY
Our activities are conducted in more than 100 countries and territories. Oil and gas, by far the largest of our business activities (including the oil and gas related revenues from the Exploration & Production, Gas & Power, Oil Sands and Oil Products segments), accounted for just over 90% of revenue in 2008. We market oil products in more countries than any other oil company and have a strong position not only in the major industrialised countries but also in the developing ones. The distinctive Shell pecten (a trademark in use since the early part of the twentieth century) and trademarks in which the word Shell appears support this marketing effort throughout the world. Shell also ranks among the world’s major chemical companies (by sales); in 2008, the Chemicals segment accounted for around 9% of the revenue of Shell.
A summary of revenue of Shell by business segment and by geographical region for the years 2006, 2007 and 2008 is set out below:
 
                             
REVENUE BY BUSINESS SEGMENT (including inter-segment sales)     $ million      
    2008     2007     2006      
Exploration & Production
                           
Third parties
    20,841       14,963       16,750      
Inter-segment
    45,331       38,345       35,796      
                             
      66,172       53,308       52,546      
                             
Gas & Power
                           
Third parties
    24,576       15,982       16,035      
Inter-segment
    1,214       1,056       1,303      
                             
      25,790       17,038       17,338      
                             
Oil Sands
                           
Third parties
    558       1,069       1,159      
Inter-segment
    3,210       1,785       1,340      
                             
      3,768       2,854       2,499      
                             
Oil Products
                           
Third parties[A]
    368,853       282,665       248,581      
Inter-segment
    3,750       3,407       2,728      
                             
      372,603       286,072       251,309      
                             
Chemicals
                           
Third parties[B]
    43,494       41,046       36,306      
Inter-segment
    5,591       4,865       4,444      
                             
      49,085       45,911       40,750      
                             
Corporate
                           
Third parties
    39       57       14      
Inter-segment
                     
                             
      39       57       14      
                             
 
[A]  The figures in this table, which include crude oil sales and non-fuel revenue, are different from the table shown on page 47, 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.
 
                                                     
REVENUE BY GEOGRAPHICAL AREA (excluding inter-segment sales)     $ million      
    2008     %     2007     %     2006     %      
Europe
    196,968       43.0       148,465       41.8       136,307       42.8      
Africa, Asia, Australia/Oceania
    120,889       26.4       90,141       25.3       76,898       24.1      
USA
    100,818       22.0       87,548       24.6       80,974       25.4      
Other Americas
    39,686       8.6       29,628       8.3       24,666       7.7      
                                                     
Total
    458,361       100.0       355,782       100.0       318,845       100.0      
                                                     
 
STRATEGY
Our strategy of More Upstream, Profitable Downstream remains on track. We selectively strengthen our existing assets and pursue growth via attractive long-term investments, all supported by strong capital discipline. Our strategy seeks to reinforce our position as an industry leader in order to provide investors with a competitive and sustained total shareholder return; and to help meet energy demand in a responsible way – the energy challenge.
 
Three hard truths shape the way we tackle the energy challenge. First, while the current weaker global economy will lessen demand growth in the short to medium term, the demand for energy will continue to rise in the longer term. It is expected that three billion people will be added to

 
 
Shell Annual Report and Form 20-F 2008  11


Table of Contents

BUSINESS REVIEW
 

BUSINESS AND MARKET OVERVIEW
 
 
 
 

the world population by 2050, while rapidly-developing economies such as China and India are entering into a more energy-intensive phase. Second, energy supplies from conventional sources of oil and gas will struggle to keep up with demand. Alternative sources of energy will increasingly be needed. Third, environmental stresses are increasing as emissions of greenhouse gases, such as CO2, continue to rise in step with the increased use of fossil fuels.
 
Intense competition will remain both for access to resources by our upstream businesses as well as for access to new markets by our downstream businesses. We believe our technology, project delivery and operational excellence capabilities will remain key differentiators for our upstream and downstream businesses.
 
In our upstream businesses, in line with our strategy, we focus on developing major new projects where our technology and know-how adds value to the resource holders. In our downstream businesses, our emphasis remains on sustained cash generation from our existing assets and a continued shift in our portfolio to the faster-growing emerging markets in Asia.
 
In 2009, however, the global economic environment is likely to affect the ability to execute certain plans in the short to medium term. Specifically, we expect the financial market turbulence to impact energy investment. We will continue to focus on capital and cost discipline. Nonetheless, these near-term events will not affect our overall strategic direction. We expect around 80% of our capital investment in 2009 will be in upstream and oil sands projects. In downstream, we will maintain our capital programme and enhance our competitive position by improving the efficiency and safety of our refineries.
 
Meeting the growing demand for energy worldwide in ways that minimise environmental and social impact is a major challenge for the global energy industry. Shell is committed to improving energy efficiency in our own operations, supporting customers in managing their energy demands and continuing to research and develop technologies that increase efficiency and reduce emissions in oil and gas production. We are working to create a leading biofuels business and aim to build our capability in the capture and storage of CO2.
 
Our commitment to technology and innovation continues to be at the core of our strategy. As energy projects become more complex and more technically demanding, we believe our technical expertise will be a deciding factor in the growth of our business. Shell’s key strengths include the development and application of technology, the financial and project management skills that allow us to deliver large oil and gas projects, and the management of integrated value chains. We leverage our diverse and global business portfolio and customer-focused businesses built around the strength of the Shell brand.
 
MARKET OVERVIEW
The demand for oil and gas is strongly linked to the strength of the global economy and as such projected economic growth is considered an indicator for future demand for our products and services.
 
The financial crisis that began in August 2007 in the US sub-prime mortgage market – and spread to other credit market segments – intensified dramatically since September 2008, following the bankruptcy of a major US investment bank. This escalation of the financial crisis occurred when the global economy was already slowing significantly and tipped most developed economies into recession. At 3.4% in 2008, global gross domestic product (GDP) growth was down significantly from the 5.2% registered in 2007, and 5.1% in 2006. China, India, Russia and
other emerging markets accounted for more than half of global growth in 2008. In contrast, growth in developed economies weakened significantly in 2008, particularly in the second half of the year.
 
In the USA, GDP growth in 2008 was 1.1% for the year as a whole but turned negative in the second half of the year, with sharp falls in consumer and business confidence and tightening credit conditions. For 2009, cuts in consumer spending and business investment and the downturn in housing and tight credit conditions are likely to continue to weigh on the US economy.
 
European GDP growth slowed sharply in 2008 to 0.8% from 2.6% in 2007. Appreciation of the euro, based on an average for the year, reduced the contribution of net exports to growth and severe stresses in international financial markets increasingly weighed on business and consumer sentiment as the year progressed. These factors point to a possible further slowing of growth in 2009.
 
GDP in Japan contracted in 2008 by (0.7)% compared to a growth rate of 2.4% in 2007. This reflects a decline in export growth with the slowdowns in the USA and Europe as well as weakening domestic demand.
 
China and India saw growth moderate in 2008 to below recent trend rates, but both countries remained somewhat resilient to the economic and financial stresses in the USA and Europe. In China, domestic consumption made an increasing contribution to growth as exports slowed. Meanwhile in India, domestic demand and the services sector supported continued expansion. However, for 2009, growth in these two countries is expected to continue to moderate further below recent trend rates.
 
In 2009, global growth is likely to fall well below its longer-term trend rate, with the risk profile indicating a continued downward trend. The main risk remains the potential for a wider and deeper slowdown in US, European and Japanese domestic demand. The main factors that are likely to contain the depth of the recession in developed economies are significant monetary stabilisation and fiscal stimulus programmes and lower oil and other commodity prices. It is not expected that the emerging economies will fully offset these trends.
 
Oil and natural gas prices
Brent crude oil prices averaged $97.14 per barrel in 2008 compared with $72.45 in 2007, while West Texas Intermediate (WTI) averaged $99.72 per barrel compared with $72.16 a year earlier. Oil prices saw great volatility in 2008 with Brent starting the year at $97 per barrel, reaching just under $145 per barrel in July and then falling to a low of just under $34 per barrel in December.
 
Henry Hub gas prices in the USA averaged $8.87 per million British thermal units (Btu) in 2008 compared with $6.94 in 2007. Gas prices also saw a wide range in 2008 from a high of $13.58 per Btu in July, when storage was in a deficit and summer cooling demand was at its peak, down to a low of $5.29 per Btu in December, when the economic slowdown hit industrial and power demand, while supply was still showing significant growth.
 
In the UK, prices at the National Balancing Point averaged 57.97 pence/therm in 2008 compared with 30.02 pence/therm in 2007.
 
The drivers of natural gas prices are more regional than the relatively global nature of crude oil pricing. While the Henry Hub price is a recognised price benchmark in North America, Shell also produces and sells natural gas in other areas that have significantly different supply,

 
 
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demand and regulatory circumstances and therefore pricing structures. Natural gas prices in continental Europe and Asia-Pacific are predominantly indexed to oil prices. In both regions, annual average prices have risen reflecting higher oil prices and strong demand during the first three quarters of the year.
 
Oil and natural gas prices for investment evaluation
The range of possible future crude oil and natural gas prices used in project and portfolio evaluations within Shell 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 possible future 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-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 2008, Shell used a grid based on low, medium and high oil and gas prices to test the economic performance of long-term projects. As part of our normal business practice, the range of prices used for this purpose continues to be under review and may change.
Refining and petrochemical market trends
Refining margins were robust in Europe and the Asia-Pacific region in 2008, but trended lower in the USA compared with 2007 when the industry experienced extensive refinery disruptions and prolonged shutdowns. Margins in the USA also came under downward pressure as gasoline demand contracted with the deepening of the economic crisis in the latter half of 2008. The outlook for margins in 2009 is weak with the expectation that advanced economies will be in recession or a period of reduced growth with some knock-on impact on developing economies, at a time when significant new refining capacities are expected to come online globally. However, the eventual margin levels are uncertain and will be strongly influenced by the depth and duration of the recession and the start up timing of expected refinery expansions.
 
During the second half of 2008, the effects of the financial crisis on the economy impacted the chemical industry as industrial demand declined and falling crude and gas prices led to substantial reduction of stock levels. The demand for petrochemicals in 2009 is expected to be depressed. Globally, new additions to industry capacity coupled with the prospect of suppressed economic growth are expected to put continued downward pressure on margins.

 
 
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RISK FACTORS

Shell’s operations and earnings are subject to risks from changing conditions in competitive, economic, political, legal, regulatory, social, industry, business and financial fields. Investors should carefully consider these risks. If these risks are not adequately managed, they could have a material adverse effect separately or in combination on Shell’s operational performance, earnings or our financial condition.
 
Shell’s operating results and financial condition are exposed to fluctuating prices for oil, natural gas, oil products and chemicals.
Prices of oil, natural gas, oil products and chemicals are affected by supply and demand. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, or conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations can have a material effect on our earnings and our financial condition. For example, in a low oil and gas price environment Shell would generate less revenue from its upstream production, and as a result certain long-term projects might become less profitable or even incur losses. Additionally, low oil and gas prices could result in the debooking of oil or natural gas reserves, as they become uneconomic in this type of environment. Prolonged periods of low oil and gas prices, or rising costs, could also result in projects being delayed or cancelled, as well as in the impairment of certain assets. For example, Shell has recently delayed the investment decisions for further expansions of our oil sands activities in Canada as a result of rising costs. In a high oil and gas price environment, we can experience sharp increases in cost and, under some production-sharing contracts, our entitlement to reserves would be reduced. Higher prices can also reduce demand for our products. Lower demand for our products might result in lower profitability, particularly in our downstream businesses.
 
Shell’s future hydrocarbon production depends on the delivery of capital projects, some of them large and complex, as well as the ability to replace oil and gas and oil sands reserves.
In developing capital projects, especially large ones, we face numerous challenges. These include uncertain geology, frontier conditions, the existence and availability of necessary technology and engineering resources, availability of skilled labour, project delays and potential cost overruns, as well as technical, fiscal, regulatory, political and other conditions. Such potential obstacles may impair our delivery of these projects and, in turn, adversely affect our operational performance and financial position (including the financial impact from failure to fulfil contractual commitments related to project delivery). Future oil and gas and oil sands production will depend on our access to new reserves through exploration, negotiations with governments and other owners of known reserves, and acquisitions. Failure to replace proved reserves could result in lower future production.
 
See below Shell’s production and proved oil and gas reserves.
 
                             
OIL AND GAS PRODUCTION [A]         million boe      
    2008     2007     2006      
Subsidiaries
    846       886       947      
Equity-accounted investments
    314       295       291      
                             
Total production
    1,160       1,181       1,238      
                             
 
[A]  Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel.
                             
PROVED OIL AND GAS RESERVES [A][B]
               
(At December 31)         million boe [C]      
    2008     2007     2006      
Proved oil and gas reserves from subsidiaries attributable to Royal Dutch Shell shareholders (less minority interest)
    7,078       6,669       7,703      
Shell share of proved oil and gas reserves from equity-accounted investments
    3,825       4,140       3,355      
                             
 
[A]  We manage our total proved reserve base without distinguishing between proved oil and gas reserves associated with our equity-accounted investments and proved oil and gas reserves from subsidiaries.
[B]  Does not include produced gas for own consumption or incidental flaring.
[C]  Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel.
 
Shell’s ability to achieve its strategic objectives depends on our reaction to competitive forces.
We face significant competition in each of our businesses: in obtaining access to raw materials, including oil and gas and oil sands reserves and refinery feedstock; in the sale of our products to customers; in the development of innovative products and solutions, including the development of new technologies necessary to our core upstream and downstream businesses and our alternative energy businesses; and in our search for employees with the skills and experience we need. Increasingly, we compete with state-run oil and gas companies, particularly in seeking access to reserves. Today, these state-run oil and gas companies control vastly greater quantities of oil and gas reserves than the major publicly-held oil and gas companies. State-run entities have access to significant resources and may be motivated by political or other non-economic factors in their business decisions.
 
An erosion of Shell’s business reputation would adversely impact our licence to operate, our brand, our ability to secure new resources and our financial performance.
Shell is one of the world’s leading energy brands, and our brand and reputation are important assets. The Shell General Business Principles and Code of Conduct govern how Shell and our individual companies conduct our affairs. While we seek to ensure compliance with these requirements by all of our over 100,000 employees, it is a significant challenge. Failure – real or perceived – to follow these principles, or other real or perceived failures of governance or regulatory compliance could harm our reputation, which could impact our licence to operate, damage our brand, harm our ability to secure new resources and affect our operational performance and financial condition.
 
Rising climate change concerns could lead to additional regulatory measures that may result in project delays and higher cost.
Emissions of greenhouse gases and associated climate change are real risks to Shell and society in general. In the future, in order to help meet the world’s energy demand, we expect to produce more hydrocarbons from unconventional sources than currently. The production of hydrocarbons from those sources has an energy intensity that is a number of times higher than that for production from conventional sources. Therefore, in the long term, it is expected that the CO2 intensity of our production will increase. If we are unable to find solutions that reduce our CO2 emissions for new and existing projects or products, future government regulation or challenges from society could lead to project delays, additional costs as well as compliance and operational risks.
 
The nature of Shell’s operations exposes us to a wide range of significant health, safety, security and environment (HSSE) risks.
Given the geographic range, operational diversity and technical complexity of Shell’s daily operations, our potential HSSE risks cover a wide spectrum. These risks include major process safety incidents; failure

 
 
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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 risks materialising can be injuries, loss of life, environmental harm, disruption to business activities and, depending on their cause and severity, material damage to Shell’s reputation.
 
Shell operates in more than 100 countries, with differing degrees of political stability. This exposes us to a wide range of political developments and resulting changes to laws and regulations.
Developments in politics, laws and regulations can and do affect our operations and earnings. Potential developments include forced divestment of assets; expropriation of property; limits on production; import and export restrictions; international conflicts, including war; civil unrest and local security concerns that threaten the safe operation of company facilities; price controls, tax increases, additional windfall taxes and other retroactive tax claims; re-writing of leases; cancellation of contract rights; and environmental regulations. It is difficult to predict the timing or severity of these occurrences or their potential effect upon us. When such risks materialise they can affect the employees, reputation, operational performance and financial position of Shell as well as of the Shell companies located in the country concerned.
 
Our investment in joint ventures and associated companies may reduce our degree of control as well as our ability to identify and manage risks.
Many of our major projects and operations are conducted in joint ventures or associated companies. In certain cases, we may have limited influence over and control of the behaviour, performance and cost of operations in which a Shell company holds an equity interest. Additionally, our partners or members of a joint venture or associated company (particularly local partners in developing countries) may not be able to meet their financial or other obligations to the projects, threatening the viability of a given project.
 
Reliable information technology (IT) systems are a critical enabler of our operations.
Organisational changes and process standardisation, which lead to more reliance on a decreasing number of global systems, outsourcing and relocation of information technology services as well as increased regulations increase the risk that our IT systems may fail to deliver products, services and solutions in a compliant, secure and efficient manner.
 
Shell’s future performance depends on successful development and deployment of new technologies.
Technology and innovation are essential to all of our businesses, including our upstream and oil sands businesses and downstream businesses, as well as our alternative energy businesses. If we do not develop the right technology, do not have access to it or do not deploy it effectively, it may affect the delivery of our strategy, our profitability and our financial condition.
 
Skilled employees are essential to the successful delivery of Shell’s strategy.
Recruiting and retaining staff in sufficient quality and quantity is a prerequisite for the delivery of our strategy. We periodically face shortages in the availability of qualified staff, particularly for our operations in remote or frontier locations.
 
Shell is subject to many legal regimes, with different fiscal and regulatory systems, as well as to changes in legislation.
Changes in legislation, taxation (tax rate or policy), regulation and policies on nationalisation and the seizure of property all pose a risk to our operations. In our upstream and oil sands activities these policies affect
land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. Our Oil Products business is subject to price controls in some countries. If we do not comply with these policies, it may result in regulatory investigations, lawsuits, and ultimately fines.
 
Economic and financial market conditions affect our profitability.
Shell companies are subject to differing economic and financial market conditions throughout the world. Political or economic instability affect such markets. If the current worldwide economic downturn deepens or is prolonged, it could contribute to instability. Shell uses debt instruments such as bonds and commercial paper to raise significant amounts of capital. Should our access to debt markets become more difficult, we might not be able to maintain a level of liquidity required to fund the implementation of our strategy.
 
The estimation of reserves is not an exact calculation and involves subjective judgements based on available information.
The estimation of oil and gas and minable oil sands reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. The estimate may change because of new information from production or drilling activities or changes in economic factors. It may also alter because of acquisitions and disposals, new discoveries and extensions of existing fields and mines, as well as the application of improved recovery techniques. Published reserves estimates may also be subject to correction due to the application of published rules and guidance.
 
Shell’s Articles of Association determine the jurisdiction for shareholder disputes. This might limit shareholder remedies.
Our Articles of Association generally require that all disputes between our shareholders in such capacity and Royal Dutch Shell or our subsidiaries (or our Directors or former Directors) or between Royal Dutch Shell 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. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions. Please see “Corporate governance and Control of registrant” for further information.
 
Violations of antitrust and competition law pose a financial risk for Shell and expose Shell or our employees to criminal sanctions.
Antitrust and competition laws apply to Shell companies in the vast majority of countries in which we do business. Shell companies have been fined for violations of antitrust and competition law. These include a number of fines by the European Commission Directorate-General for Competition (DG COMP). Due to the DG COMP’s fining guidelines, any future conviction of Shell companies for violation of European Union (EU) competition law could result in significantly enhanced fines. Violation of antitrust laws is a criminal offence in many countries, and individuals can be either imprisoned or fined. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages.
 
An erosion of the business and operating environment in Nigeria could adversely impact our earnings and financial position.
We face various risks in our Nigerian operations. These risks include security issues surrounding the safety of our people, host communities, and operations, our ability to enforce existing contractual rights, limited infrastructure, difficulty in obtaining a mutually agreeable solution to the

 
 
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funding structure and potential legislation that could increase our taxes. These risks could have a material impact on our production, reserves and/or earnings associated with our Nigerian operations.
 
Shell has investments in Iran and Syria, countries against which the US government imposed sanctions. We could be subject to sanctions or other penalties in connection with these activities.
US laws and regulations identify certain countries, including Iran and Syria, 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 EU, which means the statutes conflict with each other in some respects. While Shell did not exceed the limit on investments in Iran in 2008, we have exceeded it in the past and may exceed the US-imposed investment limits in Iran in the future. While we seek to comply with legal requirements in our dealings in these countries, it is possible that Shell or persons employed by Shell could be found to be subject to sanctions or other penalties under this legislation in connection with their activities in these countries.
 
Shell faces property and liability risks and does not insure against all potential losses.
Shell companies are exposed to property and liability risks, for example from natural disasters such as hurricanes, civil war or unrest, and terrorism, that can result in business interruptions and casualty losses, and we do not insure against all potential losses and, therefore, we could be seriously harmed by unexpected events or liabilities. We may be subject to losses that could affect our earnings or financial condition.
 
Shell’s business model involves trading, treasury and foreign exchange risks.
Trading and treasury risks include among others exposure to movements in commodity prices, interest rates, and foreign exchange rates, counter
party default and various operational risks (see also page 101). As a global company doing business in over 100 countries, we are exposed to changes in currency values and exchange controls. While Shell does undertake some currency hedging, we do not do so for all of our activities. The resulting exposure could affect our earnings and cash flow. See Notes 5 and 25 to the Consolidated Financial Statements.
 
Shell has substantial pension commitments, whose funding is subject to capital market risks.
The risk regarding pensions is the ability to fund defined benefit plans to the extent that the pension assets fail to meet future liabilities. Liabilities associated with and cash funding of pensions can be significant and are dependent on various assumptions. Volatility in capital markets, such as occurred in 2008, and the resulting consequences for investment performance and interest rates, may result in significant changes to the funding level of future liabilities. In case of a shortfall, Shell might be required to make substantial cash contributions, depending on the applicable regulations per country. In 2008, the value of the assets in our pension plans decreased and at year end the present value of pension obligations exceeded plan assets by $8.3 billion. See “Liquidity and capital resources” for further discussion.
 
Shell companies face the risk of litigation and disputes worldwide.
From time to time cultural and political factors play a significant role in unprecedented and unanticipated judicial outcomes contrary to local and international law. In addition, certain governments, states and regulatory bodies have, in the opinion of Shell, exceeded their constitutional authority by attempting unilaterally to amend or cancel existing agreements or arrangements; by failing to honour existing contractual commitments; and by seeking to adjudicate disputes between private litigants. Adverse outcomes in these areas could have a material effect on our operations and financial condition.
 
Shell is currently under investigation by the United States Securities and Exchange Commission and the United States Department of Justice for violations of the US Foreign Corrupt Practices Act.
In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has an ongoing internal investigation and is co-operating with the US Department of Justice and the US Securities and Exchange Commission investigations. While these US investigations are ongoing, Shell may face fines and additional costs.

 
 
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SUMMARY OF RESULTS

KEY FEATURES
•  Earnings of $26.5 billion.
•  Dividends to shareholders increased by 11% compared with 2007.
•  Cash returned to shareholders of $13.1 billion.
•  Return on average capital employed of 18.3%.
•  Net cash from operating activities increased 27% reaching $43.9 billion.
•  Challenging economic conditions expected to continue in 2009.
 
                             
EARNINGS   $ million      
    2008     2007     2006      
Exploration & Production
    20,235       14,686       14,544      
Gas & Power
    5,328       2,781       2,633      
Oil Sands
    941       582       651      
Oil Products
    446       10,439       7,125      
Chemicals
    (405 )     2,051       1,064      
Corporate
    (69 )     1,387       294      
                             
Total
    26,476       31,926       26,311      
                             
 
EARNINGS 2008 COMPARED TO 2007 AND 2006
In a highly volatile business environment, Shell delivered satisfactory operational and financial performance in 2008, resulting in earnings of $26.5 billion. Shell’s financial position allowed us to return $13.1 billion to shareholders, through dividends and share repurchases, while capital investment reached $38.4 billion (see page 6). The 2008 dividend increased 11% to $1.60 per share compared to $1.44 in 2007.
 
Return on average capital employed (ROACE)[A] for 2008 was 18.3% compared with 23.7% for 2007.
 
The most significant factors affecting year-to-year comparisons of earnings and cash flow generated by our operating activities are changes in realised prices for crude oil and natural gas; crude oil, natural gas and oil sands (bitumen) production levels; and refining and marketing margins.
 
Earnings in 2008 were 17% lower than in 2007, when they were 21% higher than in 2006. The decrease in 2008, compared with 2007, reflected the effect of declining oil prices on inventory in the second half of the year, lower production volumes, lower realised refining margins and higher operating costs. These more than offset the positive impact on earnings from higher realised oil and gas prices as well higher LNG and GTL product prices. Oil and gas production in 2008, including oil sands production, was 3,248 barrels of oil equivalent per day (boe/d) compared to 3,315 boe/d in 2007. The change reflected the effects of various factors, positive and negative, including field declines, production from new fields, divested volumes, shutdowns due to hurricanes and price impacts of production-sharing contracts.
 
In 2008, Exploration & Production earnings were $20,235 million, 38% higher than in 2007 and 39% higher than in 2006. Earnings in 2008 reflected the impact of higher realised oil and gas prices, which were partly offset by lower production volumes, higher exploration expenses and higher taxes and royalties. In 2007 earnings increased 1% on 2006, reflecting the impact of higher realised oil and gas prices, which were partly offset by lower production volumes, higher exploration expenses and higher costs, reflecting industry conditions.
 
[A]  ROACE is defined as income attributable to shareholders adjusted for interest expense, after tax, as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt. For more information on ROACE see “Key performance indicators” on page 56.
Gas & Power earnings were up 92% in 2008 reaching $5,328 million, compared with $2,781 million in 2007 and $2,633 million in 2006. The 2008 earnings reflected strong LNG and GTL prices and a net gain of $1,302 million, mainly related to the divestment of the BEB Erdgas und Erdoel GmbH gas transport business in Germany. The increase in 2007 earnings compared with 2006 reflected increased LNG sales volumes, strong LNG and GTL prices, and a net gain of $275 million mainly related to the sale of common units in Enterprise Products Partners LP. This was partly offset by lower earnings from marketing and trading activities. LNG sales volumes of 13.05 million tonnes (mt) in 2008 were 1% lower compared with 13.18 mt in 2007. LNG sales volumes in 2007 showed an increase of 9% compared to 12.12 mt in 2006, due to growth in Nigeria.
 
Oil Sands earnings were $941 million in 2008 compared with $582 million in 2007 and $651 million in 2006. In 2008 earnings benefited from higher average oil prices partly offset by higher operating costs and lower bitumen production compared with 2007. The 2007 earnings decreased compared with 2006 due to an unplanned shutdown in September and a fire in November at the Scotford Upgrader, higher operating and maintenance costs and increased royalty expenses, which were partly offset by the impact of higher oil prices and a favourable tax adjustment of $94 million.
 
Oil Products earnings in 2008 were $446 million compared with $10,439 million in 2007 and $7,125 million in 2006. After taking into account the impact of falling crude prices on our inventory, the 2008 earnings reflected higher operating costs and lower realised margins in the USA compared to 2007. In 2007, after taking into account the impact of increasing crude prices on our inventory, earnings were impacted by lower realised refining margins in the second half of 2007, a lower trading contribution and higher operating costs compared to 2006.
 
Chemicals losses were $405 million in 2008 compared with earnings of $2,051 million in 2007 and $1,064 million in 2006. The change in 2008 compared with 2007 results from significantly lower margins, lower income from equity-accounted investments and higher operating expenses. The higher earnings in 2007 compared with 2006 reflected higher margins, higher earnings from equity-accounted investments and lower fixed costs, which were partly offset by a reduced trading contribution.
 
BALANCE SHEET AND CAPITAL INVESTMENT
Shell’s strategy to invest in the development of major growth projects, primarily in the upstream businesses of Exploration & Production and Gas & Power, explains the most significant changes to the balance sheet in 2008. Property, plant and equipment increased by $10.5 billion in 2008 as capital investment increased by 42% compared with 2007 reaching $38.4 billion. This was partly offset by depreciation, depletion and amortisation of $13.7 billion. Of the total capital investment, $32.2 billion related to upstream and oil sands projects and acquisitions that will primarily deliver organic growth over the long term. These projects include several multi-billion dollar, integrated facilities that should provide significant cash flow for the coming decades. The capital investment programme in 2008 was primarily funded internally, either from cash from operations of $43.9 billion or with proceeds from divestments of $6.3 billion. Overall total equity increased $2.9 billion in 2008 resulting in a year-end balance of $128.9 billion. The balance sheet gearing ratio was 5.9% at the end of 2008, compared with 6.3% at the end of 2007. The adjusted gearing ratio increased from 16.6% at the end of 2007 to 23.1% at the end of 2008 reflecting the change to an under-

 
 
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funded position of retirement benefit obligations. See Note 18[D] to the Consolidated Financial Statements for further discussion on gearing.
 
OUTLOOK
We want to maintain and enhance our competitive position and provide investors with a competitive and sustained total shareholder return. We plan net capital investment of $31-32 billion in 2009 (net capital investment represents capital investment, less divestment proceeds). This amount relates largely to investments in projects where the final investment decision already has been taken or is expected to be taken in 2009. The majority of our capital investment will be in upstream, including LNG and GTL, and oil sands projects. The remainder will be invested in downstream on improving or expanding our oil products and chemicals business.
 
The credit crisis and volatile commodity prices that emerged in the second half of 2008 affected many aspects of the business environment. Many of these effects will probably continue or increase with potential impact on our partners, customers and suppliers. We will continue to manage our exposures as well as costs carefully while maintaining our long-term strategy. See “Liquidity and Capital Resources” for further discussion.
 
In the longer term, reserve replacement of oil and gas and minable oil sands reserves will affect the ability of Shell to continue to maintain or increase production levels in Exploration & Production and Oil Sands, which in turn will affect our earnings and net cash from operating activities. We will need to take measures to maintain or increase production levels and cash flows in future periods, which may include developing new fields and mines, continuing to develop and apply new technologies and recovery processes to existing fields and mines and
making selective focused acquisitions. However, our investment decision-making will focus on generating value rather than specific reserves or volume targets.
 
It is our intention to continue to divest and, where appropriate, make selective acquisitions as part of active portfolio management. The level of this activity will depend on market opportunities.
 
Oil and gas production in 2009 is expected to be broadly similar to, or slightly down on, 2008 levels. Shell expects oil and gas production and LNG, refining and chemicals capacity to increase in the medium term. Actual growth each year will depend on project start-ups, portfolio management actions and project contracting conditions, among other factors.
 
PERFORMANCE AND CAPITAL
Please refer to pages 56-61 for discussion of key performance indicators and liquidity and capital resources.
 
PRODUCTION AND RESERVES
Total oil and gas production was 1,160 million boe for 2008. Production from subsidiaries was 846 million boe and 314 million boe from equity-accounted investments. After taking into account production we had a net increase of 404 million boe in proved oil and gas reserves from subsidiaries while the Shell share of proved oil and gas reserves from equity-accounted investments decreased by 315 million boe.
 
These totals reflect the net positive volume impact of year-end price changes of approximately 19 million boe for 2008; in 2007 the impact was a reduction of 183 million boe and a reduction of 59 million boe for 2006. See “Exploration & Production – Proved reserves” for further discussion.

 
 
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EXPLORATION & PRODUCTION

KEY FEATURES
•  Segment earnings of $20.2 billion.
•  Production of 3.2 million boe/d (excluding oil sands).
•  Added 1.2 billion boe of proved reserves. Made 11 notable discoveries and secured additional exploration rights in Australia, Canada, Colombia, Libya, Sweden and the USA.
•  New flagship upstream projects such as Perdido in the Gulf of Mexico, BC-10 in Brazil, Gumusut-Kakap in Malaysia, Qatar Pearl GTL and Qatargas 4 progressed well. Delivered first production from a number of new projects, which in the fourth quarter contributed some 80 thousand boe/d of new volume.
•  Portfolio: acquisition of Duvernay Oil Corp. (Duvernay) in Canada and acreage in North America. Completed divestments in Australia, Canada, the Netherlands, Nigeria, the UK and the USA.
•  Global economic downturn presents significant cost management and investment challenges to the industry in 2009; plans are being adjusted accordingly.
 
                             
EARNINGS         $ million      
    2008     2007     2006      
Revenue (including inter-segment sales)
    66,172       53,308       52,546      
Purchases (including change in inventories)
    (3,742 )     (3,935 )     (2,710 )    
Exploration
    (2,049 )     (1,712 )     (1,562 )    
Depreciation
    (8,929 )     (9,338 )     (8,672 )    
Operating expenses
    (11,132 )     (11,458 )     (11,000 )    
Share of profit of equity-accounted investments
    4,970       3,583       3,075      
Other income/(expense)
    (514 )     (390 )     (316 )    
Taxation
    (24,541 )     (15,372 )     (16,817 )    
                             
Segment earnings
    20,235       14,686       14,544      
                             
 
                 
COUNTRIES IN WHICH EXPLORATION & PRODUCTION HAS ACTIVITIES
Europe   Africa   Middle East, Russia, CIS[A]   Asia-Pacific    
Denmark   Algeria   Abu Dhabi   Australia    
Germany   Cameroon   Egypt   Brunei    
Ireland   Gabon   Iran   China    
Italy   Libya   Kazakhstan   Malaysia    
The Netherlands   Nigeria   Oman   New Zealand    
Norway   Tunisia   Pakistan   Philippines    
Sweden       Qatar        
UK       Russia   USA    
Ukraine       Saudi Arabia        
        Syria   Other Americas    
            Argentina    
            Brazil    
            Canada    
            Colombia    
            Venezuela    
                 
 
[A]  Commonwealth of Independent States.
 
OVERVIEW
Exploration & Production explores for and extracts oil and gas. Together with Gas & Power and Oil Sands it builds and operates the infrastructure necessary to deliver these hydrocarbons to market.
 
Our business is active in 37 countries and we employed an average of 18,000 staff in 2008. We carry out many of our activities in a diverse range of joint ventures and have on average over 245,000 people including employees, joint venture staff and contractors engaged daily in our operations. We are investing strongly for future growth, with $24.7 billion of capital investment in 2008.
Production is a key indicator of our short to medium-term operational performance, in terms of reliability of existing assets and on-time delivery of new wells and projects. Longer term, a key strategic goal is the increase in surplus cash generation through accessing and unlocking new reserves and growing production while sustaining strong cash performance on a per barrel basis.
 
Our investment decision-making focuses on generating value rather than specific reserves or volume targets.
 
EARNINGS 2008 COMPARED TO 2007 AND 2006
Segment earnings in 2008 were $20,235 million, 38% higher than in 2007 and 39% higher than in 2006. The increase in 2008 from 2007 was mainly driven by the impact of higher realised oil and gas prices on revenues. Earnings were partly offset by lower oil production volumes, particularly in the USA as a result of hurricanes, as well as by higher taxes, royalties and exploration costs mainly from seismic activities.
 
Segment earnings in 2007 were $14,686 million, 1% higher than in 2006 due to the impact of higher realised oil and gas prices on revenues and gains from divestments. This was partly offset by lower production volumes, higher exploration expenses (mainly from increased well write-offs and other exploration costs partly offset by lower seismic cost), higher costs and an exceptional charge related to our Nigerian operations.
 
Earnings in 2008 included net gains of $1,910 million compared with net gains of $1,102 million in 2007 and $521 million in 2006. The net gains in 2008 mainly relate to the divestment of assets in Australia, Canada, the Netherlands, Nigeria, the UK and the USA, which were partly offset by the mark-to-market valuation of certain UK gas contracts and an exceptional tax charge due to new legislation in Italy. The net gains in 2007 mainly related to asset divestments and various taxation credits, which were partly offset by the mark-to-market valuation of certain UK gas contracts and a $716 million charge mainly relating to the onshore assets in Nigeria, including impairments and provisions arising from the funding and security situation. The net gains in 2006 mainly related to the mark-to-market valuation of certain UK gas contracts and divestment gains.
 
CAPITAL INVESTMENT AND PORTFOLIO ACTIONS
Capital investment, including acquisitions, in 2008 increased 59% on 2007, to $24.7 billion. Acquisitions, including new acreage, amounted to $8.6 billion in 2008 (2007: $807 million), of which $7.4 billion (2007: $807 million) was recorded as part of exploration expenditure. Excluding acquisitions, capital investment increased 9% to $16.2 billion in 2008. Capital investment included exploration expenditure of $11.0 billion (2007: $4.0 billion), of which $805 million (2007: $594 million) relates to mainly drilling costs associated with maturing fields for which Shell has taken a final investment decision but for which no proved reserves have yet been recorded.
 
Shell took the final investment decision to proceed with a number of projects in 2008.
 
Onshore USA, Shell decided to proceed with the 2009 to 2013 Pinedale drilling programme (Shell interest ranges from 24% to 100%).
 
Through its involvement in the North West Shelf (NWS) Venture, Shell took the final investment decision in March 2008 to proceed with the North Rankin B project (Shell interest 22%) off the north-west coast of

 
 
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Australia. The project will install the North Rankin B platform and is expected to extend the lives of the North Rankin and Perseus fields.
 
In Malaysia, Shell decided to proceed with the St. Joseph redevelopment (Shell interest 50%) and Cili Padi (Shell interest 37.5%) projects. In Brunei, Shell took final investment decision to proceed with the Seria North Flank (Shell interest 50%) project and through the use of breakthrough fishhook wells technology, delivered first production in 2008.
 
In Australia, Shell signed an agreement to acquire a 30% stake in Arrow Energy Ltd’s coalbed methane acreage in Queensland, and a 10% stake in Arrow International Pte Ltd. The transactions relating to part of their domestic assets were completed, with completion of the international assets and remainder of the domestic assets achieved in early 2009.
 
In Canada, Shell completed the acquisition of Duvernay, a tight gas acreage holder in the Western Canadian Sedimentary Basin including positions in the emerging Montney tight gas formation in the Groundbirch area.
 
The Exploration & Production business continued to make significant progress on its portfolio rationalisation programme in 2008. We sold some 32 million boe of proved reserves and generated total divestment proceeds of $2.6 billion, including proceeds from divestments undertaken through equity-accounted investments.
 
In Australia, Shell completed the divestment of our 16.7% interest in the Cossack-Wanaea-Lambert-Hermes and the Egret oil ventures and certain oil exploration opportunities in the NWS to Woodside Petroleum Ltd (Woodside) (Shell interest 34.27%).
 
In Canada, Shell divested our one-third interest in Rainbow Pipe Line Company Ltd to Plains All American Pipeline, L.P.
 
In October 2008, Shell and the other members of the North Caspian production-sharing agreement (NCPSA) divested their participating interests proportionally (Shell’s interest decreased from 18.52% to 16.81%) to Kazakhstan’s national oil company, KazMunaiGas (KMG), thus allowing KMG’s stake to increase to match that of each of the four major shareholders. Given the size and complexity of the Kashagan project and other NCPSA developments, the participants agreed to combine their resources and to carry out the project under a new joint operating company named North Caspian Operating Company (NCOC) BV, which is now the operator. Under the terms of the new operating model, Shell will be responsible for the front-end engineering and design work for Kashagan Phase 2 along with the subsequent offshore development, and will be working with KMG to jointly manage production operations on behalf of NCOC.
 
Shell completed the sale to Agip of our 49.81% interest in deep-water blocks OML 125 and OML 134, offshore Nigeria. Block OML 125 (Abo field) is a producing asset with an average production of approximately 7,000 boe/d. OML 134 is an exploration asset.
 
In the UK, Shell completed the sale to TAQA Bratani Limited of its interests in South Cormorant, Cormorant North, Tern, Eider, Kestrel and Pelican, non-operated interests in Hudson, and interests in the Brent System and the Sullom Voe Terminal. Shell also completed the divestment of our interest in the Dunlin Cluster in the North Sea covering the Dunlin, Dunlin South West, Osprey and Merlin fields to Fairfield Energy and Mitsubishi Corporation.
In the Netherlands, Shell, through its joint venture Nederlandse Aardolie Maatschappij BV (NAM) (Shell interest 50%) completed the sale of selected interests in assets situated along and including the Noordelijke Offshore Gas Transport (NOGAT) pipeline in the southern North Sea area to Gaz de France SUEZ.
 
In the USA, Shell completed the sale of its 12.5% interest in the Big Foot prospect and its 50% interest in the Boomvang field in the Gulf of Mexico.
 
Capital investment was $15.6 billion in 2007 and $15.7 billion in 2006 (excluding the contribution of the minority participants in Sakhalin II of $0.3 billion and $1.4 billion respectively). In 2007, the contribution of the minority participants in Sakhalin II was up to the date of the partial divestment of our interest in Sakhalin II in April.
 
PRODUCTION
In 2008, hydrocarbon production (excluding production from oil sands) was 3,170 thousand boe/d. This was 2% lower than in 2007 and 7% lower than in 2006. Lower production in 2008 when compared with 2007 is attributable to field declines, divested volumes, the effects of the hurricanes in the US Gulf of Mexico, the planned maintenance turnarounds in the UK related to the shutdown of the St. Fergus gas processing facilities and price impacts of production-sharing contracts (PSCs), which were partly offset by new fields production, increased ramp-up volumes and higher demand in north-west Europe. The underlying production trend was flat when compared with 2007 (excluding price impacts of PSCs, hurricanes, divestments and OPEC restrictions).
 
Field declines affecting oil production were seen in Australia, Brunei, Denmark, Nigeria, Norway, the UK and the USA during 2008. Natural gas production was impacted by declining fields in Brunei, Germany, Malaysia, the UK and the USA, partly offset by higher seasonal demand in north-west Europe.
 
The effect of declining fields was almost completely offset by production from new fields.
 
In Australia, Shell through our participation in the NWS Venture, brought on-stream the Angel (Shell interest 22.4%) gas field. The field is now fully operational and produces gas for processing at the NWS Venture’s Karratha LNG plant in Western Australia.
 
In Malaysia, Shell achieved first production from the E11 Hub Stage 2 project (Shell interest 50%), an integrated gas project offshore Sarawak. Shell also delivered first production from the G7 (Shell interest 50%), M3S (Shell interest 70%) and Saderi (Shell interest 37.5%) fields in Malaysia.
 
In Nigeria, Shell delivered first gas to the Afam VI power plant and the Okoloma gas plant, collectively known as the Afam Gas and Power Project (Shell interest 30%), which will supply power to the grid and gas to the domestic market in Nigeria.
 
In Russia, Shell delivered first production from the Piltun-Astokhskoye B platform and began year-round oil exports from the Sakhalin II project. In January 2009, first gas was achieved from the Lunskoye-A platform.
 
In the UK North Sea, Shell delivered first production from four fields starting with Starling (Shell interest 28%) followed by the Shamrock (Shell interest 100%) and Caravel (Shell interest 71%) monotowers, and Curlew C (Shell interest 100%).

 
 
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In the USA, Shell started water injection at the Ursa-Princess oil field in the Gulf of Mexico. This project is expected to continue for the next 30 years, extending the life of the field by some 10 years.
 
Production volumes were also supported by continued growth at Stybarrow (Shell interest 17.1%) in Australia, Champion West Phase 3B/C (Shell interest 50%) in Brunei, Duvernay (Shell interest 100%) in Canada, Changbei (Shell interest 50%) in China, Ormen Lange (Shell interest 17%) in Norway, West Salym (Shell interest 50%) in Russia and Deimos (Shell interest 71.5%) in the USA.
 
EXPLORATION
During 2008, we participated in 224 successful wells drilled outside the proved area, including 45 successful exploration and appraisal wells. These include exploration discoveries in Algeria, Australia, Brunei, Cameroon, Canada, Denmark, Egypt, Kazakhstan, Malaysia, the Netherlands, Nigeria, Oman, Russia and the USA. Discoveries will be evaluated in order to establish the extent of the volumes they contain. Of these, 11 are considered notable discoveries.
 
In 2008, we added new acreage to our portfolio mainly from exploration licences in Australia, Canada, Libya, Sweden and the USA (Alaska, Gulf of Mexico and onshore Louisiana). Shell acquired three licence permits in the South Exmouth basin, offshore north-west Australia. In North America, Shell was awarded 275 of the 302 blocks it bid for Lease Sale 193 in the Chukchi Sea, offshore Alaska, and added acreage through Lease Sales 206, 207 and 224 in the Gulf of Mexico. Shell also acquired additional tight gas leases in the Haynesville area in northern Louisiana, USA and in the Montney area in British Columbia, Canada. In Colombia, Shell with Ecopetrol was the high bidder for technical evaluation agreements on two blocks in the Llanos Basin.
 
In total, Shell secured rights to some 40,000 km2 of new exploration acreage. Overall, our acreage in 2008 increased slightly when compared with 2007 mainly due to the acreage additions in locations noted above, largely offset by a combination of divestments, relinquishments and licence expiry of acreage in various countries.
 
PRICES
Oil prices increased in 2008 with Brent and WTI crude prices 34% and 38% higher than in 2007, respectively.
 
Shell’s overall realised oil and natural gas liquids (NGL) prices averaged $92.75 a barrel in 2008, compared with $67.99 in 2007 and $60.64 in 2006. In the USA, realised oil and NGL prices averaged $95.01 a barrel, compared with $66.49 in 2007 and $58.53 in 2006. Outside the USA, realised oil and NGL prices averaged $92.39 a barrel compared with $68.24 in 2007 and $60.99 in 2006. Realised prices differ from published crude oil prices because the quality, and therefore price, of actual crude oil produced differs from the blends used for market pricing purposes or quoted blends. In general, Shell produces crude oil of a somewhat lower quality than the quoted blends.
 
Our overall realised gas prices (excluding equity-accounted investments) in Exploration & Production averaged $6.85 per thousand standard cubic feet (scf) in 2008 compared with $5.14 in 2007 and $5.08 in 2006. In the USA, realised gas prices averaged $9.61 per thousand scf, compared with $7.23 in 2007 and $7.74 in 2006. Outside the USA, realised gas prices averaged $6.25 per thousand scf compared with $4.61 in 2007 and $4.41 in 2006.
OUTLOOK AND STRATEGY
In the first half of 2008, the business environment for the exploration and production industry continued to be characterised by increasing oil prices and activity levels. However, the second half of the year saw a rapid deepening of the international credit crisis and the resulting recessionary impact on the global economy and, associated with this, a steep decline of oil prices. Brent average price in 2008 was $97.14 per barrel, up 34% from $72.45 per barrel in 2007, but with significant volatility, reaching just under $145 per barrel in July and then falling to a low of just under $34 per barrel in December. Through the year we saw a further and significant tightening in the supply of oilfield goods and services, cost escalation and strong competition for new opportunities, albeit with first indication of softening in some sectors towards year-end and into 2009.
 
Looking ahead, we believe that the effects of the economic downturn in the coming years are difficult to predict. The uncertainties around the depth as well as the length of the recession will present the industry with challenges in terms of investment choices and cost management measures. In the short term we have reviewed our activity levels and elected to defer some of our projects, notably in unconventional oil. However, longer term we believe that the world’s energy demand will again experience strong growth due to an increasing population and economic development, and that in the years to come supplies of easy-to-access oil and gas will again be increasingly challenged to keep up with demand.
 
The Exploration & Production strategy pursued consistently for the last five years therefore remains unchanged with delivery still on track. While in the short term measures are put in place to address the effects of the recession and lower oil price environment, we recognise that access to new resources continues to become more difficult as a result of host government requirements and strong competition for the more conventional resources. Our strategy has four portfolio themes:
•  Sustaining our heartlands, i.e. our core countries that have the available infrastructure, expertise and remaining growth potential for Shell to sustain strong operational performance and support continued investment;
•  Focusing on new oil and gas projects where technology, our ability to integrate along the value chains and scale are differentiators;
•  Building integrated gas opportunities; and
•  Continuing to unlock unconventional oil and gas resources.
 
For all of these themes, we seek portfolio opportunities that offer more potential through either increased oil price exposure, and/or through securing additional scope for recovery from appraisal or the application of new technology.
 
We continue to pursue an aggressive exploration programme and we are adding more acreage in support of our strategy themes. Our emphasis remains on drilling large exploration prospects, in selected basins, and targeting under-explored areas with significant potential. 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 further improve the quality of our asset portfolio. In terms of our existing portfolio, we will continue to focus on production and project delivery, cost performance and operational excellence.
 
Shell seeks to sustain long-term production from our existing heartlands which include Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA.
 
Building on success to date, we will continue to look for more and stronger integrated gas positions, notably in North America and in

 
 
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Australia but also in Europe, the Middle East, Russia and Africa. We will look to 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 II in Russia, and continued progress in various Australian LNG projects and Qatargas 4.
 
We expect that as a result of the above, the relative contribution of gas to overall production will continue to increase in the coming years, supporting the competitive cash returns from the portfolio and expanding our base of long-life assets.
 
With respect to Nigeria, the impact of continued security problems in the Niger Delta and funding limitations within the onshore joint venture continue to present challenges. While we have achieved some success with restoring production, the security situation remains fragile. It is uncertain to what extent these issues will affect near term production levels as well as our ability to grow production in the future. Ongoing and potential challenges to our contractual rights, especially in the current economic environment, are also a cause for concern. Both the security and the contractual situations will continue to be closely monitored. We have made progress on funding through the signing of the bridge loan and modified carry agreements with the Nigerian National Petroleum Corporation, which will resolve some funding issues related to certain current projects and will also secure funding for certain future projects. These agreements are subject to ratification by the Nigerian assembly. Deep-water Nigeria production continues to perform well. See “Nigeria” on pages 25-26.
 
Leveraging technology is central to our strategy and we continue to increase our investment in research and development (R&D) and the piloting of new technology, with an emphasis on the subsurface and unconventionals. We remain focused on the development and application of technology as a key differentiator in securing access to good upstream opportunities and delivering more value from them.
 
Particularly against the backdrop of the current global economic downturn, our focus on the reduction of costs will be intensified through optimised management of the supply chain and simplifying and standardising processes globally. We will continue to strengthen our capabilities in project delivery and ensure we have the people in place with the requisite skills, as this is vital to the successful delivery of our strategy.
 
PROVED RESERVES
Details of Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved reserves are summarised in the table on page 23 and are set out under the heading “Supplementary information – Oil and gas (unaudited)” on pages 161 to 170. 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 and year end price effects. 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 includes certain quantities of crude oil and natural gas that we do not have title to but pursuant to contracts we bear the upstream risks and secure the rewards from such production.
The proved reserve volumes reported for 2008 have been established by Shell using the internal assurance processes put in place in 2004 and described in previous disclosures. In December 2008, the United States Securities and Exchange Commission adopted revisions to its oil and gas reporting rules in order to modernise and update the oil and gas disclosure requirements. These rules are more principle-based in design thus additional judgement and expertise will be needed to ensure compliance. Accordingly, beginning in 2009 we have updated and enhanced our reserves assurance process by creating a central group of 10 reserves experts, within the Reserves Assurance and Reporting Group. The Reserves Assurance and Reporting Group will provide primary assurance for all future bookings of proved reserves. Currently, a Vice President, with over 35 years’ experience in the oil and gas industry, heads the Reserves Assurance and Reporting Group. The current members of the Reserves Assurance and Reporting Group average over 25 years’ experience in the oil and gas industry. This central group reports directly to the Reserves Committee. The Reserves Committee is a multidisciplinary committee consisting of senior people from the Finance, Legal and Exploration & Production organisations. The Reserves Committee will continue to review and endorse all reserves disclosure with final approval remaining with the Company’s Executive Committee. Internal Audit will continue to play a central role in the Company’s reserves assurance processes. Beginning in 2009, Internal Audit will move from volume-based post-disclosure audits to a risk-based pre-disclosure audit model, focusing on the control framework and large reserves bookings.
 
The impact of the changes to the SEC guidelines for reporting of oil and gas proved reserves, that were adopted in December 2008, are currently under review by Shell. The new rules are expected to apply to disclosures in our Form 20-F for the 2009 year end. The changes bring the reporting guidance up to date with advances made in the industry around oil and gas reserves determinations.
 
In 2008, production from Shell’s subsidiaries was 846 million boe. After taking into account production, Shell’s subsidiaries added a net 404 million boe of proved developed and undeveloped reserves, consisting of 10 million boe of proved developed and 394 million boe of proved undeveloped reserves. During 2008, before taking into account production, Shell’s subsidiaries added 1,250 million boe of proved developed and undeveloped reserves, consisting of 329 million boe of oil and natural gas liquids and 921 million boe (5,339 thousand million scf) of natural gas. These additions to proved developed and undeveloped reserves consisted of 1,032 million boe from revisions, 16 million boe from acquisitions and divestments, 148 million boe from extensions and discoveries and 54 million boe from improved recovery. Net positive revisions of 1,032 million boe include a net increase of 197 million boe as a result of year-end pricing effects. This net increase of 197 million boe was primarily a result of increased entitlements due to cost recovery provisions in some production-sharing contracts, which were significantly offset by other negative year-end price impacts such as contractual tail-end cut-off and uneconomic reserves.
 
During 2008, Shell’s share of proved developed and undeveloped reserves of equity-accounted investments declined by 315 million boe. This reduction included production of 314 million boe, a decrease of 69 million boe from revisions and reclassifications, an increase of 71 million boe from extensions and discoveries and a decrease of 3 million boe as a result of acquisitions and divestments. Negative year-end price effect of 178 million boe significantly impacted the 69 million boe reduction from revisions and reclassifications. After taking into account production of 314 million boe, Shell’s share of proved developed reserves from equity-accounted investments decreased by 180 million boe

 
 
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and Shell’s share of proved undeveloped reserves decreased by 135 million boe. After accounting for production, Shell’s share of proved developed and undeveloped oil and gas liquids reserves declined by 202 million boe and our share of proved developed and undeveloped natural gas declined by 113 million boe (658 thousand million scf).
 
Details of the main proved reserves changes during 2008 are provided in the section “Supplementary information – Oil and gas (unaudited)”.
 
At December 31, 2008, after taking account of subsidiaries’ 2008 net additions to proved developed and undeveloped reserves and production, total proved reserves for subsidiaries 6% higher than at December 31, 2007. At the same date, after taking into account the Shell share of equity-accounted investments’ net additions and production, the Shell share of total proved developed and undeveloped reserves of equity-accounted investments was 8% lower than at December 31, 2007.
A large proportion of the proved undeveloped reserves for both subsidiaries and equity-accounted investments are located in a small number of large projects that are under development and in different stages in maturity. The main contribution to these comes from projects in Russia, Qatar, Kazakhstan, Australia and the USA all of which are due to reach first production in the next one to four years.
 
In August 2008 the acquisition of Duvernay in Canada added approximately 74 million boe to Shell’s proved reserves.
 
In addition to proved conventional liquids and natural gas reserves, Shell has significant interests in proven oil sands reserves in Canada associated with the Athabasca Oil Sands Project. Since SEC regulations define these reserves as mining-related and not part of conventional oil and gas reserves, these are presented separately to the conventional oil and gas reserves in the Oil Sands section of this Business Review.

 
                             
PROVED DEVELOPED AND UNDEVELOPED RESERVES (At December 31)[A][B]   million boe [C]      
    2008     2007     2006      
Shell subsidiaries
    7,090       6,686       8,452      
Less: minority interest in reserves of Shell subsidiaries
    12       17       749      
                             
Proved oil and gas reserves from subsidiaries attributable to Royal Dutch Shell Plc shareholders
    7,078       6,669       7,703      
                             
Shell share of equity-accounted investments
    3,825       4,140       3,355      
                             
 
[A]  We manage our total proved reserve base without distinguishing between proved oil and gas reserves associated with our equity-accounted investments and proved oil and gas reserves from subsidiaries.
[B]  Does not include produced gas for own consumption or incidental flaring.
[C]  For this purpose natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel.
 
                                                         
PROVED DEVELOPED AND UNDEVELOPED RESERVES[A]   million boe[B]
    2008      
                    Middle East,
          Other
           
    Europe     Africa[C]     Asia-Pacific   Russia, CIS[D]     USA     Americas     Total      
Proved developed and undeveloped reserves
                                                       
Shell subsidiaries
                                                       
At January 1
    1,460       841     1,064     2,176       801       344       6,686      
At December 31
    1,281       874     1,072     2,780       759       324       7,090      
Shell share of equity-accounted investments
                                                       
At January 1
    2,022           542     1,247       299       30       4,140      
At December 31
    1,922           522     1,118       243       20       3,825      
                                                         
Proved developed reserves
                                                       
Shell subsidiaries
                                                       
At January 1
    1,019       456     477     303       413       229       2,897      
At December 31
    957       377     705     289       381       198       2,907      
Shell share of equity-accounted investments
                                                       
At January 1
    1,653           381     343       239       25       2,641      
At December 31
    1,582           376     294       190       19       2,461      
                                                         
 
[A]  Does not include produced gas for own consumption or incidental flaring.
[B]  For this purpose natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel.
[C]  Excludes Egypt.
[D]  Includes Caspian region, Egypt and Sakhalin.

 
 
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BUSINESS AND PROPERTY
Shell subsidiaries and 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 participant 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.
•  Lease agreements are typically used in North America and are usually governed by similar terms as licences. However, participants may include governments or private entities and royalties are typically paid in cash rather than in kind.
•  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 Shell group’s entitlement share of production would normally decrease.
 
Shell’s exploration and production interests, including acreage holdings and statistics on wells drilled, are shown on pages 32-33.
 
OIL AND GAS INTERESTS
Note that none of the below-mentioned properties or interests is individually significant to Shell.
 
Shell’s strategy is to focus on our heartlands. Our heartlands are the core countries that have the available infrastructure, expertise and remaining growth potential for Shell to sustain strong operational performance and support continued investment. They include; Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA.
Europe
Denmark  Shell Olie-og Gasudvinding Danmark B.V. (Shell interest 100%) holds a 46% non-operated interest in a producing concession until 2042. The Shell interest in this concession will reduce to 36.8% in July 2012 when the government increases its position to a 20% fully-participating stake in the concession. Shell also holds interests in four other non-operated exploration licences.
 
Germany  Shell Verwaltungsgesellschaft für Erdgasbeteiligungen mbH (Shell interest 100%) holds a 50% interest in the Brigitta & Elwerath Betriebsfuehrungsgesellschaft joint venture. This joint venture is involved in some 30 concessions with varying interests and is the largest gas producer in Germany.
 
Ireland  Shell E&P Ireland Limited (Shell interest 100%) is the operator for the Corrib Gas Project (Shell interest 45%), currently under development. A modified onshore pipeline route was announced following the conclusion of the public consultation process in 2008 and four gas wells were completed and made ready for production. A combination of factors including bad weather impeded progress on the completion of the offshore pipeline during 2008, but Shell remains committed to bringing the gas to market as soon as possible.
 
Shell also has exploration interests in six licences offshore Ireland, of which four are operated and two are non-operated.
 
Italy  Shell Italia E&P S.p.A.’s (Shell interest 100%) main assets are onshore in southern Italy and consist of Val d’Agri (Shell interest 39.23%), which is in production and operated by Eni, and Tempa Rossa (Shell interest 25%), operated by Total and which is at the onset of its development phase. Shell Italia E&P S.p.A also has 100% interests in nearby exploration prospects, as well as a 30% interest in an oil transport and storage company (Società Oleodotti Meridionali), jointly owned with Eni.
 
In 2008, Shell agreed to purchase from Northern Petroleum Ltd interests (between 55% and 70%) in six offshore exploration blocks located in the Sicily Channel, with final government approval obtained in early 2009.
 
The Netherlands  Shell Nederland B.V. (Shell interest 100%) has an indirect interest in assets through its participation in NAM. Those assets are operated by NAM, a 50:50 joint venture between Shell and ExxonMobil. An important part of NAM’s gas production is from its onshore Groningen gas field, in which the Dutch government has a 40% financial interest through the wholly state-owned company EBN, with NAM retaining the remaining share. Production licences cover NAM’s production of oil and gas, which include operations offshore. Government participation in development and production is mainly dependent on the legislation applicable at the time the licences were granted.
 
In 2008, NAM started a project to redevelop the Schoonebeek oilfield (Shell interest 30%). NAM also completed the sale of oil and gas assets situated along and including the NOGAT pipeline in the Dutch sector of the North Sea.
 
Norway  A/S Norske Shell (Shell interest 100%) 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 potential development assets. We achieved the first full year of production from the Ormen Lange (Shell interest 17%) gas field in 2008, which delivers gas to the UK market. New wells have been brought on-stream through the year as production builds to a plateau.

 
 
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Shell International Pipelines Inc. (Shell interest 100%) holds interests in several Norwegian gas transportation and processing systems, pipelines and terminals. During 2008, Shell sold its interest in the undeveloped Trym field.
 
Sweden  Shell Exploration and Production AB (Shell interest 100%) is exploring a shale gas opportunity onshore in an Alum Shale formation in southern Sweden. Shell has obtained two permits from the mining authority for an acreage position for an initial period of three years while the viability of the formation for gas production is assessed and a fuller picture of political, environmental and commercial considerations is gained.
 
UK  Shell U.K. Limited (Shell 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’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. Crude oil comes from the central and northern fields. In the Atlantic Margin area, Shell also has interests as a non-operating participant 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 significantly smaller than discoveries 15-20 years ago. In 2008 Shell and other participants delivered first production from four North Sea fields – Starling (Shell interest 28%), Caravel (Shell interest 71%), Shamrock (Shell interest 100%) and Curlew C (Shell interest 100%).
 
In 2008, Shell sold to TAQA Bratani Limited our interests in South Cormorant, Cormorant North, Tern, Eider, Kestrel and Pelican, non-operated interests in Hudson, and interests in the Brent System and the Sullom Voe Terminal. Separate activity is continuing for the sale of Shell’s non-operated interests in Otter. Shell also completed the divestment of interests in the Dunlin Cluster covering Dunlin, Dunlin South West, Osprey and Merlin fields to Fairfield Energy and Mitsubishi Corporation.
 
Ukraine  In 2006, Shell Ukraine Exploration and Production (Shell interest 100%) entered into a joint activity agreement (JAA) with Ukrgazvydobuvannya (UGV), a subsidiary of NaftoGasUkrainy (NAK), to explore for oil and gas across eight licences in the Dnieper-Donetsk Basin in central-eastern Ukraine.
 
The JAA which covers licences, agreed work programme levels and the terms of joint activities, gives Shell a 50% interest in the joint activities (excluding existing producing fields) in exchange for a commitment that comprises the acquisition of seismic data and drilling of deep exploration wells over a three-year period. Seismic data acquisition started in 2008.
 
Africa
Algeria  Shell Algeria Zerafa GmbH (Shell interest 100%) holds a 60% interest in the production-sharing contract in the Zerafa permit, where it is conducting an exploration and appraisal campaign in partnership with Sonatrach, the Algerian national oil and gas company. The first phase of the PSC ended in September 2008 and a two year second phase was entered into. Shell Algeria Reggane GmbH (Shell interest 100%) held a 80% interest in the production sharing contract in the Reggane Djebel Hirane permit, which was relinquished in 2008.
Cameroon  Pecten Cameroon Company (PCC) (Shell interest 80%) has a 40% interest in the PCC-operated Lokele concession and a 24.5% interest in the non-operated Rio del Rey concession. PCC also has a 50% interest in the Dissoni exploration licence (a PSC). Following the Dissoni Shallow commercial discovery in 2006, the government has confirmed its intention to take a 25% interest in the Dissoni licence, which will reduce PCC’s interest to 37.5%.
 
Gabon  Shell Gabon (Shell interest 75%) has interests in nine onshore mining concessions/exploitation permits, six of which (Rabi/Kounga, Gamba/Ivinga, Toucan, Awoun, Totou and Bende) are operated by the company. In the Awoun permit an exclusive exploitation authorisation is being finalised for the Koula and Damier fields. The other three concessions/PSCs (Avocette, Coucal and Atora) expire between 2010 and 2021. Some 66% of Shell’s production in Gabon is from the Rabi (Shell interest 42.5%), Toucan (Shell interest 44.25%), and Gamba fields (Shell interest 100%). Shell Offshore North Gabon B.V. (Shell interest 100%) holds the Igoumou Marin permit in ultra deep-water and Shell Offshore Central Gabon B.V. (Shell interest 100%) holds two exploration and production sharing contracts, BC9 & BCD10, in offshore central Gabon.
 
Libya  In May 2005, Shell Exploration and Production GmbH (Shell interest 100%) 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 located onshore in Libya’s major oil and gas producing Sirte Basin. With seismic data acquisition and analysis complete, exploration drilling started in March 2008. Options to expand Marsa Al Brega and possibly build a new LNG plant are features of the development agreement. Shell won the exploration concession Area 89 in December 2007 and the Exploration and Production Sharing Agreement was signed in 2008.
 
Nigeria  The Shell Petroleum Development Company of Nigeria Ltd. (SPDC) (Shell interest 100%) is operator of a joint venture (Shell interest 30%) with the Nigerian National Petroleum Corporation (NNPC) (55%), Total Exploration and Production Nigeria Limited (10%) and Nigeria Agip Oil Company Limited (5%). The venture’s onshore oil mining leases (OML) expire in 2019. The venture’s shallow water offshore leases expired on November 30, 2008, however, under the Nigerian Petroleum Act we are entitled to an extension. Currently, the status quo is maintained pursuant to a court order issued on November 26, 2008. The parties involved are pursuing a negotiated resolution.
 
In 2008, SPDC began commissioning and start-up of the first and second turbines of the 640 MW Afam VI Power Plant and the Okoloma Gas Plant and delivered first production from gas wells associated with the project – collectively known as the Afam Gas and Power Project (Shell interest 30%).
 
Shell Nigeria Exploration and Production Company Limited (SNEPCo) (Shell interest 100%) operates under a PSC with a 55% interest in deep water blocks OML 118 and OML 135 in partnership with ExxonMobil, Total and Agip. SNEPCo also has a 43.75% interest in deep-water block OML 133 (ExxonMobil operated) and a 40% interest in shallow water block oil prospecting licence OPL 238. In 2008, Shell completed the divestment of its 49.81% interest (held through SNEPCo) in deep-water blocks OML 125 (Abo field) and OML 134.
 
In 2008, Shell made three notable discoveries in offshore deep-water Nigeria.

 
 
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Shell Nigeria Ultra Deep Limited (SNUD) (Shell interest 100%) has a 100% interest in a PSC with NNPC (which is the licence holder). The ownership of the licence and the rights of SNUD in the PSC are the subject of ongoing litigation.
 
Shell Nigeria Upstream Ventures (Shell interest 100%) has a disputed 40% interest in OML 122 (the remaining interest is held by Peak Petroleum). The dispute centres around the settlement of agreement termination conditions.
 
Shell Nigeria Exploration Properties Alpha Ltd. (Shell interest 100%) has a 40% interest in deep-water block OPL 322 and is the operator.
 
Shell Nigeria Exploration Properties Beta Ltd., (Shell interest 100%) has relinquished its 27% interest in deep-water block OPL 318.
 
Asia-Pacific
Australia  Shell Development (Australia) Pty Ltd (SDA), (Shell interest 100%) has interests in a number of offshore production and exploration licences in the Carnarvon Basin, including the NWS and Greater Gorgon areas, as well as exploration licences in the Browse Basin and Timor Sea area. Some interests in these areas are held directly, and others indirectly through a 34.27% shareholding in Woodside. Woodside is the operator on behalf of six joint venture participants of the NWS gas, condensate and oil fields. Gas and condensate are produced mainly from the North Rankin and Goodwyn facilities and delivered to an onshore treatment and LNG facility on the Burrup Peninsula. In 2008, Shell through our participation in the NWS Venture, brought on-stream the Angel (Shell interest 22.4%) gas field.
 
Shell has interests in the Sunrise gas field in the Timor Sea, as well as the Calliance, Brecknock and Torosa gas fields in the Browse Basin. Shell is also a non-operating participant (25%) in the Gorgon joint venture (operated by Chevron Australia Pty Ltd) which includes the offshore Gorgon, Io and Jansz gas fields in the Carnarvon Basin. Shell also has rights to the gas in the Crux field (AC/P23) operated by Nexus Energy Ltd.
 
During 2008, Shell purchased three exploration permits in the South Exmouth basin, offshore north-west Australia. Shell also increased its interest from 50% to 65% in the AC/P41 permit in the Browse Basin (operated by SDA), where it made the Libra-1 discovery. In addition, the Iago-2 discovery was announced in the Chevron-operated permit WA-16-R in which Shell has a one-third share.
 
In September, Shell signed an agreement to acquire a 30% interest in Arrow Energy Ltd’s coalbed methane acreage in Queensland and a 10% stake in Arrow International Pte Ltd. The international transaction and part of the domestic transaction were finalised in 2008, with completion of the remainder of the domestic transaction achieved in early 2009.
 
In early 2008, Shell divested its share in the Cossack-Wanaea-Lambert-Hermes and the Egret oil ventures and certain oil exploration opportunities in the NWS to Woodside.
 
Brunei  Shell is a 50:50 shareholder with the Brunei government in Brunei Shell Petroleum Company Sendirian Berhad (BSP). BSP, 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 (Shell interest 25%). Important development projects, such as Mampak and Bugan Phase 2, continued to be matured by BSP over the course of 2008. Oil production from the Seria North Flank project
started in 2008. The project involves the development of an offshore field from land using breakthrough ‘fishhook well’ technology.
 
Shell Deepwater Borneo Ltd. (Shell interest 100%) has a 35% non-operating share in the Block B concession where gas is produced from the Maharaja Lela Field, and a 54% operating interest in exploration Block A.
 
China  Shell China Exploration & Production Company Limited (SCEPCO) (Shell interest 100%) and Pecten Orient Company LLC (Shell interest 100%) participate in the offshore Xijiang oil field (Shell interest ranges between 24.5% and 47.8%) in the South China Sea. SCEPCO holds a 50% interest in the Changbei gas field in the Ordos Basin, onshore China, in partnership with PetroChina Company Limited. In 2007, SCEPCO acquired a 55% interest in the North Shilou coalbed methane PSC in the Ordos basin from Verona Development Corp.
 
In 2008, SCEPCO signed an MOU with Shaanxi Yanchang Petroleum giving Shell a one year exclusivity on data and negotiation across an area of more than 10,000 km2 in the Ordos basin.
 
Shell China Jilin Energy Holding Company Ltd (Shell interest 100%) and Shell (China) Limited (Shell interest 100%) hold a 51% and a 10% interest respectively in the Jilin Shell Oil Shale Development Company Limited for minerals exploration, exploitation and development of oil shale resources. The JV company disposed of nearly all of its assets in early 2008 and has been dormant since June 2008.
 
Malaysia  Shell Malaysia exploration and production companies hold 18 PSCs with the national oil company PETRONAS. In many of these contracts PETRONAS Carigali Sendirian Berhad (PCSB), a 100% PETRONAS subsidiary, is the joint venture participant. Shell is the operator, with a 50% working interest, of 11 fields producing non-associated gas and the operator, with a 37.5% working interest, of a further three fields producing non-associated gas, in Sarawak. Over 92% of the gas is supplied to the MLNG, MLNG Dua and MLNG Tiga plants (Shell interest 15% in MLNG Dua & Tiga plants) for deliveries of LNG to customers mainly in Japan, Korea and Taiwan. Shell also has a 40% interest in the non-operated Baram Delta PSC, a 50% interest in the development of the SK308 discovered fields and exploration interests in the deep-water block SK-E and block SK-307.
 
In Sabah, Shell operates four producing offshore fields (Shell interest ranges from 50% to 80%) and has 40% interest in PSCs for the exploration and development of blocks SB-301, SB-G, SB-J, and a 50% interest in blocks ND-6 and ND-7. Shell also has an interest in the Sabah Gas (KBB) project through our 30% interest in the Kebabangan Petroleum Operating Company.
 
In 2008, Shell and its participants delivered first production from the E11 Hub Stage 2 (Shell interest 50%), G7 (Shell interest 50%), M3S (Shell interest 70%) and Saderi (Shell interest 37.5%) projects.
 
In 2008, Shell took final investment decisions to proceed with the St. Joseph redevelopment (Shell interest 50%) and Cili Padi (Shell interest 37.5%) projects. Gumusut-Kakap, Shell’s first deep-water project in Malaysia, continues to progress well.
 
New Zealand  Shell, through a number of entities (Shell interest 100% in all of them), has a 83.75% interest in the production licence for the offshore Maui gas field. In addition, Shell (Petroleum Mining) Company Ltd (Shell interest 100%) has a 50% interest in the onshore Kapuni gas field and Shell Exploration NZ Ltd (Shell interest 100%) has a 48% interest in the Pohokura gas field. The gas produced is sold domestically,

 
 
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mainly under long-term contracts. Shell also has 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 (Shell interest 50%), with the Pohokura field operated by Shell Exploration NZ Ltd.
 
Philippines  Shell Philippines LLC (Shell interest 100%) and Shell Philippines Exploration BV (Shell interest 100%), which is also the operator, hold a 25% and a 20% interest respectively in the deep-water PSC for block SC-38. The SC-38 interest includes a production licence for the Malampaya and San Martin fields. Current production comprises gas and condensate from the Malampaya field via a platform north-west of the island of Palawan. Shell Philippines Exploration B.V. (Shell interest 100%) holds a 55% interest in, and is operator of block SC-60.
 
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 The Shell Petroleum Company Limited’s concessionary share is 9.5% (licence expiry in 2014), arising from its 23.75% interest in the Abu Dhabi Petroleum Company Limited, which in turn holds a 40% interest in the concession granted by the Abu Dhabi government. Shell Gas B.V. 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 N.V. (Shell interest 100%) participates as a contractor in three onshore exploration concessions and has interests in four development leases, which are operated by the Badr El-Din Petroleum Company (Bapetco) joint venture. Bapetco executes the operations for those producing fields where Shell is the contractor in accordance with the concession agreement. Shell has a 50% interest in Bapetco with the Egyptian General Petroleum Corporation (the Egyptian national oil company). Shell Egypt N.V. also participates in two offshore exploration concessions, namely the deep-water North East Mediterranean Deepwater concession and North West Damietta concession with various participants. In 2008, Shell completed the sale of a 10% interest in the North West Demiatta Extension concession located offshore Egypt to Gaz de France.
 
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. Shell Exploration B.V. (Shell interest 100%) has a 70% interest in an agreement with the National Iranian Oil Company (NIOC) concerning the Soroosh/Nowrooz fields. The development phase is completed and all permanent facilities were handed over to NIOC in 2005. Since then, the Soroosh/Nowrooz fields have been producing with NIOC responsible for all aspects of the operations. 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  In October 2008, Shell and the other members of the North Caspian production-sharing agreement (NCPSA) divested their participating interests proportionally (Shell’s interest decreased from 18.52% to 16.81%) to Kazakhstan’s national oil company, KazMunaiGas (KMG), thus allowing KMG’s stake to increase to match that of each of the four major shareholders. Given the size and complexity of the Kashagan project and other NCPSA developments, the co-venturers and the Kazakh authority have agreed to combine their resources and to carry out the project under a new joint operating company named North Caspian Operating Company (NCOC) BV, which is now the operator.
Under the terms of the new operating model, Shell will be responsible for the front-end engineering and design work for Kashagan Phase 2 along with the subsequent offshore development, and will be working with KMG to jointly manage production operations on behalf of NCOC.
 
Shell has a 55% interest in the Pearls PSA which was signed in 2005. The Pearls block is operated by the Caspi Meruerty Operating Company BV (CMOC), in which Shell has a 40% interest. In 2008, after completing a successful production test, CMOC confirmed a second oil discovery in the Pearls contract area with the Auezov-1 exploration well. The Auezov structure is located approximately 15 kilometres from the Khazar structure, where a discovery was made in November 2007. Shell also has a 5.5% interest in the Caspian Pipeline Consortium.
 
The Arman Oil Company (Shell interest 100%) currently holds a 50% interest in the Arman joint venture, a small onshore producing company.
 
Oman  The Shell Petroleum Company Limited (SPCL) (Shell interest 100%) holds a 34% interest in Petroleum Development Oman (PDO), which is the operator of an oil concession expiring in 2044. The government of Oman holds a 60% interest in the concession and Private Oil Holdings Oman Ltd. (POHOL) holds the remaining 40%. SPCL has an 85% shareholding in POHOL.
 
PDO has a number of pilot and commercial-scale projects under way using all three main enhanced oil recovery (EOR) technologies – thermal, chemical and miscible gas. One of these projects at Harweel aims to significantly increase recovery and was the first miscible gas flood EOR project in the global Shell portfolio. Qarn Alam, on which final investment decision was taken in 2007, is one of the world’s largest steam injection EOR projects in a fractured carbonate reservoir. Shell Technology Oman, a regional EOR research and development hub, was established in November 2006. Shell Technology Oman works closely with PDO and the Oil and Gas Research Centre of Sultan Qaboos University with its focus on thermal and chemical EOR. A Shell company is a 17% participant in the PSA operated by Occidental to develop the Mukhaizna oil field.
 
Pakistan  Kirthar Pakistan B.V. (Shell 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. In 2008, Shell Development & Offshore Pakistan B.V. (Shell interest 100%) and the other participants advised the government of their intent to relinquish their interest in offshore deep-water Block 2365-1 (Shell interest 25%). Completion of the relinquishment process is expected in 2009.
 
Qatar  Following approval from Qatar Petroleum, Shell made the final investment decision in 2006 and began construction on the integrated GTL project, Pearl, which is being developed under a development and production-sharing agreement with the government of Qatar. Shell provides 100% of project funding. The fully integrated project includes upstream production of some 1.6 bcf/d of well-head gas from Qatar’s North Field, transport and processing of the gas to produce around 120,000 boe/d of natural gas liquids and ethane, and the construction of an onshore GTL complex to convert the remaining gas into 140,000 b/d of liquid hydrocarbon products.
 
Construction of the Qatargas 4 LNG project (Shell interest 30%) continues to progress well. The project comprises the integrated development of upstream gas production facilities to produce some 1.4 bcf/d of natural gas from Qatar’s North Field, a single LNG train

 
 
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yielding around 7.8 million tonnes per annum (mtpa) of LNG as well as the shipping of the LNG to the intended markets.
 
Russia  In June 2008, Sakhalin Energy Investment Company Ltd. (SEIC), the Japan Bank for International Cooperation and a consortium of international commercial banks signed a project finance contract for a total of $5.3 billion for Phase 2 of Sakhalin II (Shell interest 27.5%). In December 2008, we delivered first production from the Piltun-Astokhskoye B platform and began year-round oil exports. In January 2009, first gas was achieved from the Lunskoye-A platform. SEIC completed main construction of all facilities at the end of 2008 and has commenced the start-up process. In February 2009, the LNG plant was started-up, with first exports expected in the first months of 2009.
 
Salym Petroleum Development (Shell interest 50%) continued to increase production from its Salym fields in Western Siberia, reaching 150,000 boe/d in January 2009.
 
Saudi Arabia  Shell is a party to the joint venture conducting an exploration programme in the Rub Al-Khali area in the south of the Kingdom. Shell has a 50% interest in the project with Saudi Aramco holding a 50% interest, following the withdrawal of Total, who previously held a 30% interest in the joint venture, in early 2008.
 
Syria  A registered branch of Syria Shell Petroleum Development B.V. (Shell interest 100%) holds interests ranging from 62.5% to 66.67% in three PSCs (Deir Ez Zor, Fourth Annex and Ash Sham). These were extended by 10 years in December 2008 and now expire between 2018 and 2024. In addition, Shell companies are parties to a gas utilization agreement for the collection, processing and sharing of natural gas from designated fields for use in Syrian power generation and other industrial plants. Al Furat Petroleum Company, a Syrian joint stock company in which Syria Shell Petroleum Development B.V. holds a 31.25% to 33.3% interest, performs operations under these contracts. Shell South Syria Exploration Limited (Shell interest 100%) entered into two production-sharing contracts, effective from February 2007, for Blocks 13 and 15 in the south of Syria. There is a four-year exploration period for these blocks, expiring in February 2011, and seismic data acquisition was completed in 2008.
 
USA
Shell Exploration & Production Company (SEPCo), (Shell interest 100%) produces crude oil, natural gas and natural gas liquids (NGL) principally in the Gulf of Mexico, California (Aera), South Texas 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 the 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 as 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 2008, SEPCo acquired exploration interests in acreage located in offshore Alaska, New Mexico and Louisiana, where current and future exploration activities are being pursued. SEPCo also acquired additional exploration interests in the Gulf of Mexico through lease sales 206, 207 and 224 and put a recent discovery directly into production in the prolific Mars Basin. Elsewhere in the Gulf of Mexico, SEPCo drilled additional appraisals in the Stones prospect.
 
Seismic exploration in the Beaufort and Chukchi Seas was conducted in 2008 under a renewed agreement protecting subsistence whaling,
important to the local native culture. This followed the US Minerals Management Services (MMS) award of 275 Chukchi Sea exploration blocks to Shell, which was high bidder in lease sale 193 early in 2008.
 
In late November 2008, the US Court of Appeals for the Ninth Circuit vacated (i.e. rendered null and void) the MMS’s approval of Shell’s Beaufort Sea exploration plan in Alaska and ordered the agency to conduct further analysis. On this basis, Shell decided not to pursue the planned 2009 Beaufort drilling programme or seismic programme in the Beaufort and Chukchi Seas and intended to appeal the decision. On March 6, 2009, the US Court of Appeals for the Ninth Circuit issued an order vacating and withdrawing the November 20, 2008 opinion regarding MMS’s approval of Shell’s Beaufort Sea exploration plan. Shell aims to continue with permitting and other preparatory work to enable work to recommence in 2010.
 
The Gulf of Mexico remains a major production area. SEPCo holds approximately 440 federal offshore leases in the Gulf and operates five deep-water tension leg platforms, along with a dozen others, with Shell-share production of over 300,000 boe/d.
 
In 2008, SEPCo moved ahead with development of the Perdido regional host project (Shell interest 35%) in south-west Gulf of Mexico with installation of the floating spar hull. Moored in approximately 2,440 metres (8,000 feet) of water, it will be the world’s deepest spar production facility. First production is expected around the turn of the decade. Elsewhere in the Gulf, in mid 2008, SEPCo began first injections into the Yellow Reservoir with the Ursa Princess Waterflood project. Expected to extend field life by 10 years, the project’s maximum capacity is 30,000 boe/d.
 
Shell continues to operate efficient multi-rig onshore gas programmes in South Texas and in Pinedale, Wyoming, where federal regulators in late 2008 approved year round drilling operations under a new environmental plan. SEPCo also added to its substantial acreage position in the Haynesville tight gas opportunity of north-west Louisiana and has four drilling rigs in operation.
 
Affiliates of SEPCo hold a 51.8% interest in Aera Energy LLC, a US-based exploration and production company with assets in the San Joaquin Valley and Los Angeles Basin areas of Southern California. Aera operates some 15,000 wells, producing about 170,000 boe/d of heavy oil and gas, and accounting for approximately 30% of the state’s production.
 
Late 2008, Shell announced a collaboration with the West Coast Regional Carbon Sequestration Partnership in California with delivery of the first US CO2 injection test project among its goals.
 
Shell continued oil shale research in the Piceance Basin of north-west Colorado in 2008. Shell also holds three research, demonstration and development leases awarded by the US Bureau of Land Management for future oil shale activities.
 
In 2008, SEPCo completed divestment of its non-operating interests in the Boomvang field and in the undeveloped Big Foot prospect in the Gulf of Mexico.
 
Other Americas
Argentina  Shell Compania Argentina de Petroleo (Shell interest 100%) holds a 22.5% interest in the Acambuco concession in north-west Argentina.

 
 
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EXPLORATION & PRODUCTION
 
 
 
 

 
Brazil  Shell Brasil Ltda. (Shell 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’s portfolio also includes interests in two Shell operated offshore development blocks and seven offshore exploration blocks (two operated by Shell) in the Brazilian core basins of Campos, Santos and Espirito Santo. Shell interest in these blocks ranges from 17.5% to 100%.
 
Shell continued making progress on the deep-water BC-10 project (Shell interest 50%) in 2008, drilling development wells in the Ostra, Argonauta and Abalone fields. The first phase of this Shell-operated project includes nine production wells and one gas injection well tied back to the FPSO “Espirito Santo” now on site in the Campos Basin, anchored in about 1,780 metres (5,800 feet) of water. The vessel arrived in Brazil from Singapore in late 2008. First oil from BC-10 Phase 1 is expected around the turn of the decade.
 
Shell is also the operator of two heavy oil fields in Block BS-4 (Shell interest 40%) in the Santos Basin, where potential development concepts are being assessed. Shell participated in the pre-salt Bem-te-Vi well on the BMS-8 block (Shell interest 20%) in the same basin area. The results are under evaluation. Shell holds interests in two other pre-salt Santos blocks: BMS-54 (100%) and BMS-45 (40%).
 
Through Pecten Brazil Exploration Co. (Shell interest 100%), Shell retains an economic interest via a service contract in the producing Merluza gas field, operated by Petrobras, also offshore in the Santos Basin.
 
In the most recent national bid round in December 2008, Shell acquired five onshore exploration blocks in the Sao Francisco basin.
 
Canada  Shell Canada Limited (Shell interest 100%) is a producer of natural gas, NGL, bitumen, synthetic crude and sulphur.
 
The majority of Shell’s gas production comes from the Foothills region of Alberta. Shell 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, has a non-operating 20% interest in an early stage deep-water exploration asset off the east coast of Newfoundland and is a joint venture participant in the Mackenzie Gas Pipeline proposal in northern Canada.
 
In 2008, Shell made progress with the development of unconventional gas in west-central Alberta and east-central British Columbia through land acquisition, drilling programmes and investment in infrastructure facilitating new production. In the third quarter, Shell acquired Duvernay.
 
The purchase, together with other lease acquisitions in the Groundbirch region (which includes the Montney formation), added some 600,000 acres of tight gas acreage to Shell’s landholdings. Shell also holds exploration rights on an approximately 800,000-acre (3,200 km2) concession in the Klappan area of north west British Columbia where it is working toward a coalbed methane test well programme. In late summer, Shell announced it would pause exploratory drilling plans for 2008 to conduct more environmental studies and better engage with the local population.
 
Shell is also a large leaseholder offshore west coast of Canada, although this area remains under a government moratorium. Canadian exploration rights 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 produces heavy oil through cold (primary) production and thermal (enhanced) recovery in the Peace River area of Alberta and established a steam-assisted gravity drainage project (Phase 1) near Cold Lake, Alberta. Shell also holds a 20% non-operated interest in the Ells River in-situ bitumen project about 20 kilometres west of Fort McKay.
 
Shell holds another 19 land parcels in Northern Alberta (approximately 290,000 acres) where it is evaluating heavy oil resources and assessing technologies for potential development.
 
In 2008, Shell and two other interest holders divested their shares of the Rainbow Pipeline (33% each) to Plains All American Pipeline L.P.
 
The Alberta government implemented its new oil and gas royalty framework on January 1, 2009. See “Oil Sands – Outlook and Strategy” for further discussion.
 
Colombia  Shell Exploration and Production Company and Ecopetrol, the Colombian national oil company, secured two preferred blocks in the Llanos Este heavy oil trend bidding held in mid 2008. Shell and Ecopetrol were already joint venture participants (Shell interest 50%) in the Ecopetrol-operated Caño Sur block, also in the Llanos Basin.
 
Venezuela  Shell Exploration and Production Investments B.V. (Shell interest 100%) holds a 40% interest in a joint venture with the state oil company, Petroleos de Venezuela (PDVSA), to develop and produce the Urdaneta West Field in Lake Maracaibo. The joint venture, now in its third year, is called Petroregional Del Lago, S.A. (PERLA) and replaced the operating services agreement under which Shell operated earlier.

 
 
Shell Annual Report and Form 20-F 2008  29


Table of Contents

BUSINESS REVIEW
 

EXPLORATION & PRODUCTION
 
 
 
 

                             
LOCATION OF ACTIVITIES[A][B] (At December 31, 2008)
          Development and/or
    Shell
     
Location   Exploration     production     Operator[C]      
Europe
                           
Denmark
    n       n              
Germany
    n       n              
Ireland
    n       n       n      
Italy
    n       n              
The Netherlands
    n       n       n      
Norway
    n       n       n      
Sweden
    n               n      
UK
    n       n       n      
Ukraine
    n                      
                             
Africa
                           
Algeria
    n               n      
Cameroon
    n       n       n      
Gabon
    n       n       n      
Libya
    n               n      
Nigeria
    n       n       n      
Tunisia
    n               n      
                             
Asia-Pacific
                           
Australia
    n       n       n      
Brunei
    n       n       n      
China
    n       n       n      
Malaysia
    n       n       n      
New Zealand
    n       n       n      
Philippines
    n       n       n      
                             
Middle East, Russia, CIS
                           
Abu Dhabi
    n       n              
Egypt
    n       n       n      
Iran
            n              
Kazakhstan
    n       n              
Oman
    n       n              
Pakistan
    n       n              
Qatar
            n       n      
Russia
    n       n              
Saudi Arabia
    n                      
Syria
    n       n       n      
                             
USA
    n       n       n      
                             
Other Americas
                           
Argentina
    n       n              
Brazil
    n       n       n      
Canada
    n       n       n      
Colombia
    n                      
Venezuela
            n              
                             
 
[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, Shell is the operator of some but not all exploration and/or production ventures.
                             
CAPITAL EXPENDITURE AND EXPLORATION EXPENSE OF SHELL SUBSIDIARIES BY GEOGRAPHICAL AREA[A]     $ million      
    2008     2007     2006      
Europe
    2,818       2,767       2,684      
Africa[B]
    1,658       1,895       1,840      
Asia-Pacific
    1,721       1,326       1,264      
Middle East, Russia, CIS[C]
    3,766       3,515       4,528      
USA
    5,597       3,873       2,306      
Other Americas
    7,819       1,462       4,100      
                             
Total
    23,379       14,838       16,722      
                             
 
[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 major capital projects, the related interest cost is included until these are placed in service. 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]  Includes Caspian region, Egypt and, up to April 2007, Sakhalin.
 
                             
AVERAGE PRODUCTION COSTS OF SHELL
         
SUBSIDIARIES BY GEOGRAPHICAL AREA[A][D]   $/boe      
    2008     2007     2006      
Europe
    9.25       9.15       7.56      
Africa[B]
    7.59       7.85       5.60      
Asia-Pacific
    4.66       4.31       3.35      
Middle East, Russia, CIS[C]
    8.85       8.79       7.83      
USA
    10.28       8.35       8.08      
Other Americas
    15.89       14.35       11.03      
                             
Total
    8.73       8.27       6.95      
                             
 
[A]  Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel.
[B]  Excludes Egypt.
[C]  Includes Caspian region, Egypt and, up to April 2007, Sakhalin.
[D]  Production costs exclude royalty payments of $2,369 million in 2008, $1,804 million in 2007 and $1,569 million in 2006.

 
 
30  Shell Annual Report and Form 20-F 2008


Table of Contents

BUSINESS REVIEW
 

EXPLORATION & PRODUCTION
 
 
 
 

                             
CRUDE OIL AND NATURAL GAS LIQUIDS
         
PRODUCTION[A]   thousand b/d      
    2008     2007     2006      
Europe
                           
UK
    154       183       223      
Denmark
    114       126       134      
Norway
    67       69       85      
Italy
    32       35       44      
The Netherlands
    5       6       6      
Germany
    3       4       4      
                             
Total Europe
    375       423       496      
                             
Africa
                           
Nigeria
    266       287       293      
Gabon
    30       31       32      
Cameroon
    13       14       14      
                             
Total Africa
    309       332       339      
                             
Asia-Pacific
                           
Brunei
    81       92       104      
Australia
    56       58       57      
Malaysia
    38       42       42      
China
    14       17       20      
New Zealand
    12       13       14      
Others
    5       5       5      
                             
Total Asia-Pacific
    206       227       242      
                             
Middle East, Russia, CIS
                           
Oman
    192       191       202      
Abu Dhabi
    146       146       147      
Russia
    70       51       52      
Syria
    22       24       30      
Egypt
    9       10       11      
Others
    11       11       13      
                             
Total Middle East, Russia, CIS
    450       433       455      
                             
USA
    272       324       322      
                             
Other Americas
                           
Canada
    46       47       38      
Brazil
    23       22       25      
Venezuela
    11       9       31      
Others
    1       1       [B]      
                             
Total Other Americas
    81       79       94      
                             
Grand total
    1,693       1,818       1,948      
                             
                             
         
    mtpa    
                             
Metric equivalent
    85       91       97      
                             
 
[A]  Of Shell subsidiaries, plus share of equity-accounted investments, and including natural gas liquids (share of equity-accounted investments is assumed to be equivalent to Shell interest). Oil sands and royalty purchases are excluded. In those countries where PSCs operate, the figures shown represent the entitlements of the subsidiaries concerned under those contracts.
[B]  Fewer than 1,000 b/d.
                             
NATURAL GAS PRODUCTION AVAILABLE
           
FOR SALE[A]     million scf/day      
    2008     2007     2006      
Europe
                           
The Netherlands
    1,741       1,518       1,525      
UK
    678       663       775      
Germany
    333       390       421      
Denmark
    406       369       416      
Norway
    492       357       325      
Others
    29       53       61      
                             
Total Europe
    3,679       3,350       3,523      
                             
Africa
                           
Nigeria
    552       584       455      
                             
Total Africa
    552       584       455      
                             
Asia-Pacific
                           
Malaysia
    874       865       956      
Brunei
    550       553       574      
Australia
    560       542       529      
New Zealand
    216       230       241      
China
    231       106       36      
Others
    113       109       85      
                             
Total Asia-Pacific
    2,544       2,405       2,421      
                             
Middle East, Russia, CIS
                           
Egypt
    145       167       201      
Pakistan
    86       76       79      
Syria
    6       7       11      
                             
Total Middle East, Russia, CIS
    237       250       291      
                             
USA
    1,053       1,130       1,163      
                             
Other Americas
                           
Canada
    406       402       425      
Others
    98       93       90      
                             
Total Other Americas
    504       495       515      
                             
Grand total
    8,569       8,214       8,368      
                             
 
[A]  By country of origin from gas produced by Shell subsidiaries and equity-accounted investments (Shell share). In those countries where PSCs operate, the figures shown represent the entitlements of the subsidiaries concerned under those contracts.

 
 
Shell Annual Report and Form 20-F 2008  31


Table of Contents

BUSINESS REVIEW
 

EXPLORATION & PRODUCTION
 
 
 
 

                                                                                                     
OIL AND GAS ACREAGE[A][B][C] (At December 31)                 thousand acres      
    2008     2007     2006      
    Developed     Undeveloped     Developed     Undeveloped     Developed     Undeveloped      
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net      
Europe
    9,646       2,785       8,924       3,038       10,253       2,894       10,384       3,007       9,850       3,225       12,860       4,025      
Africa[D]
    6,857       2,166       19,359       14,409       7,160       2,317       26,910       18,407       7,159       2,318       24,396       15,351      
Asia-Pacific
    6,277       2,586       92,917       29,695       7,578       3,265       96,078       27,556       7,228       3,277       125,421       34,290      
Middle East, Russia, CIS[E]
    27,578       9,642       68,980       36,048       27,520       9,614       74,666       31,176       32,238       10,284       66,579       30,321      
USA
    1,009       593       6,238       4,973       1,067       620       4,825       3,542       1,234       665       3,962       3,280      
Other Americas
    1,140       760       32,179       21,423       917       598       31,795       21,077       945       569       30,413       20,328      
                                                                                                     
Total
    52,507       18,532       228,597       109,586       54,495       19,308       244,658       104,765       58,654       20,338       263,631       107,595      
                                                                                                     
 
[A]  Including equity-accounted investments.
[B]  The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
[C]  One thousand acres equals approximately four square kilometres.
[D]  Excludes Egypt.
[E]  Includes Caspian region, Egypt and Sakhalin.
 
                                                                                                     
NUMBER OF PRODUCTIVE WELLS[A][B] (At December 31)                                                      
    2008     2007     2006      
    Oil     Gas     Oil     Gas     Oil     Gas      
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net      
Europe
    1,569       422       1,323       440       1,638       427       1,334       452       1,647       475       1,487       461      
Africa[C]
    1,136       397       40       13       1,006       356       35       11       945       333       40       13      
Asia-Pacific
    1,121       521       509       152       1,096       517       286       117       1,095       520       259       109      
Middle East, Russia, CIS[D]
    4,991       1,549       49       39       4,609       1,414       44       38       4,333       1,364       50       44      
USA
    15,505       7,828       1,412       1,037       15,493       7,825       1,040       765       15,977       8,077       1,069       830      
Other Americas
    497       394       900       670       427       332       351       268       355       264       326       250      
                                                                                                     
Total
    24,819       11,111       4,233       2,351       24,269       10,871       3,090       1,651       24,352       11,033       3,231       1,707      
                                                                                                     
 
[A]  Including equity-accounted investments.
[B]  The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
[C]  Excludes Egypt.
[D]  Includes Caspian region, Egypt and Sakhalin.

 
 
32  Shell Annual Report and Form 20-F 2008


Table of Contents

BUSINESS REVIEW
 

EXPLORATION & PRODUCTION
 
 
 
 

                                                     
NUMBER OF NET PRODUCTIVE WELLS AND DRY HOLES DRILLED[A] (At December 31)                              
    2008     2007     2006      
    Productive     Dry     Productive     Dry     Productive     Dry      
Exploratory
                                                   
Europe
    9       3       10       1       7       7      
Africa[B]
    4       1       3       1       7       1      
Asia-Pacific
    12       3       5       11       8       4      
Middle East, Russia, CIS[C]
    30       6       47       9       18       7      
USA
    13       4       23       3       30       3      
Other Americas
    44       47       48       11       22       3      
                                                     
Total
    112       64       136       36       92       25      
                                                     
Development
                                                   
Europe
    7       1       18       1       32       1      
Africa[B]
    14       1       19             15            
Asia-Pacific
    32             32       1       27            
Middle East, Russia, CIS[C]
    184       1       159       1       155       2      
USA
    475       1       475       2       478            
Other Americas
    61             44             76       2      
                                                     
Total
    773       4       747       5       783       5      
                                                     
 
[A]  Including equity-accounted investments.
[B]  Excludes Egypt.
[C]  Includes Caspian region, Egypt and Sakhalin.
 
                                                                                                                     
NUMBER OF WELLS IN THE PROCESS OF EXPLORATORY DRILLING[A][B][C]                                                      
    2008      
    Europe     Africa[D]      Asia Pacific     Middle East, Russia,CIS[E]      USA     Other Americas     Total      
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net      
At January 1
    43       16