Royal Dutch Shell

1. Introduction

1.1.

Overview of Accounting Course

The accounting course is taught in class of International Business School of UTM. The topics covered are: Introduction, Basic Accounting and Costing, Project Evaluation and Analysis, Project Planning and Budgeting, Costing for Decision and Control, Costing for Special Decision, Costing and Performance

Measurement, Performance Monitoring and Detection of Distress Signal, Corporate Governance and Value Based Management, and Recent Development in Accounting, Costing and Finance.

1.2.

Lesson from the Course

Lesson from the Course are: • Many things have to be considered in Accounting side from starting up a business, business planning, monitoring, evaluation, controlling and

forecasting. • Using different kind of perspective like variable costing, the impact will be huge on the business side.

1.3.

Lesson from the Project

Lesson from the Project are: • From financial statements, much things and information can be extracted out of them. • Comparing ratio could be done overtime, inter company or using industry average, if the information is available. Sometimes information of industry average is hard to retrieve since some of them are classified. 6

1.4.

Comment on the Course

Comment on the Course: • • Some materials of the course are not clear enough. Additional books, information must be searched to complement what have been taught in the class. • Dateline of the project should be given in more advances. The students predicted that the dateline was in Exam week while actually it wasn’t.

2. COMPANY BACKGROUND 2.1. VISION

Vision of the Shell Group is: The objectives of the Shell Group are to engage efficiently, responsibly and profitably in oil, oil products, gas, chemicals and other selected businesses and to participate in the search for and development of other sources of energy to meet evolving customer needs and the world’s growing demand for energy.

2.2.

MISSION

The missions of Shell Group are: • We believe that oil and gas will be integral to the global energy needs for economic development for many decades to come. Our role is to ensure that we extract and deliver them profitably and in environmentally and socially responsible ways.

We seek a high standard of performance, maintaining a strong long-term and growing position in the competitive environments in which we choose to operate.

We aim to work closely with our customers, partners and policymakers to advance more efficient and sustainable use of energy and natural resources.

2.3.

BOARD OF DIRECTORS

Royal Dutch Shell has a single tier Board of Directors chaired by a Non-executive Chairman, Aad Jacobs. The executive management is led by, the Chief Executive, Jeroen van der Veer. The members of the Board of Royal Dutch Shell plc meet regularly to discuss reviews and reports on the business and plans of Royal Dutch Shell. 8

1 Aad Jacobs, Non-executive Chairman 2 Lord Kerr of Kinlochard GCMG, Deputy Chairman and Senior Independent Non-executive Director 3 Jeroen van der Veer, Chief Executive 4 Peter Voser, Chief Financial Officer 5 Malcolm Brinded CBE FREng, Executive Director, Exploration & Production 6 Linda Cook, Executive Director, Gas & Power 7 Rob Routs, Executive Director, Oil Products and Chemicals 8 Maarten van den Bergh, Non-executive Director 9 Sir Peter Burt FRSE, Non-executive Director 10 Mary R. (Nina) Henderson, Non-executive Director 11 Sir Peter Job KBE, Non-executive Director 12 Wim Kok, Non-executive Director 13 Jonkheer Aarnout Loudon, Non-executive Director 14 Christine Morin-Postel, Non-executive Director 15 Lawrence Ricciardi, Non-executive Director Beat Hess, Group Legal Director Michiel Brandjes, Company Secretary

2.4. 2.4.1.

ROYAL DUTCH SHELL BUSINESS AND STRATEGY Business overview

Royal Dutch Shell business consists of: • • • • • Exploration & Production Gas & Power Oil Products Chemicals Renewables and Hydrogen.

Inside the Group, higher earnings and returns on investment in the upstream has been achieved compared with the other businesses. In the mean time, demand for natural gas has significant growth potential. The downstream businesses continue to offer attractive returns, cash flow and growth potential in Asia Pacific and Middle East. The business portfolio is being restructured to capture that growth market potential.

The Group’s core strengths include: • • • • Application of technology; Financial and project management skills to develop large oil and gas projects; Ability to develop and manage a diverse and international business portfolio; Development of customer-focused businesses built around the strength of the Shell brand.

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

An increase in capital investment to support that strategy has been announced and in 2006 the Group plan to spend a total of $19 billion (excluding capital contribution of minority shareholders in Sakhalin), of which around $15 billion will be invested in upstream projects.

This increased investment will be used to: • • • Grow and mature hydrocarbons resource base; Increase production; Build on the Group strong position in integrated gas and unconventional energy; • Enhance Shell competitive leadership in the downstream.

2.4.2.

More upstream

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

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

2.4.3.

Profitable downstream

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

Shell continues to reshape the portfolio and, in 2005, generated proceeds from divestments from various markets of over $3 billion. Focus will be continued on differentiating business through the provision of premium fuels such as Optimax and V-Power as well as working to make cleaner fuels such as Biofuels more widely and competitively available. Capital investment in downstream in 2006 will

be over $4 billion and $1.7 billion of investment will include areas of strong growth potential to deliver competitive returns.

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

2.4.4.

Reshaping the portfolio

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

2.4.5.

Operational excellence

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

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

2.4.6.

Technology and innovation

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

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

2.4.7.

Creating the culture and organization to deliver

Significant progress has been made in changing organization and shaping Shell culture to deliver its strategy and competitive returns to shareholders over time. The Unification Transaction of the former parent companies under Royal Dutch Shell in 2005 has provided a clearer, simpler, more efficient and accountable form of governance. The integration of the Oil Products and Chemicals businesses into one downstream organization has been successful in creating a more dynamic, responsive and competitive downstream organization.

2.5.

RECENT MERGER

In 2005, Royal Dutch Shell became the single 100% parent company of Royal Dutch Petroleum Company (Royal Dutch) and of Shell Transport and Trading Company Limited (Shell Transport) the two former public parent companies of the Group. These transactions include: • the scheme of arrangement of Shell Transport under the applicable laws of England and Wales (“the Scheme”) on July 20, 2005, pursuant to which Royal Dutch Shell acquired all the outstanding capital stock of Shell Transport; • the exchange offer for all of the ordinary shares of Royal Dutch, commenced on May 19, 2005, which became unconditional on July 20, 2005, and, including the subsequent offer acceptance period which expired on August 9, 13

2005, through which Royal Dutch Shell acquired a total of 98.49% of the outstanding capital stock of Royal Dutch; and • the series of restructuring transactions of the Group, which included the merger under Dutch law of Royal Dutch with its wholly-owned subsidiary, Shell Petroleum N.V, which became effective on December 21, 2005. As a result of the Merger, Royal Dutch and the Royal Dutch shares have ceased to exist and Shell Petroleum, the surviving company in the Merger, became a 100% owned subsidiary of Royal Dutch Shell. The diagram at the bottom of this page illustrates the structure of the Group following completion of the Unification. Operating and service company subsidiaries are not shown.

Figure 1: Structure of the Group

Royal Dutch Shell Class A ordinary shares (“Class A shares”) and Royal Dutch Shell Class B ordinary shares (“Class B shares”) have identical rights as set out in the Royal Dutch Shell Articles, except in relation to the dividend access mechanism applicable to the Royal Dutch Shell Class B ordinary shares. 14

The Unification Transaction did not result in the formation of a new reporting entity. Accordingly, the Unification Transaction has been accounted for using a carry-over basis of the historical costs of the assets and liabilities of Royal Dutch, Shell Transport and the other companies comprising the Group.

Royal Dutch and Shell Transport entered into a scheme of amalgamation dated September 12, 1906 and agreements from 1907 by which the scheme of amalgamation was implemented. From that time until the Restructuring, Royal Dutch owned 60% of the other companies comprising the Group and Shell Transport owned 40% of the other companies comprising the Group. All operating activities have been conducted through the subsidiaries of Royal Dutch and Shell Transport that have operated as a single economic enterprise. Prior to the consummation of the Unification Transaction, economic interests of the Royal Dutch and Shell Transport shareholders in the other companies comprising the Group reflected the 60:40 economic interests of Royal Dutch and Shell Transport in these companies.

2.6. 2.6.1.

INDUSTRY OUTLOOK Market overview

Global economic output expanded by around 4.5% in 2005, supported by strong activity in the US and Asia, down from 5.1% in 2004. The two key drivers underpinning this growth were US consumer resilience to higher energy prices and interest rates, and generally moderate inflationary pressures in key industrialized economies. Economic expansion is expected to stay broadly on track for 2006, despite prospects of continued higher oil prices, monetary tightening and further easing of investment growth in China.

In the US, business investment, residential sector spending and robust manufacturing output all contributed to high economic growth levels in 2005. For 2006, the expected moderate slow down in personal consumption and easing of the housing market would bring GDP growth largely in line with potential output growth of around 3.4%. In Europe, economic growth in 2005 came from export growth, partially fuelled by a weaker than expected euro, and a moderate increase in personal consumption, leading to an expansion of roughly 1.4%. Assuming moderate monetary tightening, and a more substantial recovery in personal consumption, this could increase to 1.8% in 2006.

The Japanese economy is continuing on a path of gradual recovery with both private consumption and non-residential business investments generating substantial momentum during the first half of 2005. Whether such momentum can be maintained over the next year remains uncertain, but the structural factors are in place for the economy to grow at around 2% in 2006. In China, 2005 was characterized by a change in the structure of growth, with the economy relying increasingly on exports, and to a lesser extent on domestic demand. For 2006, domestic demand growth is expected to slow and net exports to make a smaller contribution. GDP growth is expected to reduce moderately to around 8% in 2006.

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

2.6.2.

Oil and natural gas prices

Brent crude oil prices averaged $54.55 per barrel in 2005 compared with $38.30 in 2004, while West Texas Intermediate (WTI) averaged $56.60 per barrel compared with $41.50 a year earlier. 2005 saw a steady increase in 16

crude oil prices mainly driven by limited spare OPEC crude oil production capacity, weather related demand and supply effects and geopolitical tensions in the Middle East. WTI reached a new record high of just under $70 per barrel at hurricane Rita’s landfall at the end of August 2005, but prices were subsequently reduced by the International Energy Agency’s decision to release emergency stocks. Brent and WTI crude oil prices ended 2005 at $58 and $61 per barrel respectively.

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

The drivers of natural gas prices are more regionalized than the relatively global nature of crude oil pricing. While the Henry Hub price is a recognized price benchmark in North America, the Group also produces and sells natural gas in other areas that have significantly different supply, demand, regulatory circumstances and therefore pricing structure. Natural gas prices in continental Europe and Asia Pacific are predominantly indexed to oil prices. In Europe prices have also risen reflecting higher oil prices and strong demand.

In the UK prices at the National Balancing Point averaged $6.39 per million Btu versus $4.72 in 2004 and Germany border prices averaged around $5.81 per million Btu versus $4.30 in 2004.

2.6.3.

Oil and natural gas prices for investment evaluation

The range of possible future crude oil and natural gas prices to be used in project and portfolio evaluations within the Group are determined after assessment of short, medium and long-term price drivers under different sets of assumptions. 17

Historical analysis, trends and statistical volatility are part of this assessment, as well as analysis of global and regional economic conditions, geopolitics, OPEC actions, cost of future supply and the balance of supply and demand. Sensitivity analyses are used to test the impact of low price drivers, like economic weakness and high investment levels in new production, and high price drivers, like strong economic growth, and low investment levels in new production. Short-term events, such as relatively warm winters or cool summers, weather and (geo)-political related supply disruptions and the resulting effects on demand and inventory levels, contribute to price volatility.

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

3. FINANCIAL INFORMATION In 2005, as a result of the Unification Transaction, Royal Dutch Shell became the single 100% parent company of Royal Dutch Petroleum Company (Royal Dutch) and of Shell Transport and Trading Company Limited (previously known as The Shell Transport and Trading Company, plc (Shell Transport). Royal Dutch and Shell Transport are the two former public parent companies of the Group.

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

3.1.

Financial Statements

The Consolidated Financial Statements include the accounts of Royal Dutch Shell and of those companies in which it, either directly or indirectly, has control either through a majority of the voting rights or the right to exercise a controlling influence or to obtain the majority of the benefits and be exposed to the majority of the risks. Investments in companies over which Shell Group companies have significant influence but not control are classified as associated companies and are accounted for on the equity basis.

Interests in jointly controlled entities are also recognized on the equity basis. Interests in jointly controlled assets are recognized by including the Shell Group share of assets, liabilities, income and expenses on a line-by-line basis.

The Consolidated Financial Statements have been prepared using the carryover basis to account for the Unification and on the basis that the resulting structure was in place throughout the periods presented. The 2005 and 2004 Financial Statements have been prepared in accordance with applicable laws in England and Wales and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to Royal Dutch Shell, there are no material differences with IFRS as issued by the International Accounting Standards Board. The 2003, 2002, 2001 and other years Financial Statements have been prepared in accordance with US Generally Accepted Accounting Principles (US GAAP), applied by the Group prior to its transition date to IFRS.

3.2.

Reconciliation from previous GAAP to IFRS

The Group adopted IFRS in 2005, which varies from US GAAP in certain respects, with a date of transition of January 1, 2004. The differences between IFRS and US GAAP are described below.

3.2.1.

Discontinued operations

The definition of activities classified as discontinued operations differs from that under US GAAP. Under IFRS the activity must be a separate major line of business or geographical area of operations. Equity accounted and other investments are included in this classification. Under US GAAP this definition is broadened to include a component of an entity (rather than as a separate major line of business or geographical area of operations) but equity accounted and other investments are excluded.

As a result, all of the items presented as discontinued operations in 2004 under US GAAP are included within continuing operations under IFRS. In 2004 the Shell Group’s equity accounted investment in Basell was classified under IFRS as a discontinued operation.

20

3.2.2.

Reclassifications

Reclassifications are differences in line item allocation under IFRS that do not affect equity or income compared with that previously shown under US GAAP. They mainly comprise: • Incorporated joint ventures, in which the Group has a liability proportionate to its interest, are presented as equity accounted investments. For US GAAP purposes, the Shell Group proportionally consolidated these joint ventures until December 31, 2004. • The Group share of profit of equity accounted investments is reported on a single line (net of net finance costs and tax), which differs from the presentation under US GAAP until December 31, 2004.

• There is separate reporting of provisions under IFRS, which differs from the presentation under US GAAP until December 31, 2004. • Certain loans to equity accounted investments are classified as other noncurrent assets under IFRS and were reported under US GAAP until December 31, 2004 as equity accounted investments. • Research and development costs are included in cost of sales while these are separately disclosed under US GAAP. • Accretion expense for asset retirement obligations is reported as interest expense under IFRS and as cost of sales under US GAAP.

3.2.3.

Retirement benefits

Under IFRS, all gains and losses related to defined benefit pension arrangements and other post retirement benefits at the date of transition to IFRS have been recognized in the 2004 opening balance sheet, with a corresponding reduction in equity of $4,938 million. Under IFRS, the use of the fair value of pension plan assets (rather than market-related value under US GAAP) to calculate annual expected investment returns and the changed approach to amortization of investment gains/losses can be expected to increase volatility in income going forward as compared to past IFRS and US GAAP results. 21

3.2.4.

Share-based compensation

Under IFRS, share-based compensation awarded after November 7, 2002 and not vested at January 1, 2005 are recognized as an expense based on their fair value rather than recognizing the expense based on the intrinsic value method. This intrinsic value method was used by the Group until December 31, 2004, on a US GAAP basis and required no recognition of compensation expense for plans where the exercise price is not at a discount to the market value at the date of the grant, and the number of options is fixed on the grant date.

3.2.5.

Cumulative currency translation differences

Under IFRS at January 1, 2004, the balance of cumulative currency translation differences of $1,208 million was eliminated to increase retained earnings. There is no change under US GAAP. Equity in total under both IFRS and US GAAP was not impacted. Upon divestment or liquidation of an entity, cumulative currency translation differences related to that entity are taken to income under both IFRS and US GAAP. Due to the elimination of the opening balance as at January 1, 2004, the amounts of cumulative currency translation differences that are taken to income may differ between IFRS and US GAAP.

3.3.

Auditors

On May 12, 2005, PricewaterhouseCoopers LLP and KPMG were appointed as the auditors of Royal Dutch Shell. KPMG resigned from the position of joint auditors to Royal Dutch Shell on November 7, 2005, as a result of the Unification. PricewaterhouseCoopers LLP have signified their willingness to continue in office, and a resolution for their reappointment will be submitted to the AGM.

Prior to the Unification PricewaterhouseCoopers LLP acted as auditor to Shell Transport and KPMG acted as auditor for Royal Dutch. 22

3.4.

Currency translation

Assets and liabilities of non-US dollar Group companies are translated to US dollars at year-end rates of exchange, whilst their statements of income and cash flows are translated at quarterly average rates. Translation differences arising on consolidation are taken directly to a currency translation differences account within equity. Upon divestment or liquidation of an entity, cumulative currency translation differences related to that entity are taken to income.

3.5.

Directors’ Interest Directors' Name Maarten van den Berghd Malcolm Brinded Sir Peter Burt Linda Cook Nina Henderson Aad Jacobs Sir Peter Job Lord Kerr of Kinlochard Wim Kok Aarnout Loudon Christine Morin-Postel Lawrence Ricciardi Rob Routs Jeroen van der Veer Peter Voser Royal Dutch Shell Transport 4,000 – – 3,702 – – – – – 75,000 – 10,000 – 10,512 – – 77,948 10,000 – 9,000 – 3,570 10,000 – – – – – – –

Figure 2: Director’s Interest

3.6.

Substantial shareholdings

As at March 1, 2006, Royal Dutch Shell’s register of substantial shareholdings showed the following interests in 3% or more of Royal Dutch Shell’s shares:

23

Investor Barclays PLC Legal and General Group Plc The Capital Group Companies Inc UBS AG

Class A shares Class B shares 4.28% 3.08% 7.50% 3.16% 4.13% 3.94% 4.45% –

Figure 3: Major Shareholders

3.7.

Compensation structure

The Executive Directors’ compensation package is made up of: > base pay; > annual bonus; > long-term incentives: > Long-Term Incentive Plan; > Deferred Bonus Plan; > pension; and > other benefits.

Figure 4: 2005 Pay Mix for Executive Directors

3.8.

Base pay

Base pay is set at a competitive level, appropriate to the scope and complexity of the roles of Chief Executive and Executive Director, and reflecting the reporting structure in the Executive Committee. Base pay levels are set by reference to appropriate market levels benchmarked against four comparator groups: 24

> the major integrated oil companies (industry peers); and > the FTSE 20, the AEX 10 and the top 20 continental European companies in the FTSE Eurotop 100, based on market capitalization, (home market peers).

Major integrated oil companies (industry peers) are: BP, Chevron, Exxon Mobil and TOTAL.

3.9.

Consolidated Income of Statement IFRS $ million 2005 2004 18,400 9,625 210,424 26,877 1,060 266,386 223,259 43,127 15,098 1,809 5,015 1,483 1,059 31,659 12,168 19,491 -234 19,257 717 18,540 553

Revenue Exploration & Production Gas & Power Oil Products Chemicals Other industry segments and Corporate Revenue* Cost of sales Gross profit Selling, distribution and administrative expenses Exploration Share of profit of equity accounted investments Interest and other income Interest expense Income before taxation Taxation Income from continuing operations Income/(loss) from discontinued operations Income for the period Income attributable to minority interest Income attributable to shareholders of Royal Dutch Shell plc Research and development expenditure included in cost of sales

23,970 13,766 237,210 31,018 767 306,731 252,622 54,109 15,482 1,286 7,123 1,171 1,068 44,567 17,999 26,568 -307 26,261 950 25,311 588

Depreciation, depletion and amortization are included within the following expense headings as follows: Cost of sales 10,384 10,569 Selling, distribution and administrative expenses 1,472 1,593 Exploration 125 683 11,981 12,845 Revenue is stated after deducting sales taxes, excise duties and similar levies of $72,277 million in 2005 and $72,370 million in 2004.

Figure 5: Income Statement 2004-2005

3.10. Income Statement US GAAP format with MYR currency Below is Consolidated Income of Statement for year 2005 and 2004. It was converted to US GAAP from IFRS format reporting based on information from 2005 Shell annual report. For income statement, average exchange rate is going to be used. Rate for 2005 1 USD = 3.79 MYR and for 2004 1 USD = 3.80. The rates were taken from Asian Development Bank site http://www.adb.org. The formatting of the statement is made for comparison over time and trend analysis because before 2005 backward, the main reporting is in US GAAP format. US GAAP $ million 2004 264,281 221,009 43,272 14,775 1,823 553 26,121 5,653 31,774 1,691 1,215 32,250 15,088 17,162 626 16,536 1,646

Revenue* Cost of sales Gross profit Selling, distribution and administrative expenses Exploration R&D Operating profit of Shell Group companies Share of operating profit of associated companies Operating profit Interest and other income Interest expense Currency exchange gains/(losses) Income before taxation Taxation Income after taxation Income applicable to minority interests Income from continuing operations Income/(loss) from discontinued operations, net of tax Cumulative effect of a change in accounting principle, net of tax Income for the period Income attributable to minority interest Income attributable to shareholders of Royal Dutch Shell plc

2005 306,111 252,682 53,429 15,407 1,286 585 36,151 7,018 43,169 1,188 748 43,609 17,843 25,766 1,010 24,756 378 554 25,688

2005 1,160,161 957,665 202,496 58,393 4,874 2,217 137,012 26,598 163,611 4,503 2,835 165,278 67,625 97,653 3,828 93,825 1,433 2,100 97,358

MYR million 2004 1,004,268 839,834 164,434 56,145 6,927 2,101 99,260 21,481 120,741 6,426 4,617 122,550 57,334 65,216 2,379 62,837 6,255

18,182

69,092

25,688

18,182

97,358

69,092

Figure 6: Income Statement in MYR currency

3.11. Additional reporting Internal income segment reporting is on a global basis. For the main segments an analysis of certain data is provided between the USA and the world outside the USA.

3.11.1.

Business Segment Reporting $ million Total 6 2005 306,731 – 306,731 37,341 7,123 1,171 1,068 17,999 26,568 – – – -307 – -307 26,261 Dec 31, 2005 184,647 16,905 17,964 219,516 92,314 29,278 121,592 2005 15,916 705

1 Revenue Third party Intersegment Total Segment result Share of profit of equity accounted investments Interest and other income Interest expense Taxation Income from continuing operations Income/(loss) from discontinued operations Income for the period

2

3 237,210 16,643 253,853 11,608 1,713

4

5

23,970 13,766 21,704 1,858 45,674 15,624 25,268 392 4,112 999

31,018 767 – 3,978 – -44,183 34,996 767 -44,183 1,219 -1,146 – 423 -124 –

Segment assets Equity accounted investments Taxation, cash and financial asset investments Total assets Segment liabilities Debt and taxation Total liabilities

59,351 43,631 5,152 2,947

67,253 6,173

12,087 2,325 2,330 303

14,280 34,333

36,298

4,997 2,406

Capital expenditure New equity accounted investments Depreciation, depletion and amortization charge Impairment losses Impairment reversals

10,858 372

1,568 34

2,810 34

387 212

293 53

130 –

– –

85 5

20 4

70 –

305 9

Other 1 = Exploration & Production 2 = Gas & Power 3 = Oil Products 4 = Chemicals 5= Corporate and Other 6 = Eliminators

8,147

290

2,532

575

123

11,667

Figure 7: Business Segment Reporting of Income Statement

3.11.2.

Geographical area Segment Reporting $ million 2005 Other Other Eastern Western Europe Hemisphere USA Hemisphere Total 122,684 61,388 101,308 21,351 306,731

Third party revenue Segment assets at December 31: Property, plant and equipment and intangible assets Other Total Capital expenditure

26,558 30,802 57,360 3,358

34,003 15,054 49,057 8,876

19,767 35,270 55,037 1,948

11,580 11,613 23,193 1,734

91,908 92,739 184,647 15,916

Figure 8: Geographical Segment Reporting

3.12. Earning per Share $ Earnings per share Basic earnings per 0.07 ordinary share (*,**) Continuing operations Discontinued operations Diluted earnings per 0.07 ordinary share (*,**) Continuing operations Discontinued operations 3.79 3.84 -0.05 3.78 3.83 -0.05 2.74 2.77 -0.03 2.74 2.77 -0.03

* Earnings per Royal Dutch Shell Class A ordinary and Class B ordinary shares are identical.

** The basic earnings per share number have been restated to exclude shares held by ShareOwnership Trusts for share-based compensation plans. The diluted earnings per share are based on the same income figures. The difference between the basic and diluted number of shares relates to share-based compensation plans.

Figure 9: Earning per Share in USD

3.13. Consolidated Balance Sheet IFRS $ million 2005 2004 Assets Non-current assets Intangible assets Property plant and equipment Exploration & Production Gas & Power Oil Products Chemicals Other industry segments and Corporate Investments: Equity accounted investments Financial assets Deferred tax Prepaid pension costs Other Current assets Inventories Accounts receivable Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Deferred tax Retirement benefit obligations Other provisions Other Current liabilities Debt Accounts payable and accrued liabilities Taxes payable Retirement benefit obligations

4,350 87,558 51,275 7,256 22,263 5,945 819 16,905 3,672 2,562 2,486 4,091 121,624 19,776 66,386 11,730 97,892 219,516

4,528 87,918 50,889 6,251 23,622 6,348 808 19,190 2,700 2,789 2,479 5,793 125,397 15,375 37,473 9,201 62,049 187,446

7,578 10,763 5,807 7,385 5,095 36,628 5,338 69,013 8,782 282

8,858 12,930 6,795 6,828 5,800 41,211 5,734 37,909 9,058 339

Other provisions Total liabilities Equity Ordinary share capital Preference share capital Treasury shares Other reserves Retained earnings Equity attributable to shareholders of Royal Dutch Shell plc Minority interest Total equity Total liabilities and equity Capital employed*

1,549 84,964 121,592 571 – -3,809 3,584 90,578 90,924 7,000 97,924 219,516 110,840

1,812 54,852 96,063 584 20 -4,187 8,865 80,788 86,070 5,313 91,383 187,446 105,975

Capital employed is total assets minus total liabilities before deduction of minority interests plus short-term and long-term debt.

Figure 10: Balance Sheet of 2004-2005

3.14. Additional Reporting of Balance Sheet 3.14.1. Intangible Assets $ million 2005 Goodwill Other Total Cost At January 1, 2005 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31, 2005 Depreciation, depletion and amortization At January 1, 2005 Charge for the year Sales, retirements and other movements Currency translation differences At December 31, 2005 Net book amount at December 31, 2005 4,032 3,093 12 267 -148 -79 -80 -136 3,816 3,145 1,344 1,253 14 308 -175 -9 -51 -73 1,132 1,479 2,684 1,666 7,125 279 -227 -216 6,961 2,597 322 -184 -124 2,611 4,350

Figure 11: Intangible Assets

Goodwill relates primarily to the acquisition in 2002 of Pennzoil-Quaker State, which is in the Oil Products segment. In 2005, this goodwill was tested for impairment on a value in use basis utilizing a 6% nominal discount rate, a 2% inflation rate and a 20 year forecast of cash flows based on business projections.

3.14.2.

Balance Sheet US GAAP Format with MYR currency US GAAP $ million 2005 2004 MYR million 2004

2005

Assets Non-current assets Intangible assets Property plant and equipment Investments: Equity accounted investments Financial assets Deferred tax Prepaid pension costs Other Current assets Inventories Accounts receivable Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Deferred tax Retirement benefit obligations Other provisions Other Current liabilities Debt Accounts payable and accrued liabilities Taxes payable Retirement benefit obligations Other provisions Total liabilities Minority interest Equity Ordinary share capital

4,644 88,007 16,685 2,934 1,759 11,756 125,785 19,776 66,355 11,730 97,861 223,646

4,890 88,940 19,743 2,748 1,995 12,647 130,963 15,391 38,063 9,208 62,662 193,625

17,601 333,547 63,236 11,120 6,667 44,555 476,725 74,951 251,485 44,457 370,893 847,618

18,582 337,972 75,023 10,442 7,581 48,059 497,659 58,486 144,639 34,990 238,116 735,775

7,368 12,093 12,851 5,346 37,658 5,328 70,763 8,788

8,600 14,844 10,753 8,065 42,262 5,762 39,862 9,885

27,925 45,832 48,705 20,261 142,724 20,193 268,192 33,307

32,680 56,407 40,861 30,647 160,596 21,896 151,476 37,563

84,879 122,537 7,006 571

55,509 97,771 5,309 584

321,691 464,415 26,553 2,164

210,934 371,530 20,174 2,219

Preference share capital Treasury shares 3,637 Other reserves -3,809 Retained earnings 95,965 Accumulated other comprehensive income/(loss) -2,261 Equity attributable to shareholders of Royal Dutch Shell plc 94,103 Minority interest Total equity 94,103 Total liabilities and equity 223,646 Capital employed* 113,805

20 5,371 -4,187 85,791 2,966 90,545 90,545 193,625 110,216

13,784 -14,436 363,707 -8,569 356,650 356,650 847,618 431,321

76 20,410 -15,911 326,006 11,271 344,071 344,071 735,775 418,821

Figure 12: Balance Sheet in MYR currency

3.15. Consolidated Cash Flow IFRS $ million 2,005 2,004 Cash flow from operating activities: Income for the period Adjustment for: Current taxation Interest (income)/expense Depreciation depletion and amortization (Profit)/loss on sale of assets Decrease/(increase) in net working capital Share of profit of equity accounted investments Dividends received from equity accounted investments Deferred taxation and other provisions Other Cash flow from operating activities (pre-tax) Taxation paid Cash flow from operating activities Cash flow from investing activities:

Capital expenditure Investments in equity accounted investments Proceeds from sale of assets Proceeds from sale of equity accounted investments Proceeds from sale of/Additions to financial assets Interest received Cash flow from investing activities Cash flow from financing activities: Net increase/(decrease) in debt with maturity period within three months Other debt: 26,261 19,435 632 11,981 -1,313 -5,664 -7,123 6,709 -1,515 -47 49,356 -19,243 30,113 19,257 13,081 803 12,845 -3,087 -4,062 -5,015 4,190 -1,007 292 37,297 -10,760 26,537

-15,904 -705 2,310 4,313 362 863 -8,761

-13,566 -1,058 5,142 1,316 1,739 463 -5,964

-956

New borrowings Repayments Interest paid Change in minority interest Net issue/(repurchase) of shares Dividends paid to: Shareholders of Royal Dutch Shell plc Minority interest Payments to former Royal Dutch shareholders Treasury shares: net sales/(purchases) and dividends received Cash flow from financing activities Currency translation differences relating to cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31

2,057 -2,656 -1,124 1,143 -4,988

2,044 -6,380 -962 812 -698

-10,556 -7,391 -293 -264 -1,651 – 451 -761 -18,573 -13,592 -250 113 2,529 7,094 9,201 2,107 11,730 9,201

Figure 13: Cash Flow of 2004-2005

3.16. Operating Review Oil and gas reserves can’t be measured precisely since estimation of reserves involves subjective judgment. The estimation remains subject to revision. Totals are influenced by acquisition and divestment activities. Proved reserves are shown net of any quantities of crude oil or natural gas that expected to be taken. Proved reserves include certain quantities of crude oil or natural gas that will be produced under an arrangement that involves Group companies in upstream risks and rewards but do not transfer title of the product to those companies.

Table below shows proved developed and undeveloped reserves in 2005. Reserves that don’t have producing activities are excluded. For this purpose natural gas has been converted to crude oil equivalent using a factor of 5,800 standard cubic feet per barrel. million barrels of oil equivalent 2005 Eastern Western Hemisphere Hemisphere Middle USA Other Total East, Russia, CIS

Europe Africa

Asia Pacific

Proved developed and undeveloped reserves

33

Group companies At January 1 At December 31 Group share of equity accounted investments At January 1 At December 31 Proved developed reserves Group companies At January 1 At December 31 Group share of equity accounted investments At January 1 At December 31

1,981 1,848

1,582 1,257

1,418 1,169

1,726 2,213

945 878

412 396

8,064 7,761

2,175 2,078

– –

791 709

457 490

395 428

– –

3,818 3,705

1,302 1,270

775 667

600 496

504 461

565 507

301 242

4,047 3,643

1,693 1,755

– –

464 412

360 360

352 348

– –

2,869 2,875 million barrels

Oil sands Group companies At January 1 At December 31 * Africa territory excludes Egypt. * Russia excludes Sakhalin.

– –

– –

– –

– –

– –

615 746

615 746

* CIS is former Soviet Union (Commonwealth of Independent States), which includes Caspian region, Egypt and Sakhalin.

Figure 14: Proved Developed and Undeveloped Reserves

Below table shows capital expenditure and exploration expense by geographical area. $ million 2004 2003 1,625 2,185 1,982 1,861 536 579 3,199 2,155 1,282 1,652 588 686 9,212 9,118

Europe Africa Asia Pacific Middle East, Russia, CIS USA Other Western Hemisphere

2005 1,991 1,937 1,070 3,841 1,486 1,074 11,399

Figure 15: Capex and Exploration Expense by Geographical Ares

Crude oil and natural gas liquids production are attached below.

UK Norway Denmark Italy Netherlands Germany Others Total Europe Nigeria Gabon Cameroon Others Total Africa Brunei Australia Malaysia China New Zealand Thailand Others Total Asia Pacific Oman Abu Dhabi Syria Russia Egypt Others Total Middle East Total Other Eastern Hemisphere USA Other Western Hemisphere Canada Venezuela Brazil Others Total Other Western Hemisphere Grand total Metric equivalent ** Less than one thousand barrels daily.

thousand barrels/day 2005 2004 2003 250 275 354 107 129 143 143 142 141 30 21 19 7 8 8 4 5 5 ** ** 1 541 580 671 324 349 314 36 35 35 13 15 16 – – – 373 399 365 95 98 103 53 60 73 41 47 51 20 20 22 15 15 19 – – 14 4 3 3 228 243 285 214 246 269 134 133 126 36 35 44 35 32 30 14 10 11 10 15 17 443 471 497 1,585 1,113 1,147 333 375 414 39 40 44 14 22 46 26 43 11 1 ** ** 80 105 101 1,998 2,173 2,333 million tones a year 100 109 117

Figure 16: Crude Oil and Natural Gas Production

4. PERFORMANCE MEASUREMENT Financial measures will be taken mainly on Income Statement and Balance Sheet of recent years. Later, for trend analysis, because the financial statements are available until 1993, the measures can be done until 1994. It is because for some ratios that involve income statement and balance sheet, the balance item must be averaged first between current year and past year before used as fraction or denominator. Except for earning per share (EPS) ratio, all ratios use MYR million as their component.

The balance sheet and income statement have been converted to MYR for the year 1993-2005 based on rate on http://www.adb.org (Asian Development Bank). Because balance is stated at the end of the year, the rate give is on that date also. For income statement, rate used is on average since Shell Group has issued the statement quarterly basis. The rates are attached in the Appendix. For calculation of ratios, all $ million has been converted to $ MYR. All of the ratios use MYR as base for calculation except EPS and P/E use MYR instead.

To measure Shell financial statements here, kind of ratios to be used are: • • • • • • • Profitability Ratios Liquidity Ratios Efficiency Ratios Leverage Ratios Market Ratios Dupont de-Composition Ratios Altman Z-score

4.1.

Profitability Ratios

This familiar dimension of a company's financial structure concerns management's ability to control expenses and to earn a return on committed funds. Ratios that measure profitability usually consist of a profit element and one that represents the amount of funds invested in aspect of the firm in the view of user’s interest.

4.1.1.

Profit Margin on Sales ratio

This ratio measures profit per dollar or ringgit of sales. The profit margin on sales is computed by dividing net income after taxes by sales. = profit after tax / net sales = 97,357.52 /1,160,160.69 = 8.39%

4.1.2.

Basic Earning Power ratio

The basic earning power ratio is calculated by dividing the earnings before interests and taxes by total assets. It measures operating income per asset. = operating income / total assets = 163,610.51 / ((845,381.88 + 735,775) / 2) = 20.70% 4.1.3. Return on Sales ratio

This ratio is calculated by dividing operating income by net sales. It measures profit outcome per dollar of sales. = operating income / net sales = 163,610.51 / 1,160,160.69 = 14.10%

4.1.4.

Return on Assets (ROA) ratio

ROA is measurement to calculate profit by total assets. The ratio return on assets is calculated by dividing net income by total assets. = income before taxes / total assets = 165,278.11 / ((845,381.88 + 735,775)/2) = 20.91%

4.1.5.

Return on Investment (ROI) ratio

Shell group management has replaced investment replaced by capital employed term because the management thinks it is better representation of Group investment. Capital employed is Group total assets minus total liabilities before deduction of minority interests, plus short-term and long-term debt. = net income / capital employed = 97,357.52 / ((430,182.9 + 418,820.8)/2) = 22.93%

4.1.6.

Return on Equity (ROE) ratio

ROE ratio is the ratio of net income available to common stockholders to common equity. = net income available for stockholders / equity = 97,357.52 / ((355,709.34 + 344,071) / 2) = 27.83%

4.2.

Liquidity Ratios

The liquidity of a firm is its ability to pay current liabilities as they come due (current liabilities are debts due within one year). The only funds available for payment of short-term debt are either cash or other current assets readily convertible to cash.

4.2.1.

Current ratio

Measuring firm’s ability to meet its current debt, current ratio is computed by dividing current assets by current liabilities. = current assets / current liabilities = 238,115.6 / 210,934.2 = 1.13 times

4.2.2.

Quick ratio

Quick ratio is the same with current ratio except that it eliminated inventory. It is calculated by deducting inventories from current assets and dividing the result by current liabilities. = (current assets - inventories) / current liabilities = (369,914.58 – 74,753.28) / 210,934.2 = 92.00%

4.3.

Efficiency Ratios

Efficiency ratios, also called activity or turnover ratios, measure how efficient a firm's assets are managed.

4.3.1.

Accounts Receivable Turnover

This ratio measures the number of times trade receivables turn over during the year. It is calculated by dividing net sales by accounts receivable = net sales / accounts receivable = 1,160,160.69 / ((250,821.9 + 144,639.4) / 2) = 5.87 times

4.3.2.

Accounts Receivable Collection

It is an indicator of how quickly the firm is collecting from its credit sales. This calculation is 365 days divided by accounts receivable turnover. = 365 / accounts receivable turnover = 365 / 5.87 = 62 days

4.3.3.

Inventory Turnover

It indicates the liquidity of the inventory. This is calculated by dividing the Cost of Goods Sold by the Average Inventory. = cost of goods sold / average inventory = 957,664.78 / ((74,753.28 + 58,485.8) / 2) = 14.38 times

4.3.4.

Days Inventory

To get days inventory, 365 days is divided by inventory turnover. = 365 / inventory turnover = 365 / 14.38 = 25 days

4.3.5.

Accounts Payable Turnover

This ratio measures times of accounts payable turnover during a year. The cost of goods sold is divided by accounts payable. = cost of goods sold / accounts payable = 957,664.78 / ((267,484.14 + 151,475.6) / 2) = 4.57 times

4.3.6.

Days Payable

To get days payable, 365 days is divided by accounts payable turnover. = 365 / accounts payable turnover = 365 / 6.98 = 79 days

4.3.7.

Cash Flow Cycles

To calculate cash flow cycles of the firm, days inventory is added by accounts payable collection and reduced by days payable. = Days Inventory + Accounts Receivable Collection – Days Payable = 25 + 62 – 79 = 8 days

4.4.

Leverage Ratios

The extent to which the firm relies on debt as opposed to owner's capital (net worth) is its leverage position. A highly leveraged firm is one with a high proportion of debt relative to owner's investment.

4.4.1.

Long-term Debt ratio

The ratio is computed by dividing long-term debt with capital employed less shortterm debt. This ratio measures proportion of capital employed is financed by longterm debt. = long-term debt / (capital employed – short-term debt) = 27,851.04 / (430,182.9 – 20,139.84) = 6.79%

41

4.4.2.

Total Debt ratio

The total debt ratio is calculated by dividing total debt by total assets. It measures proportion of capital employed is financed by debt. = (long-term debt + short-term debt) / capital employed = (27,851.04 + 20,139.84) / 430,182.9 = 11.16%

4.4.3.

Debt to Equity ratio

This ratio expresses the relationship between capital contributed by creditors and that contributed by owners. The debt to equity ratio is calculated by dividing total debt by owner's equity. = total debt / equity = (27,851.04 + 20,139.84) / 355,709.34 = 13.49%

4.5.

Market ratios

Market ratios relate a market value, the stock price, to values from the company's financial statements.

4.5.1.

Earning Per Share

The earning per share ratio is calculated by dividing net income by the number of shares outstanding. = net income / shares outstanding = 97,357.52 million/ 6,674,179,767 = 14.59

4.5.2.

Price Earning ratio (P/E)

This ratio indicates how much investors are willing to pay per dollar of current earnings. It is computed by dividing market price per share by EPS. Price per share is in dollar before converted to MYR. Because Shell group shares are sold in two stock name, Royal Dutch Shell A and Royal Dutch Shell B, there will be two different share price and two different price earning ratio. = price per share / EPS = 233.05 / 14.59 = 15.98 = 244.57 / 14.59 = 16.77 (RDS B) (RDS A)

4.6.<