Royal Dutch Shell plc (RDS) 2nd Quarter 2018 and Half Year Unaudited Results

THE HAGUE, Netherlands, July 26, 2018 /PRNewswire/ --

Compared with the second quarter 2017, CCS earnings attributable to shareholders excluding identified items of $4.7 billion reflected increased contributions from Integrated Gas and Upstream, partly offset by lower earnings in Downstream.

Cash flow from operating activities for the second quarter 2018 was $9.5 billion, which included negative working capital movements of $2.1 billion, compared with $11.3 billion in the second quarter 2017, which included positive working capital movements of $2.5 billion[i].

Total dividends distributed to shareholders in the quarter were $3.9 billion. Today, Shell starts a share buyback programme of at least $25 billion in the period 2018-2020, subject to further progress with debt reduction and oil price conditions. In the first tranche of this programme Shell enters into an irrevocable, non-discretionary arrangement to enable the purchase of A ordinary shares and/or B ordinary shares up to the maximum aggregate consideration of $2 billion over a period of 3 months.

^[i] Revised from positive working capital movements of $2.3 billion. See Note 7 and Definition I.

Royal Dutch Shell Chief Executive Officer Ben van Beurden commented: "Today we are taking another important step towards the delivery of our world-class investment case, with the launch of a $25 billion share buyback programme.

This move complements the progress we have made since the completion of the BG acquisition in 2016, to reshape our portfolio through a $30 billion divestment programme and new projects, to reduce net debt, and to turn off the scrip dividend.

Our financial framework remains unchanged. Our free cash flow outlook and the progress we have made to strengthen our balance sheet give us the confidence to start our share buyback programme."

Supplementary financial and operational disclosure for this quarter is available at www.shell.com/investor.

SECOND QUARTER 2018 PORTFOLIO DEVELOPMENTS

Integrated Gas

Divestments completed in the quarter amounted to $1,995 million. These included the sale of Shell's interest in the Bongkot field and adjoining acreage offshore Thailand to PTT Exploration & Production and the sale of its 15% shareholding in Malaysia LNG Tiga Sdn Bhd to the Sarawak State Financial Secretary.

In July, Shell and its partners completed the dilution of interests in LNG Canada to Petronas. As a result of this transaction, Shell's interest in LNG Canada is 40%.

Upstream

During the quarter, Shell announced a large deep-water exploration discovery in the US Gulf of Mexico with its Dover well (Shell interest 100%). In July, Shell signed production-sharing contracts with the government of Mauritania for the exploration and potential future production of two offshore blocks (Shell interest 90%).

In May, Shell announced the start of production of Kaikias Phase 1, a subsea development in the US Gulf of Mexico with estimated peak production of 40 thousand boe/d (Shell interest 80%).

NAM's shareholders and the Dutch State signed a Heads of Agreement in June, which includes measures to support the ramp-down of production and to ensure the financial robustness of NAM. As part of the agreement, NAM's shareholders have agreed for NAM not to declare dividends for 2018 and 2019. In 2016 and 2017, dividends received by Shell from NAM totalled $260 million and $342 million respectively.

Divestments completed in the quarter amounted to $486 million.

In June, Shell announced the sale of its entire 44.56% interest in Draugen and 12.00% interest in Gjøa in Norway to OKEA AS for $556 million. Shell also sold its shares in Canadian Natural Resources Limited for $3,307 million.

Downstream

In May, Shell and China National Offshore Oil Corporation ("CNOOC") announced the start-up of the second ethylene cracker at their Nanhai petrochemicals complex in Huizhou, Guangdong Province, China. The new cracker increases ethylene capacity at the complex by around 1.2 million tonnes per year (Shell interest 50%).

PERFORMANCE BY SEGMENT

Second quarter

identified items primarily reflected a total net gain on sale of assets of $876 million, mainly related to divestments in Thailand and India, and a gain on fair value accounting of commodity derivatives of $238 million. Identified items also included a charge of $53 million related to the impact of the weakening Australian dollar on a deferred tax position.

Compared with the second quarter 2017, Integrated Gas earnings excluding identified items benefited from higher realised oil, gas and LNG prices, increased contributions from trading, as well as higher sales volumes. This was partly offset by higher operating expenses. Total production increased by 16% compared with the second quarter 2017, mainly due to higher volumes from Pearl GTL. LNG liquefaction volumes increased by 5% compared with the same quarter a year ago, mainly due to increased feedgas availability across the portfolio, partly offset by higher maintenance.

Cash flow from operating activities increased compared with the same quarter a year ago mainly as a result of higher earnings, partly offset by increased cash margining on derivatives and higher tax payments. Cash flow from operating activities included negative working capital movements of $48 million, compared with positive movements of $166 million[ii] in the same quarter a year ago.

Half year identified items comprised a total net gain on sale of assets of $877 million and a gain on fair value accounting of commodity derivatives of $208 million, partly offset by impairments of $50 million.

Compared with the first half 2017, Integrated Gas earnings excluding identified items benefited from higher realised oil, gas and LNG prices, increased contributions from trading and higher sales volumes. This was partly offset by higher operating expenses. Total production increased by 23%, mainly due to higher volumes from Pearl GTL and Gorgon. Despite the Woodside divestment, LNG liquefaction volumes increased by 7% compared with the same period last year, mainly due to increased feedgas availability.

Cash flow from operating activities increased compared with the same period a year ago mainly as a result of higher earnings, partly offset by increased cash margining on derivatives. Cash flow from operating activities included negative working capital movements of $432 million, compared with negative movements of $239 million[iii] in the same period last year.

^[ii] Revised from negative working capital movements of $133 million. See Note 7 and Definition I.

^[iii] Revised from negative working capital movements of $723 million. See Note 7 and Definition I.

Second quarter identified items primarily reflected a charge of $532 million related to the impact of the weakening Brazilian real on a deferred tax position, as well as impairments of $352 million, mainly related to Shell's share of impairments in deep-water rig joint ventures. Identified items also included a net gain on sale of assets of $585 million, primarily related to the divestment of Shell's interest in the Mukhaizna asset in Oman as well as a tax remeasurement triggered by divestments in Norway.

Compared with the second quarter 2017, Upstream earnings excluding identified items benefited from higher realised oil prices, lower depreciation and lower operating expenses. These were partly offset by lower volumes, higher taxation as a result of adverse currency exchange effects and movements in deferred tax positions. Production decreased by 7%, compared with the same quarter a year ago, mainly due to divestments. Excluding divestments, production was 2% higher than in the same quarter a year ago, mainly due to the start-up of new fields and the continuing ramp-up of existing fields.

Cash flow from operating activities increased compared with the same quarter a year ago, mainly reflecting higher earnings, partly offset by higher tax payments and lower dividends received. Cash flow from operating activities included positive working capital movements of $485 million, compared with positive movements of $752 million[iv] in the second quarter 2017.

Half year identified items comprised impairments of $666 million, mainly related to Shell's share of impairments recognised by deep-water rig joint ventures and by NAM, and a $557 million charge related to the impact of the weakening Brazilian real on a deferred tax position. These were partly offset by a net gain on sale of assets of $1,191 million, primarily related to divestments in West Qurna, North Sabah and Oman as well as a tax remeasurement triggered by divestments in Norway.

Compared with the first half 2017, Upstream earnings excluding identified items benefited from higher realised oil prices as well as lower depreciation, partly offset by lower volumes. Production decreased by 6%, compared with the same period a year ago, mainly due to divestments and field decline, partly offset by new fields ramping up. Excluding divestments, production was 4% higher than in the same period last year.

Cash flow from operating activities reflected increased earnings, partly offset by higher tax payments and lower dividends received compared with the same period a year ago. Cash flow from operating activities included negative working capital movements of $345 million, compared with positive movements of $80 million[v] in the first half 2017.

^[iv] Revised from positive working capital movements of $673 million. See Note 7 and Definition I.

^[v] Revised from negative working capital movements of $130 million. See Note 7 and Definition I.

Second quarter identified items mainly reflected a loss on fair value accounting of commodity derivatives of $323 million, redundancy and restructuring costs of $72 million, impairments of $53 million and a net loss on the sale of assets of $49 million, mainly related to tax remeasurements.

Compared with the second quarter 2017, Downstream earnings excluding identified items were negatively impacted by lower trading results, higher operating expenses and adverse currency exchange effects.

Cash flow from operating activities decreased compared with the second quarter 2017, mainly due to negative working capital movements of $2,491 million, compared with positive movements of $1,831 million[vi] in the same quarter a year ago. Excluding working capital movements, cash flow from operating activities increased as lower cash cost of sales more than offset lower CCS earnings.

^[vi] Revised from positive working capital movements of $1,744 million. See Note 7 and Definition I.

Oil Products

• Refining & Trading earnings excluding identified items were negatively impacted by lower trading results, adverse currency exchange effects and higher operating expenses compared with the second quarter 2017.
  Refinery availability decreased to 87% compared with 91% in the second quarter 2017, mainly due to higher planned maintenance.
  
• Marketing earnings excluding identified items decreased compared with the second quarter 2017. Earnings were impacted by lower retail margins, higher operating expenses and adverse currency exchange effects, partly offset by higher margins in global commercial.
  Compared with the second quarter 2017, Oil Products sales volumes were higher due to increased Refining & Trading sales volumes.

Chemicals

• Chemicals earnings excluding identified items were primarily impacted by lower underlying cracker margins, increased feedstock prices and higher operating expenses, partly offset by improved underlying margins on intermediates.
  Chemicals manufacturing plant availability increased to 93% compared with 92% in the second quarter 2017, mainly due to lower planned maintenance.

Half year identified items comprised a loss on fair value accounting of commodity derivatives of $336 million and impairments of $90 million, partly offset by a gain of $57 million related to deferred tax remeasurements in non-Shell operated ventures.

Compared with the first half 2017, Downstream earnings excluding identified items were negatively impacted by lower trading results, adverse currency exchange effects and higher operating expenses.

Cash flow from operating activities decreased compared with the first half 2017, mainly due to negative working capital movements of $2,520 million, compared with positive movements of $1,463 million[vii] in the same period a year ago. Excluding working capital movements, cash flow from operating activities of $6,617 million reflected decreased CCS earnings, partly offset by lower cash cost of sales.

Oil Products

• Refining & Trading earnings excluding identified items were negatively impacted by lower trading results, adverse currency exchange effects and higher operating expenses, compared with the first half 2017.
  Refinery availability decreased to 90% compared with 92% in the same period last year, mainly due to additional planned maintenance.
• Marketing earnings excluding identified items were impacted by higher operating expenses and adverse currency exchange effects, compared with the first half 2017.

Compared with the first half 2017, Oil Products sales volumes were higher largely due to increased Refining & Trading sales volumes.

Chemicals

• Chemicals earnings excluding identified items reflected less favourable industry conditions and higher operating expenses.

Chemicals manufacturing plant availability increased to 94% from 93% in the first half 2017, mainly reflecting lower planned maintenance.

^[vii] Revised from positive working capital movements of $1,523 million. See Note 7 and Definition I.

Second quarter identified items primarily reflected a tax credit of $325 million related to the impact of the weakening Brazilian real on financing positions.

Compared with the second quarter 2017, Corporate earnings excluding identified items reflected lower tax credits and adverse currency exchange effects.

Half year identified items primarily reflected a tax credit of $331 million related to the impact of the weakening Brazilian real on financing positions.

Compared with the first half 2017, Corporate earnings excluding identified items reflected adverse currency exchange effects.

OUTLOOK FOR THE third QUARTER 2018

Compared with the third quarter 2017, Integrated Gas production is expected to be 40 – 70 thousand boe/d lower, mainly due to divestments and higher maintenance. LNG liquefaction volumes are expected to be at a similar level.

Compared with the third quarter 2017, Upstream production is expected to be 210 – 240 thousand boe/d lower, mainly due to divestments, field decline and higher maintenance, partly offset by volumes from new fields.

Given the unplanned downtime events in the third quarter 2017, refinery availability is expected to increase in the third quarter 2018 compared with the same period a year ago. This will be partly offset by higher planned maintenance.

Oil products sales volumes are expected to be at a similar level compared with the same period a year ago.

Given the unplanned downtime events in the third quarter 2017, chemicals availability is expected to increase in the third quarter 2018 compared with the same period a year ago. This will be partly offset by higher planned maintenance from the turnaround season.

Corporate earnings excluding identified items are expected to be a net charge of $ 400 – 450 million in the third quarter and a net charge of around $1.4 – 1.6 billion for the full year 2018. This excludes the impact of currency exchange effects.

UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

^1.    Prior period comparatives within Cash flow from operating activities have been revised to conform with current year presentation. Overall, the revisions do not have an impact on the previously published Cash flow from operating activities. See Note 7 "Change in presentation of Consolidated Statement of Cash Flows".

^2.    Second quarter 2017 includes $5,188 million related to the oil sands divestment.

^3.    Second quarter 2018 includes $3,307 million from the sale of shares in Canadian Natural Resources Limited, which were received in connection with the oil sands divestment.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.  Basis of preparation

These unaudited Condensed Consolidated Interim Financial Statements ("Interim Statements") of Royal Dutch Shell plc ("the Company") and its subsidiaries (collectively referred to as "Shell") have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board and as adopted by the European Union, and on the basis of the same accounting principles as those used in the Annual Report and Form 20-F for the year ended December 31, 2017 (pages 142 to 148) as filed with the US Securities and Exchange Commission, except for the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers on January 1, 2018, and should be read in conjunction with that filing.

The Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing these Interim Statements.

IFRS 9 sets out the requirements for recognising and measuring financial assets, financial liabilities and certain contracts to buy or sell non-financial items. Furthermore, the standard facilitates use of hedge accounting and also results in different income recognition upon the sale of certain investments in securities. The adoption of IFRS 9 resulted in a decrease of $83 million in equity at January 1, 2018, mainly representing the recognition of additional provisions for impairment of receivables under the expected loss model. In addition, changing the measurement basis from amortised cost to fair value for certain financial assets resulted in an increase of $33 million in equity at January 1, 2018. Furthermore, a reclassification within equity between other reserves and retained earnings, primarily representing deferred cost of hedging, was recognised. 

IFRS 15 provides a single model of accounting for revenue arising from contracts with customers based on the identification and satisfaction of performance obligations, and revenue from contracts with customers that is distinguished from other sources. Shell has adopted IFRS 15 with effect from January 1, 2018, and has elected to apply the modified retrospective transition approach. Although IFRS 15 does not generally represent a change from Shell's current practice, the accounting for certain contracts, such as those with provisional pricing or take-or-pay arrangements, and underlifts and overlifts, has been identified as an area of change. However, these do not have a significant effect on Shell's accounting or disclosures, and therefore no transition adjustment is presented.

IFRS 16 Leases will be applied by Shell with effect from January 1, 2019. Under the new standard, all lease contracts, with limited exceptions, are recognised in financial statements by way of right-of-use assets and corresponding lease liabilities. Shell will apply the modified retrospective transition approach without restating comparative information.

Compared with the existing accounting for operating leases under IAS 17, application of the new standard will have a significant impact on the classification of expenditures and consequently the classification of cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. It will also impact the timing of expenses recognised in the statement of income.

Differences between the operating lease commitments under the current standard and the additional lease liabilities recognised on balance sheet at January 1, 2019 are expected to be mainly driven by the impact of discounting lease payments, short-term leases, the use of hindsight to assess options to extend or terminate leases and commencement of lease contracts after January 1, 2019. To determine the impact upon application of the new standard, a detailed review of contracts is underway. No impact is expected in relation to lease contracts previously classified as finance leases.

The financial information presented in the Interim Statements does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006 ("the Act"). Statutory accounts for the year ended December 31, 2017 were published in Shell's Annual Report and Form 20-F and a copy was delivered to the Registrar of Companies for England and Wales. The auditor's report on those accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498(2) or 498(3) of the Act.

2.  Segment information

Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. Sales between segments are based on prices generally equivalent to commercially available prices.

3.  Earnings per share

4.  Share capital

At Royal Dutch Shell plc's Annual General Meeting on May 22, 2018, the Board was authorised to allot ordinary shares in Royal Dutch Shell plc, and to grant rights to subscribe for, or to convert, any security into ordinary shares in Royal Dutch Shell plc, up to an aggregate nominal amount of €194 million (representing 2,771 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 22, 2019, and the end of the Annual General Meeting to be held in 2019, unless previously renewed, revoked or varied by Royal Dutch Shell plc in a general meeting.

5.  Other reserves

The merger reserve and share premium reserve were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, in 2005. The merger reserve increased in 2016 following the issuance of shares for the acquisition of BG Group plc. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is in respect of equity-settled share-based compensation plans.

6.  Derivative financial instruments and debt excluding finance lease liabilities

As disclosed in the Consolidated Financial Statements for the year ended December 31, 2017, presented in the Annual Report and Form 20-F for that year, Shell is exposed to the risks of changes in fair value of its financial assets and liabilities. The fair values of the financial assets and liabilities are defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Methods and assumptions used to estimate the fair values at June 30, 2018 are consistent with those used in the year ended December 31, 2017, and the carrying amounts of derivative financial instruments measured using predominantly unobservable inputs have not changed materially since that date.

With effect from 2018, current and non-current derivative assets and liabilities are no longer presented as part of "Trade and other receivables" and "Trade and other payables", but separately disclosed on the Balance Sheet to provide more insight. 

The table below provides the comparison of the fair value with the carrying amount of debt excluding finance lease liabilities, disclosed in accordance with IFRS 7 Financial Instruments: Disclosures.

7.  Change in presentation of Consolidated Statement of Cash Flows

With effect from 2018, the reconciliation from "Income for the period" to "Cash flow from operating activities" has been revised to provide more insight and improve correlation with the Balance Sheet and Statement of Income. "Cash flow from operating activities" itself remains unchanged.

Exploration well write-offs, previously presented under "Other", are shown separately. Changes in current and non-current derivative financial instruments, previously presented under "Decrease/(increase) in working capital" and "Other", are presented under a new line item "Derivative financial instruments". Changes in current retirement benefits and decommissioning provisions, previously included in "Increase/(decrease) in payables", are presented under "Deferred tax, retirement benefits, decommissioning and other provisions", together with changes in non-current balances. The impact of these changes is presented below.

DEFINITIONS

A.   Identified items

Identified items comprise: divestment gains and losses, impairments, fair value accounting of commodity derivatives and certain gas contracts, redundancy and restructuring, the impact of exchange rate movements on certain deferred tax balances, and other items. These items, either individually or collectively, can cause volatility to net income, in some cases driven by external factors, which may hinder the comparative understanding of Shell's financial results from period to period. The impact of identified items on Shell's CCS earnings is shown below.

^1.    Comparatives for the first quarter 2018 have been revised to include a loss of $79 million after tax ($103 million before tax) following the definition change described in Note A. Second quarter 2018 includes a loss of $192 million after tax ($250 million before tax) related to the same definition change. No revision was made for prior years because the effect was immaterial.

The categories above represent the nature of the items identified irrespective of whether the items relate to Shell subsidiaries or joint ventures and associates. The after-tax impact of identified items of joint ventures and associates is fully reported within "Share of profit of joint ventures and associates" in the Consolidated Statement of Income, and fully reported as "identified items before tax" in the table above. Identified items related to subsidiaries are consolidated and reported across appropriate lines of the Consolidated Statement of Income. Only pre-tax identified items reported by subsidiaries are taken into account in the calculation of "underlying operating expenses" (Definition G).

Fair value accounting of commodity derivatives and certain gas contracts: In the ordinary course of business, Shell enters into contracts to supply or purchase oil and gas products, as well as power and environmental products. Shell also enters into contracts for tolling, pipeline and storage capacity. Derivative contracts are entered into for mitigation of resulting economic exposures (generally price exposure) and these derivative contracts are carried at period-end market price (fair value), with movements in fair value recognised in income for the period. Supply and purchase contracts entered into for operational purposes, as well as contracts for tolling, pipeline and storage capacity, are, by contrast, recognised when the transaction occurs; furthermore, inventory is carried at historical cost or net realisable value, whichever is lower. As a consequence, accounting mismatches occur because: (a) the supply or purchase transaction is recognised in a different period, or (b) the inventory is measured on a different basis. In addition, certain contracts are, due to pricing or delivery conditions, deemed to contain embedded derivatives or written options and are also required to be carried at fair value even though they are entered into for operational purposes. The accounting impacts are reported as identified items.

Impacts of exchange rate movements on tax balances represent the impact on tax balances of exchange rate movements arising on (a) the conversion to dollars of the local currency tax base of non-monetary assets and liabilities, as well as losses (this primarily impacts the Integrated Gas and Upstream segments) and (b) the conversion of dollar-denominated inter-segment loans to local currency, leading to taxable exchange rate gains or losses (this primarily impacts the Corporate segment).

Other identified items represent other credits or charges Shell's management assesses should be excluded to provide additional insight, such as the impact arising from the US tax reform legislation and certain provisions for onerous contracts or litigation.

B.   Basic CCS earnings per share

Basic CCS earnings per share is calculated as CCS earnings attributable to Royal Dutch Shell plc shareholders (see Note 2), divided by the weighted average number of shares used as the basis for basic earnings per share (see Note 3).

C.   Capital investment

Capital investment is a measure used to make decisions about allocating resources and assessing performance. It comprises capital expenditure, new investments in joint ventures and associates, exploration expense excluding well write-offs, new finance leases and investments in Integrated Gas, Upstream and Downstream equity securities, all of which are recognised on an accruals basis.

The reconciliation of "Capital expenditure" to "Capital investment" is as follows.

D.   Divestments

Divestments is a measure used to monitor the progress of Shell's divestment programme. This measure comprises proceeds from sale of property, plant and equipment and businesses, joint ventures and associates, and other Integrated Gas, Upstream and Downstream investments in equity securities, reported in "Cash flow from investing activities", adjusted onto an accruals basis and for any share consideration received or contingent consideration initially recognised upon the related divestment, as well as proceeds from the sale of interests in entities while retaining control (for example, proceeds from sale of interest in Shell Midstream Partners, L.P.), which are included in "Change in non-controlling interest" within "Cash flow from financing activities".

In future periods, the proceeds from any disposal of shares received as divestment consideration, and proceeds from realisation of contingent consideration, will be included in "Cash flow from investing activities".

The reconciliation of "Proceeds from sale of property, plant and equipment and businesses" to "Divestments" is as follows.

E.   Return on average capital employed

Return on average capital employed (ROACE) measures the efficiency of Shell's utilisation of the capital that it employs. In this calculation, ROACE is defined as income for the current and previous three quarters, adjusted for after-tax interest expense, as a percentage of the average capital employed for the same period. Capital employed consists of total equity, current debt and non-current debt.

Return on average capital employed on a CCS basis excluding identified items is defined as the sum of CCS earnings attributable to shareholders excluding identified items for the current and previous three quarters, as a percentage of the average capital employed for the same period.

F.   Gearing

Gearing is a key measure of Shell's capital structure and is defined as net debt as a percentage of total capital. With effect from 2018, the net debt calculation includes the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt, and associated collateral balances. Management believes this amendment is useful, because it reduces the volatility of net debt caused by fluctuations in foreign exchange and interest rates, and eliminates the potential impact of related collateral payments or receipts. Debt-related derivative financial instruments are a subset of the derivative financial instrument assets and liabilities presented on the Balance Sheet. Collateral balances are reported under "Trade and other receivables" or "Trade and other payables" as appropriate. Prior period comparatives have been revised to reflect the change in net debt calculation.

G.   Operating expenses

Operating expenses is a measure of Shell's cost management performance, comprising the following items from the Consolidated Statement of Income: production and manufacturing expenses; selling, distribution and administrative expenses; and research and development expenses. Underlying operating expenses measures Shell's total operating expenses performance excluding identified items.

H.   Free cash flow

Free cash flow is used to evaluate cash available for financing activities, including dividend payments, after investment in maintaining and growing our business. It is defined as the sum of "Cash flow from operating activities" and "Cash flow from investing activities" as shown on page 1.

I.   Cash flow from operating activities excluding working capital movements

Working capital movements are defined as the sum of the following items in the Consolidated Statement of Cash Flows: (i) (increase)/decrease in inventories, (ii) (increase)/decrease in current receivables, and (iii) increase/(decrease) in current payables.

Cash flow from operating activities excluding working capital movements is a measure used by Shell to analyse its operating cash generation over time excluding the timing effects of changes in inventories and operating receivables and payables from period to period.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties affecting Shell are described in the Risk Factors section of the Annual Report and Form 20-F for the year ended December 31, 2017 (pages 12 to 16) and are summarised below. Other than the risk associated with production from the Groningen field in the Netherlands, an updated description of which is set out below, there are no material changes in the Risk Factors for the remaining 6 months of the financial year.

• We are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals.
• Our ability to deliver competitive returns and pursue commercial opportunities depends in part on the accuracy of our price assumptions.
• Our ability to achieve strategic objectives depends on how we react to competitive forces.
• We seek to execute divestments in the pursuit of our strategy. We may not be able to successfully divest these assets in line with our strategy.
• Our future hydrocarbon production depends on the delivery of large and integrated projects, as well as on our ability to replace proved oil and gas reserves.
• The estimation of proved oil and gas reserves involves subjective judgements based on available information and the application of complex rules; therefore, subsequent downward adjustments are possible.
• Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels, potential litigation and additional compliance obligations.
• Our operations expose us to social instability, civil unrest, terrorism, piracy, cyber-disruption, acts of war and risks of pandemic diseases that could have a material adverse effect on our business.
• We operate in more than 70 countries that have differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments that could result in changes to contractual terms, laws and regulations. In addition, we and our joint arrangements and associates face the risk of litigation and disputes worldwide.
• The nature of our operations exposes us, and the communities in which we work, to a wide range of health, safety, security and environment risks.
• A further erosion of the business and operating environment in Nigeria could have a material adverse effect on us.
• Our future performance depends on the successful development and deployment of new technologies and new products.
• We are exposed to treasury and trading risks, including liquidity risk, interest rate risk, foreign exchange risk, commodity price risk and credit risk. We are affected by the global macroeconomic environment as well as financial and commodity market conditions.
• We have substantial pension commitments, funding of which is subject to capital market risks.
• We mainly self-insure our risk exposure. We could incur significant losses from different types of risks that are not covered by insurance from third-party insurers.
• An erosion of our business reputation could have a material adverse effect on our brand, our ability to secure new resources and our licence to operate.
• Many of our major projects and operations are conducted in joint arrangements or associates. This could reduce our degree of control, as well as our ability to identify and manage risks.
• We rely heavily on information technology systems for our operations.
• Violations of antitrust and competition laws carry fines and expose us and/or our employees to criminal sanctions and civil suits.
• Violations of anti-bribery, anti-corruption and anti-money laundering laws carry fines and expose us and/or our employees to criminal sanctions, civil suits and ancillary consequences (such as debarment and the revocation of licences).
• Violations of data protection laws carry fines and expose us and/or our employees to criminal sanctions and civil suits.
• Violations of trade compliance laws and regulations, including sanctions, carry fines and expose us and our employees to criminal sanctions and civil suits.
• The Company's Articles of Association determine the jurisdiction for shareholder disputes. This could limit shareholder remedies.

The description of the following Risk Factor has been changed.

• Production from the Groningen field in the Netherlands causes earthquakes that affect local communities.
  
  Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM). An important part of NAM's gas production comes from the onshore Groningen gas field, in which EBN, a Dutch government entity, has a 40% interest and NAM a 60% interest. Since 1995, production from the Groningen field has caused earthquakes. Some of these earthquakes have caused damage to houses and other structures in the region, resulting in complaints and lawsuits from the local community. Following the Dutch cabinet's decision to reduce NAM's production from the Groningen field to zero by 2030, NAM's shareholders and the Dutch State signed a Heads of Agreement in June 2018. This agreement supports the ramp-down of production from the Groningen field, includes measures to ensure the financial robustness of NAM, and determines the split of legal responsibilities between the Dutch government and the Groningen field partners. Shell's proved reserves are expected to be reduced by an estimated 0.5 to 0.65 billion boe in 2018 as a result. Additional earthquakes, lawsuits and any acceleration of the current plan to cease production from the Groningen field by 2030 could have further adverse effects on NAM and therefore could impact our earnings, cash flows and financial condition.

FIRST QUARTER 2018 PORTFOLIO DEVELOPMENTS

Integrated Gas

During the quarter, Shell announced the sale of its shares in Shell entities in New Zealand to OMV for $578 million.

Upstream

During the quarter, Shell announced one of its largest US Gulf of Mexico exploration finds in the past decade from the Whale deep-water well (Shell share 60%). The discovery is under evaluation.

In the deep-water bid round in Mexico in January for the Gulf of Mexico, Shell won four exploration blocks on its own, four with its partner Qatar Petroleum and one with its partner Pemex Exploración y Producción. Shell will be the operator of all nine blocks.

Shell won four additional deep-water exploration blocks in Brazil, one block on its own, and three in joint bids with Chevron, Petrobras and Galp. Shell will be the operator of two blocks.

In March, the Dutch cabinet decided to reduce NAM's production (Shell interest 50%) from the Groningen field to zero by 2030. It is expected that this decision, if fully implemented, will reduce Shell's proved reserves by an estimated 0.5 to 0.65 billion boe in 2018.

In March, Shell completed the sale of its 19.6% interest in the West Qurna 1 oil field in Iraq to Itochu Corporation. Divestments completed in the quarter totalled $574 million.

In April, Shell announced a final investment decision to develop the Vito deep-water field in the US Gulf of Mexico. Vito (Shell interest 63.1%) is expected to reach an average peak production of 100 thousand boe/d.

Downstream

During the quarter, Shell Midstream Partners, L.P., sold approximately 36 million common units for total gross proceeds of $980 million. Gross proceeds from the public offering were $680 million with $300 million from a private offering with Shell Midstream LP Holdings LLC.

In April, Shell signed an agreement to sell its Downstream business in Argentina to Raízen. The sale includes the Buenos Aires refinery, around 645 retail stations, the global commercial businesses, as well as supply and distribution activities in the country. The businesses acquired by Raízen will continue the relationship with Shell through various commercial agreements.

RESPONSIBILITY STATEMENT

It is confirmed that to the best of our knowledge: (a) the Condensed Consolidated Interim Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union; (b) the interim management report includes a fair review of the information required by Disclosure Guidance and Transparency Rule (DTR) 4.2.7R (indication of important events during the first six months of the financial year, and their impact on the Condensed Consolidated Interim Financial Statements, and description of principal risks and uncertainties for the remaining six months of the financial year); and (c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties transactions and changes thereto).

The Directors of Royal Dutch Shell plc are shown on pages 69-71 in the Annual Report and Form 20-F for the year ended December 31, 2017 save for the following changes:

• Hans Wijers – stepped down as a Director on May 22, 2018
• Ann Godbehere – appointed Director with effect from May 23, 2018

On behalf of the Board

Ben van Beurden                  Jessica Uhl

Chief Executive Officer          Chief Financial Officer

July 26, 2018                       July 26, 2018

INDEPENDENT REVIEW REPORT TO ROYAL DUTCH SHELL PLC

Introduction

We have been engaged by Royal Dutch Shell plc to review the Condensed Consolidated Interim Financial Statements in the half-yearly financial report for the six months ended June 30, 2018, which comprise the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Condensed Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Cash Flows and Notes 1 to 7. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to Royal Dutch Shell plc in accordance with guidance contained in the International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than Royal Dutch Shell plc, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

The annual Consolidated Financial Statements of Royal Dutch Shell plc and its subsidiaries are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU). The condensed set of financial statements included in the half-yearly financial report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as issued by the IASB and as adopted by the EU.

Our responsibility

Our responsibility is to express to Royal Dutch Shell plc a conclusion on the Condensed Consolidated Interim Financial Statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland), "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the Condensed Consolidated Interim Financial Statements in the half-yearly financial report for the six months ended June 30, 2018 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as issued by the IASB and as adopted by the EU and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

July 26, 2018

The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) are the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Condensed Consolidated Interim Financial Statements since they were initially presented on the website.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

CAUTIONARY STATEMENT

All amounts shown throughout this announcement are unaudited. All peak production figures in Portfolio Developments are quoted at 100% expected production.

The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this announcement "Shell", "Shell group" and "Royal Dutch Shell" are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words "we", "us" and "our" are also used to refer to Royal Dutch Shell plc and subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. ''Subsidiaries'', "Shell subsidiaries" and "Shell companies" as used in this announcement refer to entities over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as "joint ventures" and "joint operations", respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as "associates". The term "Shell interest" is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement, after exclusion of all third-party interest.

This announcement contains forward-looking statements (within the meaning of the US Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management's expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as "aim", "ambition", ''anticipate'', ''believe'', ''could'', ''estimate'', ''expect'', ''goals'', ''intend'', ''may'', ''objectives'', ''outlook'', ''plan'', ''probably'', ''project'', ''risks'', "schedule", ''seek'', ''should'', ''target'', ''will'' and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this announcement, 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) reserves 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 regulatory measures addressing climate change; (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. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this announcement 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. Additional risk factors that may affect future results are contained in Royal Dutch Shell's Form 20-F for the year ended December 31, 2017 (available at www.shell.com/investor and www.sec.gov) and under " – Cautionary Statement" above. These risk factors also expressly qualify all forward-looking statements contained in this announcement and should be considered by the reader. Each forward-looking statement speaks only as of the date of this announcement, July 26, 2018. Neither Royal Dutch Shell plc 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 announcement.

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.

We may have used certain terms, such as resources, in this announcement that the United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our filings with the SEC. US investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website www.sec.gov.

This announcement contains inside information.

July 26, 2018

The information in this Report reflects the unaudited consolidated financial position and results of Royal Dutch Shell plc. Company No. 4366849, Registered Office: Shell Centre, London, SE1 7NA, England, UK.

LEI number of Royal Dutch Shell plc: 21380068P1DRHMJ8KU70

Classification: Inside Information

Contacts:

- Linda Szymanski, Company Secretary

- Investor Relations:
International - +31(0)70-377-4540
North America - +1-832-337-2034

- Media:
International +44(0)207-934-5550
USA +1-832-337-4355

SOURCE Royal Dutch Shell plc

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