annual report and accounts 2011 shell oman marketing …

Annual Report and Accounts 2011

Shell Oman Marketing Company SAOG

“As youth are the present and future of the nation we gave them the attention and care they deserve throughout the years of the blessed Renaissance as the government endeavoured to provide them with education, training, qualifications and employment opportunities.”

His Majesty Sultan Qaboos bin Said

Excerpt from the speech at the opening of the Council of Oman, 31 October 2011

H I S M A J E S T Y S U L T A N Q A B O O S B I N S A I D

TheEnergyof YouthAt its heart, the story of Oman’s renaissance is about creating greater opportunities for the youth of the nation to realise their full potential and to build a brighter future for their nation.

From its modern cities and world-class industrial hubs, to its farthest-flung communities, greater security and stability, vastly state-of-the-art infrastructure, progress in education, and the introduction of new technology, has enabled the sons and daughters of Oman to make the most of the opportunities extended to them, while staying true to their rich culture and proud heritage.

Over the last 41 years, Oman has scripted a unique success story in sustainable development under the wise leadership and guidance of His Majesty Sultan Qaboos bin Said. In fact, the UNDP Human Development Report 2010 has ranked Oman No. 1 among 135 countries for the most progress made since 1970.

Shell Oman is an active partner in enabling the youth of the nation to ascend to their full potential: Attracting some of the brightest young Omani talent; Honing skills through training; Providing an environment that values excellence; Empowering them to contribute to business success and to participate meaningfully in the nation-building.

The energy of youth at Shell Oman

ContentsBoard of Directors 6

Management Team 8

Directors’ Report 10

Auditor’s Report on Corporate Governance 15

Corporate Governance Report 16

Management Discussion and Analysis 23

Auditor’s Report 31

Financial Statement 32

SHELL OMAN MARKETING COMPANY SAOGPO Box 38, PC 116, Mina Al Fahal,Sultanate of OmanPhone: +968 24 570100Fax: +968 24 570121

www.shelloman.com.om

CONTRIBUTION OF TURNOVEREarnings per share (RO) 0.126*

Dividend per share (RO) 0.117*

Dividend Yield (on offer price of RO 4.900) 23.9%*

Dividend Yield (at 31 Dec 2011 price of RO 2.393) 4.9%

* rebased on an equity share face value of 100 baiza following the stock-split in 2006

Earnings (RO million)

Balance Sheet (RO million)Retail

53%

Aviation

16%

Lubricants

14%

CommercialFuels

17%

RO

‘0

00

1997 - one quarter from inception of the company

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

EBITA

2,4233,268

bais

a /

Share

1997 is for one quarter only (All data based on a equity share face value of 100 baiza)

0

25

50

75

100

125

150

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

13

24

EPS

Return on Average Capital Employed is net profit divided by the average ofopening & closing balances of Capital Employed. Net profit for 1997 has been annualised

0%

10%

20%

30%

40%

50%

60%

70%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

65%

7.45%

2011

12,602

18,677

2011

126

117

2011

41.82%

4.01%

OPM

4

CONTRIBUTION OF TURNOVEREarnings per share (RO) 0.126*

Dividend per share (RO) 0.117*

Dividend Yield (on offer price of RO 4.900) 23.9%*

Dividend Yield (at 31 Dec 2011 price of RO 2.393) 4.9%

* rebased on an equity share face value of 100 baiza following the stock-split in 2006

Earnings (RO million)

2011 2011 2010 2010

Turnover Turnover 358.8 323.6 323.6

Gross Profit 36.0 34.8 34.8

Net Operating Expenses (21.7) (18.9) (18.9)

(includes depreciation, interest & amortisation) (includes depreciation, interest & amortisation)

Profit before tax 14.3 15.9 15.9

Taxation (1.7) (1.9) (1.9)

Profit after tax 12.6 14.0 14.0

Dividends (RO million) 11.7 13.0 13.0 11.7 13.0 11.7

Balance Sheet (RO million)

2011 2011 2010 2010

Share Capital 10.0 10.0 10.0

Reserves 3.6 3.6 3.6

Retained Earnings 16.4 16.7 16.7

Net Assets 29.9 30.3 30.3

FINANCIAL HIGHLIGHTS

Retail

53%

Aviation

16%

Lubricants

14%

CommercialFuels

17%

Net Profit & EBITA (Earnings before interest, taxes, depreciation and amortization)Net Profit & EBITA (Earnings before interest, taxes, depreciation and amortization)Net Profit & EBITA

RO

‘0

00

1997 - one quarter from inception of the company

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Net Profit

EBITA

2,4233,268

EPS & Dividends

bais

a /

Share

1997 is for one quarter only (All data based on a equity share face value of 100 baiza)

0

25

50

75

100

125

150

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

13

24

DividendEPS

Return on Average Capital Employed is net profit divided by the average ofopening & closing balances of Capital Employed. Net profit for 1997 has been annualised

Return on Average Capital Employed (RoACE) & Operating Profit Margin (OPM)

0%

10%

20%

30%

40%

50%

60%

70%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

65%

7.45%

2011

12,602

18,677

2011

126

117

2011

41.82%

4.01%

(RoACE)

OPM

5

From Left to Right:Majan Abdullatif Board SecretaryAtif Abdulhamid Al Raisy DirectorSarim Sheikh DirectorShabib Mohammed Al Darmaki DirectorAdil Ismail Al Raisi Managing Director

Board of Directors

6

From Left to Right:John Blascos ChairmanGhalib Fawzy Al Busaidi Deputy ChairmanSaleh Nasser Al Araimi DirectorScott McDonald Finance DirectorIrshad Moosa Al Lawati DirectorAbdulsalam Mohammed Al Murshidi Director

7

From Left to Right:Said Al Rawahi Commercial Fuels ManagerAhmed Hilal Lubricants Supply Chain ManagerRedha Jumma Al Lawati Acting Aviation ManagerFrank Richters Distribution & Operations ManagerAli Al Lawati Commercial Lubes Manager

Management Team

8

From Left to Right:Adil Ismail Al Raisi Managing DirectorScott McDonald Finance DirectorMohammed Ali Al Farsi GM-External Affairs & Business DevelopmentAsma Al Ghabshi Human Resources & Administration ManagerSalim Al Busaidi Engineering Manager

9

Directors’ ReportDear Shareholders,On behalf of the Board of Directors, I am pleased to present the Directors’ Annual Report of Shell Oman Marketing Company SAOG for the year ended December 31, 2011.

Business EnvironmentOil prices have remained strong during 2011. The actual average oil price realised in the first ten months of the year was approximately $102 per barrel, well above the Oman 2011 budget figure of $58 per barrel. Some of these additional gains have been utilised for higher public spending, including significant job creation for the country’s youth.

For the 2012 budget, the Oman government has assumed oil prices at $75 per barrel, and daily production level of 915,000 barrels. The five-year plan envisages that the country will continue to invest heavily in infrastructure projects, power plants, highways, sea and airports.

Your Company and the FutureIn support of its strategic growth objectives, your Company embarked on a major transformation and business process re-engineering programme in 2010 and it concludes in the first quarter of 2012. This will enable Shell Oman Marketing to be well prepared for the future in terms of growth, customer

value proposition, internal efficiency and operational excellence. The plan includes a major revision of end-to-end business processes and implementation of a new integrated SAP application platform.

The total approved spending for this process re-engineering programme is RO 6.3 million from 2010 to 2012 that consists of operating and capital expenditure.

The programme successfully went live on 1st January 2012 and I take this opportunity to thank the staff members, contractors and partners who have worked tirelessly to achieve this key milestone for the Company. I look forward to seeing the Company demonstrating the benefits of this programme in 2012 and beyond.

The Company has received a Letter of Intent from Oman Air to supply 50% of Oman Air’s total fuel uplift at Muscat International Airport, subject to final contract signing. The proposed contract is for a two-year duration from 1st March 2012 to 28th February 2014. This contract will further strengthen Shell Oman’s position as the leading Jet Fuel Supplier in the Sultanate of Oman.

Business ResultsDuring the year, your Company’s performance was impacted by unrest in the Middle East and North Africa. Our lubricant export business was particularly adversely impacted as there was reduced off-take from customers in these regions.

The Company made adjustments to salaries and benefits in line with the country’s trend. We also reacted positively by supporting road transport contractors’ drivers’ demands through additional payment linked with HSSE and performance.

Cash generation during the year was lower than last year. The main impacts are from lower Net Income and timing differences of major payable amounts at year end 2010 and 2011, that have resulted in a higher than operationally normal amount being paid in Calendar Year 2011. The resulting net cash generated from operating activities is RO 8.4 million, a decrease of RO 8.1 million from the previous year.

The Retail business remains the largest portfolio segment for your Company. Total Retail volumes sold were significantly higher than the previous year fuelled by volume from new sites, road infrastructure developments, and strong business growth

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For the year ended 2011, revenues were RO 358.79

million, 11% higher than the same period last year’s mainly driven by growth in Retail, Aviation and Marine fuel.

in the industrial estates and Al-Batina Region. Throughout the year, the Company’s total Retail sites achieved a new record of 144 sites in total with the opening of 4 new sites, and a rebuild of a further 2 sites.

In 2011 the business continued to focus on its drive to fuel leadership by offering superior customer experience and quality fuels. The business continues to place a special focus on its Mystery Motorists Programme together with its marketing initiatives and network configurations to broaden coverage across markets & business models.

The Commercial Fuels business came under intense competitive pressure, resulting in decisions to allow certain contracts to move to the competitors due to the low prices being offered and a lowering of Gross Margins for some existing contracts that were retained. In the last few months of 2011, the Company was awarded several key competitive tender contracts demonstrating recovery in its competitive positioning.

The Aviation sector continues to be highly competitive, but the Company retained its profitable footprint in both new and existing contracts with both local and international customers, which has contributed strongly to the Company’s growth and bottom line. The Company has been able to win new business in recent months including the significant regaining of Oman Air at Muscat Airport for a 2-year period & the Arab Airlines members group for 1 year, along with a 2 year extension of our exclusive operating concession at Salalah Airport, where volumes are expected to grow in this period.

The Lubricants business focus on customers value proposition is illustrated through its drive for safety, customer service and assurance of superior product quality. Close coordination with marketing and sales helped the business make the right end-to-end business decisions and maximise product mix benefits. While the local business has successfully retained its major contracts and acquired new contracts during the year, margins were compressed as a result of the upward movement in the base oil price.

The Marine business has grown steadily and the Company has secured key contracts at Oman’s ports. The Company holds a Sohar Port bunkering franchise, and all efforts will be made in 2012 to commence & secure bunkering business in this port.

The Bitumen business developed new capabilities and brought new technologies to Oman ensuring customers needs are met, and hence it has shown a steady growth during the year evident by commencing the supply of its advanced formulated product to Muscat International Airport as well as signing new contracts with major road contractors in the Sultanate. The business is expected to continue its growth over the coming years following the government’s announcement of infrastructure projects in the Sultanate’s five-year plan.

The Company successfully appealed its legal case against Al Maha Petroleum Products Marketing Company at the Appeals Court in Muscat in June 2011. The approximate amount the Court awarded in your Company’s favour was RO 2.1 million. However, Al Maha has appealed to the Supreme Court which has put the judgement on hold pending further legal debate. The Company has not taken any credit to the Income Statement and will only do so after all legal avenues are exhausted.

Financial PerformanceFor the year under review, the Company achieved strong volume growth mostly in the Retail and Aviation segments, and significant Bitumen supply commenced to the Muscat Airport redevelopment project. There were challenges in retaining and winning volume in the Commercial segments due to increased competitive pressure, and export volumes of lubricants manufactured in Oman decreased due to lower demand across the Middle East / North Africa.

11

For the year ended 2011, revenues were RO 358.79 million, 11% higher than the same period last year mainly driven by growth in Retail, Aviation and Marine fuel.

For the year ended 2011, Net Profit was RO 12.60 million compared to RO 13.99 million last year. Basic Earnings Per Share (EPS) were 10% lower than the same period a year ago mainly due to lower margins and additional costs from major investment in the business process re-engineering project, accelerated depreciation and write-off of some obsolete stocks

The growth in revenues from higher volumes in 2011 was impacted by lower margins on competitive businesses, and increasing cost levels in the industry and in the Company. A significant proportion of the business process re-engineering project cost was also expensed in 2011, and there were some one-off product inventory related accounting items that reduced underlying profits available for distribution to Shareholders.

EPS and DividendAs a result of the lower net income, our earnings per share for 2011 is 126 baisa compared to 140 baisa in 2010. The Board of Directors is recommending a final dividend of RO 11.7 million i.e. 117 baisa per share, representing a decrease of 10% over the prior year’s total final dividend of RO 13 million. This maintains the industry leading payout ratio of Earnings to Dividend whilst also reflecting the lower earnings achieved by the Company in 2011.

Our Commitment to Sustainable DevelopmentIn line with our Statement of General Business Principles, your Company subscribes to the principle of sustainable development - which means helping meet the world’s growing energy needs in economically, environmentally and socially responsible ways. In short, it’s about helping secure a responsible energy future.

This is also a commitment to responsible operations, building projects, running facilities and managing supply chain safely and in ways that reduce negative environmental and social impacts and create positive benefits. Through our operations, we look to create lasting social benefits, by for example employing local people and using local contractors and suppliers and by setting a good example through business practices and ethics.

Business OutlookDespite the turbulence and uncertainty in the global market and the Euro currency crisis in the Eurozone, the Sultanate has unveiled a budget with expenditure planned at RO 10 billion in 2012 and revenues at RO 8.8 billion. A significant part of the budget will be deployed in job creation for the country’s school & college graduates. The economy is expected to continue on its stable growth path with GDP expected to register a growth of nearly 7% in 2012, with inflation stable at around 3.5%. During the current five-year development plan, starting in 2011, the country is expected to set a growth rate target of at least three percent, boosting exports, encouraging investment and devising a strategy to expand productivity.

The fuels market will normally follow the economic trend of the country and thus expected to be stable, growing with the economic activities. New developments in road network and residential areas will open up opportunities for addition of new retail sites where it is needed and viable. Major infrastructure projects announced by the government previously will see some activities starting out during 2012, and the Company will ensure that it is ready to position itself to get its share of the new business by investing in new systems and business redesign. In the aviation sector the development of the new Muscat International Airport gathers pace with contracts being awarded for the airport and the terminal building. The Company is closely following developments and will aggressively pursue opportunities as they arise.

Health, Safety, Security & Environment (HSSE)HSSE remains your Company’s top priority hence the undivided focus to maintain Health, Safety, Security, and Environmental performance at optimum levels. The Company ended the year with zero recordable Fatalities and Lost Time Injuries (LTI). In that direction, the Company has embarked in the implementation of the new Shell Health, Safety, Security & Environment (HSSE) Control Framework in pursuit of its commitment to prevent harm to people and protect the environment. This Control Framework encompasses current best-in-class HSSE standards that will further enhance the efficiency and safety of the Company’s operation across all businesses.

Risks and ConcernsYour Company will utilise its revised Business Processes and Capabilities to respond to the increased competitive environment and continue to expand its market share across all business

The Company will ensure that it is ready to position

itself to get its share of the new business by investing in new systems and business redesign.

Directors’ Report

12

segments. Strategic plans are under execution to increase the roll out of our quality Retail networks across the Sultanate. While external factors such as international demand and base oil price volatility might still have impacts at various levels, your Company will remain alert on the latest developments and shall have solid back-up plans to defend any risk.

Internal Control Systems The Board of Directors recognises that good corporate governance has its roots in sound internal controls and a robust risk management programme. The Board affirms its overall responsibility for reviewing the adequacy and the integrity of the Company’s internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines. There was no material losses reported during the current financial year as a result of weaknesses in internal control. The Management of your Company continues to take measures to strengthen the internal control environment.

During the year, the Company took part in the Capital Market Authority-sponsored Corporate Governance contest for companies listed on the Muscat Securities Market (MSM). We are pleased to report that the Company won the first prize for the 2nd year running in the Services & Insurance Sector. We believe that this is a strong endorsement of the Corporate Governance and Internal Controls structure of the Company.

Board ChangesDuring the year, Hong Zhou Wong, the Finance Director, was transferred to another Shell company. His replacement is Scott McDonald, a Shell Group secondee, who has over 15 years of relevant finance experience.

Zaiviji Ismail bin Abdullah, a Non-Executive Director, retired from the Shell Group and his replacement is Sarim Sheikh who is the Chairman and Managing Director of Shell Pakistan Limited. Sarim brings with him a wealth of experience after having worked with Shell in Europe and Asia.

In AppreciationI take this opportunity to commend His Majesty Sultan Qaboos bin Said and his government for the excellent achievements during 2011. The wise direction and leadership of His Majesty has taken the country to prosperity.

On behalf of the Company, I express my sincere gratitude to our Shareholders, the Board of Directors, the Management, our employees, customers, contractors and all our other stakeholders for their loyalty, perseverance, dedication and effort in the face of an ever-growing and challenging business environment. For our part, rest assured that as a Board of Directors we remain committed to pursuing all opportunities with a view to maintaining your Company’s expansion and wealth while enhancing shareholders’ value. And finally, we truly are grateful for your constant support as we secure growth and prosperity for your Company.

John BlascosChairman of the Board

13

“I came to Shell Oman in 2010 through the Graduate Scheme. Being part of one of the world’s leading multinational companies is a challenge, as well as an excellent learning experience.”

Shahad Nasr Al Wahibi, Operations Excellence Manager (Retail)

Shell Oman invests significantly not only in the development of its present staff – but also has instituted an annual programme that facilitates on-the-job training for University students and promising future talented employees.

14

Auditor’s Report onCorporate Governance

15

Corporate Governance Report

In accordance with the Capital Market Authority (“CMA”) guidelines, we are pleased to present the Corporate Governance Report of Shell Oman Marketing Company SAOG (“the Company”) for the year ended December 31 2011. The Company’s auditors, PricewaterhouseCoopers has issued a separate Factual Findings Report on the Company’s Corporate Governance Report for the year ended December 31, 2011.

Company’s PhilosophyCorporate Governance at Shell Oman Marketing Company SAOG envisages commitment of the Company towards the attainment of high levels of transparency, accountability and business propriety with the ultimate objective of increasing long term shareholders value, keeping in view the needs and interests of all other stakeholders.

Shell Oman Marketing Company SAOG is committed to adopting the best global practices of Corporate Governance and fully supports the guidelines on Corporate Governance issued in June 2002 by the CMA.

Board of DirectorsThe Board comprises Executive and Non-Executive Directors. The present strength of the Board is ten Directors comprising two Executive Directors, five Non-Executive and Independent Directors and three Non-Executive directors. The non-executive Chairman, the Executive and Non-Executive Directors are accomplished professionals and experts in their respective corporate fields, ensuring proper direction and control of the Company’s activities.

At present all directors are considered to be shareholder directors in that they or the juristic person they represent own at least 1,000 shares in the Company. As per the Articles of Association the general meeting has the power to increase the size of the Board by up to two non-shareholder directors.

Functions of the BoardThe Company in general complies with the functions of the Board as per the CMA Code of Corporate Governance. With respect to the selection of the key executives a selection process applied within the Shell Group is used. The same applies for evaluation of staff where a comprehensive performance and appraisal system of the Shell Group is implemented.

Process of Nomination of the DirectorsAt the ordinary general meeting in March 2009 all the ten directors have been elected for a period of three years. Juristic persons have nominated seven directors. There are arrangements for the filling of vacancies by the Board itself on a temporary basis and for the appointment of substitutes. The Company has an induction programme for Directors, which covers the business environment and the Company businesses as well as specific corporate governance elements (e.g. Code of Conduct and confidentiality).

Entity Represented by Non-Independent Directors

Non-Independent Director

Entity Represented

Mr John Blascos Shell Petroleum NV

Mr Adil Ismail Al Raisi Shell Gas BV

Mr Irshad Moosa Al Lawati

BV Petroleum Assurantie Maatschappij

Mr Scott Michael McDonald

BV Dordtsche Petroleum Maatschappij

Mr Sarim Sheikh Shell Overseas Investment BV

During the year 2011, the Company held six Board meetings. The dates are January 25, April 16, July 25, September 26, October 22, and December 17, 2011. The intervals between the meetings are in line with the CMA required interval of a maximum of four months.

The Company took part in a CMA sponsored

Corporate Governance Excellence Award for the year 2011 and won the first prize in the Services and Insurance sector. This is the second consecutive year that the Company has won thisaward.

16

Shell Oman receives CMA Corporate Governance Excellence Award for the second consecutive year.

Directors’ Attendance Record and Directorships Held During the Financial Year 2011.

Name of Director PositionBoard

meetings attended

Whether attended last AGM

Directorship in other SAOG Companies

Mr John Blascos Non-Executive Chairman 6 Yes NoneMr Ghalib Fawzy Al Busaidi Non-Executive and Independent

Director (Deputy Chairman)5 Yes None

Mr Adil Ismail Al Raisi Executive Whole-time Managing Director

6 Yes None

Mr Irshad Moosa Al Lawati Non-Executive Director 6 No None Mr Hong Zhou Wong Executive Whole-time Director

(Finance) (up to 25 June 2011)2 Yes None

Mr Scott Michael McDonald Executive Whole-time Director (Finance) (from 26 June 2011)

4 Not applicable

None

Mr Zaiviji Ismail bin Abdullah Non-Executive Director (up to 24 July 2011)

2 Yes None

Mr Sarim Sheikh Non-Executive Director (from 25 July 2011)

2 Not applicable

None

Mr Atif Abdulhamid Ahmed Al Raisy

Non-Executive and Independent Director

6 Yes Raysut Cement Company SAOG

Mr Shabib Mohammed Saif Al Darmaki

Non-Executive and Independent Director

6 Yes None

Mr Abdulsalam Al Murshidi Non-Executive and Independent Director

6 No BankMuscat SAOG

Mr Saleh Nasser Juma Al Araimi Non-Executive and Independent Director

6 No Oman Fisheries Co SAOG (Deputy Chairman)Oman Cement Co SAOG (Deputy Chairman)Bank Dhofar SAOG

The Board of Directors manages and supervises the business and affairs of the Company in a stewardship role. The day-to-day management is delegated to the officers of the Company. Any responsibilities that have not been delegated to the officers or to a committee of the Board remain with the Board.

17


In order to facilitate proper governance the following information amongst others is provided to the Board:

n Review of operating plans of business, capital budgets and updates;

n Quarterly/annual results of the Company and its business segments;

n Quarterly performance on Health, Safety, Security, and Environment;

n Reports of fatal, serious accidents or dangerous occurrences;n Directors’ fees and remuneration;n Minutes of the audit committee;n Issues involving possible public or product liability claims

of substantial nature;n Any significant industrial relations problems;n Senior management changes;n Policies / procedures as are deemed important to place

before the board; andn Related party transactions.As required by Corporate Governance Guidelines, the Board of Directors has adopted Internal Regulations - these include adoption of principles, policies, procedures and practices for doing business and conducting affairs that are commonly used in the Shell Group. As part of this Shell Group Statement of General Business Principles; Health, Safety, Security, and Environment Policies are in place. The Board in general is informed of any changes advised by the Shell Group.

There have been no materially significant related party transactions, pecuniary transactions or relationships between the Company and its Directors that may have potential conflict of interest with the Company at large during the period in question. The Board has adopted a specific Related Party Transaction procedure to ensure compliance with the corporate governance guidelines.

Company SecretaryThe Board Secretary is Mrs Majan Abdullatif. She records minutes of every Board meeting whereby decisions are recorded and action items are identified.

Remuneration MattersEach non-executive director is awarded RO 800 as a sitting fee for every board meeting and Annual General Meeting attended, and RO 400 for every audit committee meeting attended. Annual remuneration is awarded as long as the sum of sitting fees does not exceed RO 10,000 and the total remuneration does not exceed RO 15,000 per director. The total remuneration paid to Non-Executive Directors for year ended December 31, 2011 was RO 108,400. Executive directors are compensated in their salary for service as a board member; they do not receive any separate remuneration or sitting fees.

Details of Directors’ RemunerationThe details of directors’ remuneration for the year 2011 is as follows:

Sr No

Name / Position

Annual remuneration

(Rials)

Sitting Fees

(Rials)

1 Mr John BlascosNon-Executive Director; Chairman

7,800 5,600

2 Mr Adil Ismail Al RaisiExecutive – Whole-time Managing Director

Nil* Nil*

3 Mr Irshad Moosa Al LawatiNon-Executive Director; Member Audit Committee

7,800 6,000

4 Mr Hong Zhou WongExecutive – Whole-time Finance Director (up to 25 June 2011)

Nil* Nil*

5 Mr Scott Michael McDonald Executive – Whole-time Finance Director (from 26 June 2011)

Nil* Nil*

6 Mr Zaiviji Ismail bin AbdullahNon-Executive Director (up to 24 July 2011)

3,343 2,400

7 Mr Sarim SheikhNon-Executive Director (from 25 July 2011)

4,457 1,600

8 Mr Atif Abdulhamid Ahmed Al RaisyNon-Executive Director; Member Audit Committee

7,800 7,200

9 Mr Shabib Mohammed Saif Al DarmakiNon-Executive Director; Member Audit Committee

7,800 7,200

10 Mr Ghalib Fawzy Al BusaidiNon-Executive Director; Deputy Chairman

7,800 4,800

11 Mr Abdulsalam Al MurshidiNon-Executive Director, Member Audit Committee

7,800 6,400

12 Mr Saleh Nasser Juma Al AraimiNon-Executive Director

7,800 4,800

Total* 62,400 46,000

(* A salaried key employee of the company, covered under the top-five executives remuneration below)

The total benefits such as salaries, bonuses, allowances, share benefits, pension contributions & perquisites paid to the top five members of the management team was RO 645,029 in 2011.

18

Audit Committee of the BoardThe Audit Committee was reconstituted by the Board in April 2009 in which they appointed four non-executive directors of which three are Independent. The Audit Committee Chairman is Mr. Abdulsalam Al-Murshidi, who is a Non-Executive, Independent Director. The committee held four meetings during 2011, which have been minuted.

The audit charter approved by the Board includes the main responsibilities of the Audit Committee as follows:

n Reviewing the annual audited financial statements and the Auditors’ Report on the statements prior to submission to the Board for approval;

n Reviewing and approving the interim financial statements prior to public release and filing;

n Reviewing the scope of external and internal audits;n Reviewing and discussing accounting and reporting

policies and changes in accounting principles;n Assessing the effectiveness of the Company’s internal

control systems and procedures, and the process for identifying principal business risks;

n Reviewing compliance with the Code of Conduct;n Reviewing legal matters with counsel;n Reviewing Directors and officers’ expense and related

party transactions; andn Meeting with the internal and external auditors

independently of management of the Company.

Attendance Record of the Audit Committee Members

Name of DirectorNo. of

meetingsMeetings attended

Mr Abdulsalam Al Murshidi 4 4

Mr Atif Abdulhamid Ahmed Al Raisy 4 4

Mr Shabib Mohammed Saif Al Darmaki 4 4

Mr Irshad Moosa Al Lawati 4 3

In consultation with the CMA the Audit Committee continued with the arrangement of using Shell Global Internal Audit as the Company’s internal auditor. These auditors are part of the Shell Global Audit Network and shares in global best practices of the Shell Group, and reports to the Audit Committee of the Board.

Audit and Internal ControlIn consultation with the Audit Committee, the Board of Directors recommended the appointment of external auditors to the annual general meeting. The shareholders have, therefore, appointed PricewaterhouseCoopers LLP (PwC) as auditors for the financial year 2011.

In accordance with the Corporate Governance Code, the services of PwC are not used where a conflict of interest might occur.

The Audit Committee has reviewed, on behalf of the Board, the effectiveness of internal controls by meeting the internal auditor, reviewing the internal audit reports and recommendations and meeting the external auditor, reviewing the audit findings report and the management letter. The Audit Committee and the Board are pleased to inform the shareholders that, in their opinion, an adequate and effective internal control system is in place.

Annual General MeetingThe Company’s Annual report contains written clarifications on each item on the agenda of the Annual General Meeting so that shareholders are suitably briefed on matters that are to be discussed to enable their effective participation thereat. The Directors encourage shareholders to attend and participate in the Annual General Meeting. Questions posed are, where possible, answered in detail either at the General Meeting itself or thereafter. Shareholders are welcomed to raise queries by contacting the Company at any time throughout the year and not just at the General Meetings.

Means of Communication with the Shareholders and InvestorsThe Company has its own web site and all vital information relating to the Company and its performance, including quarterly results, official press releases, annual report and governance related policies and procedures are posted on the web site for all interested parties. The Company’s website is www.shelloman.com.om

During the year the Finance Director has had several meetings with banks, fund managers and investment managers to brief them about the Company’s performance and field any questions that they might have.

Financial ReportingThe Company presents quarterly public financial announcements that include details of the Company’s business performance and current issues and concerns. As per legal requirements and policy, quarterly and annual results of Company’s performance are published in the leading newspapers in both Arabic and English. The Directors scrutinise these announcements at their Board Meetings prior to publication to ensure that they are accurate and present a clear assessment of the Company’s affairs.

Further the Company entertains specific meetings with analysts and shareholders, upon requests, as appropriate.

Dividend PolicyThe Company’s dividend policy is to remit the optimum amount of profit, in any operating year, to shareholders. Several factors will be considered whilst making this decision viz. Future investment plans, working capital requirements, ability to borrow funds, and other constraints. If, in accordance with the business plans, funds and profits were likely to be available the Company would like to pay an interim dividend. In line with this policy the Company, is expected to pay a dividend for the year 2011, in March 2012.

19

Share Price Relative Performance

SOM IndexMSM Index

Jan

Mar

Jun

Sep

Dec Jan

Mar

Jun

Sep

Dec Jan

Mar

Jun

Sep

Dec Jan

Mar

Jun

Sep

Dec

2008 2009 2010 2011

160

140

120

100

80

60

40

20

0


Market Price DataMonthly High / low share price data for financial year 2011.

Month 2011 High Low VolumeJanuary 2.548 2.247 495,469February 2.480 2.416 156,620March 2.420 2.274 446,171April 2.360 2.300 183,628May 2.400 2.380 98,808June 2.380 2.350 62,914July 2.400 2.336 980,641August 2.400 2.350 348,758September 2.375 2.350 107,649October 2.375 2.350 86,283November 2.350 2.322 161,578December 2.400 2.350 365,794

Performance in Comparison to Broad Based Index of MSM

Distribution of ShareholdingThe Shell Group holds, through 5 wholly-owned Shell subsidiaries, 49% of the shares, whereas 51% of the shares are held by other investors and traded on the Muscat Security Market. In line with the Commercial Companies Law and the Company’s Articles of Association, 5,000,000 shares of the Company have a preferential characteristic, in that they are multi vote shares. The Shell Group owning those multi-vote shares thereby is able to cast 54,000,000 votes at the ordinary general meeting. This will not itself enable them to control an Extraordinary General Meeting of the Company.

Major Shareholders (as on December 31, 2011)

Shareholder Name No of shares held

Shareholding %

BV Dordtsche Petroleum Maatschappij

20,000,000 20.0

Shell Overseas Investment BV 20,000,000 20.0Civil Service Employees Pension Fund

9,122,963 9.1

Shell Petroleum NV 8,800,000 8.8MOD Pension Fund 8,115,990 8.1

Specific Areas of Non-compliance with the Provisions of Corporate Governance The Company is pleased to inform the shareholders that it is in full compliance with the Corporate Governance Code. During the year under review, the company’s corporate governance structure and process were audited by the CMA. The CMA report had no adverse comments.

Details of Non-compliance by the CompanyThere are no penalties or strictures imposed on the Company by CMA/MSM or any statutory authority during the period of this report.

Professional Profile of the Statutory AuditorPwC firms provide industry focused assurance, tax and advisory services to enhance value for their clients. Around 169,000 people in 158 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com/middle-east for more information.

Established in Oman for over 40 years, PwC’s Middle East network has offices in 12 countries: Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Palestine, Qatar, Saudi Arabia and the United Arab Emirates, with around 2,500 people. Complementing PwC’s depth of industry expertise and breadth of skills is PwC’s sound knowledge of local business environments across the Middle East.

Corporate Governance at Shell Oman Marketing

Company SAOG envisages commitment of the Company towards the attainment of high levels of transparency, accountability and business propriety

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Shell Oman is consistently ranked among Oman’s Top 5 listed companies by OER Top 20 since the ranking was initiated in 2003.

PricewaterhouseCoopers LLP is one of the leading accredited accounting firms in Oman with 4 partners and over 140 employees. They have a reputation for providing quality professional services to a well diversified client portfolio, both in the public and private sectors. The total fee paid or due to PwC for audit services in 2011 is RO 9,900.

Awards/RecognitionThe Company took part in a CMA sponsored Corporate Governance Excellence Award for the year 2011 and won the first prize in the Services and Insurance sector. This is the second consecutive year that the Company has won this award.

Acknowledgement by Board of DirectorsThe Directors are required by the Commercial Companies Law of 1974, as amended, and the Capital Market Authority Administrative Decision 5/2007 to prepare financial statements for each financial year which have been made out in accordance with the International Financial Reporting Standards (“IFRS”) to fairly reflect the financial position of the company and its financial performance during the relevant financial period.

In preparing the financial statements, the Directors have:

n selected suitable accounting policies and applied them consistently;

n made judgments and estimates that are reasonable and prudent;

n ensured that all applicable accounting standards have been followed; and

n prepared financial statements on the going concern basis as the Directors have a reasonable expectation, having made enquiries, that the Company has adequate resources to continue in operational existence for the foreseeable future.

The Directors have responsibility for ensuring that the Company keep accounting records which disclose with reasonable accuracy the financial position of the Company and which enable them to ensure that the financial statements comply with Commercial Companies Law of 1974, as amended.

The Board affirms its overall responsibility for the Company’s systems of internal controls and risk management, and for reviewing the adequacy and integrity of those systems. It should be noted, however, that such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives. In addition, it should be noted that any system can provide only reasonable, and not absolute, assurance against material misstatement or loss.

John Blascos Adil Ismail Al Raisi Chairman Managing Director

21

“With Shell Oman, I learnt the advantages of applying world-class business practices. Today, I employ many Omani youth, and operate five Service Stations – one of which was voted Best Site in Oman.”

Saif Al Mahrooqi,Cluster Retailer (New Izki, Sinaw, Shwaighya, Jabriah, A’Shariq)

Besides 85% Omanisation, Shell Oman offers extensive entrepreneurship and employment opportunities throughout its network of144 Service Stations, 55 Shell Select stores, Lubricant retail outlets, Aviation fuel terminals, and at its Lube Oil Blending Plant.

22

Management Discussionand Analysis Health, Safety, Security & Environment (HSSE)Your Company continued its drive to maintain an exemplary HSSE performance by ending the year with zero recordable Fatality and Lost Time Injuries (LTI). The implementation of the new Shell Group HSSE Control Framework reinforces our commitment to prevent harm to people and protect the environment. This Control Framework encompasses current best-in-class HSSE standards that will further enhance the efficiency and safety of the Company’s operation across all businesses.

HSSE in Retail In 2011 your Company continued to play a leading role in promoting HSSE across the Retail network. Several key HSSE initiatives were launched including two public awareness campaigns to promote traffic and forecourt safety. In addition, for the first time, the results of the retail stations’ HSSE assessment programme were used to identify the highest performing HSSE retailer in the network. The Shell Group CEO, Peter Voser, took part in the Shell Oman Safety Day and also launched the Shell Oman Khareef Drive Safe Campaign.

The Goal Zero incident concept was also introduced throughout the network this year, promoting HSSE not only at work but emphasising responsibility and commitment of the individual to both our employees and contractors.

The number of recorded security related incidents remained low throughout the year; however it remains an area of concern and continues to be closely monitored. There was an increase in the number of small flash fire incidents in 2011 compared to the number recorded in 2010. These fires were mainly caused by the inappropriate filling of portable fuel containers. A remedial action plan has been rolled out to tackle the issue at different levels, including the involvement of the local authorities as appropriate.

HSSE in AviationIt has been another year of excellent HSSE performance with ZERO recordable fatalities and Lost Time Injuries (LTI). For the second consecutive year, Shell Oman Aviation received the Goal Zero HSSE Gold Award. With the exception of one near miss relating to a drive-away incident, your Company has worked close to 163,000 hours without any significant incidents. The members of the team consistently exercised a high standard of awareness and intervention towards ensuring an HSSE Compliant Environment.

HSSE in Distribution In 2011, your Company delivered products to all customers with consistent industry leading HSSE standards. The overall HSSE performance in Distribution was excellent with ZERO recordable fatalities and Lost Time Injuries (LTI). Distribution operations encountered no vehicle rollover in 2011. Our continued attention to reduce the number of spills has resulted in a significant improvement as compared to last year.

Key to the excellent HSSE performance is the close interaction between Distribution staff and our partner drivers. With many interactions at syndicate sessions and frequent Haulier meetings, HSSE as our top priority is actively pursued and communicated.

At our terminals, an updated Process Safety Programme was implemented, thereby further enforcing the continuous HSSE journey specifically on the asset integrity of our installations.

HSSE in Lubricants ManufacturingThe team continued to invest relentlessly to emphasise the importance of transport safety across all of its available fleet, working closely with different stakeholders to implement the 2011 road transport safety plan for Oman. The implementation of the plan encompassed regular and consistent engagements with LSC transport contractors that included monthly safety follow-up meetings as well as several successful focused discussion syndicate sessions.

Staff and contractors in the Lubricants Blending Plant (LOBP), demonstrated their commitment to HSSE by effectively participating in several tailor-made key HSSE activities to address the HSSE risks encountered in the Plant. These activities included HSSE audits, reviews, training, and the implementation of a spill prevention plan as well as other HSSE related projects such as the concreting of tank farms and establishment of a dedicated temporary hazardous waste storage facility.

Unfortunately, a forklift related incident was recorded in the month of May causing a slight medical treatment case injury which was subsequently registered as a Total Recordable Case (TRC). This incident, highlighted the need to apply additional safety controls to address the risk of forklift operation within the plant which was rigorously investigated and remediated to prevent the repeat of similar incident.

HSSE in Commercial Fuels and LubesRoad exposure continued to be the highest safety concern

23

within the business, and subsequently was given top priority in the activities conducted by the business. The Safety Day campaign helped raise employee awareness of this particular area of concern and the techniques that can be used to safeguard the individual and other road users.

The team worked closely with customers to raise awareness and address safety concerns at our customer sites by conducting regular HSSE site audits and using the information gathered to improve site compliance. In addition, the management team maintained high HSSE management visibility by consistently addressing HSSE risks and remaining vigilant to ensure effective implementation of the Life Saving Rules (LSR).

People Attraction & Recruitment In 2011, we went through a major reorganisation to align ourselves with the business process re-engineering project. HR partnered with the business to assess the skills and competencies required for these roles. This comes as a continuation of our efforts towards succession planning and development of local talent. We ended the year with 296 staff compared to 288 in 2010.

Due to the heavy involvement of a number of our key resources in the business process re-engineering projected, we injected a number of temporary opportunities to ensure continuation of core business activities.

We conducted 3 assessment days and recruited 5 graduates in the Supply and Distribution and Supply Chain units.

We participated in the annual Career and Training Fair in SQU. The fair offers great opportunities for Shell Oman staff to share their experiences with students and create awareness around careers in Shell Oman. This year we hosted 6 interns in different areas of the business.

Learning & Development Learning and development of staff is an important item in the people agenda in Shell Oman. In 2011, we focused on improving the quality of the Individual development plans and development discussions between staff and supervisor. We delivered 4 Individual Development Plans sessions focusing on the creating awareness on the development plans process, Do’s and Don’ts.

We see an increase in the usage of the on line training, which demonstrates a healthy awareness of the importance of online training together with the traditional class room training. Leadership development is a key aspect of our training plans; we delivered 3 Front Line Leadership sessions, and other leadership development programmes.

In 2011, we conducted 2 stage one Territory Managers Accreditation sessions for 5 territory managers who successfully completed the programme and now getting prepared for the second stage. The programme is an international accreditation programme based on assessment of competencies required for a territory manager in Shell.

In Aviation, we rolled out the Wings competence Assessment. Wings is the global competence assessment for staff working in airfields. The assessment was run by the business together with HR.

In total, we delivered 118 training days for 429 participants.

Mohammed Al Balushi, Retail Territory Manager - Batinah, receiving Shell Global Best Territory Manager Award in Rome, Italy.

Management Discussion and Analysis

24

Omanisation We have managed to maintain our Omanisation level at 85% although resourcing for the business process re-engineering project had to be injected with experienced international staff.

Reward & Recognition We continue to drive improvement in our employee value proposition. In 2011, we implemented a number of improvements in the compensation and benefits area. Our reward and recognition philosophy continues to focus on differentiating performance and improving productivity. We were proud to see our Retail team win a global award in a celebration in Rome this year. Shell Oman staff once again won the global Shell Group Executive Vice President’s Award and the Managing Director’s Award.

Retail

Business EnvironmentThe year saw gradual incorporation of the business process re-engineering project (Downstream One) into Retail and a significant number of man-hours were spent by retail staff to see the project ready to go live from January 2012.

Retail again witnessed good growth during the year through increase in volumes, new sites and improved operational excellence, in addition to the direct role many staff had in the Downstream One project. This is due to the excellent planning and teamwork encouraged by all concerned departments.

PerformanceRetail sales grew by 11% year-on-year and in October we recorded a historic high in terms of monthly volumes. On key performance indicators like Average Thruput per site and Brand Preference, Shell Retail continues to be the leader in the industry as seen from the Global Customer Tracker, an independent market research commissioned globally by Shell Group.

During the year 4 new sites were opened and 2 sites underwent a major upgrade and refurbishment to bring them up to date. In operations excellence Retail witnessed high scores consistently. One of our Territory Managers won the Shell Global Best Territory Manager Award.

Shell Fleet Cards continued to grow at above the rate of the rest of the Retail business during the year and has contributed again significantly to the bottom line of the Retail department.

Shell Select stores also saw growth during the year and lubricants sales at Retail sites had a 60% year-on-year growth.

Fuel Marketing activities included two major Petrol promotions – one during Summer months with a Four wheel drive and a sedan as Lucky draw prizes, and the other in October & November in line with the National Day celebrations. The two promotions contributed to the volumes as well as increasing customer goodwill.

OutlookThe government’s latest 5 year development plan provides strong infrastructure development and creates expected growth in the Retail market above GDP. The outlook for 2012 is bright and we foresee a good growth for retail business.

Retail sales grew by 11% year on year and in October

we recorded a historic high in terms of monthly volumes.

141st Shell Service Station at North Azaiba being inaugurated.

25

The key focus areas for retail in 2012 will be increased Network roll-out, further Cards business, Operational Excellence and innovative Marketing campaigns.

Commercial Fuels

Business EnvironmentIn 2011, the Commercial market continued to be competitive with the Governments continued release of new infrastructure projects offering confidence to the market. New initiatives have been put in place to influence sales and change buying behaviour of customers. The company continues to work towards introducing innovative solutions for the Omani market, drawing upon the expertise of the Global Shell Group, which will reduce costs & emissions for our customers.

The Marine sector continued its growth in both Fuels and Lubricants. A fundamental shift in the Marine market will take effect in 2012, with the redesignation of Port Sultan Qaboos as a Tourist port, resulting in a shift of non Tourist traffic to other ports in Oman. Your company is positioning itself to take advantage of these changing dynamics which occurs in a period of overall increased Marine traffic in Oman.

PerformanceThe Company continued its focus on major core customer segments for Fuel segment with the strategic plan enabling us to succeed in getting major tenders from industry leaders and the public sector, which helped to sustain our performance amongst a strongly competitive environment.

The Bitumen business supplied unique specialties grades of bitumen with the support of Shell Group Bitumen technology. Shell has developed a comprehensive specialist product portfolio leveraged to meet the needs of many different customer types.

In Marine we maintained our market leader position in both Marine Fuel and Marine Lubricants at ports across Oman.

OutlookThe recent announced 8th Five year plan by the Government started in 2011, and has illustrated major infrastructure projects for the coming years. Some of the projects have been awarded in Q4 of 2011 and construction of these projects will start in early 2012.

For 2012 we see major investment projects planned by the government which will attract more investment in the country, which will reflect in creating more business opportunity at different market segments.

Your Company marked its entry to 2012 with ambitious strategy to sustain market leadership and value shares in various market segments. Our focus will be in new differentiated products and technology in Fuels and Bitumen, and the expansion of Marine. Customer service and sales support will always remain the centerpiece of our execution strategy.

Commercial Lubes

Business Environment2011 proved to be a year where the lubricants industry witnessed an upward movement in the base oil prices increasing the cost of goods sold. Although this has led to a margin squeeze, the local lubes volumes show a marginally positive trend versus last year. This was a direct result of adopting a customer retention and acquisition strategy that strengthened the customer base.

PerformanceShell Oman lubricants business continued its strategy to support the companies engaged in the development of infrastructure in Oman. Shell Oman is the only supplier for the large fleet size of CCC who is engaged as the main contractor in its category for the Development of Muscat International Airport. Furthermore, Shell has signed a contract with Makyol who are the main contractor for construction of Dual Carriage Batina Highway. In addition, Shell Oman has signed a key contract with RAECO Salalah providing the lubricants needed to operate the power plants to generate and supply electricity in the Dhofar region.

“These achievements were a product of close account management strategies and successful customer retention tactics that made Shell the preferred and the sole supplier of lubricants to a majority of the companies in Oman.”

OutlookThe Company will continue its aggressive customer acquisition strategy as well as ensuring customer satisfaction and retention is at the highest level. The political, environmental and social

The Company continues to work towards introducing

innovative solutions for the Omani market.


26

stability in the region will play a key role in the base oil prices and will determine the level of margins the company can generate. With the right mix of products, the lubricants team will strive to achieve the vision and targets for the next year.

Distribution Operations

Business EnvironmentOverall, the business demands increased in 2011 compared to the previous year, resulting in increased delivered volumes. Our renewed road transport contracts have enabled Distribution to focus on HSSE and operational excellence by introducing more vehicles to the state-of-the-art fleet.

In 2011, Shell Oman Distribution Operation again proved its superior capability and prevailed against the adverse weather conditions in continuing the supply of fuels. Your Company was able to meet customer demands in full during the affected period.

PerformanceIn 2011, overall distribution costs were on target despite growth in delivered volume. This performance was achieved by rigorous implementation of the Distribution Process Improvement Programme, whereby savings in road transport and order fulfilment were identified in close co-operation with our business partners.

Distribution delivered record volume to the retail network with excellent customer delivery performance statistics. The overall stock-out level was well within target.

All asset integrity investments in Distribution were executed as per plan.

OutlookDistribution is dedicated to reaching SAFELY - the right products to the right place at the right time for our customers all the time. This is done by focusing on our key value drivers, like HSSE, Unit Cost, Service Level and Competence Development.

This focus will support distribution to achieve the aspired targets in 2012.

Aviation Business

Business EnvironmentJet fuel prices remain at a high price towards end of the year, impacting the profitability both of the airline and oil industries globally. Acute price competition continues.

At Muscat International Airport, we recorded a decrease of volume uplift from our International cargo customers. Shell Oman Aviation has secured significant new customers during the last quarter of 2011 at Muscat International Airport, which will boost volume growth for 2012.

PerformanceOur strategic relationship with our key Jet bulk fuel customers again maintained its strength in 2011, and translated into sizeable volume and margin contribution, and reflects Shell Oman’s strength in delivering quality fuel on time and in full to all our valued customers.

In Salalah, Shell Oman is proud to have secured a presence at Salalah International Airport as the sole operator through the extension of the Concession Agreement for 2 further years with Oman Airport Management Company.

Shell Oman Commercial Base at Al Sawadi Power Company (Barka 3 Project).

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OutlookThe tourism sector in Oman continued to grow in 2011, and is expected to grow further in the next few years to come, which we anticipate will have a positive outcome on the Aviation business. Competition pressure remains intense with each marketing company relentlessly in pursuit of growth.

With Jet fuel prices on the rise, and with fuel being a big portion of the airlines’ total cost, airlines are expected to be more creative in driving their costs down. Marketers will find it challenging to negotiate new contracts in a heavily price driven environment.

Your Company intends to regain a stronger competitive footing in the Aviation segment, as witnessed by the recent tender award of the Oman Air fuel supply contract at Muscat International Airport, starting in March 2012. We are proud that Oman Air trusts Shell to deliver safely and on time to them everytime.

Lubricants Supply Chain

Business Environment Despite the global lubricants market’s six percent rebound in 2010 and a promising start to 2011, the industry’s growth declined resulting in a flat global lubricants market.

The main consequences of the global market scenario on the Lubricants Blending Plant was a decline in demand on lubricants in export markets. On the other hand, several cost saving initiatives, formulation change, process simplification and complexity reduction led to a substantial reduction in the cost of the finished products, which helped us to improve on margins.

Performance In 2011 the Blending Plant produced 70 million litres, which was 12% lower than 2010 production level. Despite the volume reduction, the Lubricant Blending Plant (LOBP) was able to achieve its financial targets for the year.

The financial targets were mainly achieved due to the increase in the export price in parallel with increased controls over the operating costs and losses and improved overall plant capacity utilisation.

In Lubricants Supply Chain, 2011 showed a number of initiatives and projects targeting a clear objective of reducing operation cost and complexity with increasing overall plant efficiency and productivity.

Portfolio Re-image and Product rationalization project was delivered in time which helped supply chain to optimise number of products, batch size for production and packs for filling and delivery. Standardisation in packaging and pallet size helped to improve overall efficiency.

Product mix in the market is shifted from bulk to small packs. In line with our longer term plans, a high speed small pack filling line commissioned to cater the increased market

demand on small packs. Warehousing project was focused to increase storage area in the warehouse by installing racking system and optimisation of available space.

These projects were main drivers for improving the operation cost which led to better Export sales margins over last year in spite of lower demand from export markets.

OutlookWith current uncertainties in the market, 2012 looks to be a year of continued volatility. With Global-SAP implementation and Product rationalisation, improvement in export demand in 2012 over 2011 is expected. To remain competitive, this year the emphasis is more on cost rationalisation in product and efficiency in our operation.

Social InvestmentIn 2011, Shell Oman Marketing kept an unwavering focus on sustainable development. Your company undertook several meaningful social investment activities and programmes that are aligned to our business.

Our initiatives in support of the nation’s youth included, sponsorship of a multi-purpose training facility for the Royal Oman Police (ROP) for hiring young Omanis as per the directive by His Majesty, and sponsorship of various University students as part of an on-going Summer Internship Programme.

Shell Oman continued its commitment in promoting tourism by supporting Muscat Festival and Salalah Tourism Festival,

As part of its nationwide campaign to promote road

safety awareness “Let’s Work Together to Reduce Accidents” was launched in partnership with the ROP during GCC Traffic Week 2011.


28

which are major Government festivals of Oman. As part of its nationwide campaign to promote road safety awareness, “Let’s Work Together to Reduce Accidents” was launched in partnership with the ROP during GCC Traffic Week 2011. Activities were also organised for school children at the Traffic Safety School managed by the ROP, to educate future road users on traffic safety.

Shell Oman’s Corporate Social Responsibility included extending a helping hand to needy families during the Holy Month of Ramadan, and to support charitable organisation and NGOs, such as Oman Association for Disabled, Al Noor Association for the Blind, Environment Society of Oman, National Association for Cancer Awareness, Association

of Early Intervention - Oman, and Autism in Oman. In addition, support for the Dhofar Centre for Businesswomen to promote and empower local entrepreneurship is among other initiatives.

The Company also continued its on-going support for the research on Arabian Leopards, which are endangered species, by the Biosphere Expedition in collaboration with the Diwan of Royal Court.

Shell Oman Safety Day 2011, with the participation of Shell Group CEO, Peter Voser (centre, standing).

Shell Oman partners Biosphere Expeditions in collaboration with the Diwan of Royal Court for the Arabian Leopard Conservation Project

29

“I joined the Cards team in Operations Support, and later moved to Sales. Today in Customer Service, I manage customer relationships, while I pursue a B.E. in Data Communication & System Administration - thanks to sponsorship by Shell Oman.”

Hiba Said Al Kiyumi,Cards Customer Service

Shell Oman development programmes provide employees with the training and support infrastructure to enable them to learn, to excel and to build successful careers. Opportunities include e-Learning through the Shell Open University.

30

Auditor’s Report

31

Statement of Comprehensive IncomeFor the year ended 31 December 2011

2011 2010

Notes RO’000 RO’000

Revenue 358,796 323,604

Cost of sales (322,815) (288,849)

Gross profit 35,981 34,755

Selling and distribution expenses (15,649) (13,280)

Administrative expenses (5,954) (5,546)

Operating profit 14,378 15,929

Interest expense (84) (69)

Interest income 31 35

Profit before income tax 14,325 15,895

Income tax expense 7 (1,723) (1,904)

Profit and comprehensive income for the year 12,602 13,991

Basic and diluted earnings per share 21 RO 0.126 RO 0.140

Dividend per share 22 RO 0.117 RO 0.130

The notes on pages 37 to 54 form an integral part of these financial statements.Report of the Auditors - page 31.

32

Balance SheetAt 31 December 2011

2011 2010


ASSETSNon-current assetsProperty, plant and equipment 8 18,257 18,338Intangible assets 9 1,568 3Deferred tax asset 10 294 185

20,119 18,526Current assetsInventories 11 11,105 12,370Receivables and prepayments 12 31,687 29,910Cash at bank and in hand 13 4,320 7,630

47,112 49,910

Total assets 67,231 68,436

EQUITYShare capital 14 10,000 10,000Legal reserve 16 3,587 3,587Retained earnings 16,346 16,744Total equity 29,933 30,331

LIABILITIESNon-current liabilitiesEmployee terminal benefits 17 602 588

Current liabilitiesShort term loan 18 7,000 -Payable and accruals 19 27,150 34,825Income tax payable 1,820 1,991Provisions 20 726 701

36,696 37,517

Total liabilities 37,298 38,105

Total equity and liabilities 67,231 68,436

Net assets per share 24 RO 0.299 RO 0.303

The financial statements on pages 37 to 54 were authorised for issue in accordance with a resolution of the board of directors on 28 January 2012 and signed on their behalf by:

John Blascos Scott McDonald Chairman Finance Director

Report of the Auditors - page 31.

33

Statement of Changes in Equity For the year ended 31 December 2011

Share

capital

Legal

reserve

Retained

earnings Total

Note RO’000 RO’000 RO’000 RO’000

At 1 January 2010 10,000 3,587 14,753 28,340

Comprehensive income:

Profit for the year - - 13,991 13,991

Transaction with owners:

Dividend paid - 2009 22 - - (12,000) (12,000)

At 31 December 2010 10,000 3,587 16,744 30,331

At 1 January 2011 10,000 3,587 16,744 30,331

Comprehensive income:

Profit for the year - - 12,602 12,602

Transaction with owners:

Dividend paid - 2010 22 - - (13,000) (13,000)

At 31 December 2011 10,000 3,587 16,346 29,933


34

Statement of Cash Flows For the year ended 31 December 2011

2011 2010


OPERATING ACTIVITIES

Profit before income tax 14,325 15,895

Adjustments for:

Depreciation 8 4,175 3,325

Amortisation 9 124 2

Provision for employee retention scheme - net 20 39 71

Provision provided for environmental liability 20 - 99

Employee terminal benefits expense 17 108 75

Gain/(loss) on disposal of property, plant and equipment (94) 148

Interest income (31) (35)

Interest expense 84 69

Operating cash flows before payments of employee terminal benefits, environmental liability and working capital changes:

18,730 19,649

Employee terminal benefits paid 17 (94) (5)

Environmental liability paid 20 (14) (6)

Working capital changes due to:

Inventories 1,265 394

Receivables and prepayments (1,777) (7,489)

Payables and accruals (7,675) 5,757

10,435 18,300

Income taxes paid (2,003) (1,791)

Net cash generated from operating activities 8,432 16,509

INVESTING ACTIVITIES

Purchase of property, plant and equipment 8 (4,114) (4,534)

Capital expenditure on intangible assets 9 (1,689) -

Proceeds from disposal of property, plant and equipment 114 1

Interest received 31 35

Net cash used in investing activities (5,658) (4,498)

FINANCING ACTIVITIES

Dividends paid 22 (13,000) (12,000)

Interest paid (84) (69)

Short term loan received 7,000 -

Net cash used in financing activities (6,084) (12,069)

Net change in cash and cash equivalents (3,310) (58)

Cash and cash equivalents at beginning of the year 7,630 7,688

Cash and cash equivalents at end of the year 4,320 7,630


35

“I joined Shell Oman in 2006 as HSSE Advisor in the Lubricants team. The highly supportive environment and training programmes have helped me advance my career today to the position of Corporate & Retail HSSE Manager.”

Khamis Al Siyabi,Corporate & Retail HSSE Manager

The developmental opportunities available to Shell Oman employees are not just meant to help them excel at their present functions – but also to encourage and empower them to take charge of their career progression.

36

Notes to the Financial StatementsFor the year ended 31 December 2011

1 Legal status and principal activities

Shell Oman Marketing Company SAOG (the company) is registered in the Sultanate of Oman as a public joint stock company and is primarily engaged in the marketing and distribution of petroleum products and blending of lubricants. The company has its primary listing on the Muscat Securities Market.

The accounts of the company are consolidated in the financial statements of Royal Dutch Shell plc (the ultimate parent company), a company incorporated in the United Kingdom.

2 Summary of significant accounting policies

The principal accounting policies are summarised below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation(a) The financial statements are prepared on the historical cost basis and in accordance with International Financial

Reporting Standards (IFRS). These also comply with the Rules and Guidelines on Disclosure by Issuers of Securities and Inside Trading, with the Rules for Disclosure and Proforma issued by the Capital Market Authority and with the Commercial Companies Law of 1974, as amended.

(b) The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

(c) Standards and amendments effective in 2011 and relevant for the company’s operations:For the year ended 31 December 2011, the company has adopted all of the new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for periods beginning on 1 January 2011.

The adoption of these standards and interpretations has not resulted in changes to the company’s accounting policies and has not affected the amounts reported for the current period.

2.2 RevenueRevenue from the sale of goods is measured at the fair value of the consideration received or receivable and is recognised when the significant risks and rewards of ownership have been transferred to the buyer, it is probable that future economic benefits will flow to the entity, the amount of revenue and associated costs can be measured reliably, and there is no continuing management involvement with the goods. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved.

2.3 Directors’ remunerationThe Directors’ remuneration is governed as set out in the Memorandum of Association of the company, the Commercial Companies Law of 1974, as amended and the regulations issued by the Capital Market Authority.

The Annual General Meeting shall determine and approve the remuneration and the sitting fees for the Board of Directors and its sub-committees provided that such fees shall not exceed 5% of the annual net profit after deduction of the legal reserve and the optional reserve and the distribution of dividends to the shareholders and provided that such fees shall not exceed RO 200,000. The sitting fees for each director shall not exceed RO 10,000 in one year.

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2 Summary of significant accounting policies (continued)

2.4 End of service benefits and leave entitlementsEnd of service benefits are accrued in accordance with the terms of employment of the company’s employees at the balance sheet date, having regard to the requirements of the Oman Labour Law 2003, as amended. Employee entitlements to annual leave and leave passage are recognised when they accrue to employees and an accrual is made for the estimated liability arising as a result of services rendered by employees up to the balance sheet date. These accruals are included in current liabilities, while that relating to end of service benefits is disclosed as a non-current liability.

Contributions to a defined contribution retirement plan and occupational hazard insurance for Omani employees in accordance with the Omani Social Insurances Law of 1991 are recognised as an expense in the statement of comprehensive income as incurred.

2.5 Foreign currency Items included in the company’s financial statements are measured using Rial Omani which is the currency of the Sultanate of Oman, being the economic environment in which the company operates (the functional currency). These financial statements are prepared in Rial Omani, rounded to the nearest thousand.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income.

2.6 Finance costs and income Finance costs comprise interest cost on borrowings. Finance income comprises interest received or receivable on funds invested. Interest income is recognised in the statement of comprehensive income as it accrues taking into account the effective yield on the asset. Interest expense is recognised in the statement of comprehensive income as it accrues using the effective interest rate method.

2.7 Income taxIncome tax is calculated as per the fiscal regulations of the Sultanate of Oman.

Income tax on the profit for the year comprises current tax and deferred tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to income taxes payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. The carrying amount of deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the company intends to settle its current tax assets and liabilities on a net basis.

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2.8 Property, plant and equipmentItems of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalised. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the costs of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of comprehensive income during the financial year in which they are incurred.

The cost or valuation of property, plant and equipment is written down to residual value in equal instalments over the estimated useful lives of the assets. The estimated useful lives are:

YearsBuildings 6 - 25Plant and equipment 3 - 7Motor vehicles 3

Work-in-progress is stated at cost. When the underlying asset is available for use in its intended condition and location, work-in-progress is transferred to the appropriate property, plant and equipment category and depreciated in accordance with depreciation policy of the company.

The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Where the carrying amount of an asset is greater than its estimated recoverable amount it is written down immediately to its recoverable amount.

Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are taken into account in determining operating profit.

2.9 Segment reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Managing Director who manages the company on a day-to-day basis, as per the directives given by the board of directors that makes strategic decisions.

2.10 Intangible assetsIntangible assets are stated at cost, net of amortisation and impairment losses. Subsequent expenditure on intangible assets is capitalised only when it is probable that the associated future economic benefits will flow to the company and the cost can be measured reliably. All other expenditure is expensed as incurred.

Intangible assets with finite lives are amortised from the date when they are available for use. Amortisation is charged to the statement of comprehensive income on a straight-line basis over the useful life of the intangible asset.

2.11 InventoriesInventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and estimated cost necessary to make the sale.

The cost of lubricants is determined using the weighted average method. The cost of lubricants includes cost of direct materials, labour, related variable overheads and an appropriate share of fixed overheads based on normal operating capacity.

The cost of raw materials and stores and spares is based on weighted average method and consists of direct costs of materials and related overheads.

39



2.11 Inventories (continued)The cost of inventories of hydrocarbons is determined using the first-in-first-out method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.

Provision is made where necessary for obsolete, slow moving and defective items, based on management’s assessment.

2.12 Financial assetsThe company classifies its financial assets into loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than twelve months after the end of the reporting period. These are classified as non-current assets. The company’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet (notes 2.13 and 2.14).

2.13 Trade and other receivablesTrade and other receivables are stated at their fair value. Trade debtors are initially recognised at fair value and subsequently are stated at amortised cost using the effective interest rate method less impairment losses. A provision for impairment of trade receivables is established when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income within ‘selling and distribution expenses’.

2.14 Cash and cash equivalentsCash and cash equivalents comprise cash in hand, bank balances and short-term deposits with an original maturity of three months or less.

2.15 ImpairmentFinancial assetsFinancial assets are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

For financial assets, objective evidence of impairment could include:• significant financial difficulty of the counterparty;• default or delinquency in payments; or• it becomes probable that the borrower will enter bankruptcy or financial reorganisation.

For certain categories of financial assets, such as trade receivables that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis.

Objective evidence of impairment for a portfolio of receivables could include the company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the credit period as well as observable changes in national or local economic conditions that correlate with default on receivables.

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2.15 Impairment (continued)Financial assets (continued)The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of a provision account.

When a trade receivable is considered uncollectible, it is directly written off after appropriate approvals. Subsequent recoveries of amounts previously written off are credited to the statement of comprehensive income.

Non-financial assetsThe carrying amounts of the company’s non-financial assets other than inventories are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indications exist then the asset’s recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or cash generating unit exceeds its value in use and its fair value less costs to sell. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specified to the asset. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

2.16 ProvisionsA provision is recognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provision for environment remediation, resulting from past operations or events, is recognised in the period in which an obligation to a third party arises and the amount can be reasonably estimated. Measurement of liabilities is based on current legal requirements and existing technology.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Where some or all of the economic benefits required to settle a provision are expected to be recovered from third parties, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

2.17 DividendsDividends are recognised as a liability in the period in which the dividends are approved by the company’s shareholders.

Dividends for the year that are approved after the balance sheet date are dealt with as an event after the balance sheet date.

2.18 Trade and other payablesLiabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method.

41



2.19 LeasesLeases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight line basis over the lease term.

2.20 Share capitalOrdinary and preference shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

3 Financial risk management

3.1 Financial risk factors The company’s activities expose it to a variety of financial risks including the effects of changes in market risk

(including foreign exchange risk and interest rate risk), credit risk and liquidity risk. The company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the company. Risk management is carried out by management under policies approved by the Board of Directors.

(a) Market risk

(i) Foreign exchange risk Foreign exchange risk arises where the value of a financial instrument changes due to changes in foreign exchange

rates. The company is exposed to foreign exchange risk on sales, purchases and bank deposits that are denominated in foreign currencies. The company’s net exposure to the United States Dollar (USD) resulting from USD denominated sales is offset by USD denominated purchases of base oils, additives, sea freight and other items. Since the Rial Omani is currently pegged to the USD, management believe that the exchange rate fluctuation would have an insignificant impact on the profit. The company’s practice is to utilise USD forward exchange contracts to hedge its exposure in respect of any significant USD denominated bank deposits.

The company has no foreign exchange contracts outstanding at 31 December 2011 (2010 - nil).

(ii) Interest rate risk The company’s interest rate risk arises from their short term loan. The company manages its exposure to interest rate risk by utilising only short-term financing at the rates fixed at the

time of taking the finance.

Management has estimated the effect on profit for the year due to increase or decrease in interest rates to be insignificant.

(b) Credit risk Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual

obligations and arises principally from cash and cash equivalents, as well as credit exposures to customers. The company has a credit policy in place and exposure to credit risk is monitored on an on-going basis. Credit evaluations are performed on all customers requiring credit over a certain amount. The company requires bank guarantees on higher credit risk customers. The company does not require collateral in respect of all other financial assets.

Investments are made in liquid securities and only with commercial banks in Oman. Management does not expect any counter party to fail to meet its obligations.

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3 Financial risk management (continued)

3.1 Financial risk factors (continued)

(b) Credit risk (continued) Concentration of credit risk arises when a number of counter-parties are engaged in similar business activities, or

activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the company’s performance to developments affecting a particular industry or geographical location.

The company has significant concentrations of credit risk with the Government sector. At 31 December 2011, Government organisations in Oman accounted for 34% (2010 - 33%) of the outstanding trade accounts receivable. At 31 December 2011, there were no other significant concentrations of credit risk.

Credit risk on other financial assets, including cash and cash equivalents arises from the risk of default of the counterparty, with a maximum exposure equal to the carrying amount of these balances.

Cash and bank balances are placed on deposit with financial institutions in the Sultanate of Oman. Details of credit ratings of these financial institutions are given in note 13.

(c) Liquidity risk The company limits its liquidity risk by ensuring bank facilities are available. The company’s terms of sales require

amounts to be paid on an average of 30 days from the date of sale. Trade payables are normally settled within 45 days of the date of purchase.

The table below summarises the maturities of the company’s undiscounted financial liabilities at 31 December 2011, based on contractual payment dates and current market interest rates.

2011 Upto one year

RO’000

Payables and accruals 27,150

Provisions 726

Total 27,876

2010 Upto one year

RO’000

Payables and accruals 34,825

Provisions 701

Total 35,526

3.2 Capital risk management The company’s objectives when managing capital are to safeguard the company’s ability to continue as a going

concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a commercially defensible capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

43


3 Financial risk management (continued)

3.3 Fair value estimation The face value less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one

year are assumed to approximate to their fair values. Financial assets consist of cash and bank balances and trade and other receivables. Financial liabilities consist of payables and accruals.

4 Critical accounting estimates and judgements

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the company’s accounting policies. The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas requiring a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are set out below.

(a) Impairment of trade receivables An estimate of the collectible amount of trade receivables is made when collection of the full amount is no longer

probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and a provision applied according to the length of time past due, based on historical recovery rates.

At the balance sheet date, gross trade accounts receivable were RO 22,928,041 (2010 - RO 24,583,044) and the provision for doubtful debts was RO 225,591 (2010 - RO 163,530). Any difference between the amounts actually collected in future periods and the amounts expected will be recognised in the statement of comprehensive income.

(b) Depreciation Depreciation is charged so as to write off the cost of the assets over their estimated useful lives. The calculation of

useful lives is based on management’s assessment of various factors such as the operating cycles, the maintenance programs, and normal wear and tear using its best estimates.

5 Segmental information

Business segmentsManagement has determined the company’s operating segments based on the reports reviewed by the board, that are used to make strategic decisions.

The board identifies operating segments based on a business perspective. The reportable operating segments derive their revenue primarily from the sale of refined petroleum products.

44


5 Segmental information (continued)

The segment information provided to the Managing Director for the reportable segments for the year ended 31 December 2011 is as follows:

2011 2010

RO’000 RO’000

Retail sales 187,796 169,586

Commercial sales 61,452 64,135

Lubricants sales 50,620 48,669

Aviation sales 58,928 41,214

358,796 323,6046 Employee costs

Employee costs included in selling and distribution and administrative expenses comprise:

2011 2010

RO’000 RO’000

Salaries, wages and bonus 3,508 3,118

Allowances and other benefits 2,335 1,700

5,843 4,818

7 Income tax

2011 2010

RO’000 RO’000

Current tax expense 1,832 1,991

Deferred tax credit (109) (87)

1,723 1,904

(a) The company is liable to income tax in accordance with the income tax law of the Sultanate of Oman at the enacted tax rate of 12% on taxable income in excess of RO 30,000. The following is a reconciliation of income taxes calculated on accounting profits at the applicable tax rate with the income tax expense for the year:

2011 2010

RO’000 RO’000

Accounting profit before tax 14,325 15,895

Tax on accounting profit before tax at 12% 1,715 1,904

Add tax effect of:

Non-deductible expenses 8 -

Tax charge for the year 1,723 1,904

(b) The company’s tax assessments for the years 2007 to 2011 have not yet been assessed by Oman taxation authorities. The Board of Directors consider that the amount of additional taxes, if any, that may become payable on finalisation of assessment of the open tax years would not be significant to the company’s financial position at 31 December 2011.

45


8 Property, plant and equipment

BuildingsPlant and

equipmentMotor

vehicles

Capitalwork-in-progress Total

RO’000 RO’000 RO’000 RO’000 RO’000

Cost

1 January 2011 1,187 41,564 972 4,130 47,853

Acquisitions - 1,872 - 2,242 4,114

Disposals (2) (1,360) (258) - (1,620)

Transfers - 4,124 4 (4,128) -

31 December 2011 1,185 46,200 718 2,244 50,347

Depreciation

1 January 2011 777 27,868 870 - 29,515

Charge for the year 32 4,092 51 - 4,175

On disposals (2) (1,340) (258) - (1,600)

31 December 2011 807 30,620 663 - 32,090

Net book value

31 December 2011 378 15,580 55 2,244 18,257

BuildingsPlant and

equipmentMotor

vehicles

Capitalwork-in-

progress Total

RO’000 RO’000 RO’000 RO’000 RO’000

Cost

1 January 2010 1,187 38,243 988 4,594 45,012

Acquisitions - 1,404 3,130 4,534

Disposals - (1,677) (16) - (1,693)

Transfers - 3,594 - (3,594) -

31 December 2010 1,187 41,564 972 4,130 47,853

Depreciation

1 January 2010 745 26,173 816 - 27,734

Charge for the year 32 3,230 63 - 3,325

On disposals - (1,535) (9) - (1,544)

31 December 2010 777 27,868 870 - 29,515

Net book value

31 December 2010 410 13,696 102 4,130 18,338

The company’s depots, buildings and lubricant blending plant are constructed on land leased from the Ministry of Oil and Gas based on a lease agreement dated 1 November 2009.

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9 Intangible assets

2011 2010

RO’000 RO’000CostAt 1 January 745 745Additions during the year 1,689 -At 31 December 2,434 745

AmortisationAt 1 January 742 740Charge for the year 124 2At 31 December 866 742

Carrying amountAt 31 December 1,568 3

Intangible assets represent costs incurred in connection with the acquisition, development and implementation of an Enterprise Resources Planning system and other computer software and is amortised over a period of five years.

10 Deferred tax asset

The deferred tax asset recognised in the balance sheet is attributable to the following:

At1 January

2011

(Charge) /credit for the

year

At 31 December

2011

RO’000 RO’000 RO’000

Provisions 105 (5) 100

Depreciation 80 114 194

185 109 294

At1 January 2010

Credit for the year At 31 December

2010

RO’000 RO’000 RO’000

Provisions 98 7 105

Depreciation - 80 80

98 87 185

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11 Inventories

2011 2010

RO’000 RO’000

Finished goods

- Petroleum products 5,121 5,656

- Lubricants 1,967 1,785

7,088 7,441

Raw materials 4,017 4,745

Other material - 184

11,105 12,370

12 Receivables and prepayments

2011 2010

RO’000 RO’000

Trade receivables 28,921 24,583

Less: allowance for impairment losses (226) (164)

28,695 24,419

Receivables from related parties (note 23) 1,073 3,537

Trade and related party receivables, net of impairment losses 29,768 27,956

Prepayments 1,609 1,658

Other receivables 310 296

31,687 29,910

As at 31 December 2011, trade receivables of RO 225,591 (2010 - RO 163,530) were impaired and provided against. Movements in the allowance for impairment of receivables were as follows:

2011 2010

RO’000 RO’000

At 1 January 164 152

Provision/(reversal) for the year 62 12

At 31 December 226 164

As at 31 December, the ageing of unimpaired trade receivables is as follows:

Total

Neitherpast due

nor impaired

Past due but not impaired

< 30 days 30 - 60 days

60 - 90 days >90 days

RO’000 RO’000 RO’000 RO’000 RO’000 RO’000

2011 28,695 20,262 2,349 3,655 1,135 1,294

2010 24,419 20,696 898 1,712 468 645

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12 Receivables and prepayments (continued)

The amounts are considered to be due within 3 to 45 days from the date of invoice for all customers and the vast majority are unsecured. Unimpaired receivables are expected, on the basis of past experience, to be fully recoverable.

The other classes within receivables and prepayments do not contain impaired assets. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above.

13 Cash at bank and in hand

2011 2010

RO’000 RO’000

Bank balances 2,427 5,258

Deposit accounts 1,893 2,360

Cash balances - 12

4,320 7,630

Included in deposit accounts are call deposits of RO 1,243,149 (2010 - RO 1,452,574) denominated in Rial Omani and RO 650,112 (2010 - RO 907,827) denominated in US Dollars, with commercial banks in Oman. These are short term in nature and carry interest at commercial rates.

Credit quality of cash at bank and short-term deposits:

Bank Rating 2011 2010

RO’000 RO’000

P1 2,352 3,560

P2 1,968 4,058

4,320 7,618

The ratings are based on Moody’s Investors Service ratings for short-term deposits and balances with banks.

14 Share capital

The company’s authorised, issued and fully paid-up share capital consists of 100,000,000 shares of 100 baizas each (2010 - 100,000,000 shares of 100 baizas each) as follows:

2011 2010

RO’000 RO’000

5,000,000 Multi-vote shares of 100 baizas each 500 500

95,000,000 Ordinary shares of 100 baizas each 9,500 9,500

10,000 10,000

In accordance with Article 6 of the company’s Articles of Association, the holder of each Multi-vote share is entitled to two votes at the annual general meetings of the company. A company controlled by the ultimate parent holds all the Multi-vote shares.

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15 Significant shareholders

At 31 December, shareholders owning more than 5% of the company’s share capital are as follows:

2011Number

of shares

2010Number

of shares

2011% of

holding

2010% of

holding

Multi-vote shares

Shell Overseas Investments BV 5,000,000 5,000,000 5% 5%

Ordinary shares

BV Dordtsche Petroleum Maatschappij 20,000,000 20,000,000 20% 20%

Shell Overseas Investments BV 15,000,000 15,000,000 15% 15%

Civil Service Employees Pension Fund 9,122,963 9,122,963 9.1% 9.1%

Shell Petroleum NV 8,800,000 8,800,000 8.8% 8.8%

MOD Pension Fund 8,115,990 8,115,990 8.1% 8.1%

16 Legal reserve

Article 106 of the Commercial Companies Law of 1974, as amended requires that 10% of a company’s net profit be transferred to a non-distributable legal reserve until the amount of legal reserve becomes equal to at least one-third of the company’s issued share capital. Since the amount of legal reserve has exceeded one-third of the company’s share capital, no further transfers have been made during the year. This reserve is not available for distribution.

17 Employee terminal benefits

2011 2010

RO’000 RO’000


Increase for the year 108 75

Paid during the year (94) (5)


18 Short term loan

The carrying amount of the company’s short term loan is denominated in Rial Omani. The short term loan is unsecured, carries interest at a commercial rate and is repayable on 9 January 2012. The company is not required to pay any arrangement or commitment fees.

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19 Payables and accruals

2011 2010

RO’000 RO’000

Trade payable 22,832 29,568

Accrued expenses 3,533 3,564

Other payables 745 709

Payable to related parties (note 23) 40 984

27,150 34,825

20 Provisions

2011 2010

RO’000 RO’000

Environmental provision 359 373

Provision for employee retention scheme 367 328

726 701

Environmental provision

2011 2010

RO’000 RO’000


Provided during the year - 99

Less: Utilised during the year (14) (6)


The company provides for environmental costs based on environmental contamination assessments made on its delivery and storage sites.

Provision for employee retention scheme

2011 2010

RO’000 RO’000


Provided during the year 140 128

Less: Utilised during the year (101) (57)


The company has an employee retention scheme designed to enhance benefits to certain employees. The associated provision has been created by charging the statement of comprehensive income and is expected to be utilised after three years of employment in accordance with the scheme.

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21 Earnings per share

The calculation of basic earnings per share at 31 December 2011 is based on net profit for the year in the amount of RO 12,602,000 (2010 - RO 13,991,000) and 100,000,000 shares (2010 - 100,000,000 shares).

22 Dividends paid and proposed

Dividends paidDuring the year, dividends of RO 0.130 (2010 - RO 0.120) per share totalling to RO 13,000,000 relating to 2010 were declared and paid (2010 - RO 12,000,000 relating to 2009 were declared and paid).

Proposed dividendThe Board of Directors at their meeting dated 28 January 2012, have proposed a dividend of RO 11,700,000 for the year ended 31 December 2011 (2010 - RO 13,000,000).

Dividend per shareThe calculation of dividend per share is based on proposed final dividend totalling RO 11,700,000 (2010 - RO 13,000,000) and 100,000,000 shares (2010 - 100,000,000 shares).

23 Related party transactions

The company has entered into transactions with subsidiaries of the ultimate parent and entities over which certain directors are able to exercise significant influence. Terms of these transactions are approved by the Board of Directors and Shareholders.

(i) The transactions with related parties included in the statement of comprehensive income were as follows:

2011 2010

RO’000 RO’000

Sale of goods 44,487 51,834

Purchase of goods and services 14,187 14,580

Service and trademark licence fees 1,565 1,393

Bank interest expense 7 3

Revenue from related party sales in the amount of approximately RO 44 million (2010 - RO 51 million) were to companies controlled by the Shell Group and relate to sales of lubricants and aviation fuel. Other related party sales relate to sales to entities that are controlled by the directors of the company. Related party purchases were from companies controlled by the Shell Group and were primarily for supply of base oils and additives used for lubricant blending.

During the year, three (2010 - four) of the company’s directors were also employees of the company during the year. One of them was an employee for the full year, whilst the other two were employed for part of the year. In their capacity as employees of the company, they earned an aggregate of RO 296,795 (2010 - RO 258,764) in salaries and benefits. These three (2010 - four) directors earned no additional remuneration in their separate capacity as directors

During the year eight (2010 - seven) non-executive directors earned an aggregate amount of RO 108,400 (2010 - RO 96,200) in respect of meeting fees and director’s remuneration.

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23 Related party transactions (continued)

(ii) Compensation of key management personnel The remuneration of executive directors and other members of key management during the year were as follows:

2011 2010

RO’000 RO’000

Short-term benefits 587 554

Employees’ end of service benefits 58 54

645 608

(iii) Amounts due from and due to related parties are disclosed in notes 12 and 19 respectively.

(iv) Outstanding balances at the year-end arise in the normal course of business. No provision for impairment has been made for 2011 and 2010 in respect of amounts due from related parties.

24 Net assets per share

The calculation of net assets per share is based on net assets at 31 December 2011 in the amount of RO 29,933,000 (2010 - RO 30,331,000) and 100,000,000 shares (2010 - 100,000,000 shares).

25 Financial instruments

The accounting policies for financial instruments have been applied to the line items below:

Loans and receivables

2011 2010

RO’000 RO’000

Assets as per balance sheet

Trade and other receivables (excluding prepayments) 30,078 28,252

Cash at bank and in hand 4,320 7,630

34,398 35,882

Other financial liabilities

2011 2010

RO’000 RO’000

Liabilities as per balance sheet

Payables and accruals 27,150 34,825

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26 Contingent liabilities

a) GuaranteesAt 31 December 2011, the company has issued guarantees arising in the ordinary course of business, from which it is anticipated that no material liabilities will arise, amounting to RO 3,925,551 (2010 - RO 4,735,779) in respect of contract performance.

b) Litigation In 2009, a claim has been filed by an ex-employee, in a Primary Court against the company for illegal termination

and for compensation relating to work-related personal injury. Based on legal advice, the company considers that it is unlikely that any material liability will arise in respect of this matter. Accordingly, no provision has been made in these financial statements relating to this claim.

27 Commitments

(a) The company leases land on which their depots, office and bulk storage facilities are constructed under non-cancellable operating lease agreements. The lease terms are typically between three and ten years. Certain lease agreements are renewable at the end of the lease period at market rate. One land lease is valid for the duration of the company.

At 31 December, future minimum lease commitments under non-cancellable operating leases and other rentals are as under:

2011 2010

RO’000 RO’000

Not later than one year 463 272

Later than one year and not later than five years 2,733 1,049

More than five years 4,383 2,458

7,579 3,779

(b) At 31 December 2011, the company has future capital expenditure commitments amounting to RO 2,379,600 (2010 - RO 3,594,004).

(c) At 31 December 2011, the company has a commitment to pay Shell International Petroleum Company Limited (SIPC), a related party, a fixed fee of GBP 4.3 million in 2012. This payment relates to the successful implementation of a Global Enterprise Resource Planning System which will go live on 1 January 2012.

Report of the Auditors - page 31.

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annual report and accounts 2011 shell oman marketing …

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