Shell Annual Report Master Template

Shell Annual Report_Master Template.inddANNUAL REPORT Royal Dutch Shell plc Annual Report and Form 20-F for the year ended December 31, 2017
01 introduction 01 Form 20-F 02 Cross reference to Form 20-F 04 Terms and abbreviations 05 About this Report
06 strategic report 06 Chair’s message 07 Chief Executive Officer’s review 08 Strategy and outlook 10 Business overview 12 Risk factors 17 Market overview 19 Summary of results 22 Performance indicators 24 Integrated Gas 31 Upstream 38 Oil and gas information 46 Downstream 53 Corporate 54 Liquidity and capital resources 58 Environment and society 62 Climate change and energy transition 67 Our people
69 governance 69 The Board of Royal Dutch Shell plc 72 Senior Management 73 Directors’ Report 76 Corporate governance 90 Audit Committee Report 94 Directors’ Remuneration Report
118 Financial statements and supplements 118 Independent Auditors’ Reports related
to the Consolidated and Parent Company Financial Statements
137 Consolidated Financial Statements 179 Supplementary information – oil and gas
(unaudited) 199 Parent Company Financial Statements 208 Independent Auditors’ Reports related
to the Royal Dutch Shell Dividend Access Trust Financial Statements
213 Royal Dutch Shell Dividend Access Trust Financial Statements
217 additional inFormation 217 Shareholder information 224 Section 13(r) of the US Securities
Exchange Act of 1934 disclosure 225 Non-GAAP measures reconciliations 227 Index to the Exhibits 228 Signatures E1 Exhibits
contents
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Washington, D.C. 20549
Form 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017
Commission file number 001-32575
Royal Dutch Shell plc (Exact name of registrant as specified in its charter)
England and Wales (Jurisdiction of incorporation or organisation)
Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands Tel. no: 011 31 70 377 9111
[email protected] (Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class Name of Each Exchange on Which Registered American Depositary Shares representing two A ordinary shares of the issuer with a nominal value of €0.07 each
New York Stock Exchange
American Depositary Shares representing two B ordinary shares of the issuer with a nominal value of €0.07 each
New York Stock Exchange
1.625% Guaranteed Notes due 2018 New York Stock Exchange 1.9% Guaranteed Notes due 2018 New York Stock Exchange 2.0% Guaranteed Notes due 2018 New York Stock Exchange Floating Rate Guaranteed Notes due 2018 New York Stock Exchange 1.375% Guaranteed Notes due May 2019 New York Stock Exchange 1.375% Guaranteed Notes due September 2019 New York Stock Exchange 4.3% Guaranteed Notes due 2019 New York Stock Exchange Floating Rate Guaranteed Notes due 2019 New York Stock Exchange 2.125% Guaranteed Notes due 2020 New York Stock Exchange 2.25% Guaranteed Notes due 2020 New York Stock Exchange 4.375% Guaranteed Notes due 2020 New York Stock Exchange Floating Rate Guaranteed Notes due 2020 New York Stock Exchange 1.75% Guaranteed Notes due 2021 New York Stock Exchange 1.875% Guaranteed Notes due 2021 New York Stock Exchange 2.375% Guaranteed Notes due 2022 New York Stock Exchange 2.25% Guaranteed Notes due 2023 New York Stock Exchange 3.4% Guaranteed Notes due 2023 New York Stock Exchange 3.25% Guaranteed Notes due 2025 New York Stock Exchange 2.5% Guaranteed Notes due 2026 New York Stock Exchange 2.875% Guaranteed Notes due 2026 New York Stock Exchange 4.125% Guaranteed Notes due 2035 New York Stock Exchange 6.375% Guaranteed Notes due 2038 New York Stock Exchange 5.5% Guaranteed Notes due 2040 New York Stock Exchange 3.625% Guaranteed Notes due 2042 New York Stock Exchange 4.55% Guaranteed Notes due 2043 New York Stock Exchange 4.375% Guaranteed Notes due 2045 New York Stock Exchange 3.75% Guaranteed Notes due 2046 New York Stock Exchange 4.00% Guaranteed Notes due 2046 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: none Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: none
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Outstanding as of December 31, 2017: 4,570,138,647 A ordinary shares with a nominal value of €0.07 each. 3,742,624,272 B ordinary shares with a nominal value of €0.07 each.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised nancial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. † The term “new or revised nancial accounting standards” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board. Other If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Copies of notices and communications from the Securities and Exchange Commission should be sent to: Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR, The Hague, The Netherlands Attn: Linda M. Szymanski
Shell Annual Report_Master Template.indd 1 21/03/2018 15:32:54
02 introduction SHELL ANNUAL REPORT AND FORM 20-F 2017
Cross reference to Form 20-F
INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2017 02
Part I Pages Item 1. Identity of Directors, Senior Management and Advisers N/A Item 2. Offer Statistics and Expected Timetable N/A Item 3. Key Information
A. Selected financial data 21, 219 B. Capitalisation and indebtedness N/A C. Reasons for the offer and use of proceeds N/A D. Risk factors 12-16
Item 4. Information on the Company A. History and development of the company 08, 10, 19-20, 24-37, 46-49, 55-57, 217, 225-226 B. Business overview 08-21, 24-53, 58-61, 179-198, 224 C. Organisational structure 10, E2-E20 D. Property, plant and equipment 08-09, 12-16, 19-20, 24-52, 58-61, 179-198
Item 4A. Unresolved Staff Comments N/A Item 5. Operating and Financial Review and Prospects
A. Operating results 12-16, 19-53, 166-172 B. Liquidity and capital resources 08-09, 19-21, 24-25, 31-33, 46-48, 53-58, 146-148, 156-159, 163-172 C. Research and development, patents and licences, etc. 11 D. Trend information 08-09, 12-16, 17-23, 24-29, 31-37, 46-49, 53, 62-66 E. Off-balance sheet arrangements 57 F. Tabular disclosure of contractual obligations 57 G. Safe harbour 57
Item 6. Directors, Senior Management and Employees A. Directors and senior management 69-72, 77-81 B. Compensation 97-108 C. Board practices 69-72, 76-83, 90-93, 97, 107-108, 114-116 D. Employees 67, 176 E. Share ownership 68, 80, 94-117, 172-173, 217
Item 7. Major Shareholders and Related Party Transactions A. Major shareholders 218 B. Related party transactions 74, 145, 155, 177, 216 C. Interests of experts and counsel N/A
Item 8. Financial Information A. Consolidated Statements and Other Financial Information 54-57, 135-178, 210-216 B. Significant changes 75
Item 9. The Offer and Listing A. Offer and listing details 220 B. Plan of distribution N/A C. Markets 217 D. Selling shareholders N/A E. Dilution N/A F. Expenses of the issue N/A
Item 10. Additional Information A. Share capital N/A B. Memorandum and articles of association 83-89 C. Material contracts N/A D. Exchange controls 222 E. Taxation 222-223 F. Dividends and paying agents N/A G. Statement by experts N/A H. Documents on display 5 I. Subsidiary information N/A
Item 11. Quantitative and Qualitative Disclosures About Market Risk 54, 156, 166-172
Part I Pages Item 12. Description of Securities Other than Equity Securities A. Debt Securities N/A B. Warrants and Rights N/A C. Other Securities N/A D. American Depositary Shares 217, 221-222 Part II Item 13. Defaults, Dividend Arrearages and Delinquencies N/A Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds N/A Item 15. Controls and Procedures 82-83, 135, 210-211, E21-E22 Item 16. [Reserved] Item 16A. Audit committee financial expert 76-78, 90 Item 16B. Code of Ethics 77 Item 16C. Principal Accountant Fees and Services 93, 177, 216 Item 16D. Exemptions from the Listing Standards for Audit Committees 77 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 56, 80 Item 16F. Change in Registrant’s Certifying Accountant N/A Item 16G. Corporate Governance 76-77 Item 16H. Mine Safety Disclosure N/A
Part III Item 17. Financial Statements N/A Item 18. Financial Statements 135-178, 210-216 Item 19. Exhibits 227, E1-E27
03SHELL ANNUAL REPORT AND FORM 20-F 2017 introduction
Part I Pages Item 1. Identity of Directors, Senior Management and Advisers N/A Item 2. Offer Statistics and Expected Timetable N/A Item 3. Key Information
A. Selected financial data 21, 219 B. Capitalisation and indebtedness N/A C. Reasons for the offer and use of proceeds N/A D. Risk factors 12-16
Item 4. Information on the Company A. History and development of the company 08, 10, 19-20, 24-37, 46-49, 55-57, 217, 225-226 B. Business overview 08-21, 24-53, 58-61, 179-198, 224 C. Organisational structure 10, E2-E20 D. Property, plant and equipment 08-09, 12-16, 19-20, 24-52, 58-61, 179-198
Item 4A. Unresolved Staff Comments N/A Item 5. Operating and Financial Review and Prospects
A. Operating results 12-16, 19-53, 166-172 B. Liquidity and capital resources 08-09, 19-21, 24-25, 31-33, 46-48, 53-58, 146-148, 156-159, 163-172 C. Research and development, patents and licences, etc. 11 D. Trend information 08-09, 12-16, 17-23, 24-29, 31-37, 46-49, 53, 62-66 E. Off-balance sheet arrangements 57 F. Tabular disclosure of contractual obligations 57 G. Safe harbour 57
Item 6. Directors, Senior Management and Employees A. Directors and senior management 69-72, 77-81 B. Compensation 97-108 C. Board practices 69-72, 76-83, 90-93, 97, 107-108, 114-116 D. Employees 67, 176 E. Share ownership 68, 80, 94-117, 172-173, 217
Item 7. Major Shareholders and Related Party Transactions A. Major shareholders 218 B. Related party transactions 74, 145, 155, 177, 216 C. Interests of experts and counsel N/A
Item 8. Financial Information A. Consolidated Statements and Other Financial Information 54-57, 135-178, 210-216 B. Significant changes 75
Item 9. The Offer and Listing A. Offer and listing details 220 B. Plan of distribution N/A C. Markets 217 D. Selling shareholders N/A E. Dilution N/A F. Expenses of the issue N/A
Item 10. Additional Information A. Share capital N/A B. Memorandum and articles of association 83-89 C. Material contracts N/A D. Exchange controls 222 E. Taxation 222-223 F. Dividends and paying agents N/A G. Statement by experts N/A H. Documents on display 5 I. Subsidiary information N/A
Item 11. Quantitative and Qualitative Disclosures About Market Risk 54, 156, 166-172
Part I Pages Item 12. Description of Securities Other than Equity Securities A. Debt Securities N/A B. Warrants and Rights N/A C. Other Securities N/A D. American Depositary Shares 217, 221-222 Part II Item 13. Defaults, Dividend Arrearages and Delinquencies N/A Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds N/A Item 15. Controls and Procedures 82-83, 135, 210-211, E21-E22 Item 16. [Reserved] Item 16A. Audit committee financial expert 76-78, 90 Item 16B. Code of Ethics 77 Item 16C. Principal Accountant Fees and Services 93, 177, 216 Item 16D. Exemptions from the Listing Standards for Audit Committees 77 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 56, 80 Item 16F. Change in Registrant’s Certifying Accountant N/A Item 16G. Corporate Governance 76-77 Item 16H. Mine Safety Disclosure N/A
Part III Item 17. Financial Statements N/A Item 18. Financial Statements 135-178, 210-216 Item 19. Exhibits 227, E1-E27
04 introduction SHELL ANNUAL REPORT AND FORM 20-F 2017
Terms and abbreviations
Currencies $ US dollar
b(/d) barrels (per day)
boe(/d) barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel
kboe(/d) thousand barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel
MMBtu million British thermal units
mtpa million tonnes per annum
per day volumes are converted into a daily basis using a calendar year
scf(/d) standard cubic feet (per day)
Products GTL gas to liquids
LNG liquefied natural gas
LPG liquefied petroleum gas
NGL natural gas liquids
AGM Annual General Meeting
API American Petroleum Institute
CCS earnings earnings on a current cost of supplies basis
CO2 carbon dioxide
GHG greenhouse gas
IAS International Accounting Standard
IEA International Energy Agency
IOGP International Association of Oil & Gas Producers
IPIECA International Petroleum Industry Environmental Conservation Association (global oil and gas industry association for environmental and social issues)
LTIP Long-term Incentive Plan
OML oil mining lease
OPL oil prospecting licence
TRCF total recordable case frequency
TSR total shareholder return
WTI West Texas Intermediate
The Royal Dutch Shell plc Annual Report and Form 20-F (this Report) serves as the Annual Report and Accounts in accordance with UK requirements and as the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission (SEC) for the year ended December 31, 2017, for Royal Dutch Shell plc (the Company) and its subsidiaries (collectively referred to as Shell). This Report presents the Consolidated Financial Statements of Shell (pages 137-178), the Parent Company Financial Statements of Shell (pages 199-207) and the Financial Statements of the Royal Dutch Shell Dividend Access Trust (pages 213-216). Cross references to Form 20-F are set out on pages 02-03 of this Report. Financial reporting terms used in this Report are in accordance with International Financial Reporting Standards (IFRS). The Consolidated Financial Statements comprise the financial statements of the Company and its subsidiaries. “Subsidiaries” and “Shell subsidiaries” refer to those entities over which the Company has control, either directly or indirectly. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations” respectively, and entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. “Joint ventures” and “joint operations” are collectively referred to as “joint arrangements”. In addition to the term “Shell”, in this Report “we”, “us” and “our” are also used to refer to the Company and its subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement. The companies in which Royal Dutch Shell plc has a direct or indirect interest are separate legal entities. Shell subsidiaries’ data include their interests in joint operations. We also refer to “Shell’s net carbon footprint” in this Report. This includes Shell’s carbon emissions from the production of our energy products, our suppliers’ carbon emissions in supplying energy for that production, and our customers’ carbon emissions associated with their use of the energy products we sell. Shell only controls its own emissions but, to support society in achieving the Paris Agreement goals, we aim to help and influence such suppliers and consumers to likewise lower theirs. The use of the terminology “Shell’s net carbon footprint” is for convenience only and not intended to suggest these emissions are those of Shell or its subsidiaries. Except where indicated, the figures shown in the tables in this Report are in respect of subsidiaries only, without deduction of any non-controlling interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through subsidiaries, joint ventures and associates. All of a subsidiary’s production, processing or sales volumes (including the share of joint operations) are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of joint ventures and associates, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. The financial statements contained in this Report have been prepared in accordance with the provisions of the Companies Act 2006 and with IFRS as adopted by the European Union. As applied to the financial statements, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the financial statements have been prepared in accordance with IFRS as issued by the IASB. IFRS as defined above includes interpretations issued by the IFRS Interpretations Committee. Except where indicated, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency.
This Report contains forward-looking statements (within the meaning of the US Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Shell. All statements other than statements of historical fact are, or may be deemed to be, forward- looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward- looking statements are identified by their use of terms and phrases such as “aim”, “ambition”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “schedule”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. Also see “Risk factors” on pages 12-16 for additional risks and further discussion. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward- looking statements contained in this Report are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of this Report. Neither the Company nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Report. This Report contains references to Shell’s website and to the Shell Sustainability Report. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com or in the Shell Sustainability Report. DOCUMENTS ON DISPLAY Documents concerning the Company, or its predecessors for reporting purposes, which are referred to in this Report, have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549, USA. For further information on the operation of the public reference room and the copy charges, call the SEC at 1-800-SEC-0330. All of the SEC filings made electronically by Shell are available to the public on the SEC website at www.sec.gov (commission file number 001-32575). This Report is also available, free of charge, at www.shell.com/annualreport or at the offices of Shell in The Hague, the Netherlands and London, United Kingdom. Copies of this Report also may be obtained, free of charge, by mail.
05SHELL ANNUAL REPORT AND FORM 20-F 2017 introduction
Currencies $ US dollar
b(/d) barrels (per day)
boe(/d) barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel
kboe(/d) thousand barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel
MMBtu million British thermal units
mtpa million tonnes per annum
per day volumes are converted into a daily basis using a calendar year
scf(/d) standard cubic feet (per day)
Products GTL gas to liquids
LNG liquefied natural gas
LPG liquefied petroleum gas
NGL natural gas liquids
AGM Annual General Meeting
API American Petroleum Institute
CCS earnings earnings on a current cost of supplies basis
CO2 carbon dioxide
GHG greenhouse gas
IAS International Accounting Standard
IEA International Energy Agency
IOGP International Association of Oil & Gas Producers
IPIECA International Petroleum Industry Environmental Conservation Association (global oil and gas industry association for environmental and social issues)
LTIP Long-term Incentive Plan
OML oil mining lease
OPL oil prospecting licence
TRCF total recordable case frequency
TSR total shareholder return
WTI West Texas Intermediate
The Royal Dutch Shell plc Annual Report and Form 20-F (this Report) serves as the Annual Report and Accounts in accordance with UK requirements and as the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission (SEC) for the year ended December 31, 2017, for Royal Dutch Shell plc (the Company) and its subsidiaries (collectively referred to as Shell). This Report presents the Consolidated Financial Statements of Shell (pages 137-178), the Parent Company Financial Statements of Shell (pages 199-207) and the Financial Statements of the Royal Dutch Shell Dividend Access Trust (pages 213-216). Cross references to Form 20-F are set out on pages 02-03 of this Report. Financial reporting terms used in this Report are in accordance with International Financial Reporting Standards (IFRS). The Consolidated Financial Statements comprise the financial statements of the Company and its subsidiaries. “Subsidiaries” and “Shell subsidiaries” refer to those entities over which the Company has control, either directly or indirectly. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations” respectively, and entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. “Joint ventures” and “joint operations” are collectively referred to as “joint arrangements”. In addition to the term “Shell”, in this Report “we”, “us” and “our” are also used to refer to the Company and its subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement. The companies in which Royal Dutch Shell plc has a direct or indirect interest are separate legal entities. Shell subsidiaries’ data include their interests in joint operations. We also refer to “Shell’s net carbon footprint” in this Report. This includes Shell’s carbon emissions from the production of our energy products, our suppliers’ carbon emissions in supplying energy for that production, and our customers’ carbon emissions associated with their use of the energy products we sell. Shell only controls its own emissions but, to support society in achieving the Paris Agreement goals, we aim to help and influence such suppliers and consumers to likewise lower theirs. The use of the terminology “Shell’s net carbon footprint” is for convenience only and not intended to suggest these emissions are those of Shell or its subsidiaries. Except where indicated, the figures shown in the tables in this Report are in respect of subsidiaries only, without deduction of any non-controlling interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through subsidiaries, joint ventures and associates. All of a subsidiary’s production, processing or sales volumes (including the share of joint operations) are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of joint ventures and associates, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. The financial statements contained in this Report have been prepared in accordance with the provisions of the Companies Act 2006 and with IFRS as adopted by the European Union. As applied to the financial statements, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the financial statements have been prepared in accordance with IFRS as issued by the IASB. IFRS as defined above includes interpretations issued by the IFRS Interpretations Committee. Except where indicated, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency.
This Report contains forward-looking statements (within the meaning of the US Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Shell. All statements other than statements of historical fact are, or may be deemed to be, forward- looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward- looking statements are identified by their use of terms and phrases such as “aim”, “ambition”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “schedule”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. Also see “Risk factors” on pages 12-16 for additional risks and further discussion. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward- looking statements contained in this Report are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of this Report. Neither the Company nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Report. This Report contains references to Shell’s website and to the Shell Sustainability Report. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com or in the Shell Sustainability Report. DOCUMENTS ON DISPLAY Documents concerning the Company, or its predecessors for reporting purposes, which are referred to in this Report, have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549, USA. For further information on the operation of the public reference room and the copy charges, call the SEC at 1-800-SEC-0330. All of the SEC filings made electronically by Shell are available to the public on the SEC website at www.sec.gov (commission file number 001-32575). This Report is also available, free of charge, at www.shell.com/annualreport or at the offices of Shell in The Hague, the Netherlands and London, United Kingdom. Copies of this Report also may be obtained, free of charge, by mail.
About this Report
06 strategic report SHELL ANNUAL REPORT AND FORM 20-F 2017
Strategic Report Chair’s message: Powering progress together
STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2017 06
I would like to take this opportunity to thank everyone who contributed to Shell’s strong business performance in 2017, including our customers, partners and staff. The successful integration of BG’s business into our portfolio during 2016, combined with ongoing efforts to reduce costs and debt, are helping to reshape Shell into a world-class investment. In his review, our Chief Executive Officer Ben van Beurden outlines our performance and how this is creating value for shareholders. I would like to talk about how we are also working to thrive in the energy transition, while continuing to contribute to society. The challenge facing global society is clear: more than 1 billion people in the developing world today still live without the full benefits that energy can provide. Many hundreds of millions more will need energy in the future. Bringing the benefits of energy to everyone on the planet, while managing the risks of climate change, will require fundamental changes in the way energy is produced and used around the world. As Mahatma Gandhi is often quoted as saying, “The future depends on what you do today.” Shell is working today to make a better future. In a step that demonstrates our determination to play our part in a cleaner energy future, we announced an ambition, pegged to society’s progress, to reduce the net carbon footprint of our operations and of our customers’ emissions from using our products. As part of our drive to help power progress with more and cleaner energy solutions, we will offer customers more low-carbon products and services, such as lower-carbon fuels for drivers and low-carbon energy for homes and businesses. Expanding our power supply business, including investments in electric vehicle charging systems, will help us to deliver cleaner energy while other parts of our business work to meet rising global demand for key products such as natural gas, the cleanest-burning hydrocarbon. Powering an increasing variety of human activities with electricity can help to reduce emissions while providing energy to more people. To reduce emissions, this long-term electrification of the economy will require a combination of renewables and more natural gas in place of coal. However, electricity is unlikely to replace oil or natural gas in some key parts of the economy, such as in heavy road transport, aviation and shipping. This means the world will need large quantities of oil and natural gas for decades to come. At the same time, production from many oil and gas fields is declining and continued investment is needed to develop new resources. Oil and gas will remain central to our business for many years. We are increasingly active in wind and solar power. But today, the greatest contribution Shell can make to providing more and cleaner energy is to deliver more natural gas. Gas is expected to play an increasingly important part in global energy supply over the next few decades as more communities seek cleaner alternatives to coal. Using natural gas for power generation or as a cleaner fuel for transport, for example, can play a critical role in tackling climate change. But emissions of its chief component, methane, a potent greenhouse gas, must be reduced. Shell and seven other major natural gas producers announced plans in November to further reduce methane emissions from assets they operate. But business alone cannot drive the wider and more profound changes required across global society. Governments around the world need to accelerate change by establishing policies that encourage businesses to do more to overcome the challenges ahead. Governments need to introduce
policies that reshape several sectors of the economy and enable the development of lower-carbon and renewable sources of energy, supported by technologies such as carbon capture and storage. One of the most effective ways of doing this are government-led carbon pricing mechanisms. Any such framework for incentivising the multitrillion- dollar investments that will be needed to combat climate change must have strong global support. Society will be able to achieve much more once effective government-led carbon pricing systems are in place. As the future depends on what we all do today, Shell is already working to ensure its long-term business relevance by playing an active role in the energy transition. The quality and diversity of our people are vital to the success of our approach. In 2017, we welcomed two more women to the Board. Today, we agreed to seek shareholder approval for the appointment of Ann Godbehere at the Annual General Meeting (AGM) to be held in May. If approved by shareholders, five women and six men will sit on the Board before this year is over. I would like to thank Hans Wijers, who will not be standing for reappointment at the AGM, for his nine years of outstanding contributions to the Board, including service as Senior Independent Director, Chair of the Remuneration Committee and Chair of the Corporate and Social Responsibility Committee. It is a real honour to serve as Chair of your Board as we continue to work to make a future that is better for all.
Chad Holliday Chair
Chief Executive Officer’s review: Building a world-class investment case
Shell delivered a strong financial performance in 2017. We are making good progress towards building a world-class investment case. Higher oil and gas prices, combined with our relentless focus on performance and competitiveness, enabled us to increase our operating cash flow. We also further reshaped and refined our portfolio through our divestment programme. These factors helped to reduce debt and strengthen our financial framework. We continue to closely control costs and investment levels, working to improve our capital efficiency while improving the quality of our portfolio through asset sales and new projects. There was a terrible incident in Pakistan in June when a contractor road tanker overturned while transporting fuel from a Shell depot, following which there was a spill that subsequently ignited. Tragically, the fire caused more than 200 fatalities. Sadly, a contractor also died in a road accident in Canada and we had a fatality in Nigeria. These incidents underscore the need for all Shell contractors, suppliers and employees to adhere to effective health and safety standards at all times. Any incident is one incident too many and we must reflect deeply on these events. We must redouble our focus on safety. RESULTS Income for the period was $13.4 billion in 2017 compared with $4.8 billion in 2016. Earnings on a current cost of supplies basis were $12.5 billion, compared with $3.7 billion in 2016. A rise in crude oil and natural gas prices supported Upstream and Integrated Gas earnings. Our Downstream earnings benefited from improved refining and chemicals industry conditions. We distributed $15.6 billion to shareholders in dividends in 2017, including those taken as shares under our Scrip Dividend Programme. The strength of our balance sheet, coupled with strong cash flows and continuing focus on capital efficiency, allowed us to cancel the Scrip Dividend Programme with effect from the fourth quarter 2017 dividend. I am confident that we can do this while investing at levels that maintain growth in our portfolio. At Management Day in November, we confirmed our intention to undertake a share buyback programme of at least $25 billion in the period 2017 to 2020, subject to progress with debt reduction and a recovery in oil prices. We also raised our outlook for annual free cash flow to between $30 billion and $35 billion by 2020, at a Brent crude oil price of $60 a barrel (real terms 2016). This is $5 billion more than the outlook range we gave in June 2016. This includes the impact of acquisitions and proceeds from divestments, while excluding free cash flow from assets after planned divestments. Our delivery of new projects continues and we remain on track to deliver 1 million barrels of oil equivalent a day (boe/d) from new projects between 2014 and 2018. Overall, our production averaged 3.7 million boe/d in 2017, in line with 2016, with production from new fields offsetting the impact of field declines and divestments. Our $30 billion divestment programme for 2016-18 made good progress in 2017. Divestments included oil sands interests in Canada, onshore upstream operations in Gabon, a number of assets in the UK North Sea, and our shares in Woodside in Australia. Other divestments included our interest in a petrochemicals joint venture in Saudi Arabia and the separation of assets of the Motiva joint venture in the USA. This streamlining of our portfolio is part of our ongoing effort to raise efficiency through reduced costs and concentrating on our most competitive businesses.
The progress of our divestments has helped us to reduce net debt, with gearing standing at 24.8% at the end of 2017, down from 28.0% at the end of 2016. Debt reduction remains a priority and after this programme is completed we expect to continue divestments at an average rate of more than $5 billion a year until at least 2020. Capital investment in 2017 was $24 billion. That is lower than the $25 billion outlook we have given and reflects continued capital discipline and capital efficiency improvements. We will continue to carefully control our investment levels. We expect our annual organic capital investment to remain between $25 billion and $30 billion until 2020. But we see $30 billion as a ceiling, even if oil prices rise, while $25 billion is not a floor – we may go below this. We maintain a “lower forever” approach to our cost management, with an outlook of less than $38 billion a year for operating expenses until at least 2020, assuming no portfolio impacts or other external effects. This outlook excludes potential impacts of restructuring and redundancies, as well as certain other provisions. ENERGY FUTURE Over the next few decades, we plan to show leadership in the oil and gas industry, while responding to society’s need for more and cleaner energy as the world moves to a low-carbon energy system. Tackling climate change is a multi-generational challenge for society – including businesses, governments and consumers. As the global population grows and living standards rise, it will mean society meeting increasing energy demand with an ever-lower carbon footprint. We will play our part. In November, we announced a net carbon footprint reduction ambition covering not just emissions from our own operations but also those produced by customers when they use the energy products we sell. We plan to do this in step with society’s drive to align with the Paris climate agreement. We aim to reduce the overall footprint of our energy products by around 20% by 2035 and by around half by 2050. This measure will be reviewed every five years to ensure progress is in line with wider society’s progress towards the reductions required to meet the Paris goals.
Our New Energies unit, which we created in 2016, invested in commercial opportunities linked to the energy transition in 2017. We acquired NewMotion, one of Europe’s largest electric vehicle charging providers, in October. And, in December, we agreed to buy First Utility, a household energy provider in the UK. We expect our capital investment in New Energies to be $1 billion to $2 billion a year, on average, until 2020. We will continue to target opportunities in new fuels and power, two areas where we can effectively apply our Downstream and Integrated Gas expertise. Such steps, combined with the strategy and strength of our portfolio that underpins them, will help deepen Shell’s financial resilience and competitiveness, helping to ensure our long-term business relevance during the energy transition.
In a changing energy landscape, we will continue our focus on delivering strong shareholder returns and cash as we progress confidently along the path to becoming – and remaining – a world-class investment.
Ben van Beurden Chief Executive Officer
strategic report Chair’s message: Powering progress together
07SHELL ANNUAL REPORT AND FORM 20-F 2017 strategic report
Strategic Report Chair’s message: Powering progress together
I would like to take this opportunity to thank everyone who contributed to Shell’s strong business performance in 2017, including our customers, partners and staff. The successful integration of BG’s business into our portfolio during 2016, combined with ongoing efforts to reduce costs and debt, are helping to reshape Shell into a world-class investment. In his review, our Chief Executive Officer Ben van Beurden outlines our performance and how this is creating value for shareholders. I would like to talk about how we are also working to thrive in the energy transition, while continuing to contribute to society. The challenge facing global society is clear: more than 1 billion people in the developing world today still live without the full benefits that energy can provide. Many hundreds of millions more will need energy in the future. Bringing the benefits of energy to everyone on the planet, while managing the risks of climate change, will require fundamental changes in the way energy is produced and used around the world. As Mahatma Gandhi is often quoted as saying, “The future depends on what you do today.” Shell is working today to make a better future. In a step that demonstrates our determination to play our part in a cleaner energy future, we announced an ambition, pegged to society’s progress, to reduce the net carbon footprint of our operations and of our customers’ emissions from using our products. As part of our drive to help power progress with more and cleaner energy solutions, we will offer customers more low-carbon products and services, such as lower-carbon fuels for drivers and low-carbon energy for homes and businesses. Expanding our power supply business, including investments in electric vehicle charging systems, will help us to deliver cleaner energy while other parts of our business work to meet rising global demand for key products such as natural gas, the cleanest-burning hydrocarbon. Powering an increasing variety of human activities with electricity can help to reduce emissions while providing energy to more people. To reduce emissions, this long-term electrification of the economy will require a combination of renewables and more natural gas in place of coal. However, electricity is unlikely to replace oil or natural gas in some key parts of the economy, such as in heavy road transport, aviation and shipping. This means the world will need large quantities of oil and natural gas for decades to come. At the same time, production from many oil and gas fields is declining and continued investment is needed to develop new resources. Oil and gas will remain central to our business for many years. We are increasingly active in wind and solar power. But today, the greatest contribution Shell can make to providing more and cleaner energy is to deliver more natural gas. Gas is expected to play an increasingly important part in global energy supply over the next few decades as more communities seek cleaner alternatives to coal. Using natural gas for power generation or as a cleaner fuel for transport, for example, can play a critical role in tackling climate change. But emissions of its chief component, methane, a potent greenhouse gas, must be reduced. Shell and seven other major natural gas producers announced plans in November to further reduce methane emissions from assets they operate. But business alone cannot drive the wider and more profound changes required across global society. Governments around the world need to accelerate change by establishing policies that encourage businesses to do more to overcome the challenges ahead. Governments need to introduce
policies that reshape several sectors of the economy and enable the development of lower-carbon and renewable sources of energy, supported by technologies such as carbon capture and storage. One of the most effective ways of doing this are government-led carbon pricing mechanisms. Any such framework for incentivising the multitrillion- dollar investments that will be needed to combat climate change must have strong global support. Society will be able to achieve much more once effective government-led carbon pricing systems are in place. As the future depends on what we all do today, Shell is already working to ensure its long-term business relevance by playing an active role in the energy transition. The quality and diversity of our people are vital to the success of our approach. In 2017, we welcomed two more women to the Board. Today, we agreed to seek shareholder approval for the appointment of Ann Godbehere at the Annual General Meeting (AGM) to be held in May. If approved by shareholders, five women and six men will sit on the Board before this year is over. I would like to thank Hans Wijers, who will not be standing for reappointment at the AGM, for his nine years of outstanding contributions to the Board, including service as Senior Independent Director, Chair of the Remuneration Committee and Chair of the Corporate and Social Responsibility Committee. It is a real honour to serve as Chair of your Board as we continue to work to make a future that is better for all.
Chad Holliday Chair
Chief Executive Officer’s review: Building a world-class investment case
Shell delivered a strong financial performance in 2017. We are making good progress towards building a world-class investment case. Higher oil and gas prices, combined with our relentless focus on performance and competitiveness, enabled us to increase our operating cash flow. We also further reshaped and refined our portfolio through our divestment programme. These factors helped to reduce debt and strengthen our financial framework. We continue to closely control costs and investment levels, working to improve our capital efficiency while improving the quality of our portfolio through asset sales and new projects. There was a terrible incident in Pakistan in June when a contractor road tanker overturned while transporting fuel from a Shell depot, following which there was a spill that subsequently ignited. Tragically, the fire caused more than 200 fatalities. Sadly, a contractor also died in a road accident in Canada and we had a fatality in Nigeria. These incidents underscore the need for all Shell contractors, suppliers and employees to adhere to effective health and safety standards at all times. Any incident is one incident too many and we must reflect deeply on these events. We must redouble our focus on safety. RESULTS Income for the period was $13.4 billion in 2017 compared with $4.8 billion in 2016. Earnings on a current cost of supplies basis were $12.5 billion, compared with $3.7 billion in 2016. A rise in crude oil and natural gas prices supported Upstream and Integrated Gas earnings. Our Downstream earnings benefited from improved refining and chemicals industry conditions. We distributed $15.6 billion to shareholders in dividends in 2017, including those taken as shares under our Scrip Dividend Programme. The strength of our balance sheet, coupled with strong cash flows and continuing focus on capital efficiency, allowed us to cancel the Scrip Dividend Programme with effect from the fourth quarter 2017 dividend. I am confident that we can do this while investing at levels that maintain growth in our portfolio. At Management Day in November, we confirmed our intention to undertake a share buyback programme of at least $25 billion in the period 2017 to 2020, subject to progress with debt reduction and a recovery in oil prices. We also raised our outlook for annual free cash flow to between $30 billion and $35 billion by 2020, at a Brent crude oil price of $60 a barrel (real terms 2016). This is $5 billion more than the outlook range we gave in June 2016. This includes the impact of acquisitions and proceeds from divestments, while excluding free cash flow from assets after planned divestments. Our delivery of new projects continues and we remain on track to deliver 1 million barrels of oil equivalent a day (boe/d) from new projects between 2014 and 2018. Overall, our production averaged 3.7 million boe/d in 2017, in line with 2016, with production from new fields offsetting the impact of field declines and divestments. Our $30 billion divestment programme for 2016-18 made good progress in 2017. Divestments included oil sands interests in Canada, onshore upstream operations in Gabon, a number of assets in the UK North Sea, and our shares in Woodside in Australia. Other divestments included our interest in a petrochemicals joint venture in Saudi Arabia and the separation of assets of the Motiva joint venture in the USA. This streamlining of our portfolio is part of our ongoing effort to raise efficiency through reduced costs and concentrating on our most competitive businesses.
The progress of our divestments has helped us to reduce net debt, with gearing standing at 24.8% at the end of 2017, down from 28.0% at the end of 2016. Debt reduction remains a priority and after this programme is completed we expect to continue divestments at an average rate of more than $5 billion a year until at least 2020. Capital investment in 2017 was $24 billion. That is lower than the $25 billion outlook we have given and reflects continued capital discipline and capital efficiency improvements. We will continue to carefully control our investment levels. We expect our annual organic capital investment to remain between $25 billion and $30 billion until 2020. But we see $30 billion as a ceiling, even if oil prices rise, while $25 billion is not a floor – we may go below this. We maintain a “lower forever” approach to our cost management, with an outlook of less than $38 billion a year for operating expenses until at least 2020, assuming no portfolio impacts or other external effects. This outlook excludes potential impacts of restructuring and redundancies, as well as certain other provisions. ENERGY FUTURE Over the next few decades, we plan to show leadership in the oil and gas industry, while responding to society’s need for more and cleaner energy as the world moves to a low-carbon energy system. Tackling climate change is a multi-generational challenge for society – including businesses, governments and consumers. As the global population grows and living standards rise, it will mean society meeting increasing energy demand with an ever-lower carbon footprint. We will play our part. In November, we announced a net carbon footprint reduction ambition covering not just emissions from our own operations but also those produced by customers when they use the energy products we sell. We plan to do this in step with society’s drive to align with the Paris climate agreement. We aim to reduce the overall footprint of our energy products by around 20% by 2035 and by around half by 2050. This measure will be reviewed every five years to ensure progress is in line with wider society’s progress towards the reductions required to meet the Paris goals.
Our New Energies unit, which we created in 2016, invested in commercial opportunities linked to the energy transition in 2017. We acquired NewMotion, one of Europe’s largest electric vehicle charging providers, in October. And, in December, we agreed to buy First Utility, a household energy provider in the UK. We expect our capital investment in New Energies to be $1 billion to $2 billion a year, on average, until 2020. We will continue to target opportunities in new fuels and power, two areas where we can effectively apply our Downstream and Integrated Gas expertise. Such steps, combined with the strategy and strength of our portfolio that underpins them, will help deepen Shell’s financial resilience and competitiveness, helping to ensure our long-term business relevance during the energy transition.
In a changing energy landscape, we will continue our focus on delivering strong shareholder returns and cash as we progress confidently along the path to becoming – and remaining – a world-class investment.
Ben van Beurden Chief Executive Officer
Chief Executive Offi cer’s review: Building a world-class investment case
Strategy and outlook
STRATEGY Shell’s purpose is to power progress together with more and cleaner energy solutions. Our strategy is to strengthen our position as a leading energy company by providing oil and gas and low-carbon energy as the world’s energy system changes. Safety and social responsibility are fundamental to our business approach. Shell will only succeed by working with customers, governments, business partners, investors and other stakeholders. Our strategy is founded on our outlook for the energy sector and the chance to grasp the opportunities arising from the substantial changes in the world around us. The rising standard of living of a growing global population is likely to continue to drive demand for energy, including oil and gas, for years to come. At the same time, technology changes and the need to tackle climate change means there is a transition under way to a lower-carbon, multi-source energy system with increasing customer choice. We recognise that the pace and specific path forward is uncertain and so requires agile decision making. STRATEGIC AMBITIONS Against this backdrop, we have the following strategic ambitions to guide us in pursuing our purpose: to provide a world-class investment case. This involves growing free cash
flow and increasing returns, all built upon a strong financial framework and resilient portfolio;
to thrive in the energy transition by responding to society’s desire for more and cleaner, convenient and competitive energy; and
to sustain a strong societal licence to operate and contribute to society through a shared value approach to our activities.
The execution of our strategy is founded on becoming a more customer-centric and simpler company, focused on delivering higher and more predictable returns and growing free cash flow. By investing in competitive projects, driving down costs and selling non-core businesses, Shell continues to seek to reshape its portfolio into a more resilient and focused company. Our ability to achieve our strategic ambitions depends on how we respond to competitive forces. We continuously assess the external environment – the markets as well as the underlying economic, political, social and environmental drivers that shape them – to evaluate changes in competitive forces and business models. We undertake regular reviews of the markets we operate in and analyse our traditional and non-traditional competitors’ strengths and weaknesses to understand our competitive position. We maintain business strategies and plans that focus on actions and capabilities to create and sustain competitive advantage. We maintain a risk management framework that regularly assesses our response to, and risk appetite for, identified risk factors (see “Risk factors” on page 12). STRATEGIC THEMES As part of our strategy, we divide our portfolio into strategic themes, each with distinctive capabilities, growth strategies, risk management, capital allocation and expected returns: Cash engines are strategic themes that are expected to provide strong and
resilient returns and free cash flow, funding shareholder returns and strengthening the balance sheet. Shell continues to invest in selective growth opportunities for cash engines. Our cash engines are Conventional Oil and Gas in Upstream, Integrated Gas, and Oil Products in Downstream.
Growth priorities are the cash engines of the future. Shell seeks to invest in affordable growth in advantaged positions with a pathway to free cash flow and returns in the near future. Our growth priorities currently are Deep water in Upstream and Chemicals in Downstream.
Emerging opportunities are strategic themes that are expected to become growth priorities after further development. These opportunities should provide us with material growth in free cash flow in the next decade or beyond. We seek to manage our exposure to these businesses while establishing scale. Our emerging opportunities currently are Shales in Upstream and New Energies, which is part of the Integrated Gas and New Energies organisation.
For more details on how the strategic themes are embedded into our businesses, see “Business Overview” on page 11. Our intention is to have an advantaged and resilient position in each strategic theme to drive an optimal free cash flow and returns profile over multiple timelines. When we set our plans and goals, we do so on the basis of delivering sustained returns over decades.
We aim to leverage our diverse global business portfolio and customer-focused businesses, which have been built around the strength of the Shell brand. Our Executive Directors’ remuneration is linked to the successful delivery of our strategy, based on performance indicators that are aligned with shareholder interests. Long-term incentives form the majority of the Executive Directors’ remuneration for above-target performance. Our Long-term Incentive Plan includes cash generation, capital discipline, and value created for shareholders. See the “Directors’ Remuneration Report” on page 112. OUTLOOK FOR 2018 AND BEYOND We continuously seek to improve our operating performance, with an emphasis on health, safety, security, environment and asset performance. In order to maximise sustainable free cash flows, we will also continue to manage operating expenses, capital investment, divestments and delivery of new projects. We maintain a “lower forever” mindset in our cost management, with an outlook of less than $38 billion a year for operating expenses until 2020, assuming no portfolio impacts or other external effects. This outlook excludes potential impacts of restructuring and redundancies, as well as certain other provisions. Our organic capital investment outlook remains between $25 billion and $30 billion a year until 2020. We see $30 billion as a ceiling, even in a high oil price environment. For 2018, we expect to maintain capital investment in the lower part of this range.
We will continue delivering our 2016-18 divestment programme of $30 billion. This is a strategic value-driven, not a time-driven, programme and an integral element of Shell’s portfolio improvement plan. We believe we have already significantly high-graded our portfolio and will continue with an annual average outlook of at least $5 billion of divestments over the period 2019 to 2020. We remain on track to deliver new projects particularly in Brazil, the USA and Australia between 2014 and 2018, which we believe will add 1 million barrels of oil equivalent a day, or $10 billion of cash flow from operations at $60 per barrel by 2018. New project start-ups and ramp-ups are expected to generate an additional $5 billion cash flow from operations by 2020, assuming $60 per barrel real terms 2016 and mid-cycle Downstream industry conditions. We will remain highly selective on new investment decisions throughout 2018 and beyond.
We fully support the Paris Agreement, and its goal of keeping the rise in global temperatures to below two degrees Celsius. After having carefully listened to our critics, supporters and shareholders, in step with society’s drive to align with the Paris Agreement, we have set a long-term ambition to reduce the net carbon footprint of our energy products, measured in grams of carbon-dioxide equivalent per megajoule consumed, by around 20% by 2035 and by around 50% by 2050. This demonstrates leadership in the industry climate change debate. The statements in this “Strategy and outlook” section, including those related to our growth strategies and our expected or potential future cash flow from operations, free cash flow, operating expenses, capital investment, divestments, production and net carbon footprint are based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. See “About this Report” on page 05 and “Risk factors” on pages 12-16.
STRATEGY Shell’s purpose is to power progress together with more and cleaner energy solutions. Our strategy is to strengthen our position as a leading energy company by providing oil and gas and low-carbon energy as the world’s energy system changes. Safety and social responsibility are fundamental to our business approach. Shell will only succeed by working with customers, governments, business partners, investors and other stakeholders. Our strategy is founded on our outlook for the energy sector and the chance to grasp the opportunities arising from the substantial changes in the world around us. The rising standard of living of a growing global population is likely to continue to drive demand for energy, including oil and gas, for years to come. At the same time, technology changes and the need to tackle climate change means there is a transition under way to a lower-carbon, multi-source energy system with increasing customer choice. We recognise that the pace and specific path forward is uncertain and so requires agile decision making. STRATEGIC AMBITIONS Against this backdrop, we have the following strategic ambitions to guide us in pursuing our purpose: to provide a world-class investment case. This involves growing free cash
flow and increasing returns, all built upon a strong financial framework and resilient portfolio;
to thrive in the energy transition by responding to society’s desire for more and cleaner, convenient and competitive energy; and
to sustain a strong societal licence to operate and contribute to society through a shared value approach to our activities.
The execution of our strategy is founded on becoming a more customer-centric and simpler company, focused on delivering higher and more predictable returns and growing free cash flow. By investing in competitive projects, driving down costs and selling non-core businesses, Shell continues to seek to reshape its portfolio into a more resilient and focused company. Our ability to achieve our strategic ambitions depends on how we respond to competitive forces. We continuously assess the external environment – the markets as well as the underlying economic, political, social and environmental drivers that shape them – to evaluate changes in competitive forces and business models. We undertake regular reviews of the markets we operate in and analyse our traditional and non-traditional competitors’ strengths and weaknesses to understand our competitive position. We maintain business strategies and plans that focus on actions and capabilities to create and sustain competitive advantage. We maintain a risk management framework that regularly assesses our response to, and risk appetite for, identified risk factors (see “Risk factors” on page 12). STRATEGIC THEMES As part of our strategy, we divide our portfolio into strategic themes, each with distinctive capabilities, growth strategies, risk management, capital allocation and expected returns: Cash engines are strategic themes that are expected to provide strong and
resilient returns and free cash flow, funding shareholder returns and strengthening the balance sheet. Shell continues to invest in selective growth opportunities for cash engines. Our cash engines are Conventional Oil and Gas in Upstream, Integrated Gas, and Oil Products in Downstream.
Growth priorities are the cash engines of the future. Shell seeks to invest in affordable growth in advantaged positions with a pathway to free cash flow and returns in the near future. Our growth priorities currently are Deep water in Upstream and Chemicals in Downstream.
Emerging opportunities are strategic themes that are expected to become growth priorities after further development. These opportunities should provide us with material growth in free cash flow in the next decade or beyond. We seek to manage our exposure to these businesses while establishing scale. Our emerging opportunities currently are Shales in Upstream and New Energies, which is part of the Integrated Gas and New Energies organisation.
For more details on how the strategic themes are embedded into our businesses, see “Business Overview” on page 11. Our intention is to have an advantaged and resilient position in each strategic theme to drive an optimal free cash flow and returns profile over multiple timelines. When we set our plans and goals, we do so on the basis of delivering sustained returns over decades.
We aim to leverage our diverse global business portfolio and customer-focused businesses, which have been built around the strength of the Shell brand. Our Executive Directors’ remuneration is linked to the successful delivery of our strategy, based on performance indicators that are aligned with shareholder interests. Long-term incentives form the majority of the Executive Directors’ remuneration for above-target performance. Our Long-term Incentive Plan includes cash generation, capital discipline, and value created for shareholders. See the “Directors’ Remuneration Report” on page 112. OUTLOOK FOR 2018 AND BEYOND We continuously seek to improve our operating performance, with an emphasis on health, safety, security, environment and asset performance. In order to maximise sustainable free cash flows, we will also continue to manage operating expenses, capital investment, divestments and delivery of new projects. We maintain a “lower forever” mindset in our cost management, with an outlook of less than $38 billion a year for operating expenses until 2020, assuming no portfolio impacts or other external effects. This outlook excludes potential impacts of restructuring and redundancies, as well as certain other provisions. Our organic capital investment outlook remains between $25 billion and $30 billion a year until 2020. We see $30 billion as a ceiling, even in a high oil price environment. For 2018, we expect to maintain capital investment in the lower part of this range.
We will continue delivering our 2016-18 divestment programme of $30 billion. This is a strategic value-driven, not a time-driven, programme and an integral element of Shell’s portfolio improvement plan. We believe we have already significantly high-graded our portfolio and will continue with an annual average outlook of at least $5 billion of divestments over the period 2019 to 2020. We remain on track to deliver new projects particularly in Brazil, the USA and Australia between 2014 and 2018, which we believe will add 1 million barrels of oil equivalent a day, or $10 billion of cash flow from operations at $60 per barrel by 2018. New project start-ups and ramp-ups are expected to generate an additional $5 billion cash flow from operations by 2020, assuming $60 per barrel real terms 2016 and mid-cycle Downstream industry conditions. We will remain highly selective on new investment decisions throughout 2018 and beyond.
We fully support the Paris Agreement, and its goal of keeping the rise in global temperatures to below two degrees Celsius. After having carefully listened to our critics, supporters and shareholders, in step with society’s drive to align with the Paris Agreement, we have set a long-term ambition to reduce the net carbon footprint of our energy products, measured in grams of carbon-dioxide equivalent per megajoule consumed, by around 20% by 2035 and by around 50% by 2050. This demonstrates leadership in the industry climate change debate. The statements in this “Strategy and outlook” section, including those related to our growth strategies and our expected or potential future cash flow from operations, free cash flow, operating expenses, capital investment, divestments, production and net carbon footprint are based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. See “About this Report” on page 05 and “Risk factors” on pages 12-16.
Business overview
HISTORY From 1907 until 2005, Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c. were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group”. Operating activities were conducted through the subsidiaries of these parent companies. In 2005, Royal Dutch Shell plc became the single parent company of Royal Dutch Petroleum Company and of The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited. Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands. BUSINESS MODEL Shell is an international energy company with expertise in the exploration, development, production, refining and marketing of oil and natural gas, as well as in the manufacturing and marketing of chemicals. We are one of the world’s largest independent energy companies in terms of market capitalisation, cash flow from operating activities, and production levels. We seek to create shareholder value through the following activities:
We explore for crude oil and natural gas worldwide, both in conventional fields and from sources such as tight rock, shale and coal formations. We work to develop new crude oil and natural gas supplies from major fields. Also, bitumen extracted from oil sands is converted into synthetic crude oil.
We cool natural gas to produce liquefied natural gas (LNG) that can be safely shipped to markets around the world, and we convert gas to liquids (GTL).
We have a portfolio of refineries and chemical plants which enables us to capture value from oil and gas production, turning them into a range of refined and petrochemical products which are moved and marketed around the world for domestic, industrial and transport use. The products we sell include gasoline, diesel, heating oil, aviation fuel, marine fuel, LNG for transport, lubricants, bitumen and sulphur. We also produce and sell ethanol from sugar cane in Brazil, through our Raízen joint venture.
We invest in low-carbon energy solutions such as biofuels, hydrogen, wind and solar power, and in other commercial opportunities linked to the energy transition.
The integration of our businesses is one of our competitive advantages, allowing for optimisations across our global portfolio. Our key strengths include the development and application of innovation and technology, the financial and project management skills that allow us to safely develop large and complex projects, the management of integrated value chains and the marketing of energy products. The distinctive Shell pecten, a trademark in use since the early part of the 20th century, and trademarks in which the word Shell appears, help raise the profile of our brand globally.
ORGANISATION We describe below how our activities are organised. Integrated Gas, Upstream and Downstream focus on our seven strategic themes (see “Strategy and outlook” on page 08). Our Projects & Technology organisation manages the delivery of Shell’s major projects and drives research and innovation to develop new technology solutions. INTEGRATED GAS (INCLUDING NEW ENERGIES) This organisation covers two strategic themes: Integrated Gas, which is a cash engine; and New Energies, which is an emerging opportunity. Integrated Gas manages LNG activities and the conversion of natural gas into GTL fuels and other products. It includes natural gas exploration and extraction, when contractually linked to the production and transportation of LNG, and the operation of the upstream and midstream infrastructure necessary to deliver gas to market. It markets and trades natural gas, LNG, crude oil, electricity and carbon-emission rights and also markets and sells LNG as a fuel for heavy-duty vehicles and marine vessels. In New Energies, we are exploring emerging opportunities and are already investing in opportunities where we believe sufficient commercial value is available. We focus on new fuels for transport, such as advanced biofuels, hydrogen and charging for battery-electric vehicles; and power, including from low-carbon sources such as wind and solar as well as natural gas. UPSTREAM Our Upstream organisation covers three strategic themes: Conventional Oil and Gas, which is a cash engine; Deep water, which is a growth priority; and Shales, which is an emerging opportunity. It manages the exploration for and extraction of crude oil, natural gas and natural gas liquids. It also markets and transports oil and gas, and operates the infrastructure necessary to deliver them to market. DOWNSTREAM Our Downstream organisation comprises two strategic themes: Oil Products, which is a cash engine; and Chemicals, which is a growth priority. It manages different Oil Products and Chemicals activities as part of an integrated value chain, including trading activities, that turns crude oil and other feedstocks into a range of products which are moved and marketed around the world for domestic, industrial and transport use. The products we sell include gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen and sulphur. In addition, we produce and sell petrochemicals for industrial use worldwide. Our Downstream organisation also manages Oil Sands activities (the extraction of bitumen from mined oil sands and its conversion into synthetic crude oil). PROJECTS & TECHNOLOGY Our Projects & Technology organisation manages the delivery of our major projects and drives research and innovation to develop new technology solutions. It provides technical services and technology capability for our Integrated Gas, Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment, contracting and procurement, wells activities and greenhouse gas management. Our future hydrocarbon production depends on the delivery of large and integrated projects (see “Risk factors” on page 12). Systematic management of lifecycle technical and non-technical risks is in place for each opportunity, with assurance and control activities embedded throughout the project life cycle. We focus on the cost-effective delivery of projects through quality commercial agreements, supply-chain management, and construction and engineering productivity through effective planning and simplification of delivery processes. Development of our employees’ project management competencies is underpinned by project principles, standards and processes. A dedicated competence framework, training, standards and processes exist for various technical disciplines. In addition, we provide governance support for our non-Shell-operated ventures or projects.
SEGMENTAL REPORTING Our reporting segments are Integrated Gas, Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream (managed by our Upstream organisation) and Oil Sands (managed by our Downstream organisation), which have similar economic characteristics. Integrated Gas, Upstream and Downstream include their respective elements of our Projects & Technology organisation. The Corporate segment comprises our holdings and treasury organisation, self-insurance activities, and headquarters and central functions. See Note 4 to the “Consolidated Financial Statements” on pages 149-150.
Revenue by business segment (including inter-segment sales) $ million
2017 2016 2015 Integrated Gas Third parties 32,674 25,282 21,741 Inter-segment 3,978 3,908 4,248 Total 36,652 29,190 25,989 Upstream Third parties 7,723 6,412 6,739 Inter-segment 32,469 26,524 26,824 Total 40,192 32,936 33,563 Downstream Third parties 264,731 201,823 236,384 Inter-segment 4,248 1,727 1,362 Total 268,979 203,550 237,746 Corporate Third parties 51 74 96 Total 51 74 96
Revenue by geographical area (excluding inter-segment sales) $ million
2017 2016 2015 Europe 100,609 81,573 95,223 Asia, Oceania, Africa 114,683 87,635 [A] 95,892 USA 66,854 44,615 [A] 50,666 Other Americas 23,033 19,768 23,179 Total 305,179 233,591 264,960
[A] As revised, see Note 4 to the “Consolidated Financial Statements” on page 150. TECHNOLOGY AND INNOVATION Technology and innovation are essential to our efforts to meet the world’s energy needs in a competitive way. If we do not develop the right technology, do not have access to it or do not deploy it effectively, this could have a material adverse effect on the delivery of our strategy and our licence to operate (see “Risk factors” on page 14). We continuously look for technologies and innovations of potential relevance to our business. Our Chief Technology Officer oversees the development and deployment of new and differentiating technologies and innovations across Shell, seeking to align business and technology requirements throughout our technology maturation process. In 2017, research and development expenses were $922 million, compared with $1,014 million in 2016, and $1,093 million in 2015. Our main technology centres are in India, the Netherlands and the USA, with other centres in Brazil, China, Germany, Oman and Qatar. A strong patent portfolio underlies the technology that we employ in our various businesses. In total, we have around 10,450 granted patents and pending patent applications.
Business overview
offshore
onshore
Producing biofuels
Producing petrochemicals
lubricants
Business overview
HISTORY From 1907 until 2005, Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c. were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group”. Operating activities were conducted through the subsidiaries of these parent companies. In 2005, Royal Dutch Shell plc became the single parent company of Royal Dutch Petroleum Company and of The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited. Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands. BUSINESS MODEL Shell is an international energy company with expertise in the exploration, development, production, refining and marketing of oil and natural gas, as well as in the manufacturing and marketing of chemicals. We are one of the world’s largest independent energy companies in terms of market capitalisation, cash flow from operating activities, and production levels. We seek to create shareholder value through the following activities:
We explore for crude oil and natural gas worldwide, both in con