20-F 1 rdsa-20f_20171231.htm FORM 20-F Royal Dutch Shell plc 20-F

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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

royaldutchshell.shareholders@shell.com

(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 financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

† The term “new or revised financial 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

 

 


 

 

 

 

 


 

 

 

Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

01

 

118

 

 

 

INTRODUCTION

 

FINANCIAL STATEMENTS

AND SUPPLEMENTS

 

 

 

01  Form 20-F

 

 

 

 

02  Cross reference to Form 20-F

 

118  Independent Auditors’ Reports related to
the Consolidated and Parent Company
Financial Statements

 

 

 

04  Terms and abbreviations

 

 

 

 

05  About this Report

 

 

 

 

06

 

137  Consolidated Financial Statements

 

179  Supplementary information – oil and gas
(unaudited)

 

 

 

STRATEGIC REPORT

 

199  Parent Company Financial Statements

 

06  Chair’s message

208  Independent Auditors’ Reports related to
the Royal Dutch Shell Dividend Access
Trust Financial Statements

 

07  Chief Executive Officer’s review

 

 

 

08  Strategy and outlook

 

 

10  Business overview

213  Royal Dutch Shell Dividend Access Trust
Financial Statements

 

 

12  Risk factors

 

 

17  Market overview

217

19  Summary of results

 

 

22  Performance indicators

 

 

 

 

24  Integrated Gas

 

ADDITIONAL INFORMATION

 

 

 

31  Upstream

 

217  Shareholder information

 

38  Oil and gas information

224  Section 13(r) of the US Securities Exchange
Act of 1934 disclosure

 

 

 

46  Downstream

 

 

 

 

53  Corporate

 

225  Non-GAAP measures reconciliations

 

 

 

54  Liquidity and capital resources

 

227  Index to the Exhibits

 

 

 

58  Environment and society

 

228  Signatures

 

 

 

62  Climate change and energy transition

 

E1   Exhibits

 

 

 

67  Our people

 

 

 

 

 

69

 

 

 

 

 

GOVERNANCE

 

 

 

Cover image

 

 

69  The Board of Royal Dutch Shell plc

 

 

 

 

72  Senior Management

 

 

 

The fingerprint reflects how people are central to powering progress with more and cleaner energy, from our retail sites to our offshore operations.

 

73  Directors’ Report

 

 

 

 

76  Corporate governance

 

 

 

 

90  Audit Committee Report

 

 

 

 

94  Directors’ Remuneration Report

 

 

 

 

 

Cover Claire Concept

Design Conran Design Group

Typesetting Donnelley Financial Solutions

Printer Damen Drukkers under ISO 14001

 

 

 

 

 

 


 

Cross reference to Form 20-F

 

 

 

 

 

 

 

 

 

Part I

 

 

Pages

Item 1.

Identity of Directors, Senior Management and Advisers

N/A

Item 2.

Offer Statistics and Expected Timetable

N/A

Item 3.

Key Information

 

 

A.

Selected financial data

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

 

 

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2017

02

 

 


 

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

 

 

 

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2017

03

 

 


Terms and abbreviations

 

 

 

 

 

 

Currencies

$

US dollar

euro

£

sterling

 

Units of measurement

acre

approximately 0.004 square kilometres

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

 

 

Miscellaneous

ADS

American Depositary Share

AGM

Annual General Meeting

API

American Petroleum Institute

CCS

carbon capture and storage

CCS earnings

earnings on a current cost of supplies basis

CO2

carbon dioxide

EMTN

Euro medium-term note

EPS

earnings per share

FCF

free cash flow

GAAP

generally accepted accounting principles

GHG

greenhouse gas

HSSE

health, safety, security and environment

IAS

International Accounting Standard

IEA

International Energy Agency

IFRS

International Financial Reporting Standard(s)

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

OECD

Organisation for Economic Co-operation and Development

OML

oil mining lease

OPEC

Organization of the Petroleum Exporting Countries

OPL

oil prospecting licence

PSC

production-sharing contract

PSP

Performance Share Plan

REMCO

Remuneration Committee

SEC

US Securities and Exchange Commission

TRCF

total recordable case frequency

TSR

total shareholder return

WTI

West Texas Intermediate

 

 

 

 

 

 

 

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2017

04

 

 

 


About this Report

 

 

 

 

 

 

 

 

 

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.

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2017

05

 

 

 


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

 

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2017

06

 

 

 


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

 

 

 

 

 

 

 

 

 

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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.

 

 

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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.

 

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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.

 

 

 

 

 

 

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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.

 

 

 

 

 

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Risk factors

 

 

 

 

 

The risks discussed below could have a material adverse effect separately, or in combination, on our earnings, cash flows and financial condition. Accordingly, investors should carefully consider these risks.

Measures that we use to manage or mitigate our various risks are set out in the relevant sections of this Report, indicated by way of cross references under each risk factor. The Board’s responsibility for identifying, evaluating and managing our significant risks is discussed in “Corporate governance” on page 82.

 

We are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals.

The prices of crude oil, natural gas, oil products and chemicals are affected by supply and demand, both globally and regionally. Moreover, prices for oil and gas can move independently of each other. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, conflicts, economic conditions and actions by major oil and gas producing countries. Additionally, in a low oil and gas price environment, we would generate less revenue from our Upstream and Integrated Gas businesses, and, as a result, parts of those businesses could become less profitable, or could incur losses. Additionally, low oil and gas prices have resulted, and could continue to result, in the debooking of proved oil or gas reserves, if they become uneconomic in this type of price environment. Prolonged periods of low oil and gas prices, or rising costs, can result in projects being delayed or cancelled. In addition, assets have been impaired in the past, and there could be impairments in the future. Low oil and gas prices could also affect our ability to maintain our long-term capital investment programme and dividend payments. Prolonged periods of low oil and gas prices could affect the financial, fiscal, legal, political and social stability of countries that rely significantly on oil and gas revenue. In a high oil and gas price environment, we could experience sharp increases in costs, and, under some production-sharing contracts, our entitlement to proved reserves would be reduced. Higher prices could also reduce demand for our products, which could result in lower profitability, particularly in our Downstream business. Accordingly, price fluctuations could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Market overview” on page 17.

 

Our ability to deliver competitive returns and pursue commercial opportunities depends in part on the accuracy of our price assumptions.

We use a range of oil and gas price assumptions, which we review on a periodic basis, to evaluate projects and commercial opportunities. If our assumptions prove to be incorrect, it could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Market overview” on page 18.

 

Our ability to achieve strategic objectives depends on how we react to competitive forces.

We face competition in each of our businesses. We seek to differentiate our products; however, many of them are competing in commodity-type markets. Accordingly, failure to manage our costs as well as our operational performance could result in a material adverse effect on our earnings, cash flows and financial condition. We also compete with state-owned oil and gas entities with vast access to financial resources. State-owned entities could be motivated by political or other factors in making their business decisions. Accordingly, when bidding on new leases or projects, we could find ourselves at a competitive disadvantage as these state-owned entities may not require a competitive return. If we are unable to obtain competitive returns when bidding on new leases or projects, it could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Strategy and outlook” on page 08.

We seek to execute divestments in the pursuit of our strategy. We may not be able to successfully divest these assets in line with our strategy.

We may not be able to successfully divest assets at acceptable prices or within the timeline envisaged due to market conditions or credit risk, resulting in increased pressure on our cash position and potential impairments. We may be held liable for past acts, failures to act or liabilities that are different from those foreseen. We may also face liabilities if a purchaser fails to honour all of its commitments. Accordingly, if we are unable to divest assets at acceptable prices or within our envisaged timeframe, this could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Strategy and outlook” on page 08-09.

 

Our future hydrocarbon production depends on the delivery of large and integrated projects, as well as on our ability to replace proved oil and gas reserves.

We face numerous challenges in developing capital projects, especially those which are large and integrated. Challenges include uncertain geology, frontier conditions, the existence and availability of necessary technology and engineering resources, the availability of skilled labour, the existence of transportation infrastructure, project delays, the expiration of licences and potential cost overruns, as well as technical, fiscal, regulatory, political and other conditions. These challenges are particularly relevant in certain developing and emerging-market countries, in frontier areas and in deep-water fields, such as off the coast of Brazil. We may fail to assess or manage these and other risks properly. Such potential obstacles could impair our delivery of these projects, our ability to fulfil the value potential at the time of the project investment approval, and/or our ability to fulfil related contractual commitments. These could lead to impairments and could have a material adverse effect on our earnings, cash flows and financial condition.

 

Future oil and gas production will depend on our access to new proved reserves through exploration, negotiations with governments and other owners of proved reserves and acquisitions, as well as on developing and applying new technologies and recovery processes to existing fields. Failure to replace proved reserves could result in lower future production, potentially having a material adverse effect on our earnings, cash flows and financial condition.

 

See “Business overview” on page 11.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production available for sale

 

 

Million boe [A]

 

 

 

2017

 

 

2016

 

 

2015

 

Shell subsidiaries

 

 

1,168

 

 

 

1,158

 

 

 

880

 

Shell share of joint ventures and associates

 

 

170

 

 

 

184

 

 

 

198

 

Total

 

 

1,338

 

 

 

1,342

 

 

 

1,078

 

[A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved developed and undeveloped oil and gas reserves [A][B] (at December 31)

 

 

Million boe [C]

 

 

 

2017

 

 

2016

 

 

2015

 

Shell subsidiaries

 

 

10,177

 

 

 

11,040

 

 

 

9,117

 

Shell share of joint ventures and associates

 

 

2,056

 

 

 

2,208

 

 

 

2,630

 

Total

 

 

12,233

 

 

 

13,248

 

 

 

11,747

 

Attributable to non-controlling interest in

   Shell subsidiaries

 

 

325

 

 

 

5

 

 

 

8

 

[A] We manage our total proved reserves base without distinguishing between proved reserves from subsidiaries and those from joint ventures and associates.

[B] Includes proved reserves associated with future production that will be consumed in operations.

[C] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.

 

 

 

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The estimation of proved oil and gas reserves involves subjective judgements based on available information and the application of complex rules; therefore, subsequent downward adjustments are possible.

The estimation of proved oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. Estimates could change because of new information from production or drilling activities, or changes in economic factors, including changes in the price of oil or gas and changes in the regulatory policies of host governments, or other events. Estimates could also be altered by acquisitions and divestments, new discoveries, and extensions of existing fields and mines, as well as the application of improved recovery techniques. Published proved oil and gas reserves estimates could also be subject to correction due to errors in the application of published rules and changes in guidance. Downward adjustments could indicate lower future production volumes and could also lead to impairment of assets. This could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Supplementary information – oil and gas (unaudited)” on page 179.

 

Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels, potential litigation and additional compliance obligations.

In December 2015, 195 nations adopted the Paris Agreement, which we fully support. The Paris Agreement aims to limit increases in global temperatures to well below two degrees Celsius. As a result, we expect continued and increased attention to climate change from all sectors of society. This attention has led, and we expect it to continue to lead, to additional regulations designed to reduce greenhouse gas (GHG) emissions.

 

We expect that a growing share of our GHG emissions will be subject to regulation, resulting in increased compliance costs and operational restrictions. If our GHG emissions rise alongside our ambitions to increase the scale of our business, our regulatory burden will increase proportionally. We also expect that GHG regulation will focus more on suppressing demand for fossil fuels, either through taxes, fees, incentives to promote the sale of electric vehicles or even through the future prohibition of sales of new diesel or gasoline vehicles. This could result in lower revenue and, in the long term, potential impairment of certain assets.

 

Additionally, some groups are pressuring certain investors to divest their investments in fossil fuel companies. If this were to continue, it could have a material adverse effect on the price of our securities and our ability to access equity capital markets. The World Bank has also announced plans to stop financing upstream oil and gas projects in 2019. Similarly, according to press reports, other financial institutions also appear to be considering limiting their exposure to certain fossil fuel projects. Accordingly, our ability to use financing for future projects may be adversely impacted. This could also adversely impact our potential partners’ ability to finance their portion of costs, either through equity or debt.

 

Further, in some countries, governments and regulators have filed lawsuits seeking to hold fossil fuel companies liable for costs associated with climate change. While we believe these lawsuits to be without merit, losing any of these lawsuits could have a material adverse effect on our earnings, cash flows and financial condition.

 

If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our GHG emissions and/or GHG intensity for new and existing projects or for the products we sell, we could experience additional costs or financial penalties, delayed or cancelled projects, and/or reduced production and reduced demand for hydrocarbons, which could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Climate change and energy transition” on pages 63-64.

 

Our operations expose us to social instability, criminality, civil unrest, terrorism, piracy, cyber-disruption, acts of war and risks of pandemic diseases that could have a material adverse effect on our business.

As seen in recent years in Nigeria, North Africa, the Middle East, South America and South-East Asia, social and civil unrest, both in the countries in which we operate and elsewhere, can and do affect us. Such potential developments that could have a material adverse effect on our earnings, cash flows and financial condition include: acts of political or economic terrorism; acts of maritime piracy; cyber-espionage or disruptive cyber-attacks; conflicts including war and civil unrest (including disruptions by non-governmental and political organisations); and local security concerns that threaten the safe operation of our facilities, transport of our products and the well-being of our people. Pandemic diseases can also affect our operations directly and indirectly. If such risks materialise, they could result in injuries, loss of life, environmental harm and disruption to business activities, which in turn could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Environment and society” on page 61.

 

We operate in more than 70 countries that have differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments that could result in changes to contractual terms, laws and regulations. In addition, we and our joint arrangements and associates face the risk of litigation and disputes worldwide.

Developments in politics, laws and regulations can and do affect our operations. Potential impacts include: forced divestment of assets; expropriation of property; cancellation or forced renegotiation of contract rights; additional taxes including windfall taxes, restrictions on deductions and retroactive tax claims; antitrust claims; changes to trade compliance regulations; price controls; local content requirements; foreign exchange controls; changes to environmental regulations; changes to regulatory interpretations and enforcement; and changes to disclosure requirements. Any of these, individually or in aggregate, could have a material adverse effect on our earnings, cash flows and financial condition.

 

From time to time, social and political factors play a role in unprecedented and unanticipated judicial outcomes that could adversely affect Shell. Non-compliance with policies and regulations could result in regulatory investigations, litigation and, ultimately, sanctions. Certain governments and regulatory bodies have, in Shell’s opinion, exceeded their constitutional authority by: attempting unilaterally to amend or cancel existing agreements or arrangements; failing to honour existing contractual commitments; and seeking to adjudicate disputes between private litigants. Additionally, certain governments have adopted laws and regulations that could potentially force us to violate other countries’ laws and regulations, therefore potentially subjecting us to both criminal and civil sanctions. Such developments and outcomes could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 82.

 

 

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The nature of our operations exposes us, and the communities in which we work, to a wide range of health, safety, security and environment risks.

The health, safety, security and environment (HSSE) risks to which we, and the communities in which we work, are potentially exposed cover a wide spectrum, given the geographic range, operational diversity and technical complexity of our operations. These risks include the effects of natural disasters (including weather events), earthquakes, social unrest, personal health and safety lapses, and crime. If a major HSSE risk materialises, such as an explosion or hydrocarbon spill, this could result in injuries, loss of life, environmental harm, disruption of business activities, and loss or suspension of our licence to operate or ability to bid on mineral rights. Accordingly, this would have a material adverse effect on our earnings, cash flows and financial condition.

 

Our operations are subject to extensive HSSE regulatory requirements that often change and are likely to become more stringent over time. Operators could be asked to adjust their future production plans, as the government of the Netherlands has done, affecting production and costs. We could incur significant additional costs in the future due to compliance with HSSE requirements or as a result of violations of, or liabilities under, laws and regulations, such as fines, penalties, clean-up costs and third-party claims. Therefore, HSSE risks, should they materialise, could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Environment and society” on page 58.

 

A further erosion of the business and operating environment in Nigeria could have a material adverse effect on us.

In our Nigerian operations, we face various risks and adverse conditions. These include: security issues surrounding the safety of our people, host communities and operations; sabotage and theft; our ability to enforce existing contractual rights; litigation; limited infrastructure; potential legislation that could increase our taxes or costs of operations; the effect of lower oil and gas prices on the government budget; and regional instability created by militant activities. Any of these risks or adverse conditions could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Upstream” on page 35.

 

Production from the Groningen field in the Netherlands causes earthquakes that affect local communities.

Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM). An important part of NAM’s gas production comes from the onshore Groningen gas field, in which EBN, a Dutch government entity, has a 40% interest and NAM a 60% interest. Since 1995, production from the Groningen field has caused earthquakes. Some of these earthquakes have caused damage to houses and other structures in the region, resulting in complaints and lawsuits from the local community.

 

Since 2013, the Minister of Economic Affairs has imposed curtailments on production from the Groningen field in order to mitigate the seismicity risks. In January 2018, there was another earthquake and a further curtailment of production is likely. Additional earthquakes, lawsuits and further significant curtailments of production could have a material adverse effect on NAM and therefore could impact our earnings, cash flows and financial condition.

 

See “Upstream” on page 33.

 

 

 

Our future performance depends on the successful development and deployment of new technologies and new products.

Technology and innovation are essential to our efforts to meet the world’s energy demands in a competitive way. If we do not develop the right technology and products, do not have access to such technology and products or do not deploy these effectively, there could be a material adverse effect on the delivery of our strategy and our licence to operate. We operate in environments where advanced technologies are utilised. While we take measures to ensure that such technologies and products are safe for the environment and public health based on today’s knowledge, there is always the possibility of unknown or unforeseeable technological failures or environmental and health effects that could harm our reputation and licence to operate or expose us to litigation or sanctions. The associated costs of new technology are sometimes underestimated or delays occur. If we are unable to develop the right technologies and products in a timely and cost-effective manner, or if we develop technologies and products that adversely impact the environment or health of individuals, there could be a material adverse effect on our earnings, cash flows and financial condition.

 

See “Business overview” on page 11.

 

We are exposed to treasury and trading risks, including liquidity risk, interest rate risk, foreign exchange risk, commodity price risk and credit risk. We are affected by the global macroeconomic environment as well as financial and commodity market conditions.

Our subsidiaries, joint arrangements and associates are subject to differing economic and financial market conditions around the world. Political or economic instability affects such markets.

 

We use debt instruments, such as bonds and commercial paper, to raise significant amounts of capital. Should our access to debt markets become more difficult, the potential impact on our liquidity could have a material adverse effect on our operations. Our financing costs could also be affected by interest rate fluctuations or any credit rating deterioration.

 

We are exposed to changes in currency values and to exchange controls as a result of our substantial international operations. Our reporting currency is the dollar. However, to a material extent, we hold assets and are exposed to liabilities in other currencies. Commodity trading is an important component of our Upstream, Integrated Gas and Downstream businesses and is integrated with our supply business. While we undertake some foreign exchange and commodity hedging, we do not do so for all of our activities. Furthermore, even where hedging is in place, it may not function as expected.

 

We are exposed to credit risk; our counterparties could fail or could be unable to meet their payment and/or performance obligations under contractual arrangements. Although we do not have significant direct exposure to sovereign debt, it is possible that our partners and customers may have exposure which could impair their ability to meet their obligations. In addition, our pension plans may invest in government bonds, and therefore could be affected by a sovereign debt downgrade or other default.

 

If any of the risks set out above materialise, they could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Liquidity and capital resources” on page 54 and Note 19 to the “Consolidated Financial Statements” on pages 167-172.  

 

 

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We have substantial pension commitments, funding of which is subject to capital market risks.

Liabilities associated with defined benefit pension plans can be significant, as can the cash funding requirement of such plans; both depend on various assumptions. Volatility in capital markets or government policies, and the resulting consequences for investment performance and interest rates, as well as changes in assumptions for mortality, retirement age or pensionable remuneration at retirement, could result in significant changes to the funding level of future liabilities. We operate a number of defined benefit pension plans and, in case of a shortfall, we could be required to make substantial cash contributions (depending on the applicable local regulations) resulting in a material adverse effect on our earnings, cash flows and financial condition.

 

See “Liquidity and capital resources” on page 54.

 

We mainly self-insure our risk exposure. We could incur significant losses from different types of risks that are not covered by insurance from third-party insurers.

Our insurance subsidiaries provide hazard insurance coverage to other Shell entities and only reinsure a portion of their risk exposures. Such reinsurance would not provide any material coverage in the event of a large-scale safety and environmental incident. Similarly, in the event of a material safety and environmental incident, there would be no material proceeds available from third-party insurance companies to meet our obligations. Therefore, we may incur significant losses from different types of risks that are not covered by insurance from third-party insurers, potentially resulting in a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate” on page 53.

 

An erosion of our business reputation could have a material adverse effect on our brand, our ability to secure new resources and our licence to operate.

Our reputation is an important asset. The Shell General Business Principles (Principles) govern how Shell and its individual companies conduct their affairs, and the Shell Code of Conduct instructs employees and contract staff on how to behave in line with the Principles. Our challenge is to ensure that all employees and contract staff, more than 100,000 in total, comply with the Principles and the Code of Conduct. Real or perceived failures of governance or regulatory compliance could harm our reputation. This could impact our licence to operate, damage our brand, reduce consumer demand for our branded products, harm our ability to secure new resources and contracts, and limit our ability to access capital markets. Many other factors, including the materialisation of the risks discussed in several of the other risk factors, could impact our reputation and could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 77.

 

Many of our major projects and operations are conducted in joint arrangements or associates. This could reduce our degree of control, as well as our ability to identify and manage risks.

In cases where we are not the operator, we have limited influence over, and control of, the behaviour, performance and costs of operation of such joint arrangements or associates. Despite not having control, we could still be exposed to the risks associated with these operations, including reputational, litigation (where joint and several liability could apply) and government sanction risks. For example, our partners or members of a joint arrangement or an associate (particularly local partners in developing countries) may not be able to meet their financial or other obligations to the projects, threatening the viability of a given project. Where we are the operator of a joint arrangement, the other partner(s) could still be able to veto or block certain decisions, which could be to our overall detriment. Accordingly, where we have limited influence, we are exposed to operational risks that could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 82.

 

We rely heavily on information technology systems for our operations.

The operation of many of our business processes depends on reliable information technology (IT) systems. Our IT systems are increasingly concentrated in terms of geography, number of systems, and key contractors supporting the delivery of IT services. Shell, like many other multinational companies, is the target of attempts to gain unauthorised access to our IT systems and our data through various channels, including more sophisticated and coordinated attempts often referred to as advanced persistent threats. While our IT systems have been breached in the past, we believe that to date, no significant breach has occurred. Timely detection is becoming increasingly complex but we seek to detect and investigate all such security incidents, aiming to prevent their recurrence. Disruption of critical IT services, or breaches of information security, could harm our reputation and have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate” on page 53.

 

Violations of antitrust and competition laws carry fines and expose us and/or our employees to criminal sanctions and civil suits.

Antitrust and competition laws apply to Shell and its joint ventures and associates in the vast majority of countries in which we do business. Shell and its joint ventures and associates have been fined for violations of antitrust and competition laws. These include a number of fines in the past by the European Commission Directorate-General for Competition (DG COMP). Due to the DG COMP’s fining guidelines, any future conviction of Shell or any of its joint ventures or associates for violation of European Union (EU) competition law could result in significantly larger fines and have a material adverse effect on us. Violation of antitrust laws is a criminal offence in many countries, and individuals can be imprisoned or fined. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages. Any violation of these laws or harm to our reputation could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 77.

 

 

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Violations of anti-bribery, anti-corruption and anti-money laundering laws carry fines and expose us and/or our employees to criminal sanctions, civil suits and ancillary consequences (such as debarment and the revocation of licences).

Anti-bribery, anti-corruption and anti-money laundering laws apply to Shell, its joint ventures and associates in all countries in which we do business. Shell and its joint ventures and associates in the past have been fined for violations of the US Foreign Corrupt Practices Act. Any future violation of anti-bribery, anti-corruption or anti-money laundering laws could have a material adverse effect on our earnings, cash flows and financial condition.  

 

See “Our people” on pages 67-68, “Corporate governance” on page 77 and Note 25 to the “Consolidated Financial Statements” on pages 175-176.

 

Violations of data protection laws carry fines and expose us and/or our employees to criminal sanctions and civil suits.

Data protection laws apply to Shell and its joint ventures and associates in the vast majority of countries in which we do business. Over 100 countries have data protection laws and regulations. Additionally, the EU General Data Protection Regulation (GDPR), which will be applicable from May 2018, increases penalties up to a maximum of 4% of global annual turnover for breach of the regulation. The GDPR requires mandatory breach notification, the standard for which is also followed outside the EU (particularly in Asia). Non-compliance with data protection laws could expose us to regulatory investigations, which could result in fines and penalties. In addition to imposing fines, regulators may also issue orders to stop processing personal data, which could disrupt operations. We could also be subject to litigation from persons or corporations allegedly affected by data protection violations. Violation of data protection laws is a criminal offence in some countries, and individuals can be imprisoned or fined. Any violation of these laws or harm to our reputation could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 77.

 

Violations of trade compliance laws and regulations, including sanctions, carry fines and expose us and our employees to criminal sanctions and civil suits.

We use “trade compliance” as an umbrella term for various national and international laws designed to regulate the movement of items across national boundaries and restrict or prohibit trade and other dealings with certain parties. The number and breadth of such laws continue to expand. For example, the EU and the USA continue to impose restrictions and prohibitions on certain transactions involving Syria. In addition, the USA continues to have comprehensive sanctions in place against Iran, while the EU and other nations continue to maintain targeted sanctions. Additional restrictions and controls directed at defined oil and gas activities in Russia, which were imposed by the EU and the USA in 2014, are still in force. Further restrictions regarding Russia were introduced by the USA in 2017. The USA also introduced sectorial sanctions against Venezuela in 2017 targeting the government of Venezuela and the oil industry. In addition to the significant trade-control programmes administered by the EU and the USA, many other nations are also adopting such programmes. This expansion of sanctions, including the frequent additions of prohibited parties, combined with the number of markets in which we operate and the large number of transactions we process, makes ensuring compliance with all sanctions complex and at times challenging. Any violation of one or more of these regimes could lead to loss of import or export privileges, significant penalties on or prosecution of Shell or its employees, and could harm our reputation and have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on page 77.

 

Investors should also consider the following, which could limit shareholder remedies.

 

The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This could limit shareholder remedies.

Our Articles of Association generally require that all disputes between our shareholders in such capacity and the Company or our subsidiaries (or our Directors or former Directors), or between the Company and our Directors or former Directors, be exclusively resolved by arbitration in The Hague, the Netherlands, under the Rules of Arbitration of the International Chamber of Commerce. Our Articles of Association also provide that, if this provision is to be determined invalid or unenforceable for any reason, the dispute could only be brought before the courts of England and Wales. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, could be determined in accordance with these provisions.

 

 

 

 

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Market overview

 

 

 

 

 

 

We maintain a large business portfolio across an integrated value chain and are exposed to crude oil, natural gas, oil product and chemical prices (see “Risk factors” on page 12). This diversified portfolio helps us mitigate the impact of price volatility. Our annual planning cycle and periodic portfolio reviews aim to ensure that our levels of capital investment and operating expenses are affordable in the context of a volatile price environment. We test the resilience of our projects and other opportunities against a range of crude oil, natural gas, oil product and chemical prices and costs. We also aim to maintain a strong balance sheet to provide resilience against weak market prices.

 

GLOBAL ECONOMIC GROWTH

One of the key drivers of oil, natural gas and oil product demand is economic activity. According to the World Economic Outlook released by the International Monetary Fund (IMF) in January 2018, global economic growth increased from 3.2% in 2016 to 3.7% in 2017. Economic activity has picked up momentum in most countries and regions reflecting firmer domestic demand growth in advanced economies on the back of supportive monetary policies and benign financing conditions, and improved performance in several large emerging-market economies.

 

According to the IMF’s latest estimate, growth accelerated in the USA from 1.5% in 2016 to 2.3% in 2017. Growth in the eurozone increased to 2.4% from 1.8% in 2016. Growth in most other advanced economies also increased. In China, growth was 6.8% in 2017, up from 6.7% in 2016. In contrast, growth slowed in India, in part due to uncertainty around new policies (such as the introduction of a goods and services tax). Recovering export and domestic demand supported recoveries in Brazil, Russia and Turkey. For 2018 and 2019, the IMF expects global economic growth to increase marginally, reaching 3.9% in each year.

 

GLOBAL Prices, DEMAND AND SUPPLY

The following table provides an overview of the main crude oil and natural gas price markers that we are exposed to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas average industry prices [A]

 

 

 

2017

 

 

2016

 

 

2015

 

Brent ($/b)

 

 

54

 

 

 

44

 

 

 

52

 

West Texas Intermediate ($/b)

 

 

51

 

 

 

43

 

 

 

49

 

Henry Hub ($/MMBtu)

 

 

3.0

 

 

 

2.5

 

 

 

2.6

 

UK National Balancing Point

   (pence/therm)

 

 

45

 

 

 

35

 

 

 

43

 

Japan Customs-cleared Crude ($/b)

 

 

54

 

 

 

42

 

 

 

55

 

[A] Yearly average prices are based on daily spot prices. The 2017 average price for Japan Customs-cleared Crude excludes December data.

 

CRUDE OIL

Brent crude oil, an international benchmark, traded between $45 per barrel (/b) and $67/b in 2017, ending the year at $66/b. It averaged $54/b for the year, $10/b higher than in 2016 when the price was at its lowest average level since 2004.

 

On a yearly average basis, West Texas Intermediate crude oil traded at a $3/b discount to Brent in 2017, compared with $0.4/b in 2016. The discount widened in the second half of the year as crude oil demand from refineries on the US Gulf Coast slowed due to shutdowns related to the hurricane season. Increasing US oil exports helped to limit further widening of the price differential.

 

Reflecting the economic conditions described above, global oil demand grew by 1.5 million barrels per day (b/d), or 1.6%, to 97.8 million b/d, according to the International Energy Agency’s (IEA) Oil Market Report published in January 2018 (Oil Market Report). This growth was driven by

emerging economies, where demand grew by 1.2 million b/d. In advanced economies demand grew by 0.3 million b/d. Oil demand growth in 2017 was 0.2 million b/d higher than in 2016, when it rose by 1.3 million b/d.

 

Oil supply in 2017 is estimated in the Oil Market Report at 97.3 million b/d, an increase of 0.4 million b/d compared with 2016. Because growth in oil demand outpaced growth in supply, global crude oil and oil products inventory levels decreased during the year but remained well above the average of the last five years. Average commercial and government-controlled inventory levels for OECD countries in November 2017 were estimated at 2,910 million barrels in the Oil Market Report, some 125 million barrels less than in November 2016, but still about 200 million barrels above the year average levels seen in 2014, before the Brent price started to fall. This partial oil market rebalancing supported oil prices, particularly in the second half of the year.

 

On the non-OPEC supply side, the US Energy Information Administration reported a continuation of supply growth that began in the third quarter of 2016. US production averaged 9.3 million b/d in 2017, 0.5 million b/d higher than in 2016. Higher oil prices in 2017 reflected an attractive environment for US production to grow and for drilling activity to increase, as indicated by a higher onshore oil rig count for the year. Production from other non-OPEC countries increased by 0.4 million b/d and averaged 55.7 million b/d.

 

In order to support oil prices, OPEC members agreed in November 2016 to reduce their overall production by 1.2 million b/d, compared with October 2016, during the first half of 2017. In May 2017, they extended their agreement to early 2018. In November 2017, they extended it to the end of 2018. OPEC production averaged 32.3 million b/d in 2017, about 0.5 million b/d less than in 2016. Other, non-OPEC, resource holders, most notably Russia, continued to partner with OPEC in the attempt to limit oversupply – reducing their output by a total of 0.6 million b/d.

 

Looking ahead, higher global economic activity as indicated by the IMF’s global economic outlook and moderate oil price levels at the beginning of 2018 could create around 1.3 million b/d of additional demand growth in 2018, according to the IEA. If OPEC members and co-operating non-OPEC resource holders continue to limit production to 2017 levels, demand growth would have to be balanced by production growth from non-OPEC countries, mostly from the USA, and withdrawals from storage. A continuation of market rebalancing, as indicated by storage withdrawals, would support prices. Postponements and cancellations of new supply projects over the last few years could lead to further market tightening in the next few years. In such a scenario, we believe that the average Brent crude oil price may be 10% to 50% higher in 2021 than the 2017 average.

 

On the other hand, we believe that the price environment could weaken if OPEC and the non-OPEC resource holders abandon their production cuts, the global economy accelerates less quickly, or if other non-OPEC producers, such as US shale producers, effectively manage costs and deliver cheaper oil to the market.

 

NATURAL GAS

Global gas demand grew by about 2.4% in 2017, which is higher than the average annual growth of 2.3% in the past decade. A combination of weather conditions and increased global economic growth led to an increase in demand growth in most regions.

 

The global liquefied natural gas (LNG) market grew by 29 million tonnes (11.2%) year on year. Supply growth was primarily driven by the start-up of new projects in Australia and the USA. The majority of additional LNG supply was absorbed by North Asia and Southern Europe, offsetting a decline in imports by the Middle East and North Africa. LNG demand growth was supported by policy developments (China, South Korea and Taiwan), warmer weather (Southern Europe) and delays in nuclear power station restarts (Japan).

 

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Unlike crude oil pricing, which is global in nature, natural gas prices can vary from region to region.

 

In the USA, the natural gas price at the Henry Hub averaged $3.0 per million British thermal units (MMBtu) in 2017, 20% higher than in 2016, and traded in a range of $2.4-3.4/MMBtu. One important factor is how much natural gas is available in storage during the winter. At the end of March 2017, prices were supported by a tighter than normal balance between supply and demand, which led to around 0.5 trillion cubic feet less gas being held in storage compared with the year-ago level. Mild weather and higher prices led to lower than normal demand for gas from US power generation. But both LNG exports and pipeline exports to Mexico increased substantially as new liquefaction terminals and cross-border pipelines came online. Higher oil and gas prices compared with 2016, combined with new gas pipeline capacity, helped to increase overall gas production, which met demand but led to around 0.3 trillion cubic feet less gas held in storage in November 2017, compared with the year-ago level.

 

In Europe, natural gas prices were higher than in 2016. The average price at the UK National Balancing Point (NBP) was 28% higher in 2017. At the main continental European gas trading hubs – in the Netherlands, Belgium and Germany – prices were also stronger, as reflected by stronger Dutch Title Transfer Facility (TTF) prices. The closure of the Rough gas storage facility in the UK created a winter premium and summer discount for NBP prices relative to TTF prices. This reduction in storage space increased winter supply concerns in the UK, while removing an important source of demand in summer, when suppliers have typically restocked the facility in preparation for the following winter. Higher prices reflected the combined effect of reduced domestic production, lower nuclear power generation, increased coal prices, and growth in demand from power generation and other industrial sectors.

 

We also produce and sell natural gas in regions where supply, demand and regulatory circumstances differ markedly from those in the USA or Europe. Long-term contracted LNG prices in the Asia-Pacific region generally increased in 2017 as they are predominantly indexed to the price of Japan Customs-cleared Crude, which has increased in line with global oil prices. North Asia spot prices (reflected by the Japan Korea Marker) also increased due to relatively strong demand, particularly from China.

 

Looking ahead, we expect gas markets in North America, Europe and Asia Pacific to be well supplied over the next few years, despite our expectation of LNG demand growth in the Middle East and Asia. Price developments are very uncertain and dependent on many factors.

 

In the USA, Henry Hub gas prices may increase over the next few years due to increasing demand from LNG exports, pipeline exports to Mexico and the US residential/industrial sectors. On the other hand, increasing availability of low-cost natural gas and oil, combined with technological improvements, could continue to place pressure on natural gas prices. We believe that Henry Hub gas prices could average up to 30% higher by 2021 than in 2017. In Europe, we believe gas prices will be increasingly driven by the volume of LNG imports from the USA. In the Asia Pacific region, gas prices are expected to continue to be strongly influenced by oil prices, but also increasingly by Henry Hub gas prices. We believe that the price at the UK NBP by 2021 could average as much as 30% higher than in 2017. By 2021, we believe that the average price of LNG delivered under contract to the Asia-Pacific market could be up to 30% higher than in 2017.

 

CRUDE OIL AND NATURAL GAS PRICE ASSUMPTIONS

Our ability to deliver competitive returns and pursue commercial opportunities ultimately depends on the accuracy of our price assumptions (see “Risk factors” on page 12). The range of possible future crude oil and natural gas prices used in project and portfolio evaluations is determined after a rigorous assessment of short-, medium- and long-term market drivers. Historical analyses, trends and statistical volatility are considered in this assessment, as

are analyses of market fundamentals such as possible future economic conditions, geopolitics, actions by OPEC and other major resource holders, production costs and the balance of supply and demand. Sensitivity analyses are used to test the impact of low-price drivers, such as economic weakness, and high-price drivers, such as strong economic growth and low investment in new production capacity. Short-term events, such as relatively warm winters or cool summers, affect demand. Supply disruptions, due to weather or political instability, contribute to price volatility.

REFINING MARGINS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refining marker average industry gross margins

 

 

$/b

 

 

 

2017

 

 

2016

 

 

2015

 

US West Coast

 

 

14.0

 

 

 

12.9

 

 

 

19.4

 

US Gulf Coast Coking

 

 

9.9

 

 

 

9.1

 

 

 

10.6

 

Rotterdam Complex

 

 

4.3

 

 

 

2.5

 

 

 

4.7

 

Singapore

 

 

3.6

 

 

 

2.8

 

 

 

4.7

 

 

Industry gross refining margins were higher on average in 2017 than in 2016 in each of the key refining hubs of Europe, Singapore and the USA. Oil products demand growth was stronger globally, with an increase of 1.5 million b/d compared with 2016 according to the Oil Market Report, driven in part by a continued low-price crude oil environment and industrial demand growth. Demand growth and refinery outages, notably in Latin America, reduced overcapacity despite new refinery capacity additions in 2017 in China.

 

In 2018, we expect demand for products such as gasoline and middle distillates to continue to grow and support margins, driven by a further increase in economic activity as well as demand from freight and passenger transport. However, ample refining capacity and potentially strengthening feedstock prices could narrow margins. Overall, we believe margins could be similar to 2017, but demand and supply-side uncertainty may drive significant volatility.

PETROCHEMICAL MARGINS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cracker industry margins

 

$/tonne

 

 

 

2017

 

 

2016

 

 

2015

 

North East/South East Asia naphtha

 

 

688

 

 

 

672

 

 

 

463

 

Western Europe naphtha

 

 

727

 

 

 

598

 

 

 

617

 

US ethane

 

 

471

 

 

 

450

 

 

 

498

 

 

Asian naphtha cracker margins rose for the third consecutive year, although only slightly in 2017, driven by continued strong demand, periods of reduced cracker capacity availability and higher naphtha cracker utilisation. European naphtha cracker margins increased, supported by tight ethylene markets and high global utilisation. US ethane cracker margins increased slightly but remained lower than margins in Asia and Europe as continued low crude oil prices reduced the margin available in the ethane to polyethylene value chain.

 

The outlook for petrochemical margins in 2018 depends on supply and demand balances and feedstock costs. Demand for petrochemicals is closely linked to economic growth as well as product prices. Product prices reflect prices of raw materials, which are closely linked to crude oil and natural gas prices. The balance of these factors will drive margins.

 

The statements in this “Market overview” section, including those related to our price forecasts, are forward-looking statements 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.

 

 

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2017

18

 

 

 


Summary of results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key statistics

 

$ million, except where indicated

 

 

 

2017

 

 

2016

 

 

2015

 

Income for the period

 

 

13,435

 

 

 

4,777

 

 

 

2,200

 

Current cost of supplies adjustment

 

 

(964

)

 

 

(1,085

)

 

 

1,955

 

Total segment earnings [A][B], of which:

 

 

12,471

 

 

 

3,692

 

 

 

4,155

 

Integrated Gas

 

 

5,078

 

 

 

2,529

 

 

 

3,170

 

Upstream

 

 

1,551

 

 

 

(3,674

)

 

 

(8,833

)

Downstream

 

 

8,258

 

 

 

6,588

 

 

 

10,243

 

Corporate

 

 

(2,416

)

 

 

(1,751

)

 

 

(425

)

Capital investment [B]

 

 

24,006

 

 

 

79,877

 

 

 

28,861

 

Divestments [B]

 

 

17,340

 

 

 

4,984

 

 

 

5,540

 

Operating expenses [B]

 

 

38,083

 

 

 

41,549

 

 

 

41,144

 

Return on average capital employed [B]

 

5.8%

 

 

3.0%

 

 

1.9%

 

Gearing at December 31 [C]

 

24.8%

 

 

28.0%

 

 

14.0%

 

Oil and gas production (thousand boe/d)

 

 

3,664

 

 

 

3,668

 

 

 

2,954

 

Proved oil and gas reserves at December 31 (million boe)

 

 

12,233

 

 

 

13,248

 

 

 

11,747

 

[A] Segment earnings are presented on a current cost of supplies basis. See Note 4 to the “Consolidated Financial Statements” on pages 149-150.
[B] See “Non-GAAP measures reconciliations” on pages 225-226.
[C] See Note 14 to the “Consolidated Financial Statements” on page 158.

 

 

EARNINGS 2017-2016

Income for the period was $13,435 million in 2017, compared with $4,777 million in 2016. After current cost of supplies adjustment, total segment earnings were $12,471 million in 2017, compared with $3,692 million in 2016.

 

Earnings on a current cost of supplies basis (CCS earnings) exclude the effect of changes in the oil price on inventory carrying amounts, after making allowance for the tax effect. The purchase price of volumes sold in the period is based on the current cost of supplies during the same period, rather than on the historic cost calculated on a first-in, first-out (FIFO) basis. Therefore, when oil prices are decreasing, CCS earnings are likely to be higher than earnings calculated on a FIFO basis and, when prices are increasing, CCS earnings are likely to be lower than earnings calculated on a FIFO basis.

 

Integrated Gas earnings in 2017 were $5,078 million, compared with $2,529 million in 2016. The increase was mainly driven by higher realised oil, gas, and liquefied natural gas (LNG) prices, as well as the impact of the strengthening Australian dollar on a deferred tax position, and lower impairment charges. These effects were partly offset by the impacts in 2017 of a charge for fair value accounting of commodity derivatives, a charge as a result of US tax reform legislation, and by lower liquids production partially offset by higher LNG liquefaction volumes. See “Integrated Gas” on pages 24-25.

 

Upstream earnings in 2017 were $1,551 million, compared with a loss of $3,674 million in 2016. The improvement was mainly driven by higher realised oil and gas prices. Higher gains on divestments and lower depreciation charges were partly offset by higher impairment charges. Overall, there were higher taxation charges. Beneficial movements in deferred tax positions were more than offset by a charge in 2017 as a result of US tax reform legislation and the absence of a gain related to the impact of a strengthening Brazilian real on a deferred tax position in 2016. See “Upstream” on pages 31-32.

 

Downstream earnings in 2017 were $8,258 million, compared with $6,588 million in 2016. The increase was mainly driven by improved refining and chemicals industry conditions, the impact of fair value accounting of commodity derivatives, and lower taxation, redundancy and impairment charges. This was partly offset by lower gains on divestments and higher depreciation charges. See “Downstream” on pages 46-47.

 

Corporate earnings in 2017 were a loss of $2,416 million, compared with a loss of $1,751 million in 2016. The higher loss was mainly driven by higher interest expense and net foreign exchange losses, partly offset by lower operating expenses. There was also a charge in 2017 as a result of US tax reform legislation. See “Corporate” on page 53.

 

EARNINGS 2016-2015

Income for the period was $4,777 million in 2016, compared with $2,200 million in 2015. After current cost of supplies adjustment, total segment earnings were $3,692 million in 2016, compared with $4,155 million in 2015. BG Group plc (BG) was consolidated within Shell’s results with effect from February 2016 following its acquisition.

 

Integrated Gas earnings in 2016 were $2,529 million, compared with $3,170 million in 2015. The decrease was mainly driven by higher operating expenses and depreciation, lower oil and LNG prices, and higher taxation. These impacts were partly offset by higher production and LNG liquefaction volumes, lower impairment charges and well write-offs.

 

Upstream earnings in 2016 were a loss of $3,674 million, compared with a loss of $8,833 million in 2015. The lower loss in 2016 was partly explained by the significant charges in 2015 associated with the decision to cease Alaska drilling activities and the Carmon Creek project in Canada and other impairments. In addition, earnings in 2016 benefited from higher production volumes and lower operating expenses, partly offset by lower oil and gas prices, higher depreciation, and lower gains on divestments.

 

Downstream earnings in 2016 were $6,588 million, compared with $10,243 million in 2015. The decrease was mainly due to lower realised refining and trading margins and a higher effective tax rate. There was a partial offset from stronger marketing margins, in turn partly offset by the impact of divestments and unfavourable exchange rate effects and fair value accounting of commodity derivatives.

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2017

19

 

 

 


 

Corporate earnings in 2016 were a loss of $1,751 million, compared with a loss of $425 million in 2015. Interest expense was significantly higher in 2016, due to additional debt for the BG acquisition and debt assumed on the acquisition, partly offset by lower foreign exchange losses. There were also BG acquisition costs and lower tax credits in 2016, and a gain in 2015 on the sale of an office building.

 

production available for sale

Oil and gas production available for sale in 2017 was 1,338 million barrels of oil equivalent (boe), or 3,664 thousand boe per day (boe/d), compared with 1,342 million boe, or 3,668 thousand boe/d, in 2016. In 2017, production from new fields offset the impact of field declines and divestments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

available for sale [A]

 

thousand boe/d

 

 

 

2017

 

 

2016

 

 

2015

 

Crude oil and natural gas liquids

 

 

1,730

 

 

 

1,679

 

 

 

1,358

 

Synthetic crude oil

 

 

91

 

 

 

146

 

 

 

137

 

Bitumen

 

 

4

 

 

 

13

 

 

 

14

 

Natural gas [B]

 

 

1,839

 

 

 

1,830

 

 

 

1,445

 

Total

 

 

3,664

 

 

 

3,668

 

 

 

2,954

 

Of which:

 

 

 

 

 

 

 

 

 

 

 

 

Integrated Gas

 

 

887

 

 

 

884

 

 

 

631

 

Upstream

 

 

2,777

 

 

 

2,784

 

 

 

2,323

 

[A] See “Oil and gas information” on pages 42-43.
[B] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.

 

PROVED RESERVES

The proved oil and gas reserves of Shell subsidiaries and the Shell share of the proved oil and gas reserves of joint ventures and associates are summarised in “Oil and gas information” on pages 38-40 and set out in more detail in “Supplementary information – oil and gas (unaudited)” on pages 179-188.

 

Before taking production into account, our proved reserves increased by 368 million boe in 2017. This comprised increases of 343 million boe from Shell subsidiaries and 25 million boe from the Shell share of joint ventures and associates. The increase from Shell subsidiaries included 927 million boe from revisions and reclassifications, 706 million boe from extensions and discoveries, and 97 million boe from improved recovery, partly offset by net sales of minerals in place of 1,387 million boe mainly related to synthetic crude oil in Canada.

 

In 2017, total oil and gas production was 1,383 million boe, of which 1,338 million boe was available for sale and 45 million boe was consumed in operations. Production available for sale from subsidiaries was 1,168 million boe and 38 million boe was consumed in operations. The Shell share of the production available for sale of joint ventures and associates was 170 million boe and 7 million boe was consumed in operations.

 

Accordingly, after taking production into account, our proved reserves decreased by 1,015 million boe in 2017, to 12,233 million boe at December 31, 2017, with a decrease of 863 million boe from subsidiaries and a decrease of 152 million boe from the Shell share of joint ventures and associates.

 

CAPITAL INVESTMENT AND OTHER INFORMATION

Capital investment was $24.0 billion in 2017, compared with $79.9 billion in 2016, which included $52.9 billion related to the BG acquisition.

 

Divestments were $17.3 billion in 2017, compared with $5.0 billion in 2016.

 

Operating expenses decreased by $3 billion in 2017, to $38 billion. In 2016, operating expenses included redundancy and restructuring charges of $2 billion.

 

Our return on average capital employed (ROACE) increased to 5.8%, compared with 3.0% in 2016, mainly driven by a higher income in 2017.

 

Gearing was 24.8% at the end of 2017, compared with 28.0% at the end of 2016, driven by debt repayments in 2017.

 

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

See Note 2 to the “Consolidated Financial Statements” on pages 142-148.

 

LEGAL PROCEEDINGS

See Note 25 to the “Consolidated Financial Statements” on pages 175-176.

 

 

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2017

20

 

 

 


 

SELECTED FINANCIAL DATA

The selected financial data set out below are derived, in part, from the “Consolidated Financial Statements”. This data should be read in conjunction with the “Consolidated Financial Statements” and related Notes, as well as with this Strategic Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Income and of Comprehensive Income data

 

$ million

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Revenue

 

 

305,179

 

 

 

233,591

 

 

 

264,960

 

 

 

421,105

 

 

 

451,235

 

Income for the period

 

 

13,435

 

 

 

4,777

 

 

 

2,200

 

 

 

14,730

 

 

 

16,526

 

Income/(loss) attributable to non-controlling interest

 

 

458

 

 

 

202

 

 

 

261

 

 

 

(144

)

 

 

155

 

Income attributable to Royal Dutch Shell plc shareholders

 

 

12,977

 

 

 

4,575

 

 

 

1,939

 

 

 

14,874

 

 

 

16,371

 

Comprehensive income/(loss) attributable to Royal Dutch Shell plc shareholders

 

 

18,828

 

 

 

(1,374

)

 

 

(811

)

 

 

2,692

 

 

 

18,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet data

 

$ million

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Total assets

 

 

407,097

 

 

 

411,275

 

 

 

340,157

 

 

 

353,116

 

 

 

357,512

 

Total debt

 

 

85,665

 

 

 

92,476

 

 

 

58,379

 

 

 

45,540

 

 

 

44,562

 

Share capital

 

 

696

 

 

 

683

 

 

 

546

 

 

 

540

 

 

 

542

 

Equity attributable to Royal Dutch Shell plc shareholders

 

 

194,356

 

 

 

186,646

 

 

 

162,876

 

 

 

171,966

 

 

 

180,047

 

Non-controlling interest

 

 

3,456

 

 

 

1,865

 

 

 

1,245

 

 

 

820

 

 

 

1,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Basic earnings per 0.07 ordinary share