0001564590-19-007740.txt : 20190314 0001564590-19-007740.hdr.sgml : 20190314 20190314140157 ACCESSION NUMBER: 0001564590-19-007740 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 211 CONFORMED PERIOD OF REPORT: 20181231 FILED AS OF DATE: 20190314 DATE AS OF CHANGE: 20190314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Royal Dutch Shell plc CENTRAL INDEX KEY: 0001306965 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-32575 FILM NUMBER: 19680613 BUSINESS ADDRESS: STREET 1: CAREL VAN BYLANDTLAAN 30 CITY: THE HAGUE STATE: P7 ZIP: 2596 HR BUSINESS PHONE: 31-70-377-9111 MAIL ADDRESS: STREET 1: CAREL VAN BYLANDTLAAN 30 CITY: THE HAGUE STATE: P7 ZIP: 2596 HR FORMER COMPANY: FORMER CONFORMED NAME: Forthdeal LTD DATE OF NAME CHANGE: 20041026 20-F 1 rdsa-20f_20181231.htm 20-F rdsa-20f_20181231.htm

 

 

 

 

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, 2018

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

1.375% 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

3.5% Guaranteed Notes due 2023

New York Stock Exchange

Floating Rate 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

3.875% Guaranteed Notes due 2028

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, 2018:

4,440,549,255 A ordinary shares with a nominal value of €0.07 each.

3,738,410,368 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 every Interactive Data File required to be submitted 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 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

 

 

 

 

 

 

 

 

 

 

 

1

4

 

 

 

 

INTRODUCTION

FINANCIAL STATEMENTS

AND SUPPLEMENTS

 

01  Form 20-F

02  Cross reference to Form 20-F

04  Terms and abbreviations

05  About this Report

 

148  Independent Auditor’s Reports related to the
Consolidated and Parent Company Financial Statements

167  Consolidated Financial Statements

215  Supplementary information – oil and gas (unaudited)

237  Parent Company Financial Statements

247  Independent Auditor’s Reports related to the Royal Dutch Shell Dividend Access Trust Financial Statements

251  Royal Dutch Shell Dividend Access Trust  
Financial Statements

 

 

 

 

 

2

 

 

 

STRATEGIC REPORT

07  Chair’s message

09  Chief Executive Officer’s review

10  Strategy and outlook

12  Business overview

15  Risk factors

21  Market overview

24  Summary of results

27  Performance indicators

29  Integrated Gas

36  Upstream

44  Oil and gas information

53  Downstream

61  Corporate

62  Liquidity and capital resources

66  Environment and society

71  Climate change and energy transition

79  Our people

 

 

 

5

 

 

 

ADDITIONAL INFORMATION

256   Shareholder information

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

263   Non-GAAP measures reconciliations

265   Index to the Exhibits

266   Signatures

E1        Exhibits

 

 

 

 

 

 

 

 

 

 

 

Cover image

Shining a light on our energy

solutions. Showing the extensive

range of our activities; from

Upstream and Integrated Gas to

Downstream. Demonstrating the

importance it has on our day-to-day

lives through a simple and direct

iconographic approach.

 

Cover: Conran Design Group

Typesetting: DFIN

Printer: Tuijtel under ISO 14001

 

 

 

3

 

 

GOVERNANCE

82   The Board of Royal Dutch Shell plc

89   Senior Management

91   Directors’ Report

95  Corporate governance

113  Audit Committee Report

119  Directors’ Remuneration Report

 

 

 

 

 

 

 

 


INTENTIONALLY LEFT BLANK

 


INTENTIONALLY LEFT BLANK

 

 


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

26, 258

 

B.

Capitalization and indebtedness

N/A

 

C.

Reasons for the offer and use of proceeds

N/A

 

D.

Risk factors

15-20

Item 4.

Information on the Company

 

 

A.

History and development of the company

06, 10, 12, 24-25, 29-43, 53-56, 63-65, 256, 263-264

 

B.

Business overview

10-26, 29-61, 66-70, 215-236, 262

 

C.

Organizational structure

12, 14, E1-E19

 

D.

Property, plants and equipment

10-11, 15-20, 24-25, 29-61, 66-70, 215-236

Item 4A.

Unresolved Staff Comments

N/A

Item 5.

Operating and Financial Review and Prospects

 

 

A.

Operating results

15-20, 24-61, 201-216

 

B.

Liquidity and capital resources

10-11, 24-26, 29-30, 36-37, 53-55, 61-65, 177-181, 190-193, 197-207

 

C.

Research and development, patents and licenses, etc.

14

 

D.

Trend information

10-11, 15-20, 21-28, 29-33, 36-43, 53-56, 61-78

 

E.

Off-balance sheet arrangements

65

 

F.

Tabular disclosure of contractual obligations

65

 

G.

Safe harbor

05-06

Item 6.

Directors, Senior Management and Employees

 

 

A.

Directors and senior management

82-90, 97-103

 

B.

Compensation

126-138, 214

 

C.

Board practices

82-90, 93, 95-104, 113-118, 119-138, 144-147

 

D.

Employees

79, 213

 

E.

Share ownership

80-81, 101, 119-147, 208, 256

Item 7.

Major Shareholders and Related Party Transactions

 

 

A.

Major shareholders

257

 

B.

Related party transactions

93, 176, 188-189, 214, 255

 

C.

Interests of experts and counsel

N/A

Item 8.

Financial Information

 

 

A.

Consolidated Statements and Other Financial Information

62-65, 165-214, 249-255

 

B.

Significant Changes

93

Item 9.

The Offer and Listing

 

 

A.

Offer and listing details

256

 

B.

Plan of distribution

N/A

 

C.

Markets

256

 

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

104-118

 

C.

Material contracts

N/A

 

D.

Exchange controls

260

 

E.

Taxation

260-261

 

F.

Dividends and paying agents

N/A

 

G.

Statement by experts

N/A

 

H.

Documents on display

06

 

I.

Subsidiary Information

N/A

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

62, 189, 202-207

 

 

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2018

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

256, 259-260

 

 

 

 

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

103-104, 166, 249-250, E20-E21

Item 16.

[Reserved]

 

Item 16A.

Audit committee financial expert

95-99, 113

Item 16B.

Code of Ethics

96-97

Item 16C.

Principal Accountant Fees and Services

117-118, 214, 255

Item 16D.

Exemptions from the Listing Standards for Audit Committees

96

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

64, 92-93

Item 16F.

Change in Registrant’s Certifying Accountant

N/A

Item 16G.

Corporate Governance

96-98

Item 16H.

Mine Safety Disclosure

N/A

 

 

 

 

Part III

 

 

 

Item 17.

Financial Statements

N/A

Item 18.

Financial Statements

165-214, 249-255

Item 19.

Exhibits

265, E1-E24

 

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2018

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

megajoule

a unit of energy equal to one million joules

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

FID

final investment decision

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 2018

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, 2018, 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 167-214), the Parent Company Financial Statements of Shell (pages 237-246) and the Financial Statements of the Royal Dutch Shell Dividend Access Trust (pages 251-255). Except for these Financial Statements, the numbers presented throughout this Report may not sum precisely to the totals provided and percentages may not precisely reflect the absolute figures, due to rounding. 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. 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”.

 

This Report contains certain following forward-looking Non-GAAP measures such as free cash flow, capital investment and divestments. We are unable to provide a reconciliation of these forward-looking Non-GAAP measures to the most comparable GAAP financial measures, because certain information needed to reconcile those Non-GAAP measures to the most comparable GAAP financial measures is dependent on future events some of which are outside the control of the company, such as oil and gas prices, interest rates and exchange rates. Moreover, estimating such GAAP measures with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort. Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are calculated in a manner which is consistent with the accounting policies applied in Royal Dutch Shell plc’s financial statements. All outlooks on financial metrics and/or alternative performance measures exclude the effect of the implementation of IFRS 16 Leases, which will take place effective as of January 1, 2019.

 

In addition to the term “Shell”, in this Report “Shell Group”, “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 directly or indirectly own investments are separate legal entities. Shell subsidiaries’ data include their interests in joint operations.

 

This Report contains data and analysis from Shell’s new Sky scenario. Unlike Shell’s previously published Mountains and Oceans exploratory scenarios, the Sky scenario is based on the assumption that society reaches the Paris Agreement’s goal of holding the rise in global average temperatures this century to well below two degrees Celsius (2°C) above pre-industrial levels. Unlike Shell’s Mountains and Oceans scenarios which unfolded in an open-ended way based upon plausible assumptions and quantifications, the Sky scenario was specifically designed to reach the Paris Agreement’s goal in a technically possible manner. These scenarios are a part of an ongoing process used in Shell for over 40 years to challenge executives’ perspectives on the future business environment. They are designed to stretch management

to consider even events that may only be remotely possible. Scenarios, therefore, are not intended to be predictions of likely future events or outcomes and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities.

 

Additionally, it is important to note that Shell’s existing portfolio has been decades in development. While we believe our portfolio is resilient under a wide range of outlooks, including the IEA’s 450 scenario (World Energy Outlook 2016), it includes assets across a spectrum of energy intensities including some with above-average intensity. While we seek to enhance our operations’ average energy intensity through both the development of new projects and divestments, we have no immediate plans to move to a net-zero emissions portfolio over our investment horizon of 10-20 years. Although, we have no immediate plans to move to a net-zero emissions portfolio, in November of 2017, we announced our ambition to reduce the Net Carbon Footprint of our energy products in accordance with society’s implementation of the Paris Agreement’s goal of holding global average temperature to well below 2°C above pre‑industrial levels. Accordingly, assuming society aligns itself with the Paris Agreement’s goals, we aim to reduce the Net Carbon Footprint of our energy products, which includes not only our direct and indirect carbon emissions, associated with producing the energy products which we sell, but also our customers’ emissions from their use of the energy products that we sell, by around 20% in 2035 and by around 50% in 2050.

 

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 their emissions. 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

 

INTRODUCTION SHELL ANNUAL REPORT AND FORM 20-F 2018

05

 

 


 

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 15-20 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.

 

Shell V-Power and Shell LiveWire are Shell trademarks.

Documents on display

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  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 2018

06

 

 


Strategic Report

Chair’s message: Building trust in Shell

 

 

 

 

 

 

We are making good progress in shaping Shell into one of the best investment options for shareholders globally, while positioning it to thrive in the transition to a lower-carbon world. This progress is described in Ben’s CEO review.

 

Our ongoing work to provide more and cleaner energy should increase recognition of the positive contributions that Shell can make to society over the decades ahead.

 

But our success in achieving these goals will depend largely on whether society trusts us.  

 

Investors invest in companies they trust, governments allow trusted companies to operate and consumers buy things from people they trust. Trusted companies are also likely to attract and retain the brightest minds, helping to ensure the lasting vitality of the business.  

 

Trust is clearly a virtuous circle. The question is, how can companies create and keep it? I believe this can only be achieved by everybody demonstrating unquestionable integrity – every day, in every way and everywhere we work.

 

Unquestionable integrity is essential for earning and maintaining the trust of customers, investors and wider society.

 

PUBLIC TRUST

According to our independent research, Shell still enjoys high levels of public trust in many Asian countries, including China and India. But trust in the oil and gas industry has declined in some parts of the world, particularly in western Europe, over the last few decades. Shell is no exception.

 

Shell lost the trust of many investors in 2004, when senior executives misrepresented the size of the company's oil reserves. The company has been working to restore that trust ever since.

 

Earning trust takes time. Losing it takes no time at all.

 

That is why we invest a lot of time in raising ethical standards and underscoring the importance of absolute integrity for all our employees. We can never stop working to ensure that the highest ethical standards are always followed by all Shell staff around the world.

 

And, because we strongly believe that all leaders must set an example, in 2018 we introduced mandatory ethical leadership workshops for senior executives across our global operations. I took part in one such workshop in December 2018, together with fellow Board member Sir Nigel Sheinwald and several senior managers. It was a great opportunity to learn from each other about the challenges facing leaders at Shell.

 

Ethical considerations are a key part of discussions in the Shell boardroom. Over the last year or more, we have made a concerted effort to use the experiences of our Board members, gained from working in a variety of countries and industries, to identify ethical dilemmas that could arise from business opportunities.

 

Each member of our diverse Board brings invaluable perspectives to these discussions, blending experience from both the public and private sectors. To highlight the contributions of our three newest members, Roberto Setubal brings insights from Brazil, a major developing country. Ann Godbehere brings extensive mining, insurance and financial sector experience, and Catherine Hughes brings decades of experience in the oil and gas industry. The Board must scrutinise Shell’s plans and actions from different points of view.

 

Unfortunately, as a result of a settlement agreement Shell entered into in 2011 in Nigeria for an oil block called OPL 245, we have seen Shell’s name in news headlines around the world. This is a stark reminder that building trust requires more than just complying with the law. Trust is also about perception. If people perceive you as not sharing their values, concerns or hopes for the future, they are unlikely to trust you.

 

This has been a difficult learning experience for us, particularly in terms of how our behaviour is perceived. We are using this experience to remind all our employees that even the perception of wrongdoing can result in a loss of trust.

 

To gain and maintain trust across more than 70 countries in which we operate, we also need to ensure we always work safely, without hurting people or the environment, while rectifying problems that arise.

 

We are making good progress on improving the safety of our operations. For example, our process safety incidents were reduced by more than a quarter in 2018, compared to 2017. Our personal injury rate was our second-lowest on record, following a record low in 2017. But two people still tragically died while working for Shell in 2018. Our safety goal is zero injuries and incidents.

 

TRANSPARENCY

Trust can only be earned and kept if people see that we share their concerns and hopes for the future. They can only see that if we are transparent about what we do and why we do it. Transparency goes beyond publishing financial results and executive pay figures. It is about being as open as we can with governments, customers and partners. On tax, for example, Shell has signed up to The B Team Responsible Tax Principles. These include being open about the entities the Company owns around the world, and why we own them.

 

The more transparent we are about our activities, the better equipped our investors, customers and wider society are to decide whether we are worthy of their trust.

 

Ultimately, we need to give them lots of reasons to trust us and no reasons to distrust us. Perhaps nowhere is this more important than for the 30 million daily retail customers who trust Shell to provide products they can rely on. We must live up to that trust every day.

 

 

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We want all our retail customers to strongly believe that, when they are filling up or charging their vehicles, we are providing all the products and services they need safely, efficiently and ethically. We want all our business customers to be equally sure of Shell. By constantly demonstrating the unquestionable integrity of our businesses, people and partnerships, we believe we can earn and keep their trust over the long term.

 

 

Chad Holliday

Chair

 

 

 

 

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Chief Executive Officer’s review:

Delivering on our promises

 

 

Shell delivered a very strong financial performance in 2018. We are continuing to make good progress in building a world-class investment case.

 

Higher oil and gas prices, combined with our ongoing work to improve the performance and competitiveness of our businesses, contributed to a sharp increase in cash flow from operating activities to $53 billion in 2018. We are on track with our outlook of annual free cash flow of between $30 billion and $35 billion by 2020, at a Brent crude oil price of $60 a barrel (real terms 2016).

 

We delivered on our promises for the year, including completing our $30-billion divestment programme and starting up key growth projects, while maintaining discipline on capital investment. We paid our entire dividend in cash, further reduced our debt and launched our share buyback programme.

 

But 2018 was not all good news for us. Tragically, a contractor died at our Rheinland refinery in Germany and another died at an onshore well in the USA. I am deeply unhappy about these incidents and call on all Shell employees, contractors and suppliers to redouble their focus on safety.

 

RESULTS

Income for the period was $23.9 billion in 2018, compared with $13.4 billion in 2017. Earnings on a current cost of supplies basis increased to $24.4 billion, compared with $12.5 billion in 2017. We distributed $15.7 billion to shareholders in dividends in 2018.

 

After cancelling the Scrip Dividend Programme with effect from the fourth quarter 2017 dividend, our healthy free cash flow outlook and stronger balance sheet gave us the confidence to start our share buyback programme in mid-2018. We intend to buy back at least $25 billion of shares by the end of 2020, subject to further progress with debt reduction and oil price conditions.

 

With the continued strengthening of our balance sheet, cash flows and our ongoing focus on capital efficiency, I am confident that we will do this while continuing to grow our portfolio.

 

We continued to deliver new projects, including the completion of an important chemical plant expansion in China and starting production from a deep-water development in the US Gulf of Mexico a year ahead of schedule. Overall, our production averaged 3.7 million barrels of oil equivalent a day in 2018, unchanged from 2017. Increased production from new field start-ups and ramp-ups, as well as lower maintenance activity, was offset by the impact of divestments and field declines.

 

Stronger crude oil and gas prices contributed to sharp increases in our Upstream and Integrated Gas earnings, while Downstream earnings fell slightly.

 

We continued to streamline our business – including the sale of our Downstream business in Argentina; Upstream interests in Iraq, Ireland, Norway and Oman; and Integrated Gas interests in Malaysia, New Zealand and Thailand.

 

The progress of our divestments has helped us to reduce net debt, with gearing standing at 20.3% at the end of 2018, down from 25.0% in 2017.

Although our $30 billion divestment programme for 2016-18 has been successfully completed, we expect to continue divestments at an average rate of more than $5 billion a year until at least 2020. This will help us to further strengthen the balance sheet, reduce debt and increase focus on our strategic priorities.  

 

Capital investment in 2018 was slightly below $25 billion, reflecting our disciplined capital investment approach. Our 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. Our continued focus on capital efficiency and streamlining our portfolio will make us more resilient and competitive.

 

We will continue to carefully control our costs and investment levels, but we are still investing in strong commercial opportunities for growth. For example, we added deep-water exploration acreage in both the Mexican and US parts of the Gulf of Mexico, off the coast of Brazil, and off the coast of Mauritania in 2018. We also announced two large deep-water discoveries in the US Gulf of Mexico.

 

Natural gas will play a key role in the transition to a lower-carbon global energy system over the next few decades, with liquefied natural gas (LNG) shipments playing an increasingly important part. This is one of the driving forces behind our taking the final investment decision in 2018 on LNG Canada, a major project in which Shell has a 40% interest.  

 

LNG Canada is well positioned to help Shell meet some of the world’s growing gas needs. We expect the cash flow it generates to be significant and resilient. Sustainable development was considered in every aspect of the project. For example, it has been designed to achieve the lowest carbon intensity of any LNG project in operation today, aided by the partial use of hydropower.

 

In December, Shell announced plans to set short-term targets for reducing the Net Carbon Footprint of the energy products it sells – a carbon intensity measure that includes our customers’ emissions when they use these products – and to link these targets to executive remuneration. This is an industry first.

 

Shell’s Remuneration Committee will include a new performance condition linked to the transition to lower-carbon energy for the Long-term Incentive Plan grant starting in 2019, one year earlier than planned. Further details are in the Directors’ Remuneration Report.

 

In 2018, I also announced our ambition to provide a reliable electricity supply to 100 million people in the developing world by 2030. Economic and social progress are being hindered in many countries by a lack of reliable energy supplies that are essential to providing basic medical services and clean water, for example. Better access to energy improves people’s lives.

 

I am proud of Shell’s success in 2018. We will continue to focus on delivering on our strategy in 2019, maintaining our disciplined approach to capital investment while working to grow our cash flow and returns. Our strategy to deliver a world-class investment case is working.

 

Ben van Beurden

Chief Executive Officer

 

 

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Strategy and outlook

 

 

 

 

 

STRATEGY

Shell’s purpose is to power progress together by providing more and cleaner energy solutions. Our strategy is to strengthen our position as a leading energy company by providing oil, gas and low-carbon energy as the world’s energy system transforms. Safety and social responsibility are fundamental to our business approach. Shell will only succeed by working collaboratively 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 path forward are uncertain and require 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 make a positive contribution to society through our activities.

 

The execution of our strategy is founded on becoming a more customer-centric and simpler, more streamlined organisation, focused on growing returns and free cash flow. By investing in competitive projects, driving down costs and selling non-core businesses, we are continuously reshaping our portfolio to become 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 use multiple future scenarios to assess the resilience of our strategy. We undertake regular reviews of the markets we operate in and analyse trends and uncertainties, as well as 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 15).

 

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. In 2018, the Long-term Incentive Plan (LTIP) included cash generation, capital discipline, and value created for shareholders metrics. See the “Directors’ Remuneration Report” on page 142.

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 businesses 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 organisation.

 

For more details on how the strategic themes are embedded into our businesses, see “Business Overview” on page 13.

 

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.

 

OUTLOOK FOR 2019 AND BEYOND

We continuously seek to improve our operating performance and maximise sustainable free cash flow, with an emphasis on health, safety, security, environment and asset performance, as well as our ethics and compliance principles. In order to achieve that, we strive for highly qualified and motivated employees.

 

We are on track with our outlook of annual free cash flow of between $30 billion and $35 billion by 2020, at a Brent crude oil price of $60 a barrel (real terms 2016).

 

Our 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.

 

Following the successful delivery of our $30 billion divestment programme during 2016-18, we will continue with an annual average outlook of at least $5 billion of divestments in 2019 and 2020.

 

Following the delivery of an additional $10 billion of cash flow from operations between 2014 and 2018, key project start-ups and ramp-ups are expected to generate an additional $5 billion cash flow from operations between 2018 and 2020, assuming $60 per barrel (real terms 2016) and mid-cycle Downstream industry conditions. We will remain highly selective on new investment decisions throughout 2019 and beyond.

 

 

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We launched our share buyback programme in 2018. Our intention remains to buy back at least $25 billion of our shares by the end of 2020, subject to further progress with debt reduction and oil price conditions.

 

We fully support the Paris Agreement’s goal to keep the rise in global average temperature this century to well below two degrees Celsius above pre-industrial levels and to pursue efforts to limit temperature increase even further to 1.5 degrees Celsius. 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, in pace with society. To operationalise this long-term ambition, we will start setting specific Net Carbon Footprint targets for shorter-term periods. The first target has been set for a three-year period and is detailed in the Climate Change section on page 77. The target and other measures will be linked to our executive remuneration and we have introduced an additional performance condition in our Long-term Incentive Plan (LTIP) in 2019 linked to the transition to lower-carbon energy. Further details can be found in the Directors’ Remuneration Report on page 124.

 

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, share buybacks, 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 pages 05-06 and “Risk factors” on pages 15-20.

 

This outlook does not include the impact of the application of the new standard IFRS 16 Leases, which is effective as of January 1, 2019.

 

 

 

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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. We also extract bitumen from oil sands, which we convert 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 into liquids (GTL).

We transport and trade oil, gas and other energy-related products, such as electricity and carbon-emissions rights.

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 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 integrated 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 10). 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, and the operation of upstream and midstream infrastructure necessary to deliver gas to market. It markets and trades natural gas, LNG, 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 investing in those 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 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, that trades and refines 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 15). Systematic management of

life-cycle 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 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 181-184.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by business segment

(including inter-segment sales)

 

$ million

 

 

 

2018

 

 

2017

 

 

2016

 

Integrated Gas

 

 

 

 

 

 

 

 

 

 

 

 

Third parties

 

 

43,764

 

 

 

32,674

 

 

 

25,282

 

Inter-segment

 

 

4,853

 

 

 

3,978

 

 

 

3,908

 

Total

 

 

48,617

 

 

 

36,652

 

 

 

29,190

 

Upstream

 

 

 

 

 

 

 

 

 

 

 

 

Third parties

 

 

9,892

 

 

 

7,723

 

 

 

6,412

 

Inter-segment

 

 

37,841

 

 

 

32,469

 

 

 

26,524

 

Total

 

 

47,733

 

 

 

40,192

 

 

 

32,936

 

Downstream

 

 

 

 

 

 

 

 

 

 

 

 

Third parties

 

 

334,680

 

 

 

264,731

 

 

 

201,823

 

Inter-segment

 

 

5,358

 

 

 

4,248

 

 

 

1,727

 

Total

 

 

340,038

 

 

 

268,979

 

 

 

203,550

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

Third parties

 

 

43

 

 

 

51

 

 

 

74

 

Total

 

 

43

 

 

 

51

 

 

 

74

 

 

 

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Revenue by geographical area

(excluding inter-segment sales)

 

$ million

 

 

2018

 

 

2017

 

 

2016

 

 

Europe

 

 

118,960

 

 

 

100,609

 

 

 

81,573

 

 

Asia, Oceania, Africa

 

 

153,716

 

 

 

114,683

 

 

 

87,635

 

 

USA

 

 

89,876

 

 

 

66,854

 

 

 

44,615

 

 

Other Americas

 

 

25,827

 

 

 

23,033

 

 

 

19,768

 

 

Total

 

 

388,379

 

 

 

305,179

 

 

 

233,591

 

 

 

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 pages 17-18). 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 2018, research and development expenses were $986 million, compared with $922 million in 2017, and $1,014 million in 2016. 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 10,325 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 pages 103-104.

 

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. Government actions may also affect the prices of crude oil, natural gas, oil products and chemicals.  For example, if a government were to ban diesel automobiles from entering a city or provide tax deductions for the purchase of renewable automobiles. 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, have resulted and could continue to 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 adversely 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 21.

 

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 22.

 

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 10.

 

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. Additionally, in some cases, we have retained certain liabilities following a divestment.  Moreover, even in cases where we have not expressly retained certain liabilities, 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 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 pages 10-11.

 

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 13.

 

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Oil and gas production available for sale

 

 

Million boe [A]

 

 

 

2018

 

 

2017

 

 

2016

 

Shell subsidiaries

 

 

1,179

 

 

 

1,168

 

 

 

1,158

 

Shell share of joint ventures and associates

 

 

159

 

 

 

170

 

 

 

184

 

Total

 

 

1,338

 

 

 

1,338

 

 

 

1,342

 

[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]

 

 

 

2018

 

 

2017

 

 

2016

 

Shell subsidiaries

 

 

10,294

 

 

 

10,177

 

 

 

11,040

 

Shell share of joint ventures and associates

 

 

1,285

 

 

 

2,056

 

 

 

2,208

 

Total

 

 

11,578

 

 

 

12,233

 

 

 

13,248

 

Attributable to non-controlling interest in

   Shell subsidiaries

 

 

331

 

 

 

325

 

 

 

5

 

[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.

 

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 215.

 

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, as well as emission reduction actions by customers, will continue to 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, regulators, organisations and individuals 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.

 

In addition, physical effects of climate change such as, but not limited to, rise in temperature, sea-level rise and fluctuations in water levels could adversely impact both our operations and supply chains.    

 

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.

 

Also, if we are unable to keep pace with society’s energy transition or we are unable to provide the desired low GHG emissions products needed to facilitate society’s energy transition, it could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Climate change and energy transition” on page 73.

 

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.

 

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See “Environment and society” on page 70.

 

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.

 

In addition to the above risks, the United Kingdom is expected to leave the European Union (EU) in March 2019. As a result of this decision, it is possible that we may experience delays in moving our products and employees between the UK and EU. Also, additional tariffs and taxes could impact the demand for some of our products. This potential delay and reduced demand for our products, combined with the potential adverse changes in macroeconomic conditions in both the EU and UK, could have a material adverse effect on our earnings and cash flows.

 

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 conflict with other countries’ laws and regulations, 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 104.

 

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 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. Governments could require operators to adjust their future production plans, as has been done in the Netherlands, affecting production and costs. We could incur significant additional costs in the future due to compliance with these 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 66.

 

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 41.

 

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

Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM). An important part of NAM’s gas production comes from the onshore Groningen gas field, in which EBN, a Dutch government entity, has a 40% interest and NAM a 60% interest. Since 1995, production from the Groningen field has caused earthquakes. Some of these earthquakes have caused damage to houses and other structures in the region, resulting in complaints and lawsuits from the local community. Following the Dutch cabinet’s decision to reduce NAM’s production from the Groningen field to zero by 2030, NAM’s shareholders and the Dutch State signed a heads of agreement in June 2018. This agreement supports the ramp-down of production from the Groningen field, includes measures to ensure the financial robustness of NAM, and determines the split of legal responsibilities between the Dutch government and the Groningen field partners. Shell’s proved reserves were reduced by 0.63 billion boe as a result in 2018. Additional earthquakes, lawsuits and any acceleration of the current plan to cease production from the Groningen field by 2030 could have further adverse effects on NAM and therefore could impact our earnings, cash flows and financial condition.

 

See “Upstream” on page 39.

 

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. In developing new technologies and new products, unknown or unforeseeable technological failures or environmental and health effects

 

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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 14.

 

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 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 62 and Note 19 to the “Consolidated Financial Statements” on pages 202-207.  

 

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 62.

 

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 61.

 

An erosion of our business reputation could have a material adverse effect on our brand, our ability to secure new resources or access capital markets, and on 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 and attract staff. Many other factors, including the materialisation of the risks discussed in several of the other risk factors, could negatively impact our reputation and could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on pages 96-97.

 

 

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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 104.

 

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 dependent on key contractors supporting the delivery of IT services, and continue to expand in terms of the number of systems. 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 61.

 

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 in the past. These include a number of fines by the European Commission Directorate-General for Competition (DG COMP). Due to DG COMP’s fining guidelines, any future conviction of Shell or any of its joint ventures or associates for violation of 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. In certain circumstances, directors may receive director disqualification orders. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages. Any violation of these laws can harm our reputation and could have a material adverse effect on our earnings, cash flows and financial condition.

 

See “Corporate governance” on pages 96-97.

 

Violations of anti-bribery, tax-evasion 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, tax-evasion 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 violation of anti-bribery, tax-evasion or anti-money laundering laws, including those potential violations associated with Shell Nigeria Exploration and Production Company Ltd.’s (SNEPCO’s) investment in Nigerian oil block OPL 245 and the 2011 settlement of litigation pertaining to that block, could have a material adverse effect on our earnings, cash flows and financial condition.  

 

See “Our people” on pages 79-81, “Corporate governance” on pages 96-97 and Note 25 to the “Consolidated Financial Statements” on pages 211-213.

 

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. Most of the countries we operate in have data protection laws and regulations. Additionally, the EU General Data Protection Regulation (GDPR) came into effect in May 2018, which increased 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 as well as harm our reputation. 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 pages 96-97.

 

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 and expanded in 2018. Both the EU and the USA introduced sectorial sanctions against Venezuela in 2017, which the USA expanded in 2018 and 2019. The US sanctions primarily target the government of Venezuela and the oil industry. In addition to the significant trade-control programmes

 

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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 pages 96-97.

 

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 15). 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 appropriate 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 growth is economic growth. According to the World Economic Outlook released by the International Monetary Fund (IMF) in January 2019, global economic growth for 2018 is estimated at 3.7%, 0.1% lower than in 2017. Economic growth moderated in some large advanced economies in the second half of the year, after strong growth in 2017, while the group of emerging-market economies continued to expand at broadly the same pace as in 2017.

 

According to the IMF’s latest estimate, economic growth accelerated in the USA to 2.9% in 2018 from 2.2% in 2017, with private sector activity partly supported by sizable tax cuts and higher defense expenditures. But growth slowed in the eurozone and in the United Kingdom due to weaker export growth, higher energy prices and increased political uncertainty, such as the prospect of the UK leaving the European Union (Brexit). Growth in emerging-market economies showed a divergent picture. In China, growth slowed from 6.9% in 2017 to an estimated 6.6% in 2018, due to weaker credit growth and additional US tariffs on imports from China. Argentina and Turkey slid into recession as financial conditions deteriorated and investors became increasingly concerned about financial risks and political uncertainty. In contrast, economic recovery continued in Brazil and India. Higher oil and gas prices lifted growth among fuel-exporting economies, such as some in sub-Saharan Africa (e.g. Nigeria), the Middle East and Russia.

 

For 2019, the IMF expects the weaker economic conditions seen towards the end of 2018 to continue as many countries face headwinds from rising trade barriers, geopolitical tensions, and tightening financing conditions.

 

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]

 

 

 

2018

 

 

2017

 

 

2016

 

Brent ($/b)

 

 

71

 

 

 

54

 

 

 

44

 

West Texas Intermediate ($/b)

 

 

65

 

 

 

51

 

 

 

43

 

Henry Hub ($/MMBtu)

 

 

3.1

 

 

 

3.0

 

 

 

2.5

 

UK National Balancing Point

   (pence/therm)

 

 

60

 

 

 

45

 

 

 

35

 

Japan Customs-cleared Crude ($/b)

 

 

74

 

 

 

54

 

 

 

42

 

[A] Yearly average prices are based on daily spot prices. The 2018 average price for Japan Customs-cleared Crude excludes December data.

 

CRUDE OIL

Brent crude oil, an international benchmark, traded between $51 per barrel (/b) and $86/b in 2018, ending the year at the lower price of $51/b. It averaged $71/b for the year, $17/b higher than in 2017, and $27/b higher than in 2016 when the average price was at its lowest average level since 2004.

 

On a yearly average basis, West Texas Intermediate crude oil traded at a $6/b discount to Brent in 2018, compared with $3/b in 2017. The discount widened from 2017, reflecting constrained pipeline capacity from the landlocked Cushing storage hub to the US Gulf Coast. US oil exports increased from 2017, which helped to limit further widening of the price differential.

 

Reflecting the economic conditions described above, global oil demand grew by 1.2 million barrels per day (b/d), or 1.2%, to 99.2 million b/d, according to the International Energy Agency’s (IEA) Oil Market Report published in January 2019 (Oil Market Report). This growth was driven by emerging economies, where demand grew by 0.9 million b/d. In advanced economies, demand grew by 0.3 million b/d. Oil demand growth in 2018 was 0.4 million b/d lower than in 2017, when it rose by 1.6 million b/d.

 

Oil supply in 2018 is estimated in the Oil Market Report at 99.9 million b/d, an increase of 2.5 million b/d compared with 2017. Because growth in oil supply outpaced growth in demand, the trend of falling global crude oil and oil products inventory levels, which started in mid-2016, began to reverse in the middle of 2018. Average commercial inventory levels for OECD countries in November 2018 were estimated at 2,850 million barrels in the Oil Market Report, around 50 million barrels less than in November 2017 and about 150 million barrels above the year average levels seen in 2014 when the Brent price was around $100/b before starting to fall in late 2014.

 

Due to falling inventory levels, oil prices strengthened to a peak of $86/b in October 2018. Oil prices fell in November to below $60/b, driven by market expectations of higher supply growth and lower demand growth. The outlook for supply growth became more bullish due to the US government waiving some export sanctions on Iran and record production levels in the USA and Saudi Arabia. At the same time, the outlook for demand growth weakened as macroeconomic indicators deteriorated.

 

On the non-OPEC supply side, the US Energy Information Administration reported another year of supply growth. US production is estimated to have averaged 10.8 million b/d in 2018, 1.4 million b/d higher than in 2017, and 2.0 million b/d higher than in 2016. Like 2017, higher oil prices in 2018 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 1.2 million b/d in 2018 and averaged 56.6 million b/d.

 

To support oil prices, OPEC members agreed in November 2017 to extend an agreement to reduce overall production by 1.2 million b/d, relative to production levels in October 2016. In December 2018, in response to a 40% fall in oil prices from the peak levels seen in October, OPEC and other non-OPEC resource holders, most notably Russia, agreed to reduce production by 1.2 million b/d from October levels. OPEC production averaged 32.5 million b/d in 2018, a similar level to 2017 and about 0.5 million b/d less than in 2016.

 

 

 

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Looking ahead, the IMF’s global economic outlook indicates a slightly lower outlook for global economic growth. Additionally, according to the IEA, moderate oil price levels at the beginning of 2019 could create around 1.4 million b/d of additional demand growth in 2019. If OPEC members and co-operating non-OPEC resource holders, such as Russia, successfully implement the December 2018 agreement, then demand growth and production declines from existing operations would have to be balanced by production growth from non-OPEC countries, mostly from the USA. As a consequence, markets could tighten, and prices could rise if supply growth from the USA moderates. Postponements and cancellations of new supply projects over the last few years could lead to further market tightening in the next few years, given the long lead time of many of these projects. In such a scenario, we believe that the average Brent crude oil price could be 10% to 40% higher in 2022 than the 2018 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, global economic growth slows, or if other non-OPEC producers, such as US shale producers, effectively deliver more and cheaper oil to the market. In such a scenario, we believe that the average Brent crude oil price could be 10% to 30% lower in 2022 than the 2018 average.

 

NATURAL GAS

We estimate global gas demand to have grown by about 3.2% in 2018, which is higher than the average annual growth rate of 2.4% since the beginning of the century. A combination of weather conditions, implementation of new policies such as the partial substitution of coal by gas-fired power generation in China, and global economic growth led to an increase in demand in most regions.

 

Global liquefied natural gas (LNG) imports grew by 28 million tonnes (9.6%) in 2018. LNG demand growth was supported by weather conditions, lower nuclear power generation and the start-up of new regasification capacity in Asia. China and India alone increased their regasification capacity by 19% and 33% from 2017 respectively, equal to 21 million tonnes per annum, in total. Supply growth was primarily driven by the start-up of new projects in Australia, the USA and Russia. The majority of additional LNG supply was absorbed by Asia, offsetting declines in the Middle East and North Africa.

Natural gas prices can vary from region to region.

In the USA, the natural gas price at the Henry Hub averaged $3.1 per million British thermal units (MMBtu) in 2018, 3% higher than in 2017, and traded in a range of $2.5-4.9/MMBtu. There was some downward pressure on prices due to strong gas supply growth, which averaged 11% higher than in 2017, helped by higher oil prices and new gas pipeline capacity. However, gas prices were also supported by a range of other factors, such as below-normal storage inventory levels, and demand growth due to colder than normal weather in the second half of 2018, the completion of LNG liquefaction projects, increased exports to Mexico by pipeline and US industrial demand.

In Europe, natural gas prices were higher than in 2017. The average price at the UK National Balancing Point (NBP) was 33% higher in 2018. At the main continental gas trading hubs – in the Netherlands, Belgium and Germany – prices were also stronger, as reflected by stronger Dutch Title Transfer Facility (TTF) prices. European gas prices were supported by record prices for carbon dioxide (CO2) allowances (EUAs) which averaged €16/tCO2 in 2018

compared to €6/tCO2 in 2017, resulting in higher preference for gas over coal in power generation. Gas prices were also supported by lower nuclear power output, particularly in Belgium and Spain, lower than normal temperatures early in the year, and competition from North-East Asian markets for LNG supplies for storage replenishment ahead of winter.

 

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 2018 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 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, exports to Mexico by pipeline, and US residential/industrial users. 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. Due to such uncertainty, we believe that average Henry Hub gas prices could be between 10% lower to 30% higher by 2022 than the 2018 average. In Europe, we believe gas prices will be increasingly influenced by the cost of LNG imports from the USA. We believe that the price at the UK NBP may average between 30% lower and 30% higher by 2022 than the 2018 average. 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. By 2022, we believe that the price of LNG delivered under contract to the Asia-Pacific market may average between 30% lower and 30% higher than the 2018 average.

 

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 15). 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. See also Note 8 to the “Consolidated Financial Statements” on page 188.

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2018

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REFINING MARGINS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refining marker average industry gross margins

 

 

$/b

 

 

 

2018

 

 

2017

 

 

2016

 

US West Coast

 

 

11.5

 

 

 

14.0

 

 

 

12.9

 

US Gulf Coast Coking

 

 

7.0

 

 

 

9.9

 

 

 

9.1

 

Rotterdam Complex

 

 

2.5

 

 

 

4.3

 

 

 

2.5

 

Singapore

 

 

1.4

 

 

 

3.6

 

 

 

2.8

 

 

Industry gross refining margins were lower on average in 2018 than in 2017 in each of the key refining hubs of Europe, Singapore and the USA. Oil products demand growth has slowed in line with global economic growth. Periods of high crude prices led to reductions in oil products demand. Refinery capacity additions, especially in the Middle East and Asia, combined with tempered demand growth have led to generally lower refinery utilisations. Refinery activity continued to be low in Latin America.

 

Looking forward, we believe refinery margins may be impacted by the introduction of the new International Maritime Organization shipping fuel specification in 2020.

PETROCHEMICAL MARGINS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cracker industry margins

 

$/tonne

 

 

 

2018

 

 

2017

 

 

2016

 

North East/South East Asia naphtha

 

 

511

 

 

 

688

 

 

 

672

 

Western Europe naphtha

 

 

653

 

 

 

727

 

 

 

598

 

US ethane

 

 

332

 

 

 

471

 

 

 

450

 

 

Cracker industry margins fell in all three main regions in 2018. Asian naphtha cracker margins fell sharply in the fourth quarter, amid continuing concerns over the potential impact of US tariffs, while US ethane cracker margins came under pressure from new cracker unit start-ups. Supported by healthy European demand, European naphtha cracker margins decreased the least during 2018.

 

The outlook for petrochemical margins in 2019 and beyond depends on supply and demand balances and feedstock costs. Demand for petrochemicals is closely linked to economic growth. 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 pages 05-06 and “Risk factors” on pages 15-20.

 

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2018

23

 

 


Summary of results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key statistics

 

$ million, except where indicated

 

 

 

2018

 

 

2017

 

 

2016

 

Income for the period

 

 

23,906

 

 

 

13,435

 

 

 

4,777

 

Current cost of supplies adjustment

 

 

458

 

 

 

(964

)

 

 

(1,085

)

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

 

 

24,364

 

 

 

12,471

 

 

 

3,692

 

Integrated Gas

 

 

11,444

 

 

 

5,078

 

 

 

2,529

 

Upstream

 

 

6,798

 

 

 

1,551

 

 

 

(3,674

)

Downstream

 

 

7,601

 

 

 

8,258

 

 

 

6,588

 

Corporate

 

 

(1,479

)

 

 

(2,416

)

 

 

(1,751

)

Capital investment [B]

 

 

24,779

 

 

 

24,006

 

 

 

79,877

 

Divestments [B]

 

 

7,102

 

 

 

17,340

 

 

 

4,984

 

Operating expenses [B]

 

 

39,316

 

 

 

38,083

 

 

 

41,549

 

Return on average capital employed [B]

 

 

9.4

%

 

 

5.8

%

 

 

3.0

%

Gearing at December 31 [C]

 

 

20.3

%

 

 

25.0

%

 

 

29.1

%

Oil and gas production (thousand boe/d)

 

 

3,666

 

 

 

3,664

 

 

 

3,668

 

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

 

 

11,578

 

 

 

12,233

 

 

 

13,248

 

[A] Segment earnings are presented on a current cost of supplies basis. See Note 4 to the “Consolidated Financial Statements” on pages 181-184.
[B] See “Non-GAAP measures reconciliations” on pages 263-264.
[C] With effect from 2018, the net debt calculation has been amended. See Note 14 to the “Consolidated Financial Statements” on page 191. Gearing as previously published at December 31, 2017, and at December 31, 2016, was 24.8% and 28.0% respectively.

 

 

 

EARNINGS 2018-2017

Income for the period was $23,906 million in 2018, compared with $13,435 million in 2017. After current cost of supplies adjustment, total segment earnings were $24,364 million in 2018, compared with $12,471 million in 2017.

 

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 2018 were $11,444 million, compared with $5,078 million in 2017. The increase was mainly driven by higher realised oil, gas, and liquefied natural gas (LNG) prices, higher gains on divestments, increased contributions from LNG trading, the impact of fair value accounting of commodity derivatives, and higher production. These effects were partly offset by the absence of a gain from the strengthening Australian dollar on a deferred tax position in 2017 and by higher operating expenses. See “Integrated Gas” on pages 29-30.

 

Upstream earnings in 2018 were $6,798 million, compared with $1,551 million in 2017. The increase was mainly driven by higher realised oil and gas prices, lower impairment charges, the absence of a charge as a result of US tax reform legislation in 2017, and lower well write-offs. This was partly offset by the movements in deferred tax positions, lower gains on divestments, lower production, and a charge related to the impact of the weakening Brazilian real on a deferred tax position. See “Upstream” on pages 36-37.

Downstream earnings in 2018 were $7,601 million, compared with $8,258 million in 2017. The decrease was mainly driven by higher operating expenses, unfavourable exchange rate effects, and lower realised base chemicals and refining margins. This was partly offset by higher realised marketing margins, lower charges related to provisions, the impact of fair value accounting of commodity derivatives and higher gains on divestments. There was also a charge in 2017 as a result of US tax reform legislation. See “Downstream” on pages 53-54.

 

Corporate earnings in 2018 were a loss of $1,479 million, compared with a loss of $2,416 million in 2017. The lower loss was mainly driven by lower net foreign exchange losses and net interest expense, partially offset by higher costs. There was also a charge in 2017 as a result of US tax reform legislation. See “Corporate” on page 61.

 

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. BG Group plc (BG) was consolidated within Shell’s results with effect from February 2016 following its acquisition.

 

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 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.

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2018

24

 

 


 

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.

 

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.  

 

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.

 

production available for sale

Oil and gas production available for sale in 2018 was 1,338 million barrels of oil equivalent (boe), or 3,666 thousand boe per day (boe/d), compared with 1,338 million boe, or 3,664 thousand boe/d, in 2017. In 2018, increased production from new field start-ups and ramp-ups, as well as lower maintenance activity was offset by the impact of divestments and field declines.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

available for sale [A]

 

Thousand boe/d

 

 

 

2018

 

 

2017

 

 

2016

 

Crude oil and natural gas liquids

 

 

1,749

 

 

 

1,730

 

 

 

1,679

 

Synthetic crude oil

 

 

53

 

 

 

91

 

 

 

146

 

Bitumen

 

 

 

 

 

4

 

 

 

13

 

Natural gas [B]

 

 

1,863

 

 

 

1,839

 

 

 

1,830

 

Total

 

 

3,666

 

 

 

3,664

 

 

 

3,668

 

Of which:

 

 

 

 

 

 

 

 

 

 

 

 

Integrated Gas

 

 

957

 

 

 

887

 

 

 

884

 

Upstream

 

 

2,709

 

 

 

2,777

 

 

 

2,784

 

[A] See “Oil and gas information” on pages 49-50.
[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 44-46 and set out in more detail in “Supplementary information – oil and gas (unaudited)” on pages 215-226.

 

Before taking production into account, our proved reserves increased by 733 million boe in 2018. This comprised increases of 1,337 million boe from Shell subsidiaries and decreases of 604 million boe from the Shell share of joint ventures and associates, mainly related to the Groningen field. The increase from Shell subsidiaries included 997 million boe from revisions and reclassifications, 474 million boe from extensions and discoveries, and 42 million boe from improved recovery, partly offset by net sales of minerals in place of 175 million boe.

 

In 2018, total oil and gas production was 1,388 million boe, of which 1,338 million boe was available for sale and 50 million boe was consumed in operations. Production available for sale from subsidiaries was 1,179 million boe and 43 million boe was consumed in operations. The Shell share of the production available for sale of joint ventures and associates was 159 million boe and 7 million boe was consumed in operations.

 

Accordingly, after taking production into account, our proved reserves decreased by 655 million boe in 2018, to 11,578 million boe at December 31, 2018, with an increase of 117 million boe from subsidiaries and a decrease of 771 million boe from the Shell share of joint ventures and associates.

 

CAPITAL INVESTMENT AND OTHER INFORMATION

Capital investment was $24.8 billion in 2018, compared with $24.0 billion in 2017.

 

Divestments were $7.1 billion in 2018, compared with $17.3 billion in 2017. Operating expenses increased by $1.2 billion in 2018, to $39.3 billion.

 

Our return on average capital employed (ROACE) increased to 9.4%, compared with 5.8% in 2017, mainly driven by a higher income in 2018.

 

Gearing was 20.3% at the end of 2018, compared with 25.0% at the end of 2017, driven by debt repayments and an increased cash balance in 2018. With effect from 2018, the net debt calculation has been amended and the prior period comparative has been revised. See Note 14 to the “Consolidated Financial Statements” on page 191.

 

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

See Note 2 to the “Consolidated Financial Statements” on pages 172-181.

 

LEGAL PROCEEDINGS

See Note 25 to the “Consolidated Financial Statements” on pages 211-213.

 

 

 

 

STRATEGIC REPORT SHELL ANNUAL REPORT AND FORM 20-F 2018

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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

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Revenue

 

 

388,379

 

 

 

305,179

 

 

 

233,591

 

 

 

264,960

 

 

 

421,105

 

Income for the period

 

 

23,906

 

 

 

13,435

 

 

 

4,777

 

 

 

2,200

 

 

 

14,730

 

Income/(loss) attributable to non-controlling interest

 

 

554

 

 

 

458

 

 

 

202

 

 

 

261

 

 

 

(144

)

Income attributable to Royal Dutch Shell plc shareholders

 

 

23,352

 

 

 

12,977

 

 

 

4,575

 

 

 

1,939

 

 

 

14,874

 

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

 

 

24,475

 

 

 

18,828

 

 

 

(1,374

)

 

 

(811

)

 

 

2,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet data

 

$ million

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Total assets

 

 

399,194

 

 

 

407,097

 

 

 

411,275

 

 

 

340,157

 

 

 

353,116

 

Total debt

 

 

76,824

 

 

 

85,665

 

 

 

92,476

 

 

 

58,379

 

 

 

45,540

 

Share capital

 

 

685

 

 

 

696

 

 

 

683

 

 

 

546

 

 

 

540

 

Equity attributable to Royal Dutch Shell plc shareholders

 

 

198,646

 

 

 

194,356

 

 

 

186,646

 

 

 

162,876

 

 

 

171,966

 

Non-controlling interest

 

 

3,888

 

 

 

3,456

 

 

 

1,865

 

 

 

1,245

 

 

 

820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Basic earnings per €0.07 ordinary share

 

 

2.82

 

 

 

1.58