Earnings Call: Q3 2020

Oct 29, 2020

Welcome to the Royal Dutch Shell 2020 Q3 Live Q and A As a reminder, today's call is being recorded. I would now like to turn the call over to our first speaker, Mr. Ben Van Buren. Please go ahead, sir. Thank you very much, Anna. And ladies and gentlemen, welcome, and thank you very much for joining us today. I really hope that you like the flexibility of being able to listening to the video of the results presentation ahead of this call. And please also provide your feedback to the IR team on this new format that we have for you. But now is the time to focus on questions and answers in this particular session. So let's, 1st of all, take another look at the disclaimer. And then before we move to questions, I actually would like to have a few key messages brought across. 1st, the shell of today is resilient. Our portfolio and our operations have shown remarkable resilience in incredibly challenging times. The measures that we took to preserve cash have paid off and made us stronger, both operationally as well as financially. We have been consistently generating more operating cash flow than our peers. Secondly, the Shell of Tomorrow is growing. We are very well positioned to capture value in the energy transition with the strong position we start from and the strategic direction that we have chosen. Our portfolio delivers strong performance today and is advantageously positioned to deliver strong performance also into the future. We already are market leaders in businesses that are key for the energy transition. We lead the market in LNG. We're also the market leader in our customer facing marketing businesses. So we are ahead. We have a portfolio today that others aspire to have in years from now. And 3rd, we offer a compelling investment case today and tomorrow. We have a clear framework for our investment case. Today, we have given you more insights in our priorities for cash allocation. So we are announcing an increase of 4% in our dividends this quarter, but we're also announcing a target milestone for our net debt of $65,000,000,000 for the near term. And once we have achieved this milestone, we target to further increase shareholder distribution. So we are not offering the promise of future growth, but also increasing shareholder distributions for the near term. And with that, let's go to your questions. So please, can we have 1 or 2 of each so that everyone will have the opportunity to ask a question. Anna, back to you. We take our first question from Clint Oswald from Bernstein. The first question, please. I mean, I like your new message today around shareholders having first dibs on cash flow before the growth CapEx and especially the potentially you talked about significant mid and long term uncertainty in a potentially changed world just 6 months ago. So I'd love to hear a little bit more about what supports this really 180 degree turnaround, which is fed into your dividend decision? Or has it just been the cash flow generation has genuinely surprised you over the last 6 months question around the other message on customer focused businesses and aiming to reduce the emissions. So I received my Shell Go offer this week to pay a little bit more for each liter of fuel over here in the UK. So I can see what you're up to, but I wanted to ask about carbon neutral LNG. On a Scope 3 basis, and I can see what you've been up to, but with the carbon price assumptions I'm using, it feels relatively expensive to offer these. So question is, I mean, could you talk around the appetite for these products? Are you receiving any type of premium pricing yet or some cost pass through? Or perhaps the carbon offset price I'm using is just way too high and you could offer me a more realistic number, please? Thank you. Thank you. That's all great questions to start off with. And let me take them both, actually. So first of all, the 6 months, what has happened in the interim? I think it is fair to say that we acted with good prudence 6 months ago. We did not see the clarity of the way forward in a way that we can see now. So indeed, 6 months does make a difference to understand how this pandemic is playing out. And we all know, of course, we are not yet out of the woods when it comes to the economy and the damage that the pandemic can still cause to it. But what we do know is that the measures that we took 6 months ago, indeed, to reset the dividend, which was very painful, but also to bring down our capital costs, to bring down our operating costs, these measures have really stabilized the company in terms of financial resilience. We also know how the company operates in very, very difficult circumstances. And as you will have seen, 2 quarters in a row, it operates very well under very difficult circumstances. So it's a different level of confidence that we have in the resilience of the company going forward. And then we said, let's be very clear, even though we reset the dividend, we offer dividend lower, we are also looking at what this means for the future. So at this point in time, I think we can say with confidence not only how we go forward in terms of the direction, but also what it means for the payouts that we can give to shareholders. And if you have a progressive dividend, you better have a progressive dividend. And that is what we are confirming today. On the carbon neutrality, yes, indeed. First of all, thank you very much for stepping into our GO program, which indeed means in the UK that we will offset the carbon emissions of your car. But indeed, also increasingly, we see this taking up in other parts of our business, not only countries. It's very successfully launched, by the way, in Germany and Austria and Switzerland, and are doing it also in Canada next month, but indeed also in LNG. And we have, I think, by now sold 6 cargoes carbon neutral. And we combine that with our nature based solutions portfolio that we have and customers want it. And that is another reason why we have confidence that there is money to be made in the energy transition, also in the more traditional parts of our business. Thanks for that first opening question. Anna, can I have the next question, please? Thank you. The next question comes from Thomas Adolff from Credit Suisse. Please go ahead. Good afternoon, Ben. Jessica, two questions for me as well. Just firstly on your net debt target, what is so magical about this $65,000,000,000 Does it allow you to keep a AA in a reasonable oil price environment? And then linked to that, the new distribution policy, is the idea also to keep the cash dividend burden largely unchanged as the buyback is playing an increasingly important role? And secondly, your comment on LNG. You obviously are already the largest player amongst the publicly listed companies. And if we assume LNG demand grows, I'd say, 5% annual in the next 10 years, which is obviously slower than the 10% we've seen over the period 2017, 2019, and you want to grow in line with the market, that essentially means doubling your business because you need 40,000,000 tons of new capacity. You still have about 20,000,000 of expiries. And I was just wondering whether that's even feasible with the opportunities that you have. Thank you. Thanks very much, Thomas. Let me take the second question. Jessica will take the first one, which, by the way, was a question we anticipated. We said we will grow with the market. We see the market for LNG grow. We probably are a little bit less sort of conservative in our growth outlook. We'd be talking about 4% or 3% to 4%, depending a little bit what time frame you look at. And we want to participate in that growth. It doesn't necessarily mean that we match it percent for percent, but in a growing market, you will want to continue to invest. On the other hand, LNG, a very long day fits assets. So you want to make sure that the investment decisions you take can stand the test of time. And the test of time in LNG decisions are many decades, unlike, for instance, a deepwater investment. So we will grow with the market, not necessarily matching the market, but we believe indeed this is a good proposition for us to continue to invest in. Jessica, on the $65,000,000,000 Great. Thanks, Thomas, for your question. So the $65,000,000,000 net debt target is, as you said, a threshold number for us to indicate when we're comfortably within AA metrics. We've not changed our position. We're looking to strengthen our balance sheet. That's been unchanged for the last several years. We found gearing was a little bit messy because there are a number of accounting elements that come into play, both on the numerator and the denominator. So we wanted to have a more clear and simple target to communicate with the market. But of course, we look at a variety of metrics and ways of considering our balance sheet. The €65,000,000,000 is the threshold number that we think we need to achieve to be comfortably in the AA metrics. Thanks, Jessica. Thanks, Thomas. Can I have the next question, please, Anna? Thank you. The next question comes from Christian Marck from JPMorgan. Please go ahead. Hi, Ben and Jessica. First of all, thank you for some positive news flow in the midst of everything going on. A few questions from me. First, on the fixed variable cash return, so to speak. Once the €65,000,000,000 net debt threshold is delivered, what will determine how the variable distribution component up to 20% to 30% of cash flows are filled between buybacks and additional special dividends? Secondly, on capital allocation and CapEx, is the €19,000,000,000 to €22,000,000,000 primarily oriented to 2021? I assume it is. But essentially, it's based on executing on net debt reduction targets. But how should we think about allocation priorities and drives of medium term CapEx beyond that, including potential upward pressure on new energy spend as energy transition accelerates, especially on the lower debt, higher macro conditions? And the third and final question, apologies, is you've identified 9 core upstream regions and disposal implications. Based on full year 2020 upstream production around 2,450,000 barrels a day, how much that volume base is accounted for by the 9 identified core regions? In other words, what proportion of the remaining asset base becomes directly non core? And what parameters could determine the disposal strategy around those residual positions? Thank you. Okay. Thanks very much, Christian. I will take the questions in reverse order and do 32, and Jessica will talk about 1. So first of all, on the core and lean. So for us, core and lean is indeed a very important distinction to make sure that we pay the attention and look after the most important assets with the biggest running room and the most advantageous positions with indeed the most CapEx and the most attention. So 80% of our cash flow comes from these 9 core positions. More than 80% of our investment will go in there as well, including, by the way, exploration expense. So the other ventures that are in the lean model are there for three reasons. That could be there, for instance, because they are still in almost incubation mode, so like the Surinames of this world. We just want to make sure that we can develop it, which may well be unsuccessful, by the way. But if we do, indeed, it might become core. It may be that assets are without running room, but we are still quite happy with them. And therefore, we just run them for cash. Or it could well be that we want to ready them for divestment. So don't think for a moment that all the other non-nine positions are immediately divestment candidates. There may be, by the way. But it also means that we can flip between core and lean. At some point in time, core assets will go into a twilight zone and will go into the lean portfolio as well, and as I said, the other way around. The production associated with it, I don't have that number too hard. For us, it's indeed more value than volume. But please get back to the IR team, who I'm sure can fill you in on that. In terms of the capital, so indeed, 90 to 22, that is the sort of near term spend that we have. About a quarter of that will go into what we consider now our growth portfolio, so marketing, power, bio, hydrogen. That was, by the way, 11% in the last 3 years. So a significant step up towards growth. What we will do with capital in the medium to longer term? Well, that depends. I think, first of all, we have to get to the $65,000,000,000 then we have to increase shareholder distributions. And then indeed, a time will come when we will start with a very measured and disciplined increase in capital because after all, you want us to grow the value of the company as well. The way that will play out, we will have to ask you to be a bit more patient until February, and we can give a bit more updates on all of this as well. Jessica? Great. Christian, thanks for the question. So what we're offering today in terms of our investment case is growing distributions starting today, as well as upside and future shareholder distributions once we increase cash flow from operations. When we reach that milestone of $65,000,000,000 of net debt and we're looking to increase shareholder distributions of 20% to 30%. We continue today to have a bias, if you will, or a belief that share buybacks should play an important part in how we distribute to our shareholders and to an earlier point made today, ensure that our total distributions remain affordable and do not continue to kind of grow exponentially through time. So that's important for us. However, we're going to see where we are at that moment in time, what is appropriate for our shareholders. And we certainly can continue to give ourselves the opportunity, the space to look at different dividend levels if that seems more appropriate at that moment in time. So we've retained the optionality, if you will, so that we can be responsive to what the market needs. But share buybacks, I believe, will continue to be an important part of the overall investment case. Great. Thanks very much, Jessica. Hannah, the next question. Thank you. The next question comes from Biraj Borkhataria from RBC. Please go ahead. Hi, thanks for taking my questions. And appreciate the more condensed formats. Thank you for that. So I have one question on the Downstream business. If I look at the move you've made in the last decade or so, it's to concentrate refining and focus on these kind of 3 core hubs. So I'm looking at Slide 17 and the one thing that does stand out is Scotford. And I appreciate that's an attractive asset in the sense that it has some very regional specific dynamics. But I imagine if you wanted to sell, there'll be good demand for that type of asset. So it's not really clear to me if that fits in with your longer term vision for the company. So could you talk a little bit about your commitment to that asset specifically? And then the second question is just on the job reductions for 2021, 7,000 to 9,000 people leaving. Is there any or can you give a magnitude of the kind of severance payment on a cash basis that we should expect to come out in 2021? Any help on that would be appreciated. Thank you. Yes. Thanks, I'll take the Scotford one. Jessica will take the second one on severance. So indeed, Scotford is a high quality asset. First of all, it is a very advantaged asset in the way it's configured in terms of both the upstream value chain, but also the downstream value chain. It plays very well into a, what we consider to be, an advantaged envelope in that part of Canada. By the way, an envelope where we have also a strong branded position. And then the other thing is you have to bear in mind, Scotford is integrated with chemicals. We do have a MEG and styrene position that is fully integrated with the refinery, which in turn, by the way, is still integrated with the integrator with the upgrader. So it is a high quality asset. There is no need for us to despair about the future of that asset. We can trade around it in reasonable positions as well, even though it has no access to open water. So therefore, there is it fits within the portfolio that we see for the future. Jessica, on the redundancies? Raj, thanks for the question. We are finalizing the complete design of the organization over the coming months. So we'll have a better insight on that final number in the coming months. We're expecting somewhere between $1,500,000,000 $2,000,000,000 in severance costs that will be between 2021 2022 just depending in terms of the timing of how it's ultimately implemented. But that's the number. Okay. Thanks Biraj. Anna, the next question. Thank you. The next question comes from Ryan Todd from Simmons Energy. Please go ahead. Thanks. Maybe the first one, I mean marketing was very strong in the quarter. Can you maybe talk about some of the near term drivers of that? In the longer term, you've grown the marketing earnings at almost 10% a year over the last 8 years. Any thoughts on how you see underlying growth over the next 5 plus years and where you see that as a normalized share of kind of Shell earnings going forward? And then maybe for a second question, you have multiple refining assets for sale and obviously have a long term strategy. You said here to focus on a smaller number of large scale parks. The outlook is particularly challenging right now for refining with increasing pressure on rationalization of capacity and not a lot of obvious buyers out there. So how do you think about divestment versus rationalization and how you may approach that over the next couple of years? Okay. Two very good questions. I'll take the first. Jessica will take the second. So yes, indeed, you're right. Good observation. We have been growing the performance of our marketing business, which includes retail, our B2B sales, our lubricant sales, but also things like bitumen, sulfur and other products that have come out of our refining base, if you like, we have been growing it very consistently year after year. As a matter of fact, if you look at the last month, we made in a month what we used to make in a year, 15 years ago. And that is not because we just have it to be a very good month. It is because we have continuously upgraded that business by, 1st of all, growing it in size, growing it in scope, bringing in things like nonfuel retailing, but also better margin management, better value propositions, etcetera, etcetera. And we have high graded quite a bit by getting out of markets where we could not be number 1 or number 2, and in some cases, even getting out of number 2 market. So does that trend continue? Well, I think so. It's I can't predict that what Clippet will continue, but we see marketing very much as a platform for growth into the future, upon which we can also build our biofuels business, which relies on the fact that we are the largest marketer of jet fuel in the world as well, or a hydrogen business, where we are also in a leading position, small, but nevertheless, leading in the industry. So marketing for us is more than just the traditional fuels retailing. It is actually a transition into the future for us. I think it will continue for some time to come, but it will change in its makeup. The near term drivers are indeed, 1st of all, better margin management that we have seen, higher penetration of premium fuels, more than 20%. And we are also seeing an increase in the basket size in our average retail customer visits in our sites. So, multiple number of drivers, some of which will indeed be specific for the pandemic, but many of which will turn into longer term trends into the future. Great. So in terms of the refining portfolio and how we're going to manage the transition of that portfolio, there's a number of different levers that will be pulled. The first one is retaining the refinery capacity in the key markets tied to our chemical business and that's where the 6 Energy and Chemical Parks will be created. For those that don't make it into the parks, either they're not the right asset or not in the right location, we're going to look to divest. We recognize the market is not great at the moment in terms of divesting assets. We've had success in the past in difficult markets. So I wouldn't say that's not possible. We certainly believe that can be possible, but we recognize it's difficult. If it's not possible, we'll consider closing and shutting down. That's ultimately the last option we'd like to pull. And then there's another piece as well in the portfolio where we'll be shifting those to different types of operations, which we're doing in the Philippines today and moving that to a terminal operation. So there's a number of levers we'll pull. In all cases, we're looking to maximize value. We think we've got a lot of optionality in terms of how we manage over the next couple of years. We're not dependent on divestment proceeds over the next couple of years to deliver our strategy. So I think we're well placed to do this in a managed way and in a strategic way to end up with the position that we want with our Energy and Chemical Parks in the future. Great. Thanks. Can we have the next question please Anna? The next question comes from Michel de la Vigna from Goldman Sachs. Please go ahead. Thank you. It's Michele. Ben and Jessica, thank you for your time and sorry for asking one more question on your cash distribution. I very clearly see the benefit of building a conservative balance sheet. But I'm wondering at the time when bonds are very, very highly valued and the decades low yield and your equity holders are suffering an unprecedented crisis of confidence and low valuation. I wonder whether from a technical standpoint, it wouldn't be better to fast forward the start of the buyback program versus financial de gearing. And again, my question is very much tactical. It's not driven by the priorities, which I think are fair for the long term in terms of balance sheet, dividends and buyback. But with this level of share price, wouldn't it be better to effectively start earlier? And then my second question, if I may, also related to cash distribution is the range of 20% to 30% is actually quite wide for cash distribution. Could you perhaps shed a bit more light on what would be the key elements that would drive you to the top or to the bottom of that range? Thank you. Yes. Thanks very much. Let me take the second question, Mikaela, and then Jessica will talk about the first one. It's debatable whether 20% to 30% is wide or narrow. As a matter of fact, as you can imagine, we had a good debate about it in the Board, but ultimately, we very clearly also settled on this range. The bottom of the range, obviously, is roughly where we are today or a little bit higher. The top of the range, of course, we will probably want to reach also at a time when we have a significantly better cash flow performance as well. So it how we will make the determination? First of all, the cash flow that we will use in the determination of the buybacks will be the cash flow that we will have delivered over the, say, 4 quarters rolling past. And the percentage where we end up will, of course, then be a determination of the confidence into the future. That gives us indeed arguably a range of flexibilities. But bear in mind also, Michaella, by the time we are in the mode of indeed stepping up our distributions to shareholders beyond the progressive dividend, we also still want to be in a mode of further deleveraging the balance sheet. And that brings me to your first question, which Jessica will answer. Excellent. Good. So Michele, your tactical representation, I think, is entirely fair and it's a reasonable question to ask. However, we're here to lead and thrive in the energy transition. And we have a very clear strategy. We believe we have an important role to play. To some extent, the success of the energy transition will depend, I think, to a large extent on companies such as ourselves with our capacity, our intellectual capacity, our assets, our knowledge and our experience in energy markets to play a meaningful role in the energy transition. And we can only do that if we're a strong company. And for us, that means having a strong balance sheet, which I think this year has really proven to be a very important piece as we go through the energy transition. The volatility that we're exposed to from a commodity perspective, the volatility we've been exposed to from a pandemic perspective, to a large extent, we're able to manage because we're a strong company. And if you look at the level of change that needs to happen and the risk that we'll be exposed to, I firmly believe having a strong balance sheet is fundamental to our ability to deliver our strategy. And I think that's what we're here to do. Absolutely. Anna, who is next? Next question comes from Irene Himona from Societe Generale. Please go ahead. Thank you very much. Good afternoon and congratulations on the cash flow performance in the quarter. Ben, you have said yourself in the past that the oil majors are a little bit like big black boxes. And clearly, there's no bigger black box than integration, trading, optimization. And today, in your presentation, you highlighted that integration as an advantage as you drive the strategy through energy transition. One of your peers has tried to quantify the value to them of trading. Are you prepared either today or in the February strategy presentation to give us some concrete quantification of that value added through your integration and your ability to make the value of the portfolio much bigger than the sum of the parts? Thank you. Thank you, Irene, and thank you for acknowledgment. And thank you for what is indeed a particularly important but also tough to answer question. So indeed, I important but also tough to answer question. So indeed, our trading and optimization and our supply function, if you like, or business, whatever you like to call it, is absolutely core to the success of our company. It actually makes the magic in many cases. And quite often, it's very hard to show how that works without disclosing an awful lot of commercially sensitive information. But just two points. First of all, bear in mind, this is not a speculative trading business, where lots of people take punts on the market and then either turn lucky or unlucky, and we tend to be lucky, clearly, from our track record. That's not the way it works. Basically, what we do is we give our traders and optimizers and schedulers and operational people the mandate to work together to understand how you can add value working our molecules and electrons through our assets, through our contracts, into our markets. And that gives us opportunities to do things that others can't do. I'm happy to try again to explain a little bit more anecdotally how these things work. But take for instance our LNG business. Everybody understands, if you run a baseload, trend lined LNG business, you can't get to the results that we make. You get to those results if you are able to continuously re optimize, reschedule, re arbitrage cargoes in different parts of the world. It is impossible to show exactly what we are doing unless we want to completely open up our entire trading book, which is something we simply cannot do even if we wanted to. But I take your point, we have to tell a better story how trading and optimization adds value that is clearly visible, but not necessarily always understood in its intricate details. Thanks, Irene. The next question comes from Paul Cheng from Scotia. Two questions, please. You indicate that 25% of the future investment is going to be in the growth area. Can you break down between marketing and the rest of the new future energy business over the next 5 years? How does that going to look like? And in the marketing, how big is the contribution of the lubricant in the for the sequential improvement that we see in the Q3 from the Q2? And also that for your renewable business, the future business, how important is the inorganic acquisition is going to be a part of your strategy to achieve your target over the next 5 years? And are you concerned? It seems like asset price are being beat up. The second question is on the cost reduction, the $2,000,000,000 to $2,500,000,000 Is there any of that part is already achieved in the Q3? And can you break down by segment or by the type of expense related to that $2,000,000,000 $2,500,000,000 Thank you. Thank you very much, Paul, and welcome to the call. I like the way you managed to get 5 questions into 2, but we will take them all. So first of all, talking about marketing. So yes, indeed, 25%, a step up from where we sorry, growth, a step up from where we used to be. And marketing is a significant part of it. So 11% to 25%. The breakdown of the 25% into what is retail, what is lubricants, what is some of the other businesses, how much bio, hydrogen, etcetera. I will have to ask you to be patient and hope to see you back again in February when we share a little bit more on how that all works. That's not for today. But what we can say today is that indeed our customer facing businesses, so our retail business and our lubricants business that you both referred to, have had a very strong Q3. If you take at retail as an example, quarter 3 to quarter 3, we have seen 25% growth on a clean basis. Take lubricants, 40% growth. So very significant increases quarter to quarter in what are arguably very difficult market circumstances. Now the other questions on inorganic growth, Power, Hydrogen. Jessica? Good. So on the inorganic growth for Power and Hydrogen, in the near term, we're not expecting material in organic growth. So when we talk about the $19,000,000,000 to $22,000,000,000 of CapEx, that includes inorganic growth. So clearly, we're not expecting to do anything material in the near term. However, there will be a role for inorganic activity. There already has been for the last couple of years. We were making a number of acquisitions, but relatively small for a company our size, and that will continue to feature as we build out our capabilities, bring in different pieces of the value chain so that we can create truly integrated business models. So that will be an important piece. There was also, I thought another question, but perhaps not. I'm not seeing it up on the screen. Okay. Thanks, Jeschend. Thanks, Paul. If the IR team picked up the other question, then we'll come back to it in a moment's time. I'm sorry, Ben. I do remember. Excuse me. This is live, guys. So it was on cost. That's an important one. So I wanted to talk to it. So that's why. So it's good that I have my paper here for backup. So on OpEx, there's a lot happening. So let me just hopefully quickly but comprehensively cover it. We set an ambition to reduce our OpEx by $3,000,000,000 to $4,000,000,000 in 2020 in response to the pandemic. We are well on track on delivering that. You can see that in our OpEx costs this quarter and in last quarter. We're trending down to levels that we haven't seen for years and pulling all levers we can. But a number of the levers that we're pulling aren't necessarily sustainable. There's reduced travel. We do expect at some point in time that travel will pick up. We've stopped non essential project works in places like our IT department, etcetera. Again, when things normalize, we'll expect those costs to come back into OpEx. In response to that, that's where ReShape comes in. And ReShape is about how do we structurally change our cost base. And so it's a different set of numbers, that $2,000,000,000 to $2,500,000,000 is a structural reduction in our human resource cost in the company. And that will be coming through into the P and L starting in 2021 and into 2022. Okay, great. Thanks for remembering that question because it is indeed important. Anna, can we have the next one, please? Next question comes from Jon Rigby from UBS. Please go ahead. Yes. Hi, Ben. Hi, Jessica. Can I ask just linking CapEx and this the new dividend? So you've talked about 4% increase in the dividend. Are you trying to signal there the sort of what you would expect medium term growth or the perimeter of growth of the business to be, presumably you want the dividend to sort of grow with the business. And to that point, I think Jessica has talked about a CapEx number that preserves the perimeter of the business. And you've also talked about a CapEx number of $30,000,000,000 aspirationally, I think, from Management Day 2019. So given all the moving parts on inflation and your kind of outlook, where does the current sort of 2019 to 2022 sit? And how does that relate to what you said before, particularly around growth? And then just on the Upstream, it's a struggle, this one, because I guess you're saying you're going to invest for value, not volume. But value probably in the Upstream is going to be one of the highest returning businesses potentially for a dollar into that business and particularly competitive with renewables. So how do you go about controlling how much capital you want to allocate to that business? Thank you. Okay. Two good questions. Would you care to take the second one, Jessica? I'll talk a little bit to the first one. So what we want to signal with the 4% EPS growth is, first of all, we are growing our current returns above inflation. So if you want it to be a still a meaningful dividend per share growth. And the reason why we want to do this, John, is because we want to signal that our investment case is, 1st of all, resilience of the company, which I hope is on display, certainly this quarter, but also through the measures that we have taken. And on the foundation of resilience and performance, we can not only offer growth into the future with our strategy that very much leans into the energy transition and finds value much more at the customer end of things, But at the same time, it is JEM today. So a meaningful increase in dividend. That's our investment case. Resilience, JEM today, JEM tomorrow. And I hope that indeed over time, we will be able to demonstrate not only the resilience and the 4% and etcetera, but we will also be able to demonstrate that the growth investments that we are making are really meaningful investments that actually can outperform many other parts of our portfolio. So in terms of how we allocate capital to Upstream, Jessica? Great. John, a really important question. And to answer it completely, I would need to provide you a complete capital allocation framework. And we're looking to do that in our February update, our strategy day. So we'll go into that in more depth in February. But just to give a few pieces of that story now. Of course, we're doing this at the group level. What's it going to take to what capital do we need to deploy to deliver the complete strategy? And there's a combination of things that we need to achieve. Of course, we need to provide the highest level of return with that capital. What I'll say is Upstream absolutely can provide compelling returns. It doesn't always. In certain conditions, if you look at 2020, it hasn't necessarily been a great year for returns for the Upstream business. Whereas if you look at our marketing business, we're still able to achieve returns of 15%, 20%, 25%. So we do have other options for our capital and importantly increasing amounts of our capital as we think about the growth portion of our business and where marketing sits. It is about reorienting our capital to a place where actually there are very compelling returns. The other piece is, given the business we're in and the energy transition, we are going to have to make bets. We're going to have to build new business models in hydrogen, biofuels, power, etcetera. We'll need to deploy capital to do that. And the challenge there is how do you de risk those business models with the right level of prudence, but with the right level of ambition. And that's the balance we're trying to achieve as we manage capital. Okay. Thanks very much, John. Thanks, Jessica. And can I have the next question, please? Thank you. The next question comes from Roger Read from Wells Fargo. Please go ahead. Hey, I just want to put my comments and I thought the setup this time around with the presentation up front and then the Q and A is an improved way to go about it, especially on a busy day of earnings for a lot of us. With that, my questions really focus on a couple of things and I recognize some of this may come out more in February, but it seemed like Australia was a notable omission in your 9 core areas. I was just wanting to make sure if that was true. And if so, kind of what you think? Is that signal dispositions or is that a lean area? And then my other question was in the presentation. You talked about in the integrated power business, and these are just my notes. So if I get a little off, I apologize. But that you could build an integrated customer focused business here, not a commodity business. I was wondering if you could go into a little more detail of what maybe that is and how we should think about it? Is it kind of mean higher returns because it's a little asset light or it's trading kind of in the conventional way on top of an integrated power solution? I was just curious what exactly you were trying to get as a message there. Yes, great. Thanks very much for your questions, Roger, and very important questions to talk to. First of all, I need an important clarification. The 9 core areas or the 9 core positions that we talk about are in Upstream. So on top of that, of course, we have other positions, also in integrated gas. And Australia for us is an integrated gas company integrated as country, sorry. Of course, there are other places that are indeed in integrated gas that are not counted. Think of Trinidad and Tobago, for instance. So that's an important clarification to make. In terms of power, indeed, it is important to think of our integrated power strategy as one that is as much as marketing business, if you like, working from the customer back. So what does that mean? It doesn't mean that we just want to build wind farms and solar farms and then see whether we can add some value to it with some trading or whatever else. It is actually working back from customer value propositions that may well be a cross selling proposition or that will maybe a global proposition that we will take, for instance, with a global player who needs more than just power, maybe some other things as well in multiple places around the world. And then indeed, providing the electrons that are going to be needed to satisfy that particular customer. Now that may mean and will mean, by the way, that we will indeed also be involved in the generating business. And but it doesn't mean necessarily that we will build generating assets looking for customers. It's rather the other way around. So that also means then, of course, Roger, that from time to time, we will find that once we have a generating asset built, take for instance, the wind farm that we are currently building in the North Sea, we're perfectly okay to sell that down to a large extent, provided we keep control over the electrons that come from it. And in that way, we can actually have a generating asset on our books with a 12% plus return on it, partly because of the successful sell down and financial transaction around it. So think of it in that way. But indeed, you're also right, we will be able to go into a lot more detail in our February update. Next question comes from Lydia Rainforth from Barclays. Please go ahead. Thanks and good afternoon to both of you. Two questions if I could. The first one, just coming back to project reshape. And I certainly don't want to minimize the people that are leaving and some people that will be leaving at that period. But if I think about it, that $2,000,000,000 to $2,500,000,000 of your current cost base doesn't seem like very much in the context of how much you're seeming to want to simplify Shell and also the digital work that's going on in that whole idea, if I think about the deal with Microsoft. So can you just talk through as to how that whether you think that number is something that over time you'll get more benefit from simplifying Shell and that's just an early phase part of it? And then the second part is if I get back to the prepared presentation earlier and thank you again for that. You do mention in the low carbon part and Silicon Ranch generating 8% to 12% returns in terms of all the projects that's done. You just remind us how big Silicon Ranch is? And over time, is that your preferred solar investor investment as well? Thank you. Okay. Thanks very much, Lydia. Let me start with the second question. Jessica will take the first one. But as we also say, unless Jessica knows the answer by heart, it's probably one that you also have to get back to our IR team for. So Silicon Ranch was an investment that we made into an established developer of solar projects in Tennessee Valley that has been very successful and that we took a minority share, a bit of view to understand how we could participate in the build out of solar electricity in the United States and to see whether that could indeed turn into a platform business for us. It has been very, very successful and we now are considering the next steps, what to do with that business and indeed with our general capability when it comes to solar build out. We have an equivalent of this, by the way, Lydia, in Southeast Asia. How large it exactly is in terms of its pipeline and everything else, the IR team will get back to you. Jessica, would you mind taking the first one on ReShape and the CHF 2,500,000,000? Good. A couple of things to say on the OpEx piece. So the $2,000,000,000 $2,500,000,000 is solely the human cost piece. Of course, there are a number of other initiatives that are happening across the company to reduce our cost base and simplify the company that aren't part of that $2,000,000,000 $2,500,000,000 number. This is where we're looking to reduce the total cost by some $3,000,000,000 to $4,000,000,000 on a sustainable basis. So indeed, there are a number of other initiatives that add on to that $2,000,000,000 to $2,500,000,000 number. It is important to note though that our growth businesses tend to be OpEx heavy. So particularly our marketing business, they're relatively CapEx light and more OpEx heavy. So we will see our OpEx grow in the future in associates with the with our growth assets. So that's important to keep in mind. And Lilia, just to add a few numbers, which I just got sight of. So we have, at this point in time, 43.11 percent in Silicon Ranch. Silicon Ranch has 9 30 megawatts of capacity operational and a pipeline of 1.2 Gigawatts. Ben, there's also I'm sorry. One other point, Lydia, on you'd mentioned digital. And indeed, digital is an important part of our overall story as a company in terms of how we're trying to improve and be not only more cost effective, but more value creative because of the work in digital. And a number of partnerships have been announced in recent months around that. We take a relatively conservative approach on how we embed those numbers into our plans. So it's in there, but we really look to have very clear line of sight to delivery and execution before we put those numbers out into the market. So I think there is continued upside on the digital front and that is not fully baked in into €3,000,000,000 to €4,000,000,000 And I would see that as being incremental. Absolutely. Thank you very much, Lydia. And Anna, can I have the next question, please? The next question comes from Alastair Syme of Citi. Please go ahead. Hi, Ben. Hi, Jessica. Today, you're giving us a new branding, so a compelling investment thesis. And we've got a new financial framework for how we should think about capital allocation. But I don't feel like we're really getting anything new or incremental on how you're going to get to higher returns. Does this all really just come in February? Look, I hope I'm not asking a rhetorical question, but I'm just trying to reflect here that your shares are at 24 year lows. Yes. Thank you very much, Alastair. Indeed, we have noted that as well, and we believe that our shares are a fantastic buying opportunity because, of course, the net asset value of the company is a whole lot higher than what we currently see represented in the market cap. Of course, in February, indeed, there will be more detail on what the plans are. We're not going to be able to tell you that today. And we will have to lay out a pathway of how indeed the different parts of the businesses will develop a little bit more on capital, a little bit more on our capital allocation framework and what that means in the path for the future. But I hope you will also understand, Alastair, that a lot of the performance of the company today, but also in the future, will depend on the macro environment that we will be enjoying or suffering as the case may be. What we intend to do though is to make sure that despite the tough macro that we are experiencing and may continue to experience going forward, we have a strong performance. That means that the company can do what it intends to do and promises and what it promises, but also that it's clearly ahead of our competition. I cannot outrun the macro. The macro is what it is, but we can make the most of it. And what we also can do is to make sure that we gradually position the company much more for the future of energy rather than the current state of the energy markets. But I'm sure we'll talk again in February. Thanks, Alastair. Anna, can I have the next question, please? Next question comes from Luca Perelman of Exane. Please go ahead. Thanks very much. And Ben, Jessica, good afternoon. And also thanks for the welcome addition of a cleaner framework. 2 or 3, if I might. 2 are relatively simple. Ben, I just wondered if somebody could comment on chemicals in Pennsylvania and progress and when you think that will actually start producing? Secondly, I wondered whether you'd care to make any comments on exploration in Mexico, given the leases that you acquired, where your thoughts are there? And 3rd, and probably more challenging, I'm trying to understand how you think the earnings power of your business has changed since Management Day 2019. If I go back to that time, clearly, you had an assumption on debt. But I think the indication was that you felt that the business was capable in a 60 ish environment of $55,000,000,000 to $60,000,000,000 or so of operating cash flow as we move through the period. If you were to run your eye across the business today, Ben, where do you think the earnings power resides? Where has it been? Where have you ceded? And I guess, to some good degree, that ties back to the framework you're establishing today, where your CapEx at this time anyway is lower. You're talking of a range of return to shareholders, well, it depends on the operating cash flow. But my sense would be where you've been indicating $1,000,000,000 to $25,000,000,000 of return to a shareholder historically, that number at the moment looks as though it's probably near the order of 10 to 15. So how much is it how much of that is other priorities, balance sheets, etcetera? How much of it, to a degree is the earnings power of Shell is not what you thought it was or what it was going to be a year ago, perhaps just because the world is different? Sorry, it's so convoluted. No, no. I think it's perfectly clear, Lucas. And maybe Jessica can deal with the question first on what has changed. If the macro would spring back, what would happen to our cash flows, but also what wouldn't happen? And then I will take after that the other two questions on Mexico and Pennsylvania. A really good question, Lucas. So thank you for that. The fundamentals of the company remain strong and that is a message we've been trying to get across over the last year, year and a half since MD19 and particularly during the last few quarters with the pandemic. So in terms would hope that Q3 would be a way of demonstrating that there continues to be considerable strength in our earnings and cash flow potential of the company. What's changed? Obviously, the macro is fundamentally different, both in the near term and I'd say to some extent to the medium term. It's going to take a few years for things to normalize. That does put more time on the clock in terms of getting our balance sheet back to where we wanted it to be. So it's going to take us a little bit more time in terms of allocating capital to the balance sheet than certainly we anticipated a couple of years ago, which is I think one of the points that you raised. So fundamentals are strong. Pandemics had a pretty profound effect. And there's also a piece around our strategy in terms of accelerating our strategy a bit. But I think it's more a story about the macro and the impact on the balance sheet and making sure we're getting the balance right. On the 2 sides that you mentioned, so Pennsylvania Chemicals has, as you can imagine, been impacted by the pandemic. I can't quite remember the statistics, but I think at some point in time, just before the pandemic, we had over 6,000 people on-site and in rapid succession that actually came back to dozens, simply because we needed to preserve the safety, health and well-being of our employees. And bear in mind, of course, we are building this cracker in a relatively small community also in terms of medical facilities, something you have to take into account as well. So it's back up again. We have a very strict and stringent testing protocol for people coming back to site. We're taking it in a very measured way. And indeed, we are, again, in the thousands of employees working on the site. And I believe soon enough, we will be back on sort of maximum capacity that you can imagine for a construction site like this. It will mean that the project is delayed. There is no doubt about it, but not massively so. So we are still talking about starting it up in the next few years. We said at the beginning of the decade, we probably have to think about is 2022, I would say, Lucas. The Mexico is very much in the, of course, in the upstream sort of promising areas. We have in deepwater still very much a focus on delivering growth that will offset some of the decline that we will have in other areas. Mexico is, of course, one of these areas that have to prove itself. But if it does, then the Mexican part of the Gulf of Mexico, we hope we can count as one of the core areas going forward as well. The program there is on track. So we are in the process of drilling our first wells. When exactly we have results, you will have to be a little bit more patient on that, I'm afraid, Lukas. Let me move on to the next question, Anna. Who can we bring in? Thank you. The next question comes from Christopher Coghland, Bank of America. Please go ahead. Thank you. And thanks, Ben and Jessica, for this format. Just two follow ups, I think, both on CapEx, similar to what Lucas just mentioned. That $30,000,000,000 figure still looms large. How much do you regret not being able to spend that much in the next few years? Or in other words, what are you willing to sacrifice? What is going slower? And hopefully, not just because of COVID restrictions and slowdowns. So just wanted to feel without asking for a new number or an updated guidance that you might give us in February, what you've decided to sacrifice for the coming years compared to the plan you presented last year? And second comment quickly, if I may, on CapEx for 2020. The run rate suggests you are going to do an awful lot in Q4 with lockdowns more or less still being with us around the world. So is there a chance that on the one hand, 2020 CapEx might well be pretty much below €20,000,000,000 but at the other end, that you need to catch up in 2021 if conditions allow. Just again, some sort of qualitative commentary as well would be great. Thank you. Fully understood, Chris. And let me just be brief on both of them, but hopefully clear. You're absolutely right. So we are, at the moment, running at a run rate that is not just at the bottom end of the €19,000,000,000 to 20 €2,000,000,000 range that you mentioned, but it may well be that we even get below €19,000,000,000 That is not because we have been ultra disciplined, we have been doing that as well, but it's also because in some cases, we simply have not been able to continue with our projects. We just mentioned Pennsylvania. There's others where we had to stop work. That, of course, is not a disciplined way of bringing your CapEx down. So indeed, some of will indeed come back as part of a mini BAU wave. But to be very clear, we stay within the $19,000,000,000 to $22,000,000,000 spend. Of course, there are regrets. You talk about the $30,000,000,000 But listen, we were not going to spend $30,000,000,000 this year, not even next year in the original idea. The original idea was that we were going to spend $25,000,000,000 this year and we were going to ramp that up to be in the range of $27,000,000,000 to 32,000,000 Now that's out of the window. It doesn't happen anymore. At this point in time, indeed, we have to be much more parsimonious with our capital. And indeed, that means that we have to make regrets. To give you an idea where the regrets are, they're not in our growth category. So where we now spend about 25% of our CapEx in what we call growth that used to be 11%. But it does mean that in areas like, for instance, Upstream, where the users spend close to 50% of our CapEx, it's now more going to be 35% to 40%. So indeed, regrets have been made, but choices had to be made simply because of affordability. Anna, can I have the next question, please? Next question comes from Henry Tarr from Berenberg. Please go ahead. Hi there, and thanks for taking my questions. 2 really. 1 was, when do you expect to hit the $65,000,000,000 net debt thresholds given your current environment outlook? And then the second, just on the customer focus that you're talking about. So how are you aiming to build up customers and what type of customers are you pursuing? I saw sort of Shell was bidding on a broadband business in the UK recently. I guess that it might be a very small part of the strategy, but are we likely to see more of this type of activity? Thanks. Thanks very much, Henri. And why don't you take the first one, Jessica? I'll talk to customers. And that will, by the way, be our last question as well. In terms of the $65,000,000,000 net debt and when our expectation around it, I think the best way to consider that question is in the context of how we're currently performing and the actual performance of the company what we believe is low moment in the cycle. If I were to try and give you a number or a date 1 or 2 years down the road, I'd have to give you a whole suite of assumptions on the macro, on the performance of the company. All of that, of course, is relevant for a company such as ourselves. But what you see in the Q3 is some $9,000,000,000 of cash flow from operations, excluding working capital. When oil prices are low, LNG prices are low, where there's very little volatility in trading, There is a strong marketing business, but a number of our businesses being impacted by the macro environment. So I think that's a good indication of going back to an earlier question, the fundamental earnings and cash flow capability of the company at a low point in the cycle. And so that I think is a good indication. That being said, working capital matters, margining matters. So we should expect some fluctuation quarter on quarter, but kind of steady state in terms of the capability of the company, I think Q3 is a good indication. Okay. Thanks, Jessica. And yes, on customers, let me say the broadband news that I saw as well. Don't consider that to be sort of the mainstay of our growth plans going forward. But indeed, working from the customer back is a very important aspect of our growth strategy. And I think a very important aspect to really increasingly clearly get across as a differentiator for our company. We have been a customer focused company for many, many years, decades. But at some point in time, I think we all know that the appeal of the Upstream very much overtook the appeal of serving customers. But in the end, you have to bear in mind, the energy transition is going to be a trend where the power of the customers, the choices that customers made, the demands that society will have also on our customers will determine how the future of energy will look like. So we have reoriented ourselves a little bit back again to being a clearly customer orientated company. In a way, you could argue we never lost it because we have a very strong marketing platform that you will have seen performing very well over the last years, if not decades. But we are going to turn that very much into a platform on which we are going to build that future of energy. And that is indeed our 30,000,000 consumers that come to our retail forecourts for which we will have other value propositions. Increasingly also that we serve and that we serve with the Wobble Companies. Think of the likes of Microsoft, Google, other companies with which we can have global partnerships to work together on their decarbonization challenge. We believe decarbonization, meeting the Paris Agreement, is going to be a key driver in how the energy system is shaped, and the energy system will be shaped by our customers. And therefore, we will be part of that journey as well. That brings me to the end of this session. So again, thank you very much for all the questions that you asked. I know there's a few more outstanding, but our IR team will get to you. Thank you very much for joining the call today. And I do hope that we have given you a little bit more clarity on our strategic direction and our financial framework. But I also hope that we have given you today a real taste of how well positioned we are because we are ready to capture the opportunities and the value that is there in the energy transition. And I also hope it has give you a little bit of hunger to know more about our strategy because it will be a strategy that will deliver. So there's more to come on this in our Strategy Day on the 11th February next year. And in the meantime, have a great rest of the week and please stay safe everyone. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.