Thank you very much, Rochelle. Ladies and gentlemen, welcome to our second quarter 2020 results call. Thank you very much for joining us today. We realize it's a very busy day today. I hope that you and your families and friends and colleagues are safe and well, and that you are taking good care through these very extraordinary times that we are facing at the moment. Before I get going, let me point out to you again the disclaimer statement. As I said, these are extraordinary times. They are challenging times for our business. Many others, of course, as well. You will see the effect of COVID-19 and the overall global economic weakness and what they have meant for Shell in the second quarter when Jessica speaks shortly about the results.
While there's, of course, nothing that Shell can do about the times we find ourselves in, we can always run our business well. We can keep it resilient, and that is exactly our focus. Today, I would like to give you some insight into the actions, the big ones, the small ones, that Shell is taking. Yes, we are in the midst of a global crisis, but we are working to make sure we come out of it much stronger and much fitter. Through the second quarter, we continued operating our assets with minimal disruption, and we saw resilient cash, and that shows both the quality of our assets and our people. The near-term macro demanded quick action, and we took decisive measures to protect value, to strengthen our balance sheet, and preserve cash.
Those included rethinking and substantially reducing our cost, as well as rebasing our dividend and not continuing with the next tranche of the share buyback program. We quickly changed our processes and our operations into the virtual world, accelerating digitalization initiatives that were already underway. We can already see that these actions will also reap long-term benefits. While we remain focused on preserving cash to counter near-term challenges, we continue to position Shell for what comes next because the foundations of our investment proposition go deeper than a resilient balance sheet. We believe the long-term fundamentals of our business are strong. That is why, despite all the immediate action we have taken, we have not rushed to change our strategy and our cash allocation priorities.
Strategy is still very much centered around our customers, and it is centered around thriving in the energy transition to a lower carbon future. Before I go any further, I must give you an update on something that is crucially important no matter what timeframe you look at, our performance on health, safety, security, and the environment. Through these challenging times, our priority has been to ensure safe business continuity. After a difficult 2019, I'm pleased that we have not had any work-related fatalities at Shell operated ventures in the first half of the year. We've also reported about 40% fewer injuries in the first half of this year if you compare it with the same period in 2019. We improved our performance in process safety, but also the volume of spills.
We remain below our targets on greenhouse gas intensity emissions, both Upstream and Integrated Gas. Our refineries and our petrochemical plants, however, have been unable to match this performance on greenhouse gas intensity as we saw lower utilization across many sites due to the economic environment. At lower utilizations, these assets simply run at higher intensity. With the good progress on our health and safety performance, pleasing as it is, I'm also very sad to say that COVID-19 has left its mark on Shell. Seven of our colleagues are among the hundreds of thousands worldwide who have regretfully fallen to this virus. We are doing all we can to support their families, their communities. Safety is always a top priority, and current environment calls for even more vigilant care for each other.
This quarter, we have continued to work with partners and governments around the world to help local communities to respond to the global pandemic. In Brazil, for example, we supported the construction of a field hospital in Rio de Janeiro through the Brazilian Petroleum, Gas and Biofuels Institute, a trade association. In Nigeria, we worked with renewable energy companies to provide solar power to emergency health centers that are being set up to fight the COVID-19 pandemic there. Across all our assets, our contingency plans have worked well in the quarter. As an example, 99% of our retail sites have remained open. Besides the usual safety measures, we are taking extra precautions with our frontline people. At our Rheinland refinery in Germany, our site staff are staggered in shifts and keeping the same teams working together to minimize new contact.
Our Lubricants customers in Canada and China are now offered a zero-touch oil change. Our trading team that currently manages 1,300 seafarers on 40 Shell-managed vessels has reduced the level of contact when our ships arrive at ports and terminals to load or discharge. Most of our people, tens of thousands, normally work on our facilities, and with the lockdown in many locations, we have virtualized processes and operations significantly. We have increased the number of virtual inspections by using images, project and instrumentation diagrams, robots, even augmented reality embedded in helmets that support remote technical activity. Amongst other initiatives, we are validating and testing the design of our projects and equipment virtually using the expertise of our teams in different locations around the world to ensure business continuity. We are also using technology to support our customers remotely as if we were just next to them.
For example, we recently launched a new Lubricants logistics model, optimizing U.S. and Canada customer deliveries by successfully handing over our logistics operations to Penske in a virtual environment. We've also launched an app-based virtual payment card in China and India for our customers with fleets of cars and trucks, growing our business-to-business solutions in these two markets. In finance, in the first quarter of 2020, we closed our financial books faster than in any quarter in 2019 in a fully virtual environment. This quarter, we set a new record and closed the books even faster. We're working to make the efficiency gains structural and to free up resources across all countries and businesses in which we operate. Through the current virtual working environment, we have also progressed further digitalization.
For example, we further integrated machine learning into predictive maintenance activities of our refining and our deepwater assets, with the potential to now roll it out across other parts of the portfolio as well. We have implemented new digital features that allow us to further optimize the inventory of materials in our refineries, and we are increasing the use of artificial intelligence to run and optimize our assets in this unprecedented environment, as well as to simulate return to office scenarios for it. For us, all these actions are more than initiatives to just ensure business continuity through a crisis. They are actually opportunities to further build resilient operating models and optimize costs. Talking about cost improvement, let me give you an update on how we are progressing the countermeasures we have taken to reduce our operating expenses.
We're on track to deliver the reduction in underlying operating expenses by $3 billion-$4 billion by the end of Q1 2020. That is compared with 2019 actuals. As you can imagine, that scale of action meant some difficult decisions had to be taken, like initiating voluntary severance programs and announcing no staff bonus this year. Beyond measures with short-term impact, we have also challenged ourselves to find structural improvement opportunities in operating models across our businesses and functions. For example, in Shell, we have implemented a new operating model through a zero-based approach focusing on core workflow and asset centricity. This new model, once fully implemented, is expected to reduce overhead expenses by around 40% per annum when compared to 2019 levels. The majority of these savings will be recognized between now and 2021.
We're also reducing feasibility study costs across our portfolio and identifying operating efficiency opportunities in IT, in asset maintenance, and with suppliers. Across all our businesses, we are further moving activities to our business operation centers where we can optimize and standardize our processes. This is a journey that we had already embarked on quite some time ago, and we continue to see opportunities benefit in this model. For example, we are further consolidating research and development into those centers, which will bring structural cost reduction. Finally, as we improve our processes and operating models, we are reviewing the structures around them to maximize the efficiencies we can create.
That is why in the second quarter, we have also started a program in Shell to redesign and restructure towards a fundamentally simpler, more effective organization that can deliver the very best from our traditional businesses, from our customer-centric businesses as well, and rapidly and purposefully innovate for our future business models. You will hear more about all of this in time, but I can tell you now that besides reshaping and redesigning, we will also resize as appropriate. We are working to reduce our contingent workforce. We are rationalizing our expatriation pool and further accelerate automation and digitalization. A simpler, leaner, and a more focused organization will also cost much less. We are also finding cost efficiencies when it comes to capital expenditure. We are doing so while spending what we need to spend to ensure asset integrity and to continue with projects that are under construction.
In some cases, we have decided that opportunities are currently not attractive enough, and we stop them. We're also deferring many projects so we can better phase the capital spend while maintaining the flow of projects we need to sustain growth. For example, we have reduced our exploration budget by some $600 million for 2020, which partly appears in our capital expenditure numbers, partly in operating expenses. In agreement with partners and with governments, we plan to drill 22 exploration wells this year, and that compares with 77 originally planned. By reducing the spend, we have continued adding resources to our growth funnel. In addition to stopping and deferring projects, we have rethought how we can become more efficient in deploying capital. In Shell, for example, we have reduced activity in various basins, taking advantage of the short cycles and the flexibility that they allow.
With all these initiatives that I just mentioned, we are on track to achieve a $5 billion reduction in cash capital expenditure from our originally planned levels for this year. In this slide here, you can see how that translates to each of our businesses for 2020. Focusing on our ability to reduce spend and make choices, minimizing the impacts on our growth funnel and future cash flows. We are keeping the growth in the leading transition themes, balancing our capital spend with Upstream, and we continue to invest in power. For example, last night, the CrossWind consortium, a joint venture between Shell and Eneco, was awarded a tender for a subsidy-free offshore wind farm off the coast of the Netherlands. Offshore wind as a source of low-carbon electricity will play a pivotal role in the energy transition.
As we said previously, our annual ceiling for the period from 2021 - 2025 was around $30 billion. This level assumes a stable macroeconomic environment. However, in the current recessionary environment, if it warrants it, we can extend this year's cash CapEx spend of around $20 billion to next year as well. Currently budgeting for those scenarios, designing our CapEx plan for 2021 with flexibility in mind so we can respond to the environment accordingly. Of course, we're also reviewing our future CapEx beyond 2021 as part of our broader strategic review, and we plan to provide revised details at our strategy day early next year. Now, these are, as I'm sure you will appreciate, major moves. All this action does not change the cash priorities we have previously set out.
Our near-term focus remains on reducing net debt, strengthen the balance sheet, and maintain AA credit metrics. While we are paying dividends and investing at the revised cash CapEx levels. Strong credit metrics are important due to the high volatility in price and margins, combined with high cash obligations that we need to meet. For us, it is particularly key given our integrated business model. For example, to support trading contracts without a need for collateral payments and for our long-term offtake and supply agreements. It is also important for self-insurance as well as for liquidity and cost of debt. I'm sure you will agree that the last six months demonstrate the importance of having this strong balance sheet. In the current recessionary environment, we look to protect value.
This means further deleveraging to maintain AA credit metrics, paying an annual dividend of $5 billion, spending around $20 billion in cash CapEx. In the current environment, we expect our gearing to remain or even be higher than the top of the end of our range of 15%-25%. Bear in mind, gearing is only a proxy for the multiple credit metrics that we consider when managing our balance sheet. As the macroeconomic situation recovers and there is a surplus of cash, we intend to strike a balance between additional shareholder distributions, CapEx to enable additional growth, and a further strengthening of the balance sheet. In a more stable environment, we would further deleverage within our gearing range of 15%-25% to maintain AA credit metrics through the cycle.
We would raise CapEx for growth and increase dividends per share, as well as undertake share buyback. Also what we said before. In the last few years, we had enough liquidity to cover the dividends and bought back around $15 billion in shares. With a rebased dividend and lower cost, we expect to ensure that our sources of cash meet our cash obligations in 2020 and beyond. As the world recovers, strong balance sheet will allow Shell to stride out fitter than ever. Now, let me hand over to Jessica, who will give you some further details on our second quarter performance.
Thank you, Ben, and to everyone for joining the call today. I hope you and your families are all safe and well. As Ben just said, Shell is becoming a simpler, leaner, more focused organization. We are changing the company, even as our cash priorities remain the same. We can do this because of the strong fundamentals of our business. To show you where the strength comes from, I'm going to speak to you of our resilient cash generation and sector-leading cash flow. Let me start by outlining Shell's financial performance in the second quarter. Our Q2 2020 cash flow from operations, excluding working capital movements, was $6.5 billion, and our adjusted earnings amounted to $638 million in the quarter. Return on average capital employed was 5.3%. At the end of Q2 2020, our gearing increased to 32.7%.
2.8% of this was driven by impairments and pension remeasurements impacting the equity side of the equation. Our cash capital expenditure in the quarter was $3.6 billion, which was kept low, mainly due to the countermeasures highlighted earlier by Ben. Let us look at our Q2 earnings in more detail. Q2 2020 earnings were down, reflecting the impacts of COVID-19 on energy demand, prices, and margins. Adjusted earnings this quarter were $638 million. Integrated Gas adjusted earnings were $362 million due to lower realized oil and LNG prices, as well as unfavorable movement in deferred tax positions and well write-offs compared with second quarter 2019. In Upstream, production reduced by about 7% compared with the second quarter 2019. Sales volumes were up due to the timing of liftings, mainly in Brazil. We reported an adjusted loss of $1.5 billion, largely reflecting lower realized oil and gas prices.
In Oil Products, adjusted earnings were $2.4 billion in the second quarter. Very strong contributions from crude and Oil Products, trading and optimization, as well as lower operating expenses offset lower realized refining margins and lower marketing volumes compared with the same quarter last year. This strong performance from trading and optimization was underpinned by unprecedented market volatility as well as by price, demand, and supply dislocations among different geographies. We also saw the emergence of fixed and floating storage opportunities resulting from the contango structure during the quarter. We are already seeing a reduction in the volatility we experienced in the second quarter, and I would note that the very strong trading and optimization performance in the second quarter is not necessarily an indication for the third quarter.
In Chemicals, adjusted earnings were $206 million, up from the second quarter 2019, reflecting lower operating expenses compared with Q2 2019. Finally, in the Corporate segment, our adjusted earnings reflected lower net interest expense. Given the outlook of the macroeconomic and energy market impact of COVID-19, as well as expectations on long-term supply and demand fundamentals, we revised our commodity price and margin outlook. This resulted in lower medium and long-term oil and gas prices and a reduction in our refining margin assumptions by about 30% on average, compared with our prior assumption of mid-cycle refining margins. These lower prices and margins, amongst other assumptions, have resulted in several impairments across our portfolio. In total, we are writing down $16.8 billion of our assets, post-tax, which represents about 6% of our average capital employed.
Although impairments do not affect our adjusted earnings, they reflect our current outlook of the near and long-term environment, as well as our expectations on capital allocation and development plans. In line with accounting practices, impairment tests are performed on a standalone basis at the cash-generating unit level. This does not take into account the value generated by the integration of our portfolio. Given our integrated business model, value from an asset may be realized in other parts of our portfolio. As we continue focusing on cash generation in our assets, we are constantly high-grading our portfolio. For example, we've previously said that we plan to further rationalize our refining footprint, focusing on the truly strategic assets. We plan to reduce our refining assets from 15 to less than 10 refineries over time.
Some of the refining assets that we impaired this quarter will be strategic for us as we evolve these into new low-carbon value chains. Our cash generation proved resilient this quarter. Cash flow from operations in Q2 2020 was $2.6 billion and was negatively impacted by working capital movements of around $4 billion, driven by the increase in oil and gas prices in the quarter. Our cash flow from operations excluding working capital movements amounted to $6.5 billion. This primarily reflected lower earnings compared with Q2 2019, partly offset by the cash effect of tax. Cash flow from operations was also negatively impacted by the settlement for the unitization of the Lula field in Brazil. This is offset by a positive impact in cash flow from investing activities, so there is no impact in free cash flow from this unitization settlement at the group level.
I would now like to turn to a longer-term perspective on our cash generation and how our strategy, portfolio actions, and operational performance contributed to the step change in our cash flow profile. Over the last few years, we have high-graded our portfolio and focused on improving operational excellence across. We now have each of our businesses generating significant cash, improving our resilience and competitiveness through the cycle. With material cash generation from our customer-facing businesses in Downstream and Integrated Gas and resilient cash delivery from Upstream, the repositioned portfolio of higher-value barrels that retain upside potential. This has translated into the highest cash flow in our peer group for more than three years, and we've demonstrated disciplined execution.
Our performance on unit cash flow has increased significantly in the last few years in Upstream and Integrated Gas, as well as in Oil Products, which is also leading within our peer group. This shows the quality and resilience of our integrated business model, as well as our leading position in deep water, marketing, and LNG in particular, bolstered by our trading and optimization capabilities, which differentiates us. With that, let me hand back to Ben.
Thanks, Jessica. Let me sum it up. On the one hand, this was a quarter that confirmed our earlier expectations on the challenging macroeconomic conditions. On the other hand, it was also a quarter that confirmed our competitive advantages. This starts with what we have today. Strong portfolio with strong fundamentals. Market leader of a resilient and growing energy business with a portfolio that is continuously optimized by our trading capability. World-class deepwater asset with very low breakeven prices at tier one resources, the Brazilian pre-salt and in the Gulf of Mexico. Sector-leading marketing business, which offers high returns and has been steadily growing, bringing the brand of choice for customers worldwide. This strong portfolio is managed with disciplined execution, and we are taking tough decisions to strengthen the balance sheet.
We are extracting more value out of the already high-value portfolio, leading the peer group on cash generation. If you look ahead, our strategy embeds the transition to the cleaner energy system in every single one of our businesses. We're making sound choices, not only looking at the financial side of the balance sheet, but also future-proofing our portfolio. We're taking steps to remain competitive, but also reorienting Shell for the future, seeking higher returns through all our businesses. Next, grow value per share, delivering superior returns for our shareholders. This is our investment proposition. Platform growing shareholder value. We are looking forward to providing you with a comprehensive update on all of this on our next strategy day, which will be on the 11th of February 2021. With that, let's go for your questions.
As usual, could I please have just two of them from each of you so that everyone has the opportunity to actually ask the question. Rochelle, who can we go first?
Thank you. We will now begin the question and answer session. People dialed in, if you have questions, please press star one. If you wish to be removed from the queue, please press star two. Take a question from Oswald Clint with Bernstein.
Ben, Jessica, thank you very much. Ben, sorry, just a broad or high-level question. Actually, on the topic of hydrogen and something Shell know pretty well, and I see it's blended into your wind project yesterday in the Netherlands, and actually be great if you could talk about expected returns on that project. The bigger question is, with everything that's happening with hydrogen, is there a risk or are you worried about some of these projects in the Middle East, solar turning into ammonia and transporting ammonia, and then you could crack that back to hydrogen that can be blended into gas, residential or even into power stations, and even talking about burning ammonia. Is this potentially some serious threat to gas and LNG demand risk, I guess in much longer term? S econdly, a little bit closer to the quarter. Chemicals are pretty strong.
One of the best quarters you've had, I think, in the last 12 months. At least utilization was down, so it's cost reduction, and you get a lot of good group examples there within your comments. Which one was applicable to Chemicals? How did you get the cost out of finely tuned Chemicals business? Frankly, you didn't downgrade your Chemicals margins in the macro reset. Can you just give us what are you looking at and, or when can we expect this next Chemicals upcycle to really begin? Thank you.
Thanks very much, Oswald. Really a nice set of questions. I'll take a stab at both of them and then hand over to Jessica. The hydrogen story, yeah. For those of you who have not paid close attention to that particular press release yesterday evening. In winning the HKN wind tender in the Netherlands, we also have, as part of the integration into the Downstream value chain, the vision that we should build a very large hydrogen plant in Rotterdam, fueled by green electricity. We will use that hydrogen for which there is, at this point in time, not a high-graded, high-quality market other than, say, industrial use. We will use that hydrogen initially in our refining and Chemicals facilities.
With a view that we over time upgrade it to hydrogen for heavy duty road transport, building that business in Northwest Europe from the port of Rotterdam throughout the distribution systems of Northwest Europe. I think that's a typical example in my mind of how these businesses can play to our strengths. Many a time when we talk about new energies or power, people think of us just being another wind farm developer. In reality, of course, it needs to be much more sophisticated if we really want to play to our strengths and if you really want to have superior returns that you can build on the back of it. It will be a bit presumptuous, I think, at this point in time, Oswald, to say, well, these are the returns. This is a market that we have to do.
That will take us some time, but I do believe it will set us up very well already as one of the largest, if not the largest hydrogen player in the mobility sector to really capture very significant parts of that future value pie. You're absolutely right that there are multiple other energy vectors under consideration, ammonia being one of them. The idea of ammonia for shipping is a good one. Indeed, Middle East, cheap solar could be a way of doing it. I couldn't see why that also wouldn't be a way for us if that was a very valuable way of developing it. We try to unlock these types of opportunities with our strategic update of looking at the sectors of the economy to bring value into the house. Figuring out what customers need and then working back from.
I can also see how hydrogen and liquefaction could be an opportunity, and that's why we are also participating in pathfinding projects to do liquid hydrogen shipping. Bear in mind, I'm incredibly excited by the opportunities that this will bring, but this will not be a business to rival deep water in the next 10 years. This will take some time, as many of these businesses will take decades to develop. The first movers who lay out the strategic advantages in their own networks and capabilities will be the winners of the future. That's why you see us go after these opportunities with so much vigor. Chemicals is indeed a bit of a bright spot at this point in time, and everything is of course, relatively speaking.
I couldn't say that Chemicals is anywhere near sort of average conditions, but some aspects of Chemicals have performed really well. You can probably guess which ones they are. Those sectors that feed the detergent market, the personal care market, but also the packaging market, the medical sector, all these segments of our Chemicals business have performed well. Not so well, of course, is durable goods, cars, fridges, et cetera. Then again, these things will probably come a little bit later as we see the economy picking up. There is more to come, but I'm hopeful that Chemicals has entered the path of recovery now. In terms of cost and other aspects, Jessica, anything to add?
Perhaps two points. Just on the first one to emphasize things like HKN and getting into the wind project in the Netherlands is really the starting point of creating options and designing and implementing new business models for the low carbon energy future. Linking that to our existing capabilities, and where we believe the energy system's moving ultimately to hydrogen. Excuse me, pointed to something. The integrated value chain that we can create, starting with this one position, converting it to hydrogen and then bringing it into the transport sector or to the manufacturing sector, that will create differentiated business models for us that I think we're uniquely placed to deliver against and also differentiated return potential. It's not the unsubsidized wind project return that we're interested in.
We're interested in that bigger story, that bigger idea around the integrated value that we believe significant value and returns can be created. On the Chemicals business, a couple of points to pull out of the story. Feedstock has also contributed to some of the better performance that we're seeing in the quarter. Some of the lower costs, lower prices are helping part of our business. Of course, as Ben mentioned, all of the belt-tightening that we're doing across the organization, every corner of the company is being touched, and that's also being reflected in the operating costs for Chemicals.
That's excellent. Thank you.
Okay. Thank you very much, Oswald. Rochelle, who can we go to next?
To Alastair Syme with Citi.
Hi, thanks to both. Can I just ask about impairment? I'm still trying to figure out how much of the macro change is ultimately COVID- related versus something that's been maybe building in your thinking for some time. For instance, I make the observation that the plan to rationalize the refining footprint from 15 to 10 assets has been in place for some time, so why wait until now to impair? The second question, just to pull on the strap line that Shell is becoming a leaner, more focused company. It sounds very similar to something I remember at the time of the BG acquisition. I wonder, really what that means and how you think you'll measure success on that metric. Thank you.
Okay, thanks, Alastair. Would you take the impairment question first, Jessica? I'll go to more focus.
Yes. The impairments are a reflection or an outcome of our resetting our long-term prices for oil, gas, and refining margins in particular. That was the main driver, price. Of course, we've completely changed our CapEx profile in the near term, and that also has implications. The ultimate value we'll realize from some of our assets. Both the price change and the shift in some of the developments that we'll do, given the CapEx program that we're following, also has an impact. How much of that is COVID versus other circumstances? A significant portion of it is COVID. Certainly, the near-term outlook is largely, if not entirely, driven by the macroeconomic implications of what COVID has unleashed. Indeed, as you mentioned, Alastair, there are some strategic elements that we have been speaking to for the last couple of years.
Our outlook on the refining sector and where we believe we can create value and where we see the refining business fitting into the future of energy and the future low carbon energy system certainly is influencing our view on the assets and the potential that we see with the assets. That came into play as well, both in terms of our margin outlook as well as the investment profile that we have for our assets.
On the more focus, I do first of all believe, Alastair, that the BG acquisition gave us more focus. On the back of it, we created from two strong parts of our portfolio, two really strong crown jewels and maybe even helped a third one. Our deep water business, which was a good business, became a really core focus area in our portfolio as we added the BG deep water assets into it. Very clearly now it is a foundation piece going forward. The same can be said about our LNG business. Where we basically through combining number one, two, and if you go a bit further, the Repsol acquisition, also number three, into a really significant now global player that is totally unrivaled.
You could argue that some of our trading capabilities were further boosted as well, and that's our third crown jewel that we have. In the process, we went out of oil sands. We rationalized the portfolio in one relatively concentrated effort with $30 billion of assets that we got out of, with another $10 billion being worked on, the half of which has been delivered already last year. Yes, indeed, the portfolio has become much more concentrated on the back of that BG deal. Can we do that again? In a different way, yes, we can. I do believe that if indeed we reduce our refining footprint, we probably have a much more high-graded view on how we want to cluster our manufacturing assets in general together.
Refining and Chemicals, I think is now really down to a very high quality core footprint around which we can trade and optimize, and that can serve multiple segments of the economy. That, again, will be a portfolio simplification in that area, with all the simplifications that come with it, all the attributes that organizationally hang off it can be made much more focused. The same will be true for our Upstream portfolio. I have no doubt that at the end of the journey, we can present you with a much more high-graded focused portfolio that really concentrates on the core assets within it, core countries within it, and where we will have a differentiated approach to what it is that we will really nurture and look after and what we will really manage just for residual value.
With all of that, I'm sure we can also, having learned in the last six months how to operate things differently, become much more focused about where we want to emphasize controls and oversight. Having had to work on a very, either localized level or a very centralized level, we are discovering new ways in which we can actually effectively manage this very large portfolio of businesses, markets, assets, et cetera. Also there, therefore, we can make some further simplification, which ultimately will lead to more nimbleness, but also more focus on where we want to put our attention, where we want to put our money, where we want to make our difference. It will be, therefore, a slightly different story than the BG story, but it will be an equally compelling story, Alastair. Rochelle, how can we go to the next? Yes.
We'll hear from Michele Della Vigna with Goldman Sachs.
Good.
Ben, Jessica, it's Michele. I wanted to ask you two questions. The first one is about cash distributions to shareholders. You operate in a highly cyclical business, and it's important to preserve flexibility. I was wondering how you're thinking about the current cash distribution model of progressive dividend and buybacks in up cycles versus a possible model of variable dividends with a guaranteed floor and a more cyclical element to it as well. Secondly, in terms of investment opportunities, you continue to upgrade your portfolio. I was wondering if the economic environment improves and you can increase your CapEx back towards the mid-20s, which project and which area would you give priority to for that extra investment? Thank you.
Okay, very good. Thanks very much, Michele. Why don't you take the shareholder distribution question first, Jessica? I will talk a little bit about the CapEx and upgrade portfolio.
Good afternoon, Michele. Thank you for the question. It's a very important question and one that we spend a considerable amount of time considering and looking at different alternatives and options to ensure that the dividend policy that we have is right for the company and hopefully right for our shareholders. It's also an area that we've actively sought input from our shareholders on as well, and we continue to do that. I think, particularly at this moment in time, given, as you said, this high degree of cyclicality that we're experiencing, and particularly with the uncertainty around the outlook, our view is that certain level of stability is warranted and appropriate, and getting to a dividend level that is sustainable and resilient through the cycle and through considerable stress, which brought us to the dividend level that we're having today.
At this moment in time, we think the progressive dividend is the right way to go. Of course, we can top that up with share buybacks. I would expect that would be a feature as we have excess cash in terms of the nature of shareholder distributions going forward. At this moment in time, I think right now we see the value of stability and introducing a high degree of volatility around dividend, particularly at this moment in time, didn't look like the right choice for us. We actively review it, and as the company changes, cash flow changes over the next 5-10 years, different models may be appropriate, and we'll continue to actively consider it. With the progressive dividend combined with share buybacks, we think that's likely the right outcome for us at this moment in time.
On the portfolio development and where to grow CapEx back. Of course, we will give you a lot more detail in the strategy day when we get there, and we have done a lot of work, and we have a better view on indeed, how that economic recovery is playing out. There's a few hints already, of course, in today's material, and also if you look back at our management day last year. If you look back at our management day last year, we were going to keep Upstream basically in sustain mode. We were going to put disproportionate growth into the transition themes, and we were going to mature over time a power business that would position us for the future.
If you look at our capital program today, which of course we had to vigorously scale back, you will basically see that we are not sustaining our Upstream, with the sort of capital nurturing that we give it. We still try to grow our transition themes where we can, partly also because there's projects underway, and we preserve a certain amount of money for good opportunities in the power theme. If we find ourselves with more cash to spend, and if we want to prioritize some of that cash back again to growing our capital project portfolio, f irst of all, we will have plenty to choose from because a lot of it has been squeezed out of this year, potentially even next year, into years to come. We will have a very rich cupboard to pick from, and we will, of course, pick the best projects.
You will probably see the same sort of trend as a trend between today's program, what we were talking about last year. In other words, a preference for leaning into the energy transition, a desire to build the business of the future. All of that having to compete with what you could almost call the base projects in Upstream, that bring a certain return around, and that we also have to sustain in order to provide the cash for the future. I think that healthy tension where the different sort of strategic vectors compete for capital, we will maintain, but we will have a clear view to understand how, through capital allocation, we lean into the energy system of the future. With more details to come, Michele, in February next year.
Thank you.
Rochelle, thanks, c an we go to the next question, please?
Yes. We'll hear from Thomas Adolff with Credit Suisse.
Good afternoon, Jessica, Ben. Two questions from me as well. Firstly, on trading. Trading, obviously, the key part of how you run and optimize your business and your value chain, be it in oil, gas, and in the future, electricity. In this quarter, you generated strong earnings in oil, less so in gas, but that's life. Generally speaking, how differentiated and how difficult is it to replicate such business model as yours? Secondly, as it relates to the electricity business, and I'm excluding trading optimization here. In your view, what is the competitive advantage that Shell brings versus the incumbency utility companies, and what are the benefits or trade-offs of having everything under one roof? Thank you.
Okay. Very good. Thanks, Thomas. Two very important questions. Usually, I would talk about the electricity business and Jessica about trading. Why don't you flip it around? I will talk about trading, and Jessica will talk about the logic that we want to deploy in our power business. Is trading really differentiated? If there is a strong contango in the market, well, people who actually are so minded can make money, whether you are a good or a bad trader. Well, first of all, let me say indeed, we did make money off the conventional contango plays. We did very well, and we have a lot of opportunities to do so. It's not just the conventional contango plays we make money with.
We are very well positioned to enter into contango plays of non-benchmark routes that we understand a whole lot better than your average commodity trader in the market. We can also make money out of contango plays in blending components, particularly in fuel oil, where the reconstitution of these components into end products, having gone through a contango phase, can be value that is very hard to see unless you truly understand the structure and the nature of the business. Yes, contango plays have been important, but I think we do contango on steroids. If you look at second factor of value creation, it's around volatility. Of course, a lot of people can make money in volatility. A lot of people, by the way, can also lose a lot of money.
What we see, again, is arbitrage opportunities that we can capture, and we can probably see and understand and lock in these arbitrage opportunities a bit better than some of the others. That is because we are very well-positioned with our marketing positions around the world, our shipping operations that have access to a lot of data, our refining positions that we have, and the sheer trading flow that we have gives us a data flow that allows us to really eke out transient value a whole lot better than perhaps your average trader. Again, we can do it with assets. It's not just a matter of can I arbitrage and lock in an advantage, but again, can I lock it in through blending in unusual ways? Can I do really things that others can't do? Let me give you a really nice example.
Take the Pernis refinery in Rotterdam, largest refinery in Europe, sits in a market where it produces normally quite a bit of jet fuel. That market disappeared for 90%. We were able to completely reconstruct the way we work around this refinery so that it could produce zero jet fuel, so that we could buy jet fuel, make money on that particular trade, and then again, reconstitute the products coming out of the refinery to make money elsewhere. That's not ordinary trading. That is actually optimizing market positions that we know better than anybody how to take advantage of. More generally, the amount of data flow that comes through our trading and optimization organization is, I think, probably the richest in the world.
Again, if we want to, we can understand where positions are opening up, which positions are smart to take, but also how we can see things coming. Every week, on every Wednesday and every Sunday night, I read the trading analysis of what we see coming in the week, and I see how we respond to it. The insights that we have, truly unique. They are not just trying to understand what is happening with hydrocarbons around the world. They're tapping into multiple data repositories of every aspect of the economy. It is a very sophisticated machinery that also works with the underlying asset base and the underlying market positions to create value that others cannot create. Did it work particularly well in today's environment? Of course, it worked particularly well.
Again, it has an element of uniqueness in it that I believe sets us apart from many of the other conventional players in the market. Let me hand over to have you talk about electricity.
Great. Thank you, Thomas, for the question. Let me speak to a number of points where I think Shell brings distinct competitive advantage to the power sector. Start off with, we are the second largest marketer of power in the U.S., which is the largest energy market available to private players. We've created that position over the last 10, 15 years, and that gives us capability, insight that we're increasingly leveraging in other parts of the world, whether that be in Europe, in Australia or Brazil. We have experience and capability today in the power system that is unique, certainly in our sector. If you think about the future and the future of the energy system, power will be essential into the decarbonization of the economy.
Going back to the project we were just speaking about, HKN, it's a great example of what the future of energy is going to look like, what the future business models are going to look like. I think there's few companies that can compete with Shell in terms of trying to create these integrated business models and value chains. There's few companies that could participate in the building and operations of these large wind farms, then build the largest electrolyzer plant, convert that to hydrogen, and then bring that to refineries, our own refineries which certain amount of de-risking in it. I mportantly, then to build out the hydrogen molecule flows for transport in Europe.
I don't think there's any other company that can kind of span that in the same way, bringing capabilities that we have today and positions that we have today to serve the business models and the future energy flows. Our position in energy around the globe, I think, again, gives us unique insight on how energy flows today that speaks to the trading capability. Importantly, the position that we have across different sectors, where we're increasingly taking a sectorial approach to how we believe the systems need to decarbonize. The leadership that we can bring to that, in terms of our convening power and bringing groups of people together to figure out how do we decarbonize these different value chains, and then bringing genuine skill and capability in making that happen. We've talked about how we're doing that in the aviation sector.
That's more speaking to kind of the future of biofuels and biojet. A different way of serving that sector. If you think about the IT sector, the Microsofts, the Amazons, the Facebooks, they have significant power needs around the globe, and they're trying to decarbonize their companies, and they're speaking to us because we're present around the globe. We bring the power capability today, certainly from the trading perspective, and increasingly from the generation and development perspective, solar and wind assets. Again, being able to bring together these different capabilities, bring together different participants in a sector to figure out how do we decarbonize these sectors, and to do this globally, leveraging our assets and our people and skills, I believe is a distinct advantage that we bring to power.
Thanks, Jessica. Okay, Rochelle, who is next?
Next, we have Biraj Borkhataria.
Hi. Thanks for taking my questions. I've also two, please. The first one's on the CrossWind announcement yesterday. Obviously, there's a bunch of elements attached to that you've run through. It does strike me as something very Shell-like to find innovative ways to do things. I guess the question I have is, these innovations are not always good for the shareholders, maybe could you talk about the extra elements of that project and what it does for project returns? I'm just trying to understand the benefits of being a fast mover versus a fast follower in that type of business. The second question is on your Shales business. There's obviously a lot of focus on new energies at the moment, you're still planning to spend $1.5 billion on Shales this year, which is more than in new energies.
A couple of years ago, you and all your peers were extremely positive on that theme and talked about growing the business. I just wonder at this point, given your view on commodity prices, could you outline why you need to be in that business at all? It doesn't appear that you have an obvious strategic advantage. The track record isn't great, and you've got plenty of competition that is willing to plow more money in that business model, which hasn't been proven, especially at scale. Would you consider exiting? Just some thoughts on that would be helpful. Thank you.
Thanks, Biraj. Let me talk about CrossWind, and Jessica will say a few words about Shales and the strategic logic and what we're trying to achieve there. Indeed, I thank you for recognizing that doing a project like CrossWind with a broader value chain hanging off it is very Shell-like. I think that is an important observation. We like to think that as well for reasons that Jessica just mentioned. We are able to actually assemble a future value chain, not just building a wind farm and trying to sell it in the merchant market in the Netherlands, but assembling an entire value chain around it that, again, will set us up to win. What the returns of these value chains are, well, let me focus on the power project first. We think the power project is competitive. What exactly the returns are, we normally don't disclose.
Very much depends, of course, also on your outlook on the power market. Setting up the value chains of the future, forward integrating it into hydrogen for transportation and industrial use is actually a path-finding way that will, in the midterm, I think, give differentiated returns simply because we are capturing markets where people want to decarbonize but do not have the available tools to do so. Before such a technology becomes common good and completely commoditizes and becomes subject to the usual competitive forces, there is a sweet spot where indeed very good rents can be captured.
To enter that sweet spot, indeed, you have to take risk, or sometimes you have to figure out ways and means to make the economics work, sometimes even with government support and other ways to level the playing field against the conventional alternatives for the industrial and mobility sectors. That is our game as well. We are not just a commodity player where we step in as the number four or five follower. We break open new technologies, new markets. We were trailblazers also in the field of LNG. I am sure that you would be able to go back to those times. People were wondering, why bother? This is a small market. It doesn't really matter. Here we are, indeed, many years later, but now we believe it's one of the most successful sectors of the oil and gas industry going forward.
Sometimes you have to place these things in a somewhat longer perspective, Biraj. Are we splashing billions of dollars on hydrogen? No, of course not. These are structurally seeding our businesses, and we have to go at a pace that it is absorbable, that we understand how we are de-risking it, that we are ready to make the next step, et cetera. It is definitely a path we want to travel because we do believe that in years to come, we will look back on these decisions and say, "Right, that was a good strategic move, and now we are enjoying a growing business with strong returns." On Shales then, Jessica.
Yes. On Shales, fundamentals of shales can translate to what we believe is a high return business. If you've got the right assets, you've got the right capability, and you steward the resources appropriately, we can steer our way to high returns with our shales business. Our Permian asset, we think, is one of the kind of crown jewels in the shale industry. The capability we've developed in terms of our wells performance, we believe is best in class. Our stewardship of capital and the unit development costs we've been able to achieve and what we're doing on the operational expense side that Ben spoke to earlier speaks to, I think, the quality of our management as well as the quality of our stewardship. When you put those different elements together, it can be a very exciting business and a very competitive business in the Upstream sector.
Of course, at this moment in time, I think it's challenging for many Upstream businesses to look particularly good at the very low point in the cycle. I wouldn't use this moment to necessarily judge the quality of the sector nor the quality of the business. Again, you need to have each of those elements in play in order to achieve good return business. A couple other points I think are worth mentioning. I think the Shales business has been an important area of innovation for the Upstream business. We've gained a lot from our participation in our Shales business that we've translated to other parts of Shell. That's where we've tested some of our digital technologies and innovative ways we're working with data, and learning how to do the Upstream business at a very different pace.
I think there's other knock-on benefits of continuing to operate in that sector. In addition, as most of you know, there is a high degree of flexibility. When you think about the portfolio and the ability to ramp up and ramp down, which can be difficult in other parts of the Upstream business, that's one of the elements that Shales brings to the party that other parts of the Upstream business doesn't. F inally, there's the integration opportunity, particularly in North America, that we have, and that is a source of potential further value creation, either connecting to our Downstream business or through our trading supply optimization activities, as well as from a risk management perspective. That's served us well over the last couple of years.
I think there's a number of reasons to believe it is a difficult moment in the cycle, but the fundamentals, if you run the business well, are worth it.
Thanks, Jessica. Thanks, Biraj. Can I have the next question, please, Rochelle?
Yes. Certainly. We'll hear from Lydia Rainforth with Barclays.
Thanks. Good afternoon. Two questions, again. The first one, when we're talking about the idea of fundamentally restructuring and simplifying Shell, is that what you need to do to get to that $3 billion-$4 billion of operating expense reduction by next year? Is [audio distortion] that? Secondly, there's something you talked about in the opening remarks about being clear, both on the customer and shareholder value. If I reflect on that, we have seen a lot of changes in the last six months, be it the move towards net zero, the dividend change, the lower oil and gas price assumptions, the Downstream impairments. There have been a lot of things that have changed. Has your thinking changed at all about the strategy and where we go from here? Thanks.
Thanks very much, Lydia. You were on the line that broke up a little bit, but I believe I got what it is that you said. Let me try to see whether I can get to your next question, which I thought was, there's a lot of change, has our strategy fundamentally changed? I'll say a few words about the fundamental change and the relation to cost, and I'm sure that Jessica will have a few things to add there as well. We discussed that also in great detail over the last few weeks and yesterday with the board. I think on the change that you mentioned, stronger customer centricity. Indeed, we have come out with a sharpened ambition. We have better articulated what it means to be in line with Paris.
I think these are natural progressions from the strategy that we probably entered into years ago when we said we want to be part of the energy system of the future. That means that we have to change the product portfolio, probably has to mean that we have to have a slightly different investment mix. Progressively, we have found out that we have to actually work from the customer back, particularly if you want to have a focus on reducing Scope 3 emissions and finding the business models of the future that will do so. I wouldn't say that things that you've heard in that space are somehow a radical rethink.
They are progressive insight that is founded by the idea that if you want to thrive in the energy transition, if you want to be around in another 100 years' time, we need to evolve as we have evolved over the last 100. Indeed, it's tempting to think that that then is sort of logically connected to the dividend and other things that we have done, maybe even the impairment, et cetera, but it isn't. The reduction in dividend and the reset that we had to do was the result of a macroeconomic shock that gave us the risk of reducing our financial resilience. We had to countermeasure not only with cost and CapEx measures, but unfortunately, also with shareholder distributions. There is no correlation between one and the other.
We could have done one and the other at the same time in a normal macro environment as well. I think that's quite important to note. The same is true for the impairments. The impairments are a, if I put it as a gross oversimplification, but nevertheless with a core of truth in, it's an accounting event. If you look at the fundamental change in the company, well, yes. We are, as we said, with progressive insight, understanding what we need to do different in order to position the company successfully for the future on the energy transition and other things that are happening. At the same time, we're also learning how to cope with the pandemic, anticipating what could come next from it, and also learning, out of necessity sometimes, how different ways of working can actually be quite beneficial.
If you just don't want to suffer the pandemic and see how you work your way through it, if you want to see it as an opportunity for renewal, you think through, "What am I going to do differently at the end of this?" There is actually quite a few things that we can do different. Actually then require us to rethink. It's not just going to be trimming at the edges. Let's all work from home a day a week. No, it's completely rethinking how we are going to run this company in a different way, and how we're going to have maybe different ways of oversight, different portfolio as a result of it. That's what I mean. Now, to what extent do we need to do all of this to deliver on the original commitment? Let me hand over to Jessica.
Good afternoon, Lydia. Thank you for the questions. I was going to start with the strategy, but I'll start instead with the cost piece. When we set out the target to the market in the first quarter to reduce our OpEx by some $3 billion- $4 billion by the end of Q1 2021 relative to 2019, that was before we initiated this larger look at our organization and how do we ensure we're designed and organizing our resources to deliver on our strategy going forward. That was looking at what are the measures we can take in the next 12 months to reduce our cost. You see that happening already today. Our costs in the second quarter were down by some $1 billion relative to Q1, and importantly, on an underlying basis, down some $2 billion from Q2 2019.
These are the immediate measures we've put in place. There's things like reducing travel costs. There's the stopping of the bonus for this year, which is about $1 billion, and reducing activity, repacing growth spend, et cetera. I have a lot of confidence that we'll achieve that reduction over the next 12 months. Not all of those reductions are sustainable, and they are short-term. A number of them are short-term measures. This is where the reshape program that we're doing looks to then sustainably change the way we work to ensure we're designed to support delivery of our strategy and ultimately be a simpler company and have lower cost. That will be really felt kind of 2021, 2022, as those changes are put in place. They're different numbers, and kind of different activity levels that are driving those outcomes. Probably comparable numbers in impact.
The first one's really kind of the short-term measures, while the restructuring program or the resizing program is more about how do we sustainably change the way we work, both in terms of delivering our strategy, but also to be more simpler and lower cost going forward. On the strategy one that Ben has more than well covered very well, I would characterize it as Ben said, progressive insights that is kind of an evolution of the strategy. I think the important point for me is that it's increased pace and increased intensity. It's not that they're new ideas or new concept. A lot of this has been embedded in our thinking when we had the strategic pillar of thriving through the energy transition.
We believe that the appetite and the opportunity is accelerating, and it's with that in mind that we're looking to move probably more quickly and more intensely than perhaps 12 or 24 months ago.
Thanks, Jessica.
Great.
Okay. Thank you. I see we have quite a few more questions in the queue. Let's see whether we can add a little bit of time at the end of it to make sure that we cover them all well. Rochelle, who can we give the mic to next?
We'll hear from Jon Rigby with UBS.
Oh, hi. Yes, thanks. May I ask a question, two, please? First, on the impairments. You've alluded a couple of times to accounting issues. You also then talked about the benefits of locking together some of the Shell activities or the BG activities in LNG. You obviously reported a huge trading benefit and talked about the recurring nature of the optimization around assets and so on. My question really is, particularly in the Downstream and Integrated Gas, is there a genuine impairment in value that you're signaling with this Q2 impairment charge? When you considered and looked to this, was there an option to sort of think about the sort of consolidated activities of the business, rather than the way that the legacy assets had originally been constituted? It seems to me is there's been a lot of repurposing over the last few years. That's the first question.
The second one is, I noticed that you took about a $5 billion charge through equity for the pension fund. The pension fund, there's an obligation, I think, of about $95 billion at the end of the year of 2019, so not much short of your market capitalization. That's a big swing. I just wondered whether, A, is there a way of managing that going forward? Is that an obligation that we're going to have to live with, and some of the implications that come with that, which are often not good? The second is there a potential for increased cash out going forward to fund that pension obligation? Thanks.
Very good question, Jon. Let me make a beginning on the impairment point, and then hand over to Jessica, who will undoubtedly add some to it, and then can also cover with the pension fund adjustment. If I understand your question correctly, Jon, how can you square the idea that we would impair assets, say, for instance, in Integrated Gas, where you've seen actually the largest impairment occur, when there is so much associated trading value, for instance, with that asset? Is it indeed correct to take the impairment in the way that we have done? That is a very good question. We are absolutely bound by accounting convention, where we have to look at the cash-generating unit, which is often just very narrowly defined to the asset that sits on the books.
The intangible value that sits in our trading organization, that adds a lot of extrinsic value to such an asset, because it's part of a portfolio within which we can trade and optimize around that asset, we can, from an earning perspective, segment that income perhaps back to that asset. That is not possible to use as a methodology when we go through the accounting process of impairing or value erosion review on assets. That's narrow. That means that indeed, in some cases, yes, we have to recognize that the asset was on the books with more value than it strictly speaking has on an intrinsic basis, but it doesn't necessarily mean that that value has disappeared.
We have that not only in our gas business, we also have that in other businesses, where the assets are part of a broader value creation network, where the value creation extrinsic to the asset cannot be taken into account when looking at the devaluation of that asset . Let's see whether I have that sufficiently correct for Jessica to add something to it, and then maybe if you can also talk to the pension fund question, Jessica?
Sure. Good afternoon, Jon. Thank you for the questions. I think Ben covered it well. We engaged deeply on this with our internal accountants and our auditors as well, because some of the answers that are right from an accounting perspective are not intuitive from a business perspective for the reasons that you've mentioned, Jon, and Ben has as well. We're doing this technically correct. Does that mean that the impairment reflects the true kind of economic value of that asset in the value chain? In many cases, it doesn't. There are many instances in assets that were impaired this quarter, where they provide tremendous value to our Integrated Gas business, to our Downstream business. As I mentioned in my speech, where we see some of these assets to be very strategic for us in the future.
We're doing things right from an accounting perspective, but it may not make intuitive business sense. That being said, there are some assets that there is value, some of the exploration assets that we're not going to pursue. I'd say a significant number of the larger assets that were impacted are ones that we see significant strategic and economic value going forward. Pension fund, it's a really important question and good to raise and acknowledge that is a large number from a liability perspective. We also have significant assets against those liabilities, and what you're seeing is kind of the net of those two things. The impact on that balance does change, driven by the interest rate environment. That's been the single largest driver of change the last couple of years. Sometimes that has gone in our favor.
Last quarter, we had opposite effect of a comparable amount as interest rates increased. That is a reflection of the interest rate environment. I don't think there's much we can do. That's simply the accounting and the reporting. If you look over the last couple of years, it's been pluses and minuses going both directions. You also have movements on the asset side as well. As the equity markets recover, the asset values also increase. What you're seeing is the net of all of those effects coming through. That's on the reporting side. That's different than the funding side. Funding is handled very differently, and it's driven by the requirements of each of the pension plans in the countries where we operate. There is the potential for us to have additional funding requirements. To some extent, that's always the case.
We manage this very carefully as a group, and believe we're in a very solid funding position. Depending on what happens with interest rates, what happens with the equity markets, additional funding can be required, and that's part of what we plan for in the resiliency of the company and the cash flows going forward. It depends on what happens, as I said, in the interest rate environment and the equity markets in particular, but that's well considered in all of our plans going forward. Thank you.
Okay, thanks. Can we have the next question, please, Rochelle?
Yes. We'll hear from Christyan Malek with Morgan Stanley.
Yes, thank you for letting me ask questions. Christyan Malek from JP Morgan. First, the outlook for demand. Shell prides itself on being integrated in most end markets, yet this crisis has sort of seen the entire energy complex contract in an unprecedented way. What green shoots are you seeing, if any, in the outlook for crude demand? Compared to your views a quarter ago, has anything, I guess, changed for better or worse? I guess secondly, and allied to that, I want to ask you more about the portfolio reshaping as far as being fit for future, or vis-à-vis your volatility and not least energy transition.
February next year does seem quite a long time away, and I'm not sure I can take away from this call where the major change is on the horizon or not, especially in what you would consider core versus non-core, i.e., open to divestment. You mentioned deepwater energy marketing quite a bit, would it be fair to say that you may need a more radical overhaul of the business? What I'm trying to get to is, can you at least provide a basic framework into helping us model Shell version 2.0, the backdrop being that one could argue the financial frame as it stands either needs a major cash injection or higher oil in order to deliver the investment needed to materially scale up new energies. Thank you.
Okay. Thanks, Christyan. I'm not entirely sure whether I got everything because there was a bit of a disturbance on the line as well for me. The demand outlook, it's of course a very important question. I'll talk to that a little bit. Jessica, are you okay to do some of the portfolio reshaping? It is of course very hard to predict exactly where demand will go going forward. In some sectors, we see the beginnings of a recovery. I mentioned earlier the Chemicals sector, that is still a very significant driver for oil and gas demand as well. Of course for us, it's also a significant part of cash flow if it works well. We see the beginnings of a recovery trajectory, we believe. On the more conventional fuel side, and therefore oil, I think it's very mixed.
In some sectors we see actually quite good recovery. Take for instance motor gasoline and diesel. There's a fair degree of recovery, particularly in countries that are a bit further down the first wave. We see actually in some cases a stronger demand than we saw before the pandemic. That's not everywhere, but it's in a few cases absolutely true. Partly because people tend to use public transport less and are more safe and secure in their own car for commuting. We see countries coming out of lockdown, of course, going into a bit of a fast recovery on personal mobility fuels. There is a wide spread in this. We see resilient demand in China, as I said, ahead of last year. The biggest growth we are actually seeing in Russia, 13% up, but the worst performing market is India, 45% down.
We are dealing with a very wide tapestry of market recovery archetypes. If you look at Lubricants, we see also quite a wide range of performance. Europe, down very considerably, but now recovering back to 90% of what it was. In other places like China, for instance, we are seeing 15% more Lubricants demand in the second quarter of this year than in the second quarter of last year. It is quite surprising to see the differentiated approach. I probably don't have to tell you much about aviation, where we probably see a recovery back up to, well, probably 50% of what it used to be by the end of this year. Altogether, I do think that we will end this year not in a fully recovered market, and it may well take 2021, of course, to get back to where we were.
What happens after that is I think much more difficult to predict. Everybody who can tell you certain things with certainty, I think you have to take with a great pinch of salt. Of course, we don't know how this pandemic is going to work out. I hope it will work out well, and I hope that any subsequent episodes are going to be limited to outbreaks rather than massively new waves, and I hope we will be able to deal with it a whole lot better. The uncertainty that hangs over the market is still, I think, very palpable. Not only in demand, but in, as I'm sure you've seen as well, pricing and everything. On gas, I'm a little bit more hopeful. I think the gas markets will recover more strongly. Industrial demand will come back. There is limited short-term alternatives for that.
I think also if we see a resumption of normal economic activity, space heating, power demand, et cetera, will all come back. I think the chances are that a full recovery is going to be probably more towards the end of next year. Let me leave it at that. See, Jessica, can you take care of Christyan's next question?
Yes. Good afternoon, Christyan. It was a little bit difficult to hear you, so hopefully I'm answering the right question. The main takeaway I had from your question was, do we have the right portfolio, is it fit for the future? That's what I'm going to speak to, hopefully that touches on the elements that you wanted us to touch on. I'd start off with what I believe is a view that the quality of our portfolio today is evident in the very strong cash generation that you see in the quarter against a very difficult backdrop. Difficult prices, difficult margins, difficult volume levels, and yet the capacity to generate $6.5 billion. I was kind of expecting, Christyan, you might ask us about the break-even price, usually this would be a good quarter to have that conversation, given the cash generated against this profile.
In terms of the quality of the portfolio, I think the results, certainly from a cash generation large extent, speaks for itself in terms of the quality assets that we have in IG and in our deepw ater business, and our marketing business, which continues to show a lot of resilience through a number of different macroeconomic backdrops. That being said, we want to continue to improve, make more robust, more resilient, more competitive, our portfolio. We're never off that train. On the refining side, we've been clear that we're going to reduce the number from 15 to less than 10. That is about having the assets that best align with our strategy and where we think we can competitively differentiate. With those assets, to continue to retool them for a low-carbon energy future.
That will be the work that we're doing in the portfolio over the coming years. There's the piece of leaning into the energy transition. What are we going to do with our capital as the economy recovers? It will recover at some point in time, and we will have surplus cash. When we have that surplus cash, and we want to grow the company, where are we going to look? Ben talked about leaning into the energy transition. Just to make sure when we use those words, energy transition, that we're clear what that means. It's not just our power business. It is our Chemicals business, it's our retail business, it's our Lubricants business, as well as power, hydrogen, biofuels. This is the future of the energy system.
This is where we believe we can lead, where we're going to be building out these businesses. There are different degrees of maturity. Obviously, the Chemicals business, retail business, Lubricants business, those are all much more mature businesses. Your ability to invest more and see the returns and have confidence in that capital program is greater. Our hydrogen biofuels, those are continuing to be maturing businesses and business models, so we're going to invest in those, but we're going to be prudent and make sure that we have confidence in the business model and the return profile. We'll take some risk, but we want to take prudent risk as we build out these new businesses and business models of the future.
Great. Thanks very much, Jessica.
Thank you.
Yeah. Thank you very much. Can we have the next question please, Rochelle?
Yes. We'll move to Henry Tarr with Berenberg.
Hi, thanks for taking my questions. Two quick ones, hopefully. Firstly, have you started marketing any of the refineries already? Is there any interest in those assets in what looks like a relatively challenged space longer term? Secondly, at this point, balance sheet permitting, do you have any appetite for M&A with distressed assets available in certain sections, particularly looking at the U.S., where you suggested Shell remains a core part of the business? Thanks.
Thanks very much, Henry, and two very relevant questions. Yes, we are marketing our refineries. At the moment, we have five active, and they are actually in active discussions. This is not like we've put out some information package. We are actually in discussions, and they are at various stages. Selling refineries is not a very trivial process. There's, of course, all sorts of, you can imagine, long-term liability issues and other things that have to be taken care of as well. We started when I worked in that business in 2004 with 55 refineries, now down to 15. We know how to also not only run them, but also to get rid of them. That's what we will be doing.
On the M&A front, of course, we always have to look at opportunities in the market, that you would expect us to do so. Of course, there could well be opportunities available. We've also, I think, been very clear about what our priorities for cash are. You can rely on the things that we have set when it comes to allocation of capital between the different priorities that we have. We have to live it in the frameworks that we have set out. Now, does that mean that we can do small-sized acquisitions that fit within the framework? Yes, absolutely, and that's why we are indeed looking. We have to obey the constraints that we have set to ourselves if we want to continue to market ourselves as a disciplined allocator of capital and one that preserves the financial resilience of the company. Thanks, Henry.
Can we have the next question, please?
Yes. We'll move to Jason Gammel, Jefferies.
Thanks very much. Ben, in your prepared comments, you mentioned that in a more stable environment, you would allocate capital to deleveraging, increasing growth CapEx, and increasing shareholder returns. I guess the question I have is, what's the priority there? You have talked several times about needing to step up capital spending for growth. You've also talked about getting the leverage ratio back down into the guidance range. The second question that I had is, I thought it was quite interesting you made a comment about evolving some refineries into low-carbon chains, and I was hoping that you might expand a little bit on what you meant there. Is that converting into a biodiesel refinery? Is that further integrating into petrochemicals? Anything you can add there would be helpful and maybe even your outlook for the biodiesel market.
Okay, great question, Jason. I'll take the second one, Jessica, the first. What I think is reasonably clear, I hope, from our outlook is we believe the future of refining tech, so pure refining, is going to be challenged. Doesn't mean you can't make money in it, but you have to have a sophisticated position in it. That means refineries with high complexity, very well placed, deeply connected into well-operating trading networks, so we can do all the tricks that I referred to earlier on in this call. Also, of course, more deeply integrated with other parts of the business. Conventional way of doing it, of course, is petrochemicals, but there's other ways you can do this. We can think indeed of biocomponents. We can think of also bringing green power, hydrogen, and other ways of integrating to it.
What you will see us do over time is indeed high-grading that more broad manufacturing part of our overall asset portfolio to just that. Very sophisticated multipurpose energy parks, if you like, integrated with product facilities. What that means, in some cases, may well be reducing the straight run fuels in a refinery, so right-sizing it down to a more fit-for-purpose output, but then repurposing some of the units to do other things with. You can repurpose, say, for instance, hydrocracking units to be a feedstock provider for extremely high-quality base oils for lubricants. You are tapping into a completely different market. You can indeed integrate some of the biofuel technologies in units that then make more money than to just do, say, hydro processing. You can bring a deeper integration formula with petrochemicals in areas where that is possible.
What you will see us do is just that. It's probably going to be a combination of shrinking the fuel make, repurposing units in such a refinery to other types of processing capabilities, and in the process, producing higher quality products or products that are less susceptible to the pressures that we are seeing at the moment. Very simple and conventional ways. If I just bring it to life with one more example, is to say, for instance, why would I want to upgrade the bottom of the barrel to middle distillates if I can also turn it into bitumen? That may not sound like a very sexy proposition, but I can tell you, if you are the most sophisticated bitumen marketer in the world, which we also are, it can actually be an incredibly profitable proposition.
It is tricks like this that you will see us do over the coming quarters. Jessica?
Thank you, Jason, for the question on our capital allocation and how are we going to prioritize cash as we return to a stable environment, hopefully sooner rather than later. We've tried to be very clear about our cash priorities. We've spoken to them in the same way for the last three or so years, and want to be very clear that the paying of our interest, our dividend, and importantly, ensuring that sufficient CapEx to maintain our assets and doing that all within a AA frame is top priority for us. The resilience of our balance sheet and acting prudently at this moment in time is absolutely front of mind and what drove the decisions that we've been making over the last six months, and in particular, the dividend decision.
When the world returns to a more stable place and prices and margins recover and our cash flow recovers in that environment, we're looking to get to comfortably within AA range. We don't have to be at the bottom of our targets. We don't have to necessarily be in the middle of the target, but we want to be comfortably within it and have confidence in the outlook. Once we're in that position, we are going to look at continuing to grow the company, so CapEx. We've put a lot of things on hold. Of course, everything hangs off of investing in the company and creating more value and generating cash that we're able to fund even greater shareholder distributions and support further growth going forward.
The investment in the company and investing in future cash flow growth is important. It's also very important that we have a compelling investment proposition for our shareholders, and increasing returns for our shareholders is also front of mind. We want to be number one from a total shareholder return perspective, and that's only going to happen if we increase dividends or do buybacks, and/or through share price appreciation. I hope that all three of those things are featured in our very near future. Ensuring that we've got the right return profile for our shareholders is absolutely front in mind. We've got to keep all of these things in balance. Right now, the priority, given the circumstances that we're in and the outlook and the uncertainty around the outlook, focusing on the balance sheet, I believe, is absolutely the right thing to do.
At one point in time, we'll be out of this moment. We'll have a strong balance sheet. We'll get comfortably in the AA metrics. We'll be looking to invest in the future of this company and in creating value, and importantly, ensuring that we've got a competitive and leading return profile for our shareholders.
Okay. Thank you very much. I see there's a few more questions, so I know we are over time, but I want to make sure we do justice to all of you. We're going to continue until the questions are done. Who can we give the mic to next, Rochelle?
Martijn Rats with Morgan Stanley.
Yeah. Hi, Martijn. Not at JP Morgan. I'll keep it to one, just because it's a long call already. Ben, you were recently quoted in a Dutch newspaper talking about moving the headquarters to the U.K., and I briefly wanted to take you up on that comment. It seemed a little out of context, but I wanted to make sure I raise it. Not specifically that point, but actually the broader issue of the unification of the shares. How do you think about that? Also as part of that, what did you actually say about moving headquarters to the U.K.?
Thanks, Martijn. As both you and I are Dutch speakers, I think you can actually read the interview in the Financieele Dagblad and see what exactly I said. I hadn't quite expected it to be actually a headline on the front page, I must admit. It was entirely correct and through what I said. It's very clear we are a unified company that is quite often insufficiently well understood. We are 100% British PLC, but we are headquartered in the Netherlands. That means that we are subject to the tax regime of the Netherlands. That was a conscious choice we made at the time in 2005, when we did the unification. Consequence of all of that was that we had to live with a unified share, but with two classes, if you like, or a single class, but two versions of it, the A's and the B's.
One with withholding tax and the other without withholding tax on the dividend. The expectation at the time was that the dividend withholding tax in the Netherlands would disappear, and at that point in time, we would indeed be able to simplify that dual share position as well. That hasn't happened. We've been in dialogue with the Dutch government for a long time on that. We have looked at all sorts of alternatives, but so far, we have not been able to exactly resolve this. Is that an issue for us at this point in time? No, it's not, b ut it gives us certain limitations that we have to obey. For instance, when we did the BG acquisition, we had to get permission up front from the Dutch fisc to issue B shares, to be able to do the acquisition.
We got the permission, obviously, but it is less than ideal. We can also not completely freely buy back any and issue any of the two shares. We can well live within that limitation, but I'm concerned that at some point in time, that limitation is actually going to be a real constraint for us. We've been very clear that we need to resolve that over time. We are very clear that it is not an issue for us at the moment. One of the solutions would indeed be to step out of the Dutch tax regime. We have no plans of doing that. There is nothing in the making at this point in time, but it is indeed, you have to have an open mind on anything. That is just what good business people need to do, have an open mind. That's exactly what I said.
I think we have now a new impetus to dialogue with the people in the Netherlands on how our share structure issue gets resolved, and I'm hopeful and confident that it will get resolved. There is nothing specifically in the making at this point in time, much unlike it has been suggested in some Dutch newspapers.
Yeah. Thank you.
Okay. Thanks, Martijn.
Yeah.
Let's go to the next question, Rochelle.
We'll hear from Irene Himona with Société Générale.
Thank you. Good afternoon. One question from me as well, I guess for Jessica. If we assume that the unprecedented volatility of the first half doesn't repeat, if we stay where we are, more or less, in terms of pricing, can you say whether you're managing working capital so as to release cash in the second half of the year, please? Thank you.
Thanks, Irene. I think, Jessica, if you would take that one.
Yes. Good afternoon, Irene. The working capital increase in this quarter was driven by the increase in price predominantly, at about 2/3. A third of it was associated with increase in volumes. That, of course, is the basis of how we secure the trading upside that we saw in the quarter. The most important driver, typically, of our working capital changes, particularly with respect to inventory, which tends to be what drives the working capital number each quarter, is really price-driven. That's not so much a connection to the volatility. Volatility is probably connected to the volumes, I think that's really difficult to call. That's part of the strength of our balance sheet, is to use that to create value. To the extent that we see value out there, then we're going to maintain those volumes.
If that's not the case, then potentially you'd see a rundown in the inventory levels in the coming months. Hopefully that's helpful.
Let me add one point to it. We manage working capital on a relatively intensive basis. It is cash after all. Of course, while we can make good returns on working capital, as you have seen this quarter, it doesn't mean that it's on tap in the trading organization. We have a very strict management framework with involvement from the treasury to make sure that we deploy working capital in a very disciplined way as well. Let me see whether we have a next question, please, Rochelle.
Yes. We'll move to Christopher Kuplent, Bank of America.
Thank you. Two questions, please. Please call me impatient, but both of them are trying to look ahead to your capital markets update and your 2025 outlook. Firstly, even if CapEx under a non-recessionary environment steps up, currently you're spending about 5% on emerging power, and I think it wasn't so long ago that I heard Maarten say you wanted to become the largest electricity company in the world in the 2030s. Would you agree that 5% of group CapEx is probably not the right level for the coming decade? Just to see where the direction is going. I don't want to put any words in your mouth. Secondly, you impaired assets down on a lower short-term price deck, but you still left the $60 Brent real term.
Can you comment whether that is also going to be the very oil price that you used in the past for your 2025 outlook? Whether actually impairment tests are completely separate from your view of the next five years as you're updating that plan for February. Thank you.
Thanks very much, Christopher. We understand that you are impatient. I'm sure you're not the only one on this. You're also absolutely right that indeed, with the constraint and reduced and pared back capital program that we have this year, everything had to give a little bit. Even though we may have been a little bit more prepared to still preserve a good de minimis investment program in power, it definitely did not escape very, very close scrutiny as well. With this diet, can we succeed in our ambitions through a decade? Well, I can safely say no. A decade is a long time, and a lot of things will happen and have to happen for us to evolve to the company we want to be.
If indeed this environment would stay with us for the rest of the decade, well, I guess we would be living in a totally different world at the end of the decade as well. I'm not at the point where I just say everything is permanently different and it will only be like this going forward. Of course, there will be a recovery. Of course, there will be more capital for us to play with. Of course, we will have, again, an abundance of choices to make. We will not be on a very, very strict diet. Indeed, if you are talking about a decade here, Christopher, let me say that very clearly as a preface. In the next decade, there will also be inorganic opportunities available to us if we play our strategic cards very well.
With that, think you will have to wait indeed for the 11th of February before we can say a little bit more about it. Jessica.
Thank you, Chris, for the question on the impairments in the price lines. In terms of the decision or the choice made in terms of our outlook on prices in April, May this year, be clear for the Upstream and IG business that reflected a changed view in the outlook of prices, a reduction of some 15%-20%, whereas in the Downstream business it was around 30%. We did change our long-term outlook in addition to the short to medium-term outlook out to 2022. As part of the process, we take a lot of input in terms of making the decisions of what is the right price line from an impairment perspective. We compare that against peers, against consultants, against analysts, bank reports, et cetera.
In that comparison, we show up to be relatively conservative in the first few years and middle of the pack to lower part of the pack for the later years. Just to get a sense of where we are in the range of informed opinions on the price lines. This is an impairment line. Basis of what we do our strategy on and basis of what we plan on isn't necessarily these numbers. Importantly, we're consistently looking at a range of outcomes because of the dynamic elements that we've been speaking to, not only of the short term, but of the long term as well.
I think it's an indication of a view, and it's certainly important in terms of the balance sheet valuation, and you have to pick one number when you do the impairment line. We try and do that in a way that's informed and wise. I think these numbers represent that. It's not necessarily the one view or the only view, particularly when thinking from a strategic perspective and planning for the business.
Okay, thanks very much. I think actually that brings us to the end of the call. We've gone over a bit, and I apologize for that, but I hope you found it nevertheless valuable. Thank you very much for staying with us for this extra time. Thank you very much for all your questions. Of course, for joining the call in the first place. If there's any further questions outstanding, our IR team will make sure that they get properly answered. Of course, we will have third quarter results as well. They are on the 29th of October, and we look forward to talking to you then. Of course, we have the strategy day, which we will do on the 11th of February 2021. Let me tell you, I look forward to seeing you then.
With that, I hope you will have a good rest of your day and indeed a good summer. Thank you very much.