Welcome to the Royal Dutch Shell 2021 Q3 results announcement Q&A session. Today's session will be recorded. People dialed in, if you wish to ask a question, please dial star one. If you wish to be removed from the queue, please press star two. I would like to introduce Ms. Jessica Uhl, Mr. Ben van Beurden, and Mr. Huibert Vigeveno.
Welcome everyone to the live Q&A on Shell's third quarter results. This quarter's performance is a result of the strength of our portfolio and how well-positioned we are for the economic recovery. We are delivering sector-leading cash and making progress towards becoming a net zero emissions energy business. Let me also reference the investor letter published yesterday by Third Point. We issued a statement to acknowledge our receipt of the letter and to say we have had initial conversations with Third Point through our Investor Relations team. We will engage further with them as we do with all of our shareholders. I know you'll have questions on this topic, and I hope you'll understand there isn't much more we can say at this moment.
Today, Ben, Huibert and I will be answering your questions. Please, could we have just one or two each, so everyone has the opportunity? With that, could we have the first question, please? Tracy, over to you.
Thank you. We will now begin the question and answer session. Phone callers are requested to immediately mute the audio on their computer webcast and listen intensively to their telephone audio as we begin to progress through the telephone questions. If you would like to ask a question, please press star one. If you wish to be removed from the queue, please press star two. We will now take our first question from Oswald Clint from Bernstein. Please go ahead.
Thank you very much, and good afternoon everyone. My first question is for Ben. Ben, you very bravely sat on a stage last week at the TED conference and a tough crowd. I wanted to get your reflections on that, please, in terms of, you know, winning over the public and also the views of, I mean, certain shareholder types who are on the stage with you. I mean, the question is, do you think you can eventually appease all of these disparate views? Or do you think just successfully executing and getting Powering Progress strategy unlocked on this side of 2025 will ultimately prove the doubters wrong?
Secondly, I want to ask about LNG. I think 10% or maybe 20% of your LNG term contracts are up for renewal over the next three years. Getting Powering Progress strategy unlocked on this side of 2025 will ultimately prove the doubters wrong. Seems like a pretty good time to be renegotiating those. Seems to be a bit of a seller's market. Do you think you'll be able to increase the slope on these contracts? On that, I think my own impression was Martin was a pretty tough negotiator in this respect. Should I be worried that he's left? Thank you.
Ben, I'll let you start the first one.
Well, I will not answer the second question. I think it's probably more for Jessica. Let me say one thing, Oswald. If you haven't Wael'd someone yet, then better pay attention to how he negotiates. On the TED thing, well, I'm not sure whether the rest have seen it, so maybe a bit of context. It was indeed a dialogue with an activist. Actually two activists, I would say, although one called themselves an Active Owner. I think it's, to be perfectly honest, the discussion with Chris James, I thought was very good. I respect him very much for his perspectives. The one with the activist, probably less so. It also shows a little bit indeed the sentiment in society these days about the narrative around our companies and the inability, I suppose, to also listen and see what it is that we have to say.
I think it's nevertheless important, Oswald, that we keep on trying and that we bring our perspectives in, and that we also position our perspectives not just as a sort of cold and calculating asset developer or whatever, but also as human beings. It is after all also my planet. I also have four kids, and I also have a personal reputation and perspective that I need to look after. Also as human beings, it is after all also my planet. For me, therefore, as I said on that stage, this is highly personal. It always was. It was never gonna be any different. Can we convince our critics? Our real critics? Probably never. Can we convince significant parts of society? Well, I hope so.
Well, I hope so. I'm also really certain that what I also said right at the end, the words "trust me" are not going to cut it anymore. I can probably just do that with my children. It needs to be a new set of facts that needs to emerge around our company. I think we're working very hard on that. Again, this quarter, you will see lots of proof points, and we will continue to add to these proof points. Hopefully at some point in time, the narrative will simply change because the facts have changed.
Oswald, in terms of your second question on LNG and the outlook on the contract pricing going forward, this price environment is certainly supportive in terms of shifting up the value we can achieve in our long-term contracts. I would say that we've had some success in that respect. These uncertain times, these high prices bring value to companies such as ourselves who can provide the stability and certainty in terms of supply.
Certainly, our customers value more certainty on the pricing and are willing to pay for that risk management from a pricing perspective. As ourselves who can provide the stability and the certainty in terms of supply, and we're starting to see that. I'm optimistic that this will have a positive effect on our contract renegotiations that will occur over the coming years. In terms of Martin leaving, I'm sad to see him leave Shell, and I wish him very well. He's been a great partner on the executive committee. Wael is a fantastic leader. He is very good at getting the most value out of the businesses he's run, and we've seen that in the upstream. I'm looking forward to his impact in integrated gas, and he is known as being a pretty good negotiator himself. Tracy, next question, please.
We will now take our next question from Michele Della Vigna from Goldman Sachs. Please go ahead.
Thank you very much. It's Michele. I have two questions. The first one probably for you, Jessica. You know, it's very welcome to see a major recovery in the LNG volumes from your guidance for Q4. I was wondering if we should expect this to allow the trading, and volume maximization, to come through in the LNG results in the fourth quarter after effectively very low results in Q2 and Q3. Then one question for Huibert on refining. Fourth quarter after effectively very low results in Q2 and Q3. One question for Huibert on refining. We are seeing much higher margins, but we're also seeing higher costs for energy, for carbon in Europe.
Should we expect a material improvement in the profitability of the business as we go into Q4 and next year? Or do we run the risk that this is just a cost-push higher and that therefore margins do not substantially improve? Thank you.
Michele, thank you for the questions. I'll start with the first then hand over to Huibert. In terms of the LNG business, both in Q3 and the outlook, let me just spend a couple minutes or a couple moments rather on Q3 and then shift to the outlook. In the third quarter, our underlying assets have performed well from an LNG perspective, and those assets have seen upside associated with the current price environment. For instance, Prelude has been ramping up. Those volumes are being sold into the current market pricing, and that caused some $400 million improvement from Q2 to Q3 in our LNG business. However, in the third quarter, from a trading and optimization perspective, there were supply disruption issues that unfortunately continued into the third quarter from third-party gas issues flowing through into the terms of the LNG supply chain for our trading business. That had a negative effect for us in the quarter. It's really the trading piece and for our trading business that had a negative effect for us in the quarter.
It's really the trading piece and the supply from third-party suppliers that have had negative impact in the third quarter. I'd like to make the distinction from our own operations and our own assets versus some of what's happening on the trading side. If you look forward, unfortunately, some of those issues we expect to continue through the fourth quarter and even into the first quarter. I think we'll have this behind us as we get into the second quarter in 2022. However, this positive price environment will be reflected in the performance or the returns that we'll generate from our assets.
Some of the issues that we see in the third quarter on supply from a trading perspective will persist a bit into the fourth quarter and into the first quarter. Some of the issues that we see in the third quarter on supply from a trading perspective will persist a bit into the fourth quarter and into the first quarter, and hopefully be behind us by the second quarter of next year. Huibert?
Yeah. Thanks very much, Jessica, and thanks to Michele for the question. Looking at the refinery margins we indeed saw an average uptick in Q3. Looking into Q4, we within our own portfolio still have some items around maintenance turnarounds at Scotford, at Rheinland, and the effects of Hurricane Ida at our Norco refinery. What I can tell you is that indeed the cost structures of some of these refineries turnarounds at Scotford, at Rheinland, and the effects of Hurricane Ida at our Norco refinery.
What I can tell you is that indeed the cost structures of some of these refineries, particularly the feedstocks and associated items, have gone up. When I was visiting our partner's refinery two weeks ago, I can assure you that there are daily and nightly calls between economics and scheduling and our trading teams to consciously optimize and determine how we further can gain value out of that. On the future outlooks of refinery margins, there's not too much I can say other than that I do believe on a global scale, there's still quite some overcapacity.
Great. Thanks, Huibert. Next question, Tracy?
We will now take our next question from Lydia Rainforth from Barclays. Please go ahead.
Thanks, and good afternoon, everyone. Two questions if I could. The first one, just on the emissions targets and the new target 50% reduction for Scope 1 and Scope 2. I think that's already included within the CapEx plan. I'm just trying to work out what is different or what's additional to where we were in February. Then secondly, Huibert, marketing is clearly going very well. How does this bit of the business interact with the partnerships that are outlined in the presentation? Effectively, are you seeing a lot more demand for the carbon management and effectively energy as a service?
I know, actually, but this may link in the presentation. Effectively, are you seeing a lot more demand for the carbon management and effectively energy as a service? I know, actually, but this may link to that, to the idea, actually, does Shell work better as one integrated company rather than lots of different ones? Thanks.
Thank you, Lydia. I'll start with the first question then hand over to Huibert for the second. Yes, the emissions targets we announced today, really pleased to have those out into the market. This is the absolute emissions target for our Scope 1 and Scope 2 emissions under operational control, where we're looking to reduce this by some 50% between 2016 and 2030. Indeed, in order to achieve that, we have already Scope 2 emissions under operational control, where we're looking to reduce this by some 50% between 2016 and 2030. Indeed, in order to achieve that we have already at hand both the strategy as well as the capital allocation that's required to deliver on that ambition.
What's different now is that we've added an absolute target. I think that we've complemented our targets. All of the levers that are necessary to achieve that by 2030 were contemplated when we introduced this strategy in February. Yes, from a CapEx perspective, and importantly from a returns perspective, we don't expect this additional target to cause any change in that. It's simply executing the strategy that we'd laid out. Now, of course, each week and each month, we learn new things. Certain things go better than expected, certain things didn't go, don't go quite as fast as we would hope. Of course, we're learning every day.
Essentially the main levers, certain things go better than expected, certain things don't go quite as fast as we identified in Strategy Day 21 in terms of what is needed to achieve this reduction are already in place, and therefore the capital has already been considered and the returns are already considering these changes. Huibert?
Yeah, thanks, Jessica and Lydia, good to hear you. A couple things. You're absolutely right that our marketing businesses are doing extremely well. Since 2013, we have a net earnings CAGR of more than 7%. As you could see in the presentation Jessica gave that we continue to perform well. A lot of that is due to many factors. It's around our focus on premium products like V-Power and the penetration we can get. It's our focus on loyalty customers. It's our increase in convenience retailing, which we've now increased to 12,000 sites and actually is generating a gross margin of more than $1 billion.
You also have to realize a lot of that is integrated as well. It's our focus on loyal customers. It's our increase in convenience retailing, which we've now increased to 12,000 sites and actually is generating a gross margin. Integrated as well. We operate in 80 countries in retail, and that's all integrated with our trading and supply businesses, with our distribution businesses. So it's really an integrated value chain. If you look at the way we run our EV charging, our ambition is to be able to provide you as a customer the EV facilities you need where you are, when you are. That can be at home, that can be on the street, that can be at destinations or at Waitrose, or it can be as you go to one of our retail sites. With that, we will also then offer you the ability to recharge yourself. All those activities are coupled together, and we need to make it very easy for you.
There are other important parts of our marketing businesses. For instance, our lubricants business, where we're now 15 years in a row number one, and we increased our market share. That's fully integrated with the energy and chemical parks of the future, as we need to provide high-quality base oils, Group II, Group III, to be able to make these great lubricants. Our top-tier lubricant, actually, which can give you the fuel efficiency of 4%-5% for passenger car, comes actually from a base oil from Qatar GTL. So there you can really see the integrated nature. Another example is bitumen, where it is fully integrated with our energy and chemical parks, where we make the quality bitumen based on the customer demand.
Customer demand is working from the customer back, looking at the integrated nature of the energy and chemical parks we have.
Great. Thanks, Huibert. Next question, Tracy?
We will now take our next question from Irene Himona from Société Générale. Please go ahead.
Thank you. Good afternoon. My first question back to the new Scope 1 and 2 absolute emissions reduction target. Is it possible to split it in two, please? So how much of that will be from disposals versus own decarbonization? What will be the contribution of the Permian disposal to that 50% target? My second question, Huibert, on marketing. If you can please talk a little bit about what you're seeing in your key geographies in terms of retail demand recovery and which areas remain problematic for you at that retail end. Thank you.
Thanks, Irene. Ben?
Yeah, thanks, Irene. On the target, maybe, again, recap a little bit. It's a 50% reduction target compared to 2016, when we had 83 million tons of greenhouse gas emissions coming down to 41. If you would compare it to 2019, it's a 48% reduction, so that is therefore also better than what the court ruling in The Hague required us to do. That's why we are saying it's an important contribution to that ruling. It's of course, just the emissions that are under our control that we can do something with. Emissions from our own facilities as well as the emissions associated with the energy that we buy, power, most of the time. Now, can we break that down?
Yes, we can, and we will give you probably an update by the time we get to the AGM. Like we are saying, it's an important contribution to that ruling. It's of course just the emissions that are under our control that we can do something with. Emissions from our own facilities as well as the emissions associated with the energy that we buy power most of the time. Now, can we break that down? Yes, we can, and we will give you probably an update by the time we get to the AGM for next year. Because this is part also of our plan to put forward the progress that we are making with the attainment of our targets and ask for an advisory vote from our shareholders to understand what they feel about the progress that we are making.
We actually made quite good progress. We have already done out of the 50%, 17% by the end of this year, because this is part also of our plan to put forward the progress that we are making with the attainment of our targets and ask for an advisory vote from our shareholders to understand what they feel about the progress that we are making. So you can see that we are making progress. Are there divestments in that? Yes, there is, but also closures and conversions and high grading of facilities, et cetera, et cetera. Most of it is indeed just that. It is a shutdown of a crude distiller in Pulau Bukom. It is a conversion of a refinery into a terminal. It is more efficient furnaces. It's also going to be CCS, and it's also going to be other components that contribute to it.
Now, how much is the Permian? Negligible. Because you have to bear in mind our Scope 1 emissions, and even most of our Scope 2 emissions, are associated with our refineries, our chemical plants, our LNG plants, and our GTL plants. If you look at the contribution on Scope 1 and Scope 2 of our upstream, it is actually a very small amount. It is a few percent. I don't have the number off the top of my head, but I would be surprised if it was more than half a percentage point if you look at the Permian. Irene, we have also a video that we put together explaining again how Scope 1, 2, and 3 emissions work, what we're doing about it, what are the quantums, how are we tackling them?
I would recommend you take a view at it because it is a few percent, and I don't have the number off the top of my head, but I would be surprised if it was more than half a percentage point if you look at the Permian. Irene, we have also a video that we put together explaining again how Scope 1, 2, and 3 emissions work, what we're doing about it, what are the quantums, how are we tackling them? I would recommend you take a view at it because it's probably one of the least well-understood aspects of our strategy, how all these scopes come together and what we are doing with it. Thank you.
Irene, and good to hear you. If you look at the mobility volumes, we see actually an interesting trend. If I look at Q3 compared to Q2 of this year, we're probably at 106% of volume. Actually it was our highest volume in the last seven quarters. Then you might say, "When was it before that?" Well, we're not at the levels exactly on a volume basis on Q3 2019 yet. That's around 92%, 90% of Q3 this year. I do see quite some regional differences.
You ask me, "Well, which region is behind and which one is doing better?" I particularly still see a bit of this year, we're probably at 106% of volume. Actually it was our highest volume in the last seven quarters. Then you might say, "When was it before that?" Well, we're not at the levels exactly on a volume basis on Q3 2019 yet. That's around 92%, 90% of quarter three this year. But I do see quite some regional differences. You ask me, "Well, which region is behind and which one is doing better?" I particularly still see a bit of a softness in the East, and that's obviously many countries together.
There's a direct correlation with the still the impact of COVID-19 and the lockdowns. If you look at a country like the Philippines, where we have more than 1 million customers, there's been basically a lockdown for around 18 months right now. If you look at Malaysia, there's still some severe lockdowns and other parts of the East as well. So we see that through in our volume figures as well. I think one of the things we are demonstrating, however, is how resilient our mobility business is, that is not depending purely on the volumes, that we're able to make these very high-end record earnings.
I think this quarter is probably our second best ever for mobility, driven by different factors. I think Jessica presented that today, that we show that, 40%-50% of customers in many of our key markets don't come for fuel. They actually come for convenience retailing. You can see the differentiation coming through in that part of the business.
Thanks, Huibert. Tracy, next question, please.
We will now take our next question from Biraj Borkhataria from RBC. Please go ahead.
Hi, thanks for taking my question. I just have a follow-up on marketing, given your slides today. That business has been an incredibly stable business, and it actually generated some of the highest returns in the portfolio. It looks like through the pandemic, the metrics are only getting stronger and going in the right direction. You could make a, or I could make a reasonable argument that this business should be on a much higher multiple than
The rest of the business, but obviously gets hidden in the mix. The question is, are the metrics only getting stronger and going in the right direction. Or I could make a reasonable argument that this business should be on a much higher multiple than the rest of the business, but obviously it gets hidden in the mix. The question is, you know, if you were to look at a partial listing or float of the marketing business, but maintain the majority stake, you know, what is the downside to Shell or what would you lose? And then second question is just following up on Ben's comments around Scope 1 and 2.
You know, growing your LNG business is a strategic priority for you know, if you were to look at a partial listing or float of the marketing business but maintain the majority stake, you know, what is the strategic priority for you. Obviously from a Scope 1 and 2 basis, those can be quite carbon intensive. Obviously there you're adding, you know, large chunks to capacity as you get these things online. As you put the targets out today, does that have any implications for your ability to grow that business? Or does that imply a shift from equity volumes being an offtaker? Or are there any other constraints around that? Thank you.
Thank you, Biraj. Huibert, do you wanna share your thoughts on integration value and versus kind of a standalone entity, and then Ben?
Yeah. I think no, absolutely. I think a couple of things. I think on the question on, say, price earnings, one of the things we realized that we need to disclose much more about our marketing businesses, and that's exactly what we're doing now, and we will continue to do next year. That you and others, Biraj can understand that business in much more detail and ask questions in much more detail around it, and then hopefully see that reflected back in the investor base. But it's also very clear in my mind that a lot of the value is driven by the integration we have. I gave you some examples of our mobility business.
There's no way we can run that business without the close integration with trading supply distribution to get that physical flow of molecules, being able to source that better. If you look at our lubricants business, it's not only actually integration with base oils, it's also on the additive side. Our bitumen business is totally integrated in itself as well. There are many reasons why it is actually one value chain.
If you go to the next step and you look at the value chains of the future, the ones we're creating, for instance, with sustainable aviation fuel, it is really the gain for me, for instance, of what we're trying to do at, with Pernis HEFA, where we are building one of the largest biofuels plant in Europe, is the optimization opportunity it gives me. So let me explain to you. Because I have the customer base in aviation, but also in shipping and also in chemicals, I can determine by making those biofuels, how do I optimize that always better. I need to have a location where I can make them.
Let me explain to you. Because I have the customer base in aviation, but also in shipping and also in chemicals, I can determine by making those biofuels, how do I optimize that always better. I need to have a location where I can make them, where I have the people, where I have the logistics and where I actually have the permits, and then I can always optimize between, shall I make more sustainable aviation fuel? Shall I make more renewable diesel, or shall I make more bio-naphtha for cleaner chemicals? But then you need to work from that customer back.
For instance, in the Pernis example, if I wanna make sustainable aviation fuel, I actually have a pipeline from Pernis to Schiphol that I can go directly into the plane of KLM or any other customer I have with a blend of biofuels. That integration value is real, it's complex, but it is really a very high value for us in the marketing businesses.
Great. Thanks, Huibert.
Yeah.
Thanks. Just to add to that point, very briefly, indeed, there were times that we had some of these value chains sort of cut up and distributed with different ownership structures. I actually personally spent a large part of my career undoing all of that because you actually do create tremendous barriers with Chinese walls and arm's length relationships and non-competes and antitrust issues, et cetera, that actually eradicate the integration value that Huibert so well described. On your other point, the LNG plants, yes, indeed, they do have a certain quantum of emissions.
Of course, the ownership needs and antitrust issues, et cetera, that actually eradicate the integration value that Huibert so well described. On your other point, the LNG plants, yes, indeed, they do have a certain quantum of emissions. Of course, the ones we operate, which are quite a few, actually come onto our account. We've been very clear, therefore, that if we want to build new LNG plants, they better come with very competitive carbon footprints on the operational side, and we have to find ways to offset this. Offset not with nature-based solutions, but offset it with savings elsewhere. I've been very clear with our organization, if we are to do another LNG plant, say for instance in Canada, it needs to come either without emissions.
You need to find a way to reduce emissions elsewhere because we are on a trajectory to bring down our emissions to net zero by 2050. That means that every emission that you add, you somehow have to take out elsewhere. That, I think, is the real challenge. It's also the challenge that the world has, and that's a challenge that we are rising to.
Great. Thanks, Ben. Tracy, next question please.
We will now-
The last responses on the value of integration because I mean, I think it's a fair question with any company, does it make sense to have as many different businesses? You talked a little bit about it with lubes in the downstream, but as we step back and look at the overall operation, probably a question for you, Ben, but like, where all should we think about the integration value? How should we as analysts and investors think about Shell integration?
Thanks very much, Roger. I think, of course, integration is quite often an overused word, and we have to work harder to make clear what we actually mean by it. There's two levels I would say we have to think about, one of which is the fact that indeed we use our assets and our supply chains and our customer contracts and our trading and supply business as one ecosystem within which we can optimize. You heard some of the examples that Huibert earlier mentioned, but actually we have that across our entire piece.
You will have seen that we also in the introductory video that Jessica did, we talked about, you know, how we're going to use wind power on sea to turn into hydrogen, to turn into molecules, and to turn into transportation fuels. All these things are only possible because we have the opportunity to integrate, and we have the opportunity to treat our business as a network. Much in the same way, of course, when you think about biofuels and the like. Integration is partly the network effect, so it is an enabler for doing energy transition plays that are otherwise incredibly hard to piece together in for the future, are going to be, of course, absorbing cash because we build them from very low to no materiality to something that is quite significant.
That has to be funded as well. We've been very clear in our strategy that we see our upstream business not just providing the energy that we need today in this world, but also the funding that we need to build the energy system of the future. Now, we believe that we can do that quite efficiently in Shell, and that is what our strategy is all about. If you again take that away, you effectively take away our ability to invest in the future of energy. That's two levels to think about it. There's much more, of course, that we could talk about, but these are two very important considerations for the holistic and coherent strategy that we have.
Thanks, Ben. Tracy, next question please.
We will now take our next question from Christyan Malek from JP Morgan. Please go ahead.
Hi. Thank you. It's Christyan Malek. So first, may I just say congratulations to Wael, and given his level of 2026 and all the sentiment, is it just simply cyclical? I mean that, in the sense that, you know, you fast-forward a year, commodity prices remain strong and Shell's generating significant cash flows. That narrative diminishes in favor of more sort of a constructive dialogue around your business to decarbonize. Now, assuming that plays out, and referring to the shareholder activism that we're seeing, why wouldn't you consider breaking up the business if it generated shareholder value if at the same time you can deliver on your commitments to climate change?
In the asset manager world, and it finds its way in the asset owner world. Let's also be very clear, the world still needs oil and gas. It's using oil and gas. As a matter of fact, it's using more of it at this point in time than it used to before, and therefore it has to be provided. I think therefore it is not only legal, it is legitimate and necessary that oil and gas products are being provided, and they better be provided by companies that, first of all, know how to do it, have a very responsible attitude to doing so, and indeed have a strategy to use some of that cash, not just to fund shareholder distributions, but also to transition the company to a better, a cleaner, a lower carbon slate.
That means that we are a company in transition. Now, some people don't like that. They say, "Well, you know, I don't want to be part of this transition. I just want to only jump to those companies that never had to do a transition or that have already transitioned to whatever else." The reality of it is, Christyan, then that is actually going to impede the transition as well. In the end, the energy transition that we are talking about, and I'm here talking about humanity, not just for the investor universe, is going to be an energy transition that will only come about when companies with the scope, skill, and scale like us actually make it happen and actually work with our customers to say, "We can help you, use different types of energy products.
If you have issues in terms of competitiveness, let's jointly work on the right policy framework that governments need to put in place to make all these things happen. I do think there is a role for us in that. Now, you might say, "Well, you know, that sounds like you are an NGO or a government. In the end, you just have to deliver returns." Believe indeed, we are never done explaining that strategy and re-emphasizing aspects of it, but that is what we believe in, and that's what we will be going for.
Thanks, Ben. Ben's covered it really well, but perhaps a couple other points quickly. In terms of value creation, shareholder value, if we focus on the substance of our businesses, we have spent a lot of effort and energy over the last couple of years reshaping our upstream business. In the third quarter, our upstream business generated some $5.8 billion of cash flow from operations. That's the highest we've seen since 2018 on a much lower production base. That's a great example of how we've reshaped that portfolio for value over volume. It's a great franchise generating a substantial amount of cash. If you look at our EBITDA for the third quarter of some $13.5 billion, half of that comes from our upstream business.
We've got a really great business, highly cash generative, high value business. That's part of who we are as a company. We've got, I think, unique skills and capabilities in that space to responsibly provide oil and gas to the world. From a substance perspective, it's not obvious why you wouldn't want to have that in your portfolio in terms of who we are as a company and what we do well, but also in terms of funding the energy transition. The energy transition is going to need anywhere from $2 trillion-$4 trillion a year, depending on who you ask, over the next 30 years.
Our upstream business is a source of cash for us to then fund the energy transition that's so needed. From a substantive space, because we've got the skills and the capabilities and the assets within our portfolio, and we can get all of those teams in the same room to work out all of the issues that need to be worked out to create these new business models of the future. I think that is our source of competitive differentiation, with respect to the energy transition, particularly for fuels. Tracy, next question, please.
We will now take our next question from Jon Rigby from UBS. Please go ahead.
Hi. Hi, everybody. Thanks for taking my question. I missed, and this could be to do with poor forecasting, but it appears to have missed consensus earnings expectations six out of the last seven quarters. You might argue that even the trading update at the end of September didn't quite capture all of what was going on. With some of your peers actually making very good money in the LNG space, I was just concerned, and maybe I'm looking for reassurance here, that what was a very strong, highly profitable business was there somewhat by virtue of the fact that you dominated the space , and that actually now it's become much more competitive and your sort of competitive positioning is not as good. Therefore, maybe we're a little too optimistic. I wasn't able to capture. I remember a question maybe a year ago, and I asked whether there was a structural issue in Integrated Gas, and you said there wasn't.
The second question is on buybacks. I see you've done sort of the thick end of $1 billion in the third quarter. Obviously, you only started in August, and August is a fairly thin month. I imagine, you know, September was a decent month to do it. Yet you've not upped it into the fourth quarter. I'm sort of conscious of the amount of CFFO you're generating and the sort of straight calculation of a buyback from that, plus the commitment around the ConocoPhillips proceeds. Can you just explain to me with the fact that you're only doing B shares, and I think this is the second-largest B share purchase in any one quarter, how you are gonna get the share buyback program done? Thanks.
Great. Good. Thank you, Jon. LNG, our Pearl asset, our retail business is going quite strong and some of the best operational performance we've ever had, and that business is also contributing to the results. It's on the LNG side, I think, where most of the questions are. I'd say this, you know, this has not been the strongest year for the business. I remain very confident in the sector and very confident with our competitive positioning in the sector. I look in 2018 and 2019, we had a couple really outstanding quarters. When we had those quarters, I cautioned the market that these were really outstanding and this shouldn't be considered kind of the base expectation for the business.
I think that may have set expectations a bit high. Coming into 2021 in the last couple of quarters, the issue has really been around supply issues in our trading part of our business. This isn't an asset business, as I tried to make the distinction before. Our assets are performing well. Prelude's ramping up. It's enjoying this current price environment. You see some $500 million of new incremental earnings over Q2 associated with our assets, and that's a combination of performance and obviously the market. On the trading side, the real challenge has been on supply issues coming out of Peru, Trinidad, Nigeria, which I've mentioned before. Peru's up and running again, so hopefully that's behind us.
As I said, as we look into 2022, hopefully we can get the overall supply position where we need it to be with some of these other assets addressing the issues. Although most of those issues are related to third-party gas suppliers and aren't really Shell issues. So I think structurally there is absolutely not an issue. I think we have a very competitive business. Last year, the business did really well through a very difficult market, and that was to a large extent because of the strength of our trading business supporting in a very difficult market and propping up, if you will, earnings and cash flow. This year, unfortunately, not getting the same benefit from it. Again, this is really driven by supply issues and not kind of the fundamentals of the business.
As Biraj, a couple points to raise there. In the last 90 days, we've announced some $10 billion of incremental distributions to our shareholders if you consider the dividend, the share buybacks, and then the proceeds that we're going to distribute out of Permian. Feeling we're in a good place in terms of returning cash to our shareholders through various forms of distributions. That's the first piece. The second piece is in the second quarter we talked about, or I referenced, that we would then look at the next tranche of shareholder distribution increases in Q4. We'll be doing that in the fourth quarter. Of course, we have our annual dividend increase, but of course we'll be looking at the 20%-30% range. We'll do that looking back on the prior 12 months.
Of course, the results of this quarter will feature in the decision-making that we have in the fourth quarter in terms of increasing shareholder distributions. In terms of the pace, there is some constraints in terms of being able to execute that as efficiently as possible. That's why we're buying the B shares currently. In terms of trying to do that as fast as possible, there's various tactics that we're looking at, and we'll be more clear certainly once we get the proceeds in with Permian in terms of how we expect to execute that as quickly and as efficiently as possible. Thank you. Tracy, next question, please.
We will now take our next question from Martijn Rats from Morgan Stanley. Please go ahead.
Yeah. 30% decrease between now and 2030. If you look at the IEA net zero scenario, clearly the most stringent scenario that the IEA has, there is a sharp decline in oil demand, but it's only 30%. So it sort of sounds like you're sort of shrinking this business faster, very substantially faster than even the IEA net zero scenario sort of requires, which makes it quite interesting. I was wondering if you could put these things in context and also how much of this decline is sort of disposals and will still be operated by other people versus actual closures.
Because frankly, if companies like Shell are looking to shrink these businesses even faster than a net zero scenario requires, it does make you wonder who at least on the timeframe between now and 2030 is gonna produce these fuels. That was one. The other one is a much smaller question. In the statement there is a comment that there were comparatively lower earnings contributions from Renewables and Energy Solutions in North America. And I was wondering if you could say a few words sort of precisely what is in that business and what was driving that, and also how material the lower earnings contribution is there.
Good. Thank you, Martijn. I will quickly answer the final question you had and then hand over to Huibert. The reduction in margins on our renewable energy solutions business in North America is really a delta versus the second quarter, where we had a bit of a makeup posting, if you will, in our increase in reserves related to our mark-to-market positions. It's not a kind of fundamental issue with the business. It's really a delta versus the second quarter and not a signal in terms of the underlying performance of the business. Huibert?
Yeah, thanks. Hi, Martijn. No, the going from 100 million to 45 million barrels a day fuels by 2030 is an existing target. We mentioned it in the SD21. It's to a certain extent, it's the transformation of our refinery to energy and chemical parks. It includes the divestment of some of the refineries we've done over the last year and a half, Martinez, Fredericia, working on Puget, Mobile, Deer Park, and PCK. It also includes the conversion to a terminal. What we're doing in Tabangao and what we're thinking of a Convent refinery in the U.S. In Bukom, we actually took out a crude distiller, so we fundamentally reduced quite significantly the fuels capacity. Importantly, it's not just taking out the fuel capacities, what do you actually do?
In my view, in a customer-led world, we should make products and services based on the needs of customers, which are not only commodity-driven, but we're able to price on what that product actually does. The technology's in the product. What we will replace it with in the energy and chemical parks, which we will retain, will be more performance chemicals, more base oils for lubricants, more bitumen, which will give you more ratable margin. In the chart that you were able to see, you see indeed the reduction in total fuels production, but you see quite an increase in margin. This is actually a quite well business-driven opportunity, as I look at it, working from the customer back, and then determining per sector, what are exactly those needs and how do we make them more ratable.
Great. Thank you. Martijn, I realize that the number on the RES was about $200 million for the quarter. You'd asked that number.
May I ask one thing? Sorry.
Martijn, I was just thinking, one of the things we also said in SD21 is we're replacing actually part of that fuels with low carbon fuels. We're going from 3% of our total transport fuels to 10% low carbon fuels by 2030. That's an increase of eight times which includes the 2 million tons of sustainable aviation fuel, which we also mentioned. The blends will increase and therefore the fuel's actual consumption will decrease . I look at it, working from the customer back, and then determining per sector what are exactly those needs, and how do we make them more viable.
Great. Thank you. Next question, please.
We will now take our next question from Christopher Kuplent from Bank of America. Please go ahead.
Thank you. Good afternoon, and thanks for taking my questions. I've got two as well, if I may. The first one, a bit generic, but, considering that we are going into COP26, the EU is still debating around its taxonomy, maybe I can ask a generic question. What do you think is a successful or an unsuccessful COP26, and does that matter at all whether it is a successful or not successful outcome as you define it for your energy transition strategy? Maybe, asking as a devil's advocate, would you argue some of your commitments actually expose you if COP26 fails to reach global consensus, whatever that is?
If I may just briefly as a second question, you mentioned the IPO of Raízen, and Ben, was that one of your earlier concerns around additional Chinese walls? Because isn't that exactly contradicting your point of view on integration in biofuels marketing? Is this a very specific case given your local JV partner? Just wanted to hear a firmer message on whether you're thinking about doing many more of these IPOs around the world or whether that's actually a specific exception to your point about vertical integration. Thank you.
Thanks, Chris, and Jessica looks at me, so I'll answer the first one, I think. However, it's probably best placed to talk about Raízen IPO. I think on COP 26 was of course there's a lot of talk in the market, what does it mean, what do we expect, and what do we hope for. I'm actually working on a LinkedIn piece that I will hope to put out tomorrow, what are my hopes for COP 26. So by all means, take a look at that as well. But I would say that comes down to three things, Chris. First of all, yes, we do need more ambition. Everybody talks about it, of course. We need to do more because the current ambitions add up to something much more than 2 degrees Celsius .
You could argue that's all very bad, but you could also argue that's how it was supposed to work, isn't it? We need to ratchet up ambitions to the point that we are in the right place. Maybe if you look before COP in Paris, yes, we do need more ambition. Everybody talks about it, of course. We need to do more because the current ambitions add up to something much more than 2 degrees Celsius . You could argue that's all very bad, but you could also argue that's how it was supposed to work, isn't it? We need to ratchet up ambitions to the point that we are in the right place. Maybe if you look before COP in Paris, COP21, we were looking probably at 5 degrees Celsius .
In that sense, we have made progress, but we need more progress. We need more ambition in that respect. That's point number one. Point number two, we need more real action, because it's not just good enough to have more targets and ambitions out there. There needs to be real action on the ground. In my mind, quite a large part of that action increasingly needs to focus on the hard-to-abate sectors. In my mind, quite a large part of that action increasingly needs to focus on the hard-to-abate sectors. These are things that are somewhat outside the nationally determined contributions as well. Take aviation. No one single country is going to take care of aviation unless we collectively put mandates in place. The same is true for shipping.
The same is true for steel, cement, heavy duty industry, even heavy duty road transport probably needs to have a sort of supranational approach, and that's what we mean by a sectoral approach that we are strongly advocating for. Therefore my second point is more action along the lines of individual sectors. We are putting out today a set of policy recommendations that we believe governments need to embrace in order to drive all these different sectors forward with our own decarbonization roadmap. The third one, I would say, is finally to operationalize Article 6 of the Paris Agreement. We are not going to get anywhere close to 2 degree Celsius or 1.5 degrees Celsius, if we cannot do it with the help of the market. Meaning to say that we need to be able to exchange emissions, to trade emissions.
You cannot have a situation where people in, say, Canada, say, "We don't like to export LNG to China to shut down their coal plants because it gives emissions here." We need to be able to take a global view on how we manage emissions, and that effectively means that we have to have an operational Article 6. That has been lacking for five years. If it doesn't happen, I would be very disappointed. These are my three points, Chris.
Thank you, Ben. Next question, please, Tracy.
Do you want me to-
I think, Mr. Huibert-
Oh, sorry. My apologies.
That's okay. Just on the Raízen. Raízen, first of all, is clearly already a joint venture, 50/50 between us and Cosan. We put 8% in the IPO. It was a very specific case because we needed to have the funds, particularly also from the Cosan side, to be able to fund our growth. We were able to raise $1.3 billion in the market. What did we do with that? Well, we actually acquired Biosev, which was the number two player, domestic player, and which increased our total capacity from the agriculture side with 50%. From that perspective, it was specific. What is very important, however, that what we placed were non-voting shares. We remain fully in control of the joint venture we have.
Thank you, Huibert. Now, next question, please, Tracy.
We will now take our next question from Alastair Syme from Citi. Please go ahead.
Hi, everyone. Just one question. Just come back to this LNG trading. Just to clarify, so you're saying because of supply issues, you happened to buy cargoes in the market to fulfill contracts, or were you able to declare force majeure? I guess if you were having to buy cargoes, does that mean in fourth quarter, given that it looks like spot pricing is gonna average even higher than third quarter , that's even gonna be more of a headwind? Thank you.
Thank you, Alastair. Indeed, unfortunately, we did have to buy cargoes in the market, and so that is the negative impact that you're seeing, the incremental cost associated with those cargoes. That will continue into the fourth quarter as well. However, there is the upside as well on the price that's still coming through on the cargoes that we are receiving, both from a trading side and from an asset side as well. We will get some of the upside, but we will have some incremental cost, we expect, because of supply issues in the fourth quarter as well. Tracy, next question, please.
We will now take our next question from Lucas Herrmann from Exane BNP Paribas. Please go ahead.
Thanks very much, and thanks for the opportunity. Just as a comment, I do think there's a pretty good opportunity for the narrative to change around the space, not least given where energy prices are, what's happening in terms of energy prices, and to some extent, as a consequence of the Third Point position. Leaving my sentiments aside, Jessica, I wanted to ask you about derivatives and the impact of derivatives and how we should think about their potential reversal. Indeed, you know, how perhaps we should think about them in the context of CFFO and your calculations, you know, on returns. You know, the second question, I'm sorry, I'm going to go back to LNG. It's really about when I look at the asset base, a number of the fields that are old are declining.
I'm wondering to what extent the issues that you're having with supply are very simply also around issues of providing gas to plant, whether it's Trinidad, whether it's Nigeria, whether it's Northwest Shelf, so on and so forth, all of which, you know, are gonna place increasing pressure. A number of the fields that are old are declining you know, on the business going forward, given the maturity of, you know, much of the asset base. Thank you.
Good. Thank you, Lucas. In terms of derivatives, a couple of important or big movers there. Just a little bit of context, there are derivatives in relation to our LNG business, and then there are derivatives in relation to our gas supply business. For the third quarter, what you see happening from a mark-to-market perspective and from a variation margin perspective is a mix of those things. On balance, the variation margin perspective is a mix of those things. On balance, the variation margin for the quarter for the group was a positive help of $4 billion. All things being equal in terms of the forward curves that determine that variation margin amount, we would expect that to unwind over the next coming quarters. Yeah? That's if everything moves in tandem, and of course, these things don't always move in tandem.
I think it's a reasonable expectation that $4 billion, if things generally stay as they are today, we would expect that to roll off , if you will, in the next couple of quarters. Even if that's the case, I would just highlight that that's $4 billion. We would still then have, you know, over $13 billion of cash in the quarter. I think very strong cash generation that you would see. Of course, depending on what's happening with prices, you can also have a positive effect from a working capital perspective.
There's a lot of different moving parts in the cash flow, so I would look at the fundamentals or the underlying cash flow, if you will, of $13.5 billion in terms of the substance of the business, which is very strong, and that will certainly flow through regardless of what happens on the variation margin. In terms of the LNG business a bit more and what might be driving some of the supply issues, as I said before, it's not about the performance of our own asset portfolio, if you will, and it is about a couple of our sources of supply that I've referenced in prior quarters, Trinidad, Nigeria, those gas supply issues, which is third-party supply issues which is third-party supply issues are playing into that. We're working solutions and continue to do so. Of course, we also have other sources of supply. We contract supply. We are having some more supply coming into the portfolio next year from a contractual perspective.
There's other levers in terms of getting access to supply from contracts while we continue to work solving the gas issues and the reliability issues that we've seen in some of the supply contracts for the trading business. I hope that helps. Tracy, next question, please.
We will now take our next question from Jason Gabelman from Cowen. Please go ahead.
Hey, thanks for taking my question. I'm unfortunately going to ask another one about LNG, so apologies. I'm trying to understand how the supply impacts flow through the volumes because you're essentially saying you're backfilling your trading volumes. Are we going to see an indication in the volume number when things normalize for you in the business, or is it just that sales number stays flat, but the margin moves higher and your trading volumes. Is it possible to provide a figure for lost profit opportunity in the LNG business during Q3 as a result of these disruptions?
Good. Indeed. I'm trying to a simple way of answering the first question. On the LNG side, we will see more volumes coming through in the fourth quarter, but we're also seeing some of our mark-to-market positions will also be coming through, and we're still expecting some supply disruptions. While we'll be having increased sales happening and higher prices positively affecting the assets in our business, we will still have supply issues that will negatively affect us in the fourth quarter and in the first quarter assuming the price moves as they currently are today. Sorry, the second question on-
The opportunity loss, money loss.
Oh, the opportunity loss. Yes, indeed. For the third quarter, the impact was around $300 million for the quarter in terms of the supply impact. That's obviously a material hit for the quarter. Again, as we work through that should be sorted hopefully by first, second quarter of next year, and that will hopefully come back to our bottom line once we get those issues resolved. O through that should be sorted hopefully by first, second quarter of next year . Next question, please.
We will now take our last question from Paul Cheng from Scotiabank. Please go ahead.
Hey, good afternoon. Thank you. Two question piece. First, I think it's for Huibert. Do you have a sensitivity that you can help us in every $1 per Mcf change in the natural gas price? How that impact on your refining margin capture, on a per barrel basis, as well as in your refining OpEx, on a per barrel basis? That's the first question. Second question.
I think, Jessica, we have heard some rumor talking about LNG Canada may have seen some cost overrun, and there's a dispute between the consortium and the EPC. Can you confirm whether that is the case and where we are in terms of the costs? If I can sneak in a final one, on the $7 billion of the additional cash return from the Permian sales, is there a timeline saying when that will be executed? Is it for 12 months after the deal complete or don't really have a timeline? Thank you.
Good. Huibert, do you wanna start with the first question?
Yeah. If I understood that correctly, sensitivity and change of the gas prices impact on the refinery margin. What I mentioned earlier is that we constantly are optimizing the impact of gas prices and then determining what slates we can make. We do that, and then the different inputs we have in feedstocks between our economics and scheduling teams in all our refineries, together with the various trading teams. That happens on a daily basis. What obviously the exact impact is that will.
In all our refineries together with the various trading teams, and that happens on a daily basis. What obviously the exact impact is that will depend very much on the locality of the slate and the different feedstocks that we have. So I don't have an exact number for that now. The only thing I can assure you is that obviously we're optimizing that, and I firmly believe that within the industry, our cooperation and integration between our energy and chemical parks and our refineries is top-notch, and our trading and supply business is so top-notch that we do that very effectively.
Thanks, Huibert. Paul, I believe you, the question was about the LNG plant being constructed in Canada, if I understood you correctly.
It's the pipeline.
Pardon?
The pipeline.
Oh, it's the pipeline.
Yeah.
There are discussions on the pipeline ongoing. We've had some challenges on the pipeline. There's nothing to kind of announce at this moment in time. We're working with our contractor, so you can also direct inquiries to TC Energy as well, who is constructing the pipeline. There's no updates at this moment in time in terms of where that stands. What I would say is that the project itself is going very well. I think we've reached 50% of completion. Very pleased with the performance outside of Canada in terms of the supply chain and within Canada, particularly during the pandemic. Really pleased with the overall progress that the project has made to date.
In terms of the $7 billion cash return, we're looking to do that. Of course, I think we've reached 50% of completion. Very pleased with the performance outside of Canada in terms of the supply chain and within Canada, particularly during the pandemic. Really pleased with the overall progress that the project has made to date. Of course, we need to get the proceeds. The deal needs to close. We're hoping it closes in the fourth quarter. Once it closes and we receive the proceeds, we're looking to distribute that to our shareholders, as quickly as is possible, but also as efficiently, which means at the best price in terms of and the best method in terms of getting that back to our shareholders, as I said, as quickly and as efficiently as possible. We're looking at different ways of doing that .
With that, I believe that was the last question. So I'm going to now say thank you to all of you for joining us today and for your questions. I hope this has given you insights into our strategy delivery, absolute emissions reduction target, and our performance in the third quarter of 2021. I wish you a pleasant end of the week, and I hope you and your families stay safe and well. Thank you.
This concludes the session. Thank you for your participation. You may now leave the call.