Earnings Call: Q2 2021

Jul 29, 2021

Welcome to the Royal Dutch Shell 2021 Q2 results announcement question and answer session. Today's session will be recorded. I would now like to introduce Mr. Ben van Beurden and Mrs. Jessica Uhl. Well, welcome everyone to the live Q&A session on Shell's second quarter 2021 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're delivering sector-leading cash and making progress towards becoming a net zero emissions energy business. We're stepping up our shareholder distributions today while continuing to invest for the future of energy. We are rebasing our dividend to $0.24 per share from Q2 2021, and we're launching buybacks of up to $2 billion for the second half of 2021. Today, Jessica and I will be answering your questions, and we really look forward to them. Please could we just have one or two each so everyone has the opportunity to ask one. With that, Cecilia, could we have the first question please? We will now take our first question from Christyan Malek from JP Morgan. Please go ahead. Hi, first of all, congratulations on a great result, Ben and Jessica. Two questions, if I may. First on cash CapEx. With spend guided to around $22 billion this year, how responsive would you be in terms of your CapEx frame over the next 3 years with respect to an improving macro backdrop? Effectively how fast could spend trend towards the top end of the company's medium term range of $23 billion-$27 billion? The second question again, on capital frame, regarding the cash return outside, how do you think about the split between dividends and buybacks in terms of how it trends over the coming years, with a potentially stronger macro backdrop? What will determine the total payout within the 20%-30% cash flow range? Thank you very much. Yeah. Thanks very much, Christian. Let me take the second one. Jessica will talk to the cash CapEx one. I think in terms of the financial framework, I think messages today hopefully are very clear. First of all, we felt that with the free cash flow that we are generating today, $9.7 billion in this quarter, we're actually very confident outlook for the quarters ahead as well. We thought that the balance between the dividend and the share buybacks needed to be more clearly also towards a dividend payout. It's very clear that we would do the step up. We always said we would do at $65 billion. We felt, having a dividend at the level that we had it, even though it is a progressive dividend, was just not material enough to matter in relation to the cash flow performance that we're having. That's why we rebase it, we reset it. We're not in the business of resetting this annually. This is the new dividend level by which we want to signal not only strength, but also confidence in the future. Looking forward, we very much believe that this is going to be a progressive dividend story with a variable component of share buybacks on top of it, pretty much as per the capital framework that we have laid out back in October last year. Jessica, on the cash CapEx? Thanks, Ben, and thanks Christyan for the question. Good afternoon, everyone. Thanks for joining the call. In terms of the quantum of cash CapEx going forward, a couple of things to keep in mind. We've made significant progress in terms of our capital stewardship, both in terms of discipline, but also getting more from each dollar spent. That trend we look to continue going forward. We signaled, or we've indicated we don't expect CapEx to go above $22 billion this year. Again, that's to signal our discipline, but also our ability to deliver our strategy at this level of CapEx. Going forward, as we've moved to the second part of our capital allocation framework, we will expect to spend a bit more, in terms of CapEx, to fund the energy transition, to fund our strategy. We'll do it in a measured way, much like we've shown in the last couple of years in terms of discipline. We will do it in a disciplined and measured way as we go from the 19-22 frame to the 23-27 frame. I don't expect us to get to the top of that range particularly quickly. We'll do it in step. Of course that is tied to the macro environment that we're operating in, the cash generation from the business. As you see in the second quarter, the company responds very well to improving macro conditions, generating significant cash. We think the future looks relatively bright from a macro perspective and also in terms of our generation. Look forward to getting to that next stage of our CapEx framework in 2022. Okay. Thanks Christyan for acknowledging our cash generation. Thank you. Our earnings. Cecilia, who can I address next? Biraj Borkhataria from Royal Bank of Canada. Please go ahead. Hi, thanks for taking my questions. 2, please. The first one's on divestments. There were some reports recently about you potentially looking to divest the Permian. I was wondering whether you can make any comments on that, given it was highlighted as one of your 9 core upstream regions? The second question is on refinery sales. On the surface, it doesn't look like a good time to be selling a refinery. I am looking at your slide 12, which shows that this is clearly one way of hitting or showing progress on your carbon intensity metrics, which is something that you're being pressured to do. I guess the risk with asset sales is you may leave some value on the table. I just wanted to ask, is my understanding that as you're divesting these assets, you typically sign supply and trading agreements with the buyer, so you maintain flexibility? That's obviously something that we don't get many details on. Firstly, is that generally the case? Is there any color you can provide on how important that is in terms of the economics of these transactions? Ultimately it's something we just don't see, we just see the headline values. Any color there would be appreciated. Thank you. Thanks, Biraj. Great questions. Let me take them both. On the first one, I can be actually quite short. I've seen the rumors as well. We don't comment on rumors, and I didn't think today was a particularly good day to start changing that practice, so I'm afraid you will have to live with that. In terms of refineries, yes, we've made good progress in the last few years. You see in the chart, we started with 54 refineries back in 2004. We're down to 8 now. We will go to 5. Indeed, these refineries will not just be refineries. They will be part of integrated energy and chemical packs. Now, indeed, selling refineries is not always easy. I'll be very clear, we have been making very good returns out of selling these refineries. We have by and large divested them for value. You're also right in the sense that quite often these refineries, of course, have integration value associated with it. The integration value with chemicals we hold, because these are typically the sites that we also want to hold. Integration value with our trading and supply operations, we quite often are also able to hold onto because new buyers quite often quite like the idea of having advantaged supply contracts into it or lifting contracts out of it. Quite often we are able to find a win-win arrangement where we will hold onto part of the value while sharing it also in the deal with the buyers. As I said, I'm very pleased with the progress that we have made there. In terms of emission reductions, indeed, if you look at the divestments in refining that we have done since 2018, you take into account the divestments of this year, we expect to have over 50% reduction in our Scope 1 and 2 emissions. Bear in mind, refining is the single biggest component in our Scope 1 emissions in the company. Most of the Scope 1 emissions, 70 million tons, come from refining and chemicals. Changing that footprint actually is a significant contribution as well. That's not a reason why we do it just happens to help. Thank you very much, Biraj. Cecilia, can I have the next question, please? Thank you. Jon Rigby from UBS, please go ahead. Thank you. Hi, Ben. Hi, Jessica. Congratulations on the change to distribution. I think that's a very important signal around the performance we've seen over the last few quarters. I think just 2 questions. The first was to come back to a question I think asked in the first quarter, which was about the Integrated Gas business. If there was one place where I might have a nit, it seems to be that the Integrated Gas, which was a standout stellar performer for such a long time, has really sort of slowed right down in the last, I'd say, 4 quarters or so. I think I asked in the first quarter whether it was something structural, and I think you said no. Maybe if not structural, is there sort of a short to medium term headwind on that business that is stopping you participating in what look ostensibly like very good LNG market conditions? I know you've called out Peru and Trinidad. Maybe some sort of medium-term discussion or guidance around the performance of that business will be helpful please, because obviously things like optimization and trading is fairly low visibility for us. The second is, and maybe this is from a more optimistic point of view, is that I noticed your oil products business generated a very good return. Some of the other activity, which I think includes aviation and obviously lubricants, are still probably below where we would expect them to be in normal conditions. There's obviously some upside potential in that. I just wonder whether you can make some comments about where you think particularly the aviation and lubes businesses are after the second quarter. Thanks. Thanks, Jon, and thanks for acknowledging the strong results. Jessica, would you mind talking about IG? I'll talk about oil products. Good. Jon, thanks for the question. With Integrated Gas, we have a great business and a soft quarter. We've had, as you've noted, relatively soft quarter when considering the price environment that we're in. Let me tease out a few things. First of all, in 2019 and 2020, we had some pretty extraordinary external market events that the Integrated Gas business was able to take advantage of. When those quarters happened, I did point out these were pretty extraordinary quarters and we shouldn't consider that kind of normal course of business. I think there's been some unusually good quarters in 2019 and 2020 that can perhaps ground people to an average that was a bit higher than perhaps it should be. Looking to this year specifically and in the second quarter, we have had some softness. If you look at the production levels, and importantly, LNG liquefaction levels, that's been a combination of factors. It has been some gas supply issues in a couple of our assets, and there's been some operational issues as well. It's that supply issue that's really been the main feature for the second quarter. Those aren't long-term structural issues. We will resolve gas supply. We will resolve the operational issues. In some instances, that'll be weeks. In some instances, that may be months. We'll see some of this going into the second quarter in terms of what's impacting the business. The fundamentals of the business we continue to believe in. We think we have a privileged supply portfolio overall. We've got privileged relationships in terms of the demand relationships that we have. Of course, there's new opportunities that are emerging in this business as well. We've seen some of the risks that are realized, but we have to keep in mind the opportunities as well and things like our carbon neutral LNG that we're delivering in places like China, the opening up of new markets from a regas perspective or from a shipping perspective. There's also important new milestones in terms of growing the business that will underpin, we think, the long-term strengths. Overall, the fundamentals for the Integrated Gas business we continue to believe are quite good. Ben? Thanks very much, Jessica. I think on the OP side, it has been a very strong quarter. I think it's the best quarter since Q3 2020, which was actually an outstanding quarter. I think in retail it is the second-best quarter. Altogether, indeed, the marketing business is doing well in this environment. Now, volumetrically, we are not entirely there yet, Jon. First of all, on retail, we are, I think, globally back to about 90% of pre-pandemic levels. A little bit of variation across the different regions. It's approximating again to where we were. If you look at our non-fuel retailing, by the way, that is significantly ahead. I think it's more like 125% in terms of contribution. Indeed, you're also right, aviation is lagging behind. I think aviation globally, we're probably something like 45% of what the volumetric levels were in pre-pandemic period. That's obviously not surprising because even though aviation is picking up, intercontinental flights are still pretty much lagging. Lubricants, we're back to 100%. I do believe our lubricants business is performing well also in terms of margin. Altogether, I would say quite happy with how the marketing business has responded. Very good margin management, very good discovery of new seams of value, and I think also more potential to come. Ultimately, even though we may still see a little bit of lagging, the recovery in aviation will come as well at this point in time. Thanks very much, Jon. Cecilia, can I have the next question, please? Thanks, Ben. Michele Della Vigna from Goldman Sachs, please go ahead. Ben and Jessica, thank you very much for your time, and congratulations on the strong results. I had the two questions, if I may. The first one goes back to the shutdowns you've experienced in your LNG business. It doesn't seem to be unique. There seems to be a pretty broad trend across the industry of unplanned shutdown, which is not fully unexpected given that we've just been through a year and a half of very reduced maintenance. I was just wondering how long you think it will take for the industry as a whole, or perhaps for Shell specifically, to digest this backlog of maintenance and effectively go back to normal asset reliability. My second question is about decarbonization. You've made some very strong commitments to decarbonization. You've signaled an intention to even upgrade those commitments following the Dutch ruling. All of that is very consistent with what we are seeing, for instance, in Europe in terms of policy. If we look on a global basis and looking, for instance, at the inability of the G20 meeting last week to reach any form of global agreement and understanding about it, the risk is that you could make a commitment which makes perfect sense for Europe, but which ultimately doesn't reflect the reality of shifting demand on a global basis. How do you think strategically about this clear contrast between your aspiration, Europeans' aspiration, but what could be a very different global outcome? Thank you. Yeah. Great question, Michele. Let me take the second one first, and Jessica will take the LNG one again. I think your observation is correct. We are indeed, in my mind also, a leader when it comes to decarbonization in our industry. Indeed, we have said very clearly that we will upgrade, accelerate, step up, et cetera. Part of it, of course, was exactly what we did in SD21, our strategy announcements in February, which by the way, came after the hearings of the court ruling. I believe our Powering Progress strategy is very much a statement of stepping up and of accelerating. Indeed, following the court ruling, we now have to examine what else, if any, we can do. One thing is pretty clear. We didn't say very much on our Scope 1 and 2 emissions in February and in the document that our shareholders voted on at the AGM, other than to say that we'll go to zero by 2050. The court ruling basically introduces a waypoint and says -45% by 2030. I've been very clear, that's a challenge we will step up to. We are studying and examining what it would take, whether we could do it, et cetera. You would have seen that we are making progress already on the refining side. If we believe that that is very clear how and if and when we can do it, we will again go back to our shareholders and say, "This is what stepping up to that challenge means." To Scope 3, 45%, which of course is a significant best efforts obligation, that's a different matter. We cannot go faster than society. That is just the reality. Maybe inconvenient for society, but it's also true. Here we say we go as fast as we can. Our strategy is all about helping our customers decarbonize. Yeah, but 45% is doable remains a big question indeed. I would be delighted, by the way, if we managed to do it. If I now look at, to your point, what the EU is saying with their Fit for 55 package, which we completely endorse, by the way, in the sectors that we are serving in that package, it roughly is half of that 45%. You can, I think, legitimately ask yourself the question, how realistic is it for us to aim for a 45% reduction if the most progressive, most aggressive jurisdiction in the world can only muster half of that? That's also the reason, by the way, we appeal, but it doesn't mean that we won't be pushing when it comes to decarbonization of the economy sectors in the world. Jessica. Great. Michele Della Vigna, in terms of what are some of the dynamics at play in the LNG industry more broadly, while there have been maintenance issues happening in many assets within the Shell portfolio and across the LNG industry, I'm not aware of it being a thematic issue around backlog maintenance. Certainly within the Shell family of assets, it's been pretty disparate issues at play, so there's not a theme that there was maintenance activities that hadn't been gotten to, and therefore these are the implications of it. Not at all. We've been very careful through the pandemic to ensure that asset integrity and maintenance gets the right level of attention, and there's pretty distinct issues at play with our assets. I don't think it's a backlog issue so much. As I said, there's a maintenance piece to it. There's a gas supply piece to it. That gas supply is coming from third parties. It's not necessarily the Shell portfolio at play that's causing some of these outcomes. As I indicated before, I think some of these issues will resolve in weeks. Some of them will take some months, so I will expect some of this impact going into the second half of the year. Once again, I don't see these as structural issues, certainly for our portfolio. I would just emphasize that the fundamentals of the LNG business, we continue to believe are very strong. If you look at the volumes we've achieved or the industry has realized in the first half of 2020, it's some 10% higher than it was at pre-pandemic levels. I think that's a good solid indication of the demand for LNG. As I mentioned, I think there's many more opportunities for us, whether it be from a shipping perspective, changing out coal for gas in the power sector, or decarbonizing LNG through NBS and other means. I think there's still a lot of opportunity that will create more value creation opportunities for us going forward. Okay. Thank you. Thanks, Jessica. Cecilia, who is next? Christopher Kuplent from Bank of America, please go ahead. Thank you. Thank you for your time and taking my questions. This will sound familiar to you, but you've obviously said you are trying to accelerate your decarbonization efforts, and I wondered how much at all is possible without more disposals. To your point on refining a 50% reduction, I wonder how much of that 50% reduction from 2018-2021, I'm not sure whether you can tell us, comes from the disposals you've made. All the good things that we know about your plan for hydrogen, carbon capture, even things, Jessica Uhl, that you just mentioned in terms of net zero LNG, et cetera, they, to me, will take quite a lot longer than you have to appeal this court decision. I wonder how you view the immediate reality, what that means accelerating decarbonization. Also, if you could perhaps link that into your budget discussion. Lastly, as a second question, just wanted to come back to you and ask about the dividend reset again. You are calling it a reset. Is this very much a one-off? Perhaps you can let us know a little bit more in detail how you came up with $0.24, who you benchmarked that against, and why you feel happy with $0.24, not $0.30, not $0.20. Thank you very much. Yeah. What's in a number? Thank you very much. I'll take the first one. Jessica Uhl will talk about her dividend this time. I think just let's be very clear on the acceleration and the disposals piece. When we talk about Scope 1 and 2 emissions, that's about 70 million tons plus 10 million tons out of a total of 1.7 gigatons. That you can address if you wanted to through disposals, it will be a combination of some closures, disposals of refineries, right-sizing, efficiency improvements, CCS, electrification, all of that will drive us towards, shall we say, -45% and ultimately to zero. That is actually a very small amount of our emissions, it will require a modest amount of capital that we were going to spend on high-grading these facilities anyway. If you talk about accelerating the Scope 3 emission reductions, disposals don't work. Yeah? Certainly not of assets. The only thing you can dispose of is customers, which is obviously not a meaningful strategy. That's, again, why we are appealing. Yes, disposal will have the role in Scope 1 and 2. When it comes to addressing Scope 3 emissions, it is actually changing your product portfolio and therefore, changing your business models. That's not always as well understood as I would like it to be, hence, once more, the clarification here. Jessica? Great. Christyan, in terms of how we landed on $0.24 and why that's the right number for Shell. First of all, we looked at the actual performance of the company over the last 12-18 months, which was a great example of our ability and capacity to deal in a pretty stressful set of external, and to some extent, internal circumstances. We looked at the performance of the company, the assets, the people, the cash generation, the financial outcomes, all very strong and robust in a very stressed set of circumstances. We consider the outlook. How do we feel about the macro? What does it look like in terms of the fundamentals of the business for the next 6, 12, 24, 36+ months? Again, we're feeling very good about the pace and level of recovery that we're seeing in the business. We then think about what's resilient through a variety of different outcomes. We've all seen how volatile it's always been to some extent, but I think particularly so over the last couple of years. We stress test our financial framework at very low levels of prices and margins. We do consider the upside, but we probably spend a bit more time on the downside, particularly from a resilience perspective when considering what is the right dividend level for the company. Of course, we consider the investment case and how do we ensure we're providing compelling returns for our shareholders. You bring all of that together, we landed on the $0.24 number, which is $7.5 billion in total dividend quantum. Of course, we retain our overall capital allocation framework, which has the progressive dividend, which gives us another opportunity for us to increase dividends per share by 4% year-on-year. Of course, we keep the opportunity and flexibility to do share buybacks. At this share price level, very compelling case for us to continue to reduce our share count. That remains a priority for us. Therefore, on balance, we think 7.5% is resilient and importantly, compelling, a more meaningful number for our shareholders. That's important for us. The share buybacks will give us further flexibility to increase shareholder distributions going forward. Okay, thanks, Jessica. Cecilia, who is next, please? Martijn Rats from Morgan Stanley, please go ahead. Hi. Hello. Also from my side, congratulations with this set of announcements. I think it's extremely welcoming. I had 2 questions. First of all, I know these days we talk about many other things, oil is still such an important part of the business. It's notable that the production specifically of oil, so not on a BOE basis, but specifically of oil, is still down even relative to 2Q last year. This is actually something that is also quite visible in many of your peers. This seems to be more of an industry trend rather than anything else. With CapEx levels sort of being where they are, you could start to wonder whether bringing back all this non-OPEC supply may actually not be so easy. Now, I don't want to lead you in a certain direction, but when you put these two things together, the level of production versus the level of CapEx, what you're seeing in your own business, what you're perhaps seeing with your peers, I was wondering if you could give us your thoughts on how you think the recovery of oil production will likely take place, specifically outside of OPEC, of course. The second one that I wanted to ask is about the IPO of Raízen, which was announced a little while ago, and I think that process is ongoing. I was wondering if you could give us your thoughts on why this transaction is taking place. Is it mostly Shell-driven or is it mostly Cosan-driven? Is Shell actually selling shares in this? Could this be a template for other types of assets that fall in the new energy type space? Could you give us your thoughts on that particular transaction? Thanks. Great, Martijn. Good questions. Other one, Jessica does the Raízen. I think first of all, on oil, it is indeed still very important. The world will need it for a long time to come. Even if you believe the new IEA report, we still need to invest very significantly for the next decades in oil production. We've been very clear we want to have a high-quality oil and gas portfolio that will indeed see sort of 1%-2% decline on the oil side over the next decade. We want it to be a high enough quality portfolio that will last well into the '30s and generates a lot of cash to fund the company. That's point number 1. Indeed, it will be a mildly shrinking portfolio, and you're also right in the sense that, of course, over the last few years, many of our non-OPEC peers have not exactly invested at pace. You could indeed ask yourself the question that if indeed oil demand stays strong or maybe even grows for some time, how is it going to work out on balances? You could even argue, by the way, whether OPEC has the capacity to bring back all the volumes that are going to be needed there. I'm not going to speculate on what will happen to the oil price. I think that's too hazardous. I wouldn't be surprised if for a few quarters to come, we are going to see relative tightness in oil markets, which, well, I would imagine it's going to help us fund our strategy even better. Jessica? Good. In terms of Raízen of course, is an important part of our portfolio and our downstream, if you will, strategy in terms of our access and participation in biofuels. It makes us one of the most significant players in the sector because of this partnership with Cosan that you referenced. It's gone incredibly well for us, and we're very pleased with the performance of that business, and it's been growing quite steadily over the last couple of years. In terms of the IPO, it was another way of accessing capital for us. I'd say it's a pretty distinct set of circumstances that makes that the right choice for this business. I wouldn't necessarily see it as a template. There'll be some participation in terms of our equity. It'll be a minor change in terms of our exposure, but again, it's for us to participate in the Brazilian equity market with a very solid company aligned with our partners as a way of accessing capital to support further growth for Raízen, which we're very encouraged to do given the performance of the company. Thank you very much. Thanks very much. All right. Thank you. Cecilia. Who is next? Lucas Herrmann from Exane, please go ahead. Ben, Jessica, thanks for the opportunity, and it's nice to see some of the value in your business being taken up today. Couple of questions, if I might. Just to follow on actually from the last one, if I could start with Raízen. Are you taking any capital out? My presumption is not, but just to confirm. Questions themselves, Jessica, I wonder if you could talk at all about asset markets at the present time. You clearly have a lot of activities that you're looking to divest as you slim down to the core. More generally, just on the pipeline of developments, then usual question, can you talk a little bit about chemicals, what's happening in Pennsylvania, how Vito's developing, just the new project pipeline and where timings are at the present time. Thank you very much. Thank you, Lucas. I think this is probably going to be a double act, let me say a few things and Jessica will supplement me, if not correct me, if need be. No, we're not planning to take capital out of Raízen. This is basically funding a joint venture that has tremendous opportunities to continue to invest in 2nd-generation bio projects, but also to continuing to grow. You will have seen we have, through Raízen, done a very significant acquisition, adding 50% capacity to that venture, and we see also ways and means to continue to upgrade that business. This is basically a means to raise capital for that. It's a great milestone that we are able to do that at this point in time. I'll have Jessica talk about asset values in a moment, but in terms of the projects, of course, you will appreciate that there has been a little bit of a slippage and a setback in the pandemic period. For the projects that you have mentioned, I'm actually very, very pleased with how we have been able to deal with the pandemic. Vito, which is being constructed in the yard in Singapore, actually is doing very well, and we are picking up pace very quickly after maybe a few difficult months in the yard. On Pennsylvania, you can imagine, having 8,000 people on site and in a relatively short period of time reducing that to a few dozen is quite a significant slowdown. Also now we have been able to bring back again, almost to near full complement, the construction crews, which we have to do in a very careful way, as you can imagine, simply because there would not be capacity enough in the county to deal with a mass outbreak, which we haven't had, by the way. Again, I think, tremendous resilience from our project teams to run these projects. Same is true for the onshore construction in Kitimat for LNG Canada. Altogether, despite the fact that we have indeed seen an impact from the pandemic, I'm incredibly pleased with the resilience that our teams have shown. The pipeline of projects, I think it's probably best if I refer you to the slide deck that we have posted. Sure details in there, if you have specific questions on them, perhaps Lucas, best to talk to the IR team. Jessica, what did I miss? That was good. I believe with Pennsylvania we had our first electrons as starting up the power plant there. I think things are moving forward really well at the site, particularly given the COVID backdrop that Ben just described. In terms of the M&A market, it's proven to be very healthy this year, healthier than we expected. There was a number of assets that we had in the funnel in terms of potential divestments that we were expecting we wouldn't really get traction on until 2022, 2023. Those have been advanced. You're seeing some of that come through and hopefully we've got a few more that we're working that we can land in the second half of the year. I'd say that's true in our downstream assets as well as our upstream assets. I'd say people are responding to, I think, the uptick in the economy and are feeling pretty bullish around the sector when it comes to an M&A perspective. Very pleased with our delivery there. Yeah. Very good. Thank you. Just on, you talked about Vito, but of course, very important also to bear in mind that we just sanctioned another project, Project Whale in the Gulf of Mexico, which will be an 80% replicant of Vito. Again, you will see that we are still very much taking advantage of these opportunities as well. Anyway, thanks Lucas. Cecilia, who is next? Paul Cheng from Scotiabank, please go ahead. Thank you. Good afternoon or good morning. Two question, please. Maybe the bank, can you talk about Nigeria? You guys have mentioned that the onshore operation, given the change in or that the continued deterioration on the situation there, that you are looking for potentially for asset sales to see if there's any progress on that. Also just curious that, you still have the LNG operation in Nigeria as part of the core. If the political environment is really, in your opinion, deteriorating, why you think that the LNG operation or the gas side is not going to be impacted? If that's the case, should that still be considered as part of the core for you? That's the first question. The second question is related to Iran. If there's a nuclear deal between U.S. and Iran, I think in the past that Shell has been investing in that country. Given your new business model, even with a nuclear deal, will Iran still be an attractive place for you to go back in? How the new model, we're looking at opportunity like that. Thank you. Thank you very much, Paul, and good morning to you. I think I definitely have to take the Iran question. Let me also say a few things about Nigeria, which I'm very, very close to. On Iran, even last time around when there was an opening and there were opportunities for us to go in, we did indeed participate in discussions, but we were very cautious for obvious political reasons. I think this time around, not only would it not be any different, but of course we also have different investment strategies. I think the chances of us really actively pursuing oil development, say, in Iran, are probably lower than they were before. Let me not get too much ahead of myself because there is actually, of course, at this stage of the game, nothing whatsoever going on. On Nigeria, we've been very clear. Nigeria is completely onshore oil, is completely outside our risk appetite. We have been, I think, quite heroically trying to deal with an incredibly difficult security situation in the Delta. We have concluded that there is no way we are able to turn that around or to insulate ourselves from the banditry that is basically happening there. Indeed, the discussions are now progressing with the federal government of Nigeria. We have been talking this through quite extensively already with the Minister of State for Petroleum, with the GMD of NNPC, and with other stakeholders. Our plans are very firmly that we need to get out of onshore oil. As a matter of fact, onshore. That will progress. It's not necessarily just asset sales. We're looking at all sorts of other ways as well that are not only certain soon, but also able to be executed in a way that leaves a positive legacy behind. On LNG, that's indeed also in the Delta. It's on Bonny Island. Actually, the whole security situation there is a different ballgame altogether. Nigeria LNG is very well run. Bonny Island is a very stable oasis, if you can call it that, in the Delta. Of course, it's a whole lot more difficult to steal LNG compared to stealing oil. We actually haven't had any significant issues when it comes to Nigeria LNG. It is, of course, a very good contributor to our financial performance. Thanks, Paul. Cecilia, can I have the next question, please? Irene Himona from Societe Generale, please go ahead. Thank you very much. Good afternoon. Congratulations for the decision on investor distribution. My questions are on the upstream. In Q2, if we exclude, if we leave out the provision reversal, it seems that your upstream unit profit margins rose sequentially very substantially, about 24% for a 13% higher oil price. I wonder if you can talk around the evolution you're seeing in your unit costs in that business. The other question relates to cost inflation. Obviously, we are seeing a lot of price increases in metals, commodities, and so on. I wonder how your procurement side is protecting you from that potential cost inflation. Do you have, for example, long-term contracts that insulate you for a period? Thank you. Thanks, Irene. Let me make a beginning on the second question, and then Jessica will no doubt be able to add to it and then also take the first question. Indeed, cost inflation is something that we watch very carefully. We have been very good at taking cost out. Of course, we need to be very mindful that it also can come back. I think so far, in most categories, we are actually seeing very modest cost inflation. The areas where perhaps inflation is the most profound is maybe in steel and logistics. In steel, of course, from a significant drop that we've seen before. Logistics, you can imagine, of course, is getting a little bit more challenging with so much recovery taking place. You're also right, is that, of course, with many of our procurement activities being on the basis of long-term advantage contracts, strategic contracts with suppliers, we are actually able to lock in advantages quite significantly. Therefore, in the main, we are actually seeing quite a modest effect of inflation on our spend. Jessica? Ben, I think covered that well in terms of what's happening on the cost perspective and the supply chain. In terms of upstream and the margin improvement that you're seeing, that's been a core part of our strategy for that business. A number of things are driving it. The first piece is our portfolio. We have actively managed and reshaped the portfolio to be focused on value over volume. We talked about that a lot in the last couple of years. I think you're seeing the benefits of that strategy and that portfolio shift in action. We have a lot more access to high-margin barrels, and importantly, barrels that are available for the upside as the macro improves. The first piece is what have we done from a portfolio perspective that gives us access to high-margin barrels that have upside. The second piece is on the cost side of the equation. Wael, who's running that business, very focused in terms of driving efficiencies, and his ambition seems to grow each year. That's coming through from a cost perspective, and that's also contributing to the margin that you're seeing. Of course, operational excellence, which is another piece of the upstream story, and pushing availability and getting the most from our assets. I think all three of those levers are being pulled at the moment, and that's what's driving the improved margin that you're seeing year-on-year. Thanks very much, Jessica. Thanks very much, Irene. Cecilia, who is next? Roger Read from Wells Fargo. Please go ahead. Hello, and good afternoon. Good morning on our side of the pond. Just two questions I'd want to go to fairly quickly here. One is, I know you've reached the $65 billion net debt, and that triggered the share repurchases, congratulations and all that. What should we think about what you want to do with the balance sheet going forward? That'd be my first question. The second one, it's been kind of danced around a little bit, but basically, it's on the production front. If we look at what is going on, and I know there have been pandemic curtailments and all that sort of thing, but we're looking at a fairly consistent string in the upstream and really the company overall of significant declines in oil and gas production and at a much higher rate than what is your long-term forecast. I'm just curious, as we look over the next 2 years, some of that curtailment comes back, but what else is going on behind the scenes? It's not just asset sales or curtailment relative to the CapEx that was asked, I think, pretty much at the beginning of the call. Yeah. Thanks very much, Roger. Good morning to you. Jessica, why don't you take the first question on the balance sheet, what we're doing next. I'll talk a little bit more about production also in the sector. Good morning, Roger. Indeed, very pleased that we reached the $65 billion milestone by the 2nd quarter reflecting very strong macro, not very strong, very strong performance in a improving macro, and that coming through as we've spoken to earlier. In terms of going forward, we're very much committed to a strong balance sheet. What we'll look to manage the company to is within AA equivalent credit metrics. What that means in practice is in this macro environment, I would expect us to continue to reduce net debt by some $1 billion-$2 billion, an even trajectory in terms of improving the net debt and the balance sheet further in the coming years. Of course, net debt is a function of overall cash flow generation. These things need to go hand in hand, but the overriding message is we will continue to strengthen the balance sheet, and we will look to run the company within AA credit metrics. Yeah, on the production piece, if I first of all talk about our own company, we've been very clear. We will not invest any more at a level that just sustains this business on a headline basis. When you go back to our disclosures in 2019, we said we would need $11 billion to keep upstream where it is, and today we're spending $8 billion. Clearly that means that we are going to high-grade our spend and going to accept a certain degree of decline. We said 1%-2% decline per year in oil. We grow the percentage of gas a little bit into the mix, it is inexorably a decline in oil. The spend that we have, the $8 billion, is very much focused on the 9 core positions. Within the 9 core positions, very much focused on deep water. 80% goes to core, 70% of our spend goes to deep water, and that's pretty much how we intend to run this business going forward. I can't talk about other companies, but I do believe that indeed there is a certain degree of hesitancy to invest in the oil sector because of the uncertainties that we are currently facing and maybe some of the weaknesses that some companies have. We have decided to deploy our capital preferentially also in other areas, and some other companies have done the same. Altogether, indeed, it is not unreasonable to make the case that the whole sector is investing somewhat below what is needed to keep the production levels to where they are. Again, let's see how that plays out. The IEA has been very clear that indeed we do continue to invest in the sector collectively in order to keep the world well-supplied with energy, and we'll have to see whether indeed companies collectively and the sector collectively are up for doing that. Thanks, Roger. Cecilia, who's next? Thank you. Lydia Rainforth from Barclays, please go ahead. Thanks, good afternoon. Hi, Jessica. Hi, Ben. 2 questions if I could. The first one, and it is, I'm going to come back to the dividend and the reset there. I think the arguments when I, or the explanation when I hear it seems very, very similar to where we were in terms of April 2020, about the kind of the level of what the business can support. I get that the macro part is better. Just for me, is the idea that you're much happier with the performance underlying of the business and that in particular world of energy transition, where Shell is positioned such that potentially is the performance 40% better than you thought it might be? The second part is, we've talked about this a number of times in the past, but this idea of good costs, bad costs, good CapEx, bad CapEx. The wonderful reality is that you can now do both. You can do shareholder returns and increase the pace of investment. Can you just talk about a little bit more how you're thinking about that and how you're, in terms of predicting, in terms of some of those investment decisions, you'll be looking at those. Thanks. Thanks very much, Lydia. Let me make a start with the first comment/question that you had. Jessica will talk about the second one. Well, were we happier than expected? Well, of course, we've always been very clear that if the macro improves, we will see a better performance. I think if you just do the correlations, you will indeed see that the upside that we always said was there with a recovery is now indeed playing through. I think, what probably is the most significant part to be pleased with is actually the resilience of the company. Of course, if you go through a pandemic where you have so much disruption, potentially, where you've turned everything upside down and inside out in terms of your supply chains, where you have everybody from an office all of a sudden working from home, including people in our back offices. Bear in mind, we have 20-plus% of our people in places like Chennai and Bangalore and Manila, who all of a sudden now have to work from home. Indeed, you ask yourself the question, do we have the contingency plans for that, and how will we see ourselves through it? If you then look back on how we have managed to do so, I can only be incredibly proud and very grateful for the quality of our staff, the quality of our operations. In that sense, yes, it is a positive surprise. Well, I am very happy with it, let me put it that way. Of course, the macro is outside our hands. The fact that it has come back, I think, is good news for all of us, and also gives us the confidence to think that the choices that we have made on distributions are resilient and robust and sustainable. Jessica? Good. Lydia, thanks for the question in terms of how are we thinking about cash CapEx going forward now that we're moving to a different phase of our capital allocation? We tried to provide a framework that was clear in terms of how we want to run the company and what our intentions are as we come out of the pandemic and as the world improves and certainly our cash flows grow, which we've taken today with that first step in terms of increasing shareholder distributions. The framework was dividends and base cash CapEx reaching $65 billion, which we've achieved. That gets us to the third priority, increasing shareholder distributions. The fourth priority, which is additional cash CapEx, and further strengthening of the balance sheet. We're only getting to the third priority today at this point in time, and we're going to keep cash CapEx of $19 billion-$22 billion in 2021. As we go into 2022, and if the macro continues to perform as it currently is and the company keeps delivering, we'll be able to move to that fourth phase. How we're thinking about that fourth phase, or that fourth priority route rather, is that we need to optimize our capital allocation at the group level. We need to make sure that we're providing a compelling return for our shareholders, which hopefully today was an important step forward on that. The second piece is to ensure we've got a strong balance sheet, and the third piece is to grow. We need to make sure we maintain and serve all of those priorities through time. When we move to the next phase of cash CapEx, we want to do that in line with shareholder distributions. That's why we put shareholder distributions as a third priority versus, let's say, the fourth priority. I would see a relationship between those two things, but importantly, above that is ensuring that we maintain a disciplined, measured approach in that next step-up of cash CapEx. We indicated before that next step-up would be somewhere between 23 and 27. We'll provide more guidance in terms of what we expect in 2022, in the second half of the year. That's an indication in terms of what we're thinking the next step-up needs to be measured. I wouldn't necessarily indicate that it would be at the high end of that range at this point in time. It's important for us to step through each phase of this in a very disciplined way, demonstrate we are driving the returns that we want to see from our cash CapEx. It is important for us to invest in the company, continue to grow investments to support the energy transition, and I expect we'll have some pickup of that in 2022. Thanks very much, Lydia. Cecilia, can I have the next question, please? Alastair Syme from Citi, please go ahead. Thanks for taking my question. It is very much a follow-up to the last question. Just to clarify, if you had an incremental $1 of capital as per that priority 4, is there a specific business area that would it go into? Where does that allocation happen across the business? Yeah, thanks very much, Alastair Syme. Let me take that question. I think it doesn't necessarily always work by the incremental dollar, and it's not necessarily therefore finding where do we have the highest return. Ultimately, that's not the way decisions present themselves in a company of our size and makeup. What we are doing is very clearly when we lay out the allocations on what we call level 2, below the shareholder balance sheet and cash CapEx level, we basically say, "This is where the strategic priorities of the company are. This is what we aim to achieve with our portfolio. These are the other business objectives that we have. This is where our risk appetite is. Now we allocate a certain amount of capital to these particular sectors of the company, whether that's upstream, Integrated Gas, chemicals and products, or whether it is the Renewables and Energy Solutions business, biofuels, hydrogen, CCS, et cetera. Of course, we have an idea of what the opportunity set is so that we don't allocate money to those businesses that don't have opportunities. We're very clear about what the return expectations are, but we decide the mix of the cash CapEx on the basis of the strategy that we want to pursue. What we have been saying is very clearly, 2019 to 2022 is made up of this breakdown, and you will find it on the slides that we have also published this morning, and it's the same as what we said back in February. When we go to the next phase, we will give you a breakdown of where we think the level 2 capital allocation will go to at that point in time. What we can already say is we will have a preponderance to invest into the growth pillar of our business, in other words, the customer end and where we believe the future of energy is going. At this point in time, it would be premature to just say the next $1 will go there. Thanks, Alastair Syme. Cecilia, can I have the next question, please, which I believe is also the last question? Peter Low from Redburn, please go ahead. Hi. Thanks for taking my questions. Just another on the macro outlook. You struck a very positive tone today, which is welcome, but quite a big change from a year ago. Can you perhaps outline what's led to that change and what it is you're seeing in your markets in particular that's given you this newfound confidence? Just on the cash CapEx for this year, it's currently annualizing below the bottom end of the $19 billion-$22 billion range. Is that simply a result of phasing, and should we expect a step-up investments in the second half? Perhaps what drives that? Is it work resuming on projects following the end of COVID restrictions? Any color there would be helpful. Thanks. Yeah. Thanks very much, Peter. Jessica, why don't you talk to the second one, and I will end with the positive tone. Excellent. I think, Peter, you've touched on the points that are relevant. Indeed, the first half, a little bit lighter in terms of CapEx. That's not unusual for us that we have a bit of a pickup in the second half. As you mentioned, particularly post-COVID, we're still working through supply chains, getting staff back at sites, et cetera. That is also impacting some of the spend, and we would expect a step-up in the second half of the year. That being said, we're continuing to drive capital efficiency, and we're getting more for each dollar. That's not so much the driver this year. It's more about pace and timing. Again, that will pick up in the second half of the year. Ben? Thanks. Peter, to your question on what's the difference between last year and this year. Well, last year we were at the beginning of a pandemic. This year it feels that we are at the end of the pandemic. Last year, when we were looking at what was ahead of us, I think it was a time of prudence. We felt that our financial resilience could be significantly at risk knowing what we knew at that time could happen in the pandemic. Therefore, we had to take some really bold decisions. We did. We took out $20 billion of outgoings in that period, a lot of it in capital, a lot of it in operating costs. We contained our working capital very significantly. That was the first $10 billion. Indeed, unfortunately also in terms of shareholder distributions. What happened as a result of it is we have seen that we could not only preserve the financial resilience of the company, we could actually improve it. You will have seen since Q2 last year, we have paid down our debt with $12 billion. At the same time, by the way, absorbing a very significant amount of working capital. That shows how much needed and how prudent these measures were. At the same time, we've also seen how well the company has performed. Incredibly well from a people perspective, incredibly well from a asset resiliency perspective, incredibly well through the supply chains that we have. Now we are looking not only at a pretty sort of positive experience from that perspective, but also a very positive outlook in the macro. The vaccinations are working in many of our very, very profitable markets. We see a tremendous resurgence of volumes, whether it's oil or gas or chemicals, et cetera. Therefore, there is, I think, a grounded reason for optimism. That is basically what you see back in our results today, in our decisions today, confidence in the future as well. With that, I would like to close it. Thank you again for all of you attending. Thanks for your questions. I hope that in the last hour or so, we've given you some insights into how we're getting on with our strategy. What about the shareholder distributions, how did that come about, et cetera, but also the performance of the quarter as such. What rests me to do is to wish you a very pleasant end of the week, and I hope you and your families stay safe and stay well. Thank you very much. This concludes the session. Thank you for your participation. You may now leave the call.