Very good. We're live. Ladies and gentlemen, it's a pleasure to welcome you here again this afternoon, I look forward to have a good afternoon with you, talking about our results, talking a little bit about some portfolio developments since Management Day. I can sum it up actually already for those of you who are in a hurry in a few words. It has been a great year. It has been a transformational year. We said 2017 would be a year of delivery. I think we delivered in 2017. That was all before the disclaimer statement. Let's talk about 2017. 2017 was a year, I think, in which we showed that we have what it takes to be a world-class investment case.
It was a year of very strong financial performance, Our relentless focus on value, on achievement, and on competitiveness means that we were able to deliver very strong earnings from a high-graded portfolio. New projects more than offset the impact of divestments. We had a record LNG liquefaction, also LNG sales volumes. In Downstream, the volumes also increased excluding divestments. Let's talk a little bit quickly about the financial results for 2017. 2017, a year of very strong financial delivery from each of our businesses, We achieved this in a pretty volatile environment. Our 2017 current cost of supply earnings, excluding identified items, were around $16 billion. Cash flow from operations, $36 billion, Free cash flow was more than $27 billion. All of this at an average Brent price of $54 a barrel.
We also further reduced net debt in the year by $8 billion, The declared dividend for 2017 amounts to some $16 billion. The Q4 dividend, you will have noticed, will be fully paid in cash this year. The dividend intentions for Q1 2018 is unchanged at $0.47 per share, That's unchanged compared to Q1 2017. As I said, 2017 was a year of strong delivery. We made good progress with our divestment program. We now have $24 billion completed so far. That's at a headline level, That's since the beginning of 2016. We said our capital investment would be around $25 billion. We ended with $1 billion below that. We said our underlying operating expenses would be less than $40 billion. We delivered $2.5 billion lower than that.
We continued to deliver and start up a lot of good new projects during the year. Let's move to some of the portfolio highlights for the quarter. We completed some large divestment transactions during the quarter. Of course, we completed the sale of the package of U.K. North Sea assets for a total of up to $3.8 billion at headline level. We sold our shareholding in Woodside for a pre-tax proceeds of $2.7 billion, We completed the sales of our Gabon onshore assets. These divestments are, of course, completely consistent with our strategy and our portfolio ambitions, They were all completed at competitive valuations. All of them, of course, contributed significantly to the reduction in our gearing in 2017. We're now pretty close to completing that $30 billion divestment program.
As I said, $24 billion of divestments completed so far, and another six either announced or very significantly progressed. Again, these numbers are all at headline levels. This program is crucial, not only to simplify our portfolio, but also to deliver our world-class investment case. Also during the quarter, first oil was achieved from the Libra field. Libra is 180 km off the coast of Rio de Janeiro in the Santos Basin. Since then, Petrobras has declared commerciality to the northwest part of the block and indicated there is a total recoverable reserve of resources estimated at $3.3 billion of oil. Another highlight concerns portfolio activity related to New Energies. At Management Day, we mentioned our ambition to accelerate the pace of our investment in New Energies. You saw evidence of that during Q4 of 2017, the three deals being signed.
Firstly, we acquired NewMotion, which is one of Europe's largest providers of vehicle charging technology. We also signed an agreement with IONITY. That's the operator of high-powered vehicle charging network. This agreement is to provide 500 charging points across 10 European countries, starting with eight of Shell's biggest motorway stations. This will allow electric vehicle drivers to travel long distances across Europe with confidence as we provide the first network of its kind on key routes through the continent. The third deal that we signed was the agreement to acquire First Utility, which is a leading independent household energy and broadband supplier based here in the U.K. Once completed, that will allow Shell to deliver power to the homes of an increasing number of customers.
All these steps are consistent with the New Energies strategic intent that we presented at our Management Day in November last year. As we highlighted then, power is one of two focus areas in New Energies alongside new fuels. Power is the fastest-growing segment in the energy system, and we see opportunities in different parts of the power value chain and additional opportunity through the integration of these parts in one single value chain. Of course, the spend on New Energies has been modest in 2017, but the recently announced deals, they will reflect our intention to increase spend in New Energies in 2018. We expect our capital investment in New Energies to be $1 billion to $2 billion on average per year until the end of the decade.
As it is dependent on both organic and inorganic investment opportunities, this might be a little bit more or a little bit less, depending on the year, but that's of course, without changing the overall group capital investment budget for that year. To continue with portfolio developments, let's cover a number of significant exploration events. Yesterday, we announced that what is expected to be one of the largest U.S. Gulf of Mexico exploration finds in the past decade when we announced the Whale deepwater well. The evaluation of this discovery is still ongoing. Appraisal drilling is underway to further establish the size of the discovery, but also to define the development opportunities. This major heightened discovery offers a combination of materiality and proximity to existing infrastructure, and it adds to our previous Paleogene exploration success in the Perdido area.
This discovery, of course, strengthens our confidence in our exploration strategy focused on near-field explorations, seeking not only material volumes, but also short lead times between discovery and development. Yesterday, you may also have seen that Shell and our partners won nine exploration blocks located in the deepwater Mexican Gulf of Mexico. This is really exciting news as it allows us to leverage our decades of expertise and leadership that we have developed on the U.S. side of the Gulf of Mexico. That will complement, of course, our existing position in the region. I can assure you there will be more to come on this in the coming quarters and years. Of course, we've also achieved significant success in Brazil during Q4. As you know, this is a multifaceted and fast-growing part of our business.
The first of these achievements is the record level of production that we achieved in Q4 2017. We produced 350,000 barrels of oil equivalent per day from Brazil in Q4, and the majority of course going from the pre-salt. That's more than three times BG's last reported pre-salt volume in Q4 2014, which was 100,000 barrels of oil equivalent per day. In Q4, we also started up Lula South, the FPSO there. The two FPSOs, so Libra and Lula, represent 50,000 barrels of oil equivalent per day production capacity on a Shell share basis. Growth will continue in 2018 as we expect three more FPSOs to start up. We have P 67 coming on Lula North. We have P 68 in Berbigão.
We have P 69 in Lula Extreme South, altogether that represents over 100,000 barrels of oil equivalent per day, peak production capacity, all Shell share. The second achievement in the quarter, as I mentioned, was the declaration of commerciality at Libra. This was submitted by the Libra Consortium at the end of November, and it relates to the northwestern part of the Libra field. We now call this the Marac field. This is a very important step in the development of Libra and the consortium now plans for four new FPSOs to be developed for this Marac field. In early December, Petrobras announced it had signed a contract to charter the first of these production FPSOs, all with a daily capacity of 180,000 barrels of oil, the startup of that is planned in 2021.
The remaining three FPSOs for the Marac field are expected to follow, and that will generate further growth well into the next decade. Of course, in addition to all of this, the consortium will continue to explore the other parts of the Libra field. Another achievement in Brazil has been what we have built on our growth platform with the successful bid for three production sharing contracts, each lasting 35 years for pre-salt blocks, again, located in the Santos Basin. The winning bids include a Shell-operated block, which is adjacent to our Gato do Mato discovery, as well as an area close to the Sapinhoá field operated by Petrobras. The third block is the new Shell-operated Alto de Cabo Frio West block.
These winning bids add strategic acreage to our already leading set of global deepwater growth options and extend our opportunities in Brazil, again, well into the next decade. That gives you an idea of some of the portfolio highlights for the quarter. Let's focus now a little bit on 2017 financial delivery. I will start with two key drivers of our strategic agenda, capital discipline and lower operating costs. I will then move to speak a little bit more generally about cash flow. In 2017, capital investment was $24 billion, of which $22.5 billion was actually cash. That's lower than the $25 billion outlook that we provided, and it reflects to a very large extent, of course, continued improvement to capital efficiency, but also tremendous discipline in capital allocation.
Later on in the presentation, Jessica will talk a little bit more about capital efficiency and project execution in general. At our Management Day in November, I confirmed an unchanged capital investment range until 2020, $25 billion-$30 billion, with a soft floor and a very hard ceiling. This holds even in a high oil price environment. I think this range fits very well within our financial framework. It is also consistent with our growth aspirations. For 2018, you should expect us to maintain capital investments in the lower part of that $25 billion-$30 billion range. Our underlying operating expenses for 2017 amounted to some $38 billion. That's about 13% lower than two years ago, and $2 billion lower than our $40 billion guidance that we gave for the year.
We have now reduced operating expenses on a four-quarter rolling basis for 12 consecutive quarters. Looking forward, I can assure you, we will continue to be intensely focused on the competitiveness of our cost base. There will, of course, be portfolio changes and growth, et cetera, that may affect the cost base. Of course, we will continue to spend where it adds value, like in marketing or production optimization, et cetera. I can also assure you that our focus on cost will go without compromising our focus on safety and asset integrity. Let's move to cash. In 2017, we delivered $39 billion in cash flow from operations excluding working capital, and that is in a $55 oil price environment. That's, what I believe, an impressive number. It's a number which is 60% higher than in 2015 when the oil price was at a comparable level.
In fact, it's close to the 2014 number, when the oil price was at $99 per barrel. This exceptional delivery illustrates the cash generating capabilities of our current portfolio, with each of our businesses successfully following a strategy which is focused on operational excellence, but also activities with high margins. This strong cash generating momentum, combined with capital efficiency and discipline, is what gives me the confidence that we are on track to deliver on the upgraded 2020 financial outlook that we presented in our November Management Day. The performance delivered around $28 billion in free cash flow in 2017, with oil at $54 per barrel. By 2020, we expect to deliver $25 billion-$30 billion in organic free cash flow, and that's at an oil price of $60 a barrel, real terms 2016.
While this may look ambitious, our performance in 2017 gives us confidence that it is also very realistic. We have close to $10 billion in cash flow from new projects yet to be delivered in the 2018-2020 timeframe, growth across our portfolio, and continued cash delivery from operational improvements. As we deliver on this strategy, I think the company is becoming a world-class investment. We have canceled the scrip program, and subject to progress with debt reduction and recovery in oil prices, we will start a buyback program of at least $25 billion in the period 2017-2020. That will be another factor to enhance the per share metrics in the next decade. As I said, it has been a great year, but there is also plenty more for us to do. We must deliver.
We must continue also to drive for higher returns as we are delivering on that world-class investment case. Let me first hand over to Jessica, then we will come back for Q&A.
Thanks, Ben. Good afternoon, everyone. It is good to be here today. Let me update you further on our fourth quarter results, on our operational performance, and on our financial framework. In summary, excluding identified items, on a current cost of supply basis, Shell's earnings in the fourth quarter were some $4.3 billion, $2.5 billion more than in the fourth quarter of 2016, which represents an increase in earnings per share of more than 130%. On a Q4 to Q4 basis, we saw higher earnings in all business segments. This was driven primarily by higher oil and gas prices, as well as improved business performance. You will note that lower depreciation and a lower effective tax rate, excluding identified items, primarily driven by changes in deferred tax positions, also contributed to these strong earnings. Cash flow from operations was $7.3 billion, or $8.4 billion excluding working capital movements.
This is $1.4 billion lower than in Q4 2016, primarily as a result of higher tax payments in this quarter, $1.6 billion more than Q4 2016. These higher tax payments reflect the outcome of positive developments. They were driven mostly by higher profitability, but also by divestment completions and the overall positive resolution of various tax matters. Cash flow was also impacted by margining on commodity derivatives in our Integrated Gas business. Our dividends distributed in the fourth quarter of 2017 were some $3.9 billion, of which $1.6 billion were settled under the scrip program. Dividends per share were $0.47 to be compared with $0.52 per share on a CCS basis. Turning to reserves. Our SEC proved reserves at the end of 2017 were 12.2 billion barrels of oil equivalent, which is a decrease of around 1 billion from 2016.
Excluding production and the impact of divestments, reserves additions in 2017 amounted to 1.8 billion barrels. A reserves replacement ratio of 127%. Our three-year average RRR stands at an estimated 78%. Let me move to the financial and operational performance of each of our businesses. We delivered very strong earnings in cash in 2017, demonstrating significant improvement year-on-year. These are good results which support the full year 2017 highlights already mentioned by Ben. $16 billion of earnings excluding identified items, $39 billion in cash flow from operations excluding working capital, and $15 billion in organic free cash flow. The strong financial delivery is a result of improved performance as well as underlying growth in all of our businesses. The financial transformation of our Upstream business is notable.
To understand what has happened, it is useful to compare our performance in 2017 with our 2015 performance, as the oil price was comparable in these two years. Between 2015 and 2017, our CFFO per barrel of oil equivalent has increased by more than two and a half times. We've increased our production by 20%, while at the same time, we have reduced our costs by 20%. This is truly remarkable progress, and we are confident that there's still more potential for us to improve. This will come as the Upstream team continues to enhance the performance of our assets by benchmarking every individual asset, each major activity to ensure we are achieving top quartile performance in terms of availability and cost. Moving on to Integrated Gas. The performance of this business reflects the strength of our integrated portfolio.
In the low price environment since 2015, we've demonstrated the resilience of our Integrated Gas business. In 2017, Integrated Gas generated earnings excluding identified items above $5 billion and delivered $6.5 billion in cash flow from operations. This was achieved at $54 per barrel, despite the partial shutdown of Pearl during 2017. This resilience is a result of a diversified industry leading portfolio with supply and market positions around the globe and expertise in each step of the value chain, including the unique marketing and optimization capabilities we have developed. Our Downstream business is another example of increased resilience, competitiveness, and differentiation. In 2017, our Downstream business delivered more than $12 billion in cash flow from operations. We continue to be the number one fuel retailer in the world. We have the number one lubricants brand, which is supported by integrated manufacturing assets in key markets around the world.
In chemicals, we saw a record year from an earnings perspective. Operational performance has been an important driver of this financial transformation in each of the businesses. Let's take a bit more close look. Starting with production, our strong performance has allowed us to maximize returns in an improving price environment. Comparing Q4 2017 with Q4 2016, production, operational improvements, and delivery of new projects have played a key role in offsetting the impact of both natural declines and divestments. In Q4 2017, divestments affected production by around 270,000 barrels of oil equivalent per day compared with Q4 2016. I would like to mention three examples to illustrate the impact of operational improvements. In Malaysia's Sabah Deepwater, a multidisciplinary team was created to address reliability, resulting in a reliability increase from 86% in 2014 to 95% in 2017.
In the Gulf of Mexico, we improved the way we manage the performance of our wells, reservoirs, and topside processing equipment. The interventions made in 2017 have the potential to unlock up to 74,000 barrels of oil equivalent per day, Shell share, by the end of 2018 for an investment of around $60 million. A third example is our initiative to achieve higher asset availability by increasing the intervals between planned shutdown maintenance activities. By doing this, we've saved around $200 million in costs so far and reduced the deferment of volumes by around 20 million barrels of oil equivalent while maintaining asset integrity. Moving on to operational performance in LNG, which you can see on the slide as well. We've seen a steady growth in our liquefaction and sales volumes as Gorgon has continued to ramp up and the demand for LNG, particularly in China, has remained strong.
On the third chart on the slide, you can see that in Downstream, availability for both chemicals and refining has been stronger than in 2016, despite the impact of Hurricane Harvey and a one-month unplanned shutdown in Pernis during the year. This progress on operational efficiency does not mean we have lost our focus on capital spending. In fact, our capital efficiency continues to improve. Discipline, focus, and capital efficiency have allowed us to maintain our investment levels at or below the $25 billion-$30 billion range. We can now create more value for every dollar spent compared to a few years ago. We delivered $6 billion in capital efficiency over the period 2014 to 2017, and we are now working to deliver some $9 billion-$10 billion of further capital efficiency savings in the next few years. This represents material savings against the original projected cost of projects.
These savings are expected to materialize over time as projects are executed. Simply said, we are able to do the same for less, if not more. We can deliver more growth from the same capital investment budget. In deep water and conventional oil and gas, we have achieved significant capital efficiency improvements, as can be seen on the slide in the unit development cost reductions. Overall, the portfolio unit development costs have been reduced by some 35% since 2014. Part of the savings comes from our supply chain. More actually comes from the changes in the way we design and execute projects, and new ways of working focused on the realization of value opportunities. Let me give you a few examples. We have structurally worked on key levers to deliver resilient and capital-efficient projects. We have fundamentally changed the way we conceptualize and execute projects.
We apply more cost-effective design specifications, we increase efficiency through replication, and improve efficiency further through leaner work processes. The objective is to sustain capital efficiency, even if the contractor market heats up again. We are now choosing value and resiliency over engineering achievements. Our focus is on the competitive scoping of our designs, our effectiveness in execution, our ways of working, as well as leveraging the supply chain. Through these improved ways of working, safety remains our first priority, with improved safety outcomes typically going hand in hand with better performance. We have also leveraged the benefits of digitalization and standardization to improve capital efficiency and boost operational performance. To cite a few examples, we now have sensors that work in the deepest waters, drones that patrol our most distant oil and gas fields, and computerized tools that make use of the smallest pieces of data.
The possibilities that technology brings are becoming more and more apparent. From the wearable technology of our teams on site, to the data associated with every action, and the finely tuned sensors that yield results. In our drive to make operational improvements and to maximize the opportunities it brings, we work with our suppliers and often ask, "Is there a standard solution you have that we should be using?" We look for something tried and tested, something that can be quickly put to work. We have transformed our supply chain, extracting more value, improving our own demand management, simplifying and standardizing our specifications, and by negotiating lower prices. We drill faster, require less supply vessels, and we leverage data to have optimized designs. We are delivering across all of these areas. Let me move to our financial framework.
We are making great progress on transforming the company into a world-class investment case. 2017 was a year of delivery and an important step forward. We have clarity of purpose, we have a differentiated strategy, and we are reshaping the company to align the portfolio to that strategy. This clear direction is being combined with strong performance. We are pulling key levers to become a world-class investment case. To be successful in our industry requires financial strength, and a disciplined approach to financial management is an integral part of the world-class investment case. The pillars of our financial framework have not changed. To remind you, these are, firstly, a conservative gearing level consistent with AA credit rating. Secondly, a dividend policy of growing the U.S. dollar dividend per share through time, in line with our view of Shell's underlying earnings and cash flow.
Thirdly, the distribution of surplus free cash flow to shareholders in the form of share buybacks. This financial framework is underpinned by a clear commitment to strict capital discipline with a firm ceiling of $30 billion even in a high oil price scenario. In 2017, we generated some $28 billion of free cash flow, of which more than $15 billion in organic free cash flow. In line with our cash priorities, free cash flow was allocated to the service and repayment of our debt, some $16 billion in total in 2017, and the payment of our dividend, some $11 billion in cash in total. Gearing was reduced to 24.8% at the end of 2017, down from 28% at the end of 2016. This represents an $8 billion reduction in net debt over the last four quarters. As expected, divestment proceeds have supported debt reduction.
At a headline level, we have now completed around $24 billion of divestments since the beginning of 2016. We have announced a further $3 billion of divestments, and we can confirm that more than $3 billion worth of additional divestments are well advanced, all at a headline level. Since 2016, we received some $19 billion in cash proceeds from divestments and from the MLP, with $14 billion received in 2017. We have clear visibility on bringing gearing to 20% and generating the cash flow to support an AA credit rating. Over time, I expect gearing to move below 20% to ensure robustness of our financial framework. This will build further resilience to a changing macro environment and provide balance sheet strength to prepare us for the future.
I would, however, like to emphasize that although divestments have driven debt reduction, the overall strengthening of our financial framework runs much deeper. It is fundamentally about the strength of the underlying cash flows, improved business performance, and a disciplined approach to capital investment. You've already heard about our business performance and our commitment to our financial framework. Before I wrap up, I want to emphasize where we are on cash flow generation. Because of our strategy and our delivery, our ability to generate organic cash flow has grown significantly, and we've demonstrated resilience at lower prices. Our cash flow from operations at $54 per barrel is in line with the cash flow from operations we achieved when oil was at $99 per barrel. In 2017, our organic free cash flow achieved levels in line with our declared dividend.
This demonstrates the quality of our portfolio, the strength of our underlying performance, and our resilience through the cycle. We are confident that we can continue to grow our organic free cash flow in the years to come, with revenues from new projects coming on stream and further operational and cost efficiencies to be realized. As Ben has outlined, we expect to generate organic free cash flow of some $25 billion-$30 billion around the end of the decade at $60 per barrel, real terms 2016. We have close to $10 billion in cash flow from operations still to be delivered in a 2018-2020 timeframe, growth across our portfolio and continued cash delivery from operational improvements. We've made great progress on all fronts.
It was this progress and confidence in our financial framework that enabled the board to cancel the scrip, starting with the payment of the fourth quarter 2017 dividend. The scrip was intended as a short-term measure. With the cancellation now behind us and with strong performance and delivery against our commitments, we're entering the next phase in delivering the world-class investment case. We will maintain our commitment to the financial framework, continue to grow the company, and look to increase shareholder distributions over time. We remain committed to our intention to undertake a share buyback program of at least $25 billion in the 2017-2020 timeframe, subject to debt reduction and recovery in oil prices, to offset the shares issued under the scrip dividend program and over time to significantly reduce the equity issued in connection with the BG transaction, and therefore grow distributions to shareholders.
We will also balance buyback levels with meeting our ambition to achieve AA equivalent credit metrics as well as the need to fund growth. As we move into this next phase, our financial framework remains unchanged. We are as committed today as we were before to ensure we build our financial strength as our industry evolves. We will continue to strengthen our balance sheet, high-grade our portfolio, and deliver performance in line with our strategy and purpose. Looking forward to 2018, we remain on track to deliver a wave of new projects. Most of these projects are either already on stream and ramping up or are close to completion. In 2018, we expect more from operational excellence, but also from simplification, standardization, and digitalization. With that, let me hand you back to Ben.
Thanks, Jessica. Strong Q4 earnings concluding a very strong 2017. We enter 2018 with continued discipline, confidence, committed to delivering very strong returns and very strong cash. With that, let's do some Q&As. Just one or two questions at a time, I'm sure we will be able to cover everybody. Can I start with you? Sorry.
Hi.
Next.
It's Michele Della Vigna from Goldman. I was wondering if you could elaborate a bit on what will be the trigger to start the buyback program. Is it the 20% gearing? What will be the key drivers to determine the pace at which you'll execute the buyback from there?
Okay. We anticipated that question, actually. Jessica has the answer for that.
Great. Thank you, Michele. We covered this a bit this morning as well. I'll be consistent with what I said earlier. I can understand the attraction to try and have one metric that will be the trigger when we'll start the buyback program. What we've tried to do is be clear on our decision framework. What I mean by that is clear on our intention. We're very much committed as a leadership team, as a company, to increase shareholder distributions. We are clear about our commitment of achieving the $25 billion in the 2017 to 2020 timeframe. We've been clear in terms of how much cash we believe this company can generate, the $25 billion-$30 billion in 2020. We've been clear in terms of our financial framework. We want gearing to reach 20%.
I'd say it's more of a line of sight number than a hard number that we must meet. We need to have clarity in terms of line of sight with that. Of course, there's other factors as well. There's the macro environment, there's the performance of the business. All of these pieces come together for a very holistic approach and integrated approach to making that decision. What I can tell you is we have confidence in the cash generation capability of this company. We believe this company will be able to achieve the organic free cash flow of $25 billion-$30 billion. We believe we can move the gearing down to 20%, and in that timeframe, be able to start the buyback program.
Let me add a little point to that. We have a tremendous sense of urgency, of course, to do this. There's two things we have to balance, of course. Making sure that our credit metrics are resilient. At the same time, of course, getting into a buyback program as quickly as is sensible, because obviously, it's the most expensive way to fund a company. Don't get me wrong, it's the same argument that I made on the scrip, and you all wanted to have an algorithm for when exactly would we cancel the scrip. It's the same sentiment, as quickly as possible, because it is just not a good position to be in, or it's a better position to start buying back. Again, the algorithm, I'm afraid, will not be revealed today. You were next. Then we go to Theepan.
Thank you. Jason Gammel with Jefferies. Clearly, the cash generation trajectory is quite impressive. I would say that based upon what we were expecting, the 4Q seemed a little bit light. I recognize you have made reference to some timing differences. If I look, for instance, at the Upstream cash generation in the quarter, if I just take earnings plus DD&A, the cash performance was less by a couple of billion dollars. I was hoping you might be able to quantify what some of these timing differences are and whether this is something we get back over time and maybe just emphasize this is not systemic, if nothing else. Then just one other quick question, on the $1.8 billion of reserve additions you've made this year, can you quantify how much of that was price revision related?
Okay. Joanne?
I'm sorry, just the last piece I missed that. $1.8 billion? Yeah.
There was 1.8 billion of reserve additions from other. Can you quantify how much of that was price revisions?
Okay, good. Indeed, fourth quarter, I think it's important to keep in mind that our fourth quarter typically is relatively soft from a cash generation perspective. If you looked at the last four or five years, you would see cash flow typically softens in the fourth quarter. That has to do with normal seasonality of our business, particularly in the Downstream business. One, there's seasonality in terms of kind of top-line growth, but it's also the tax paying season as well, we make some important tax payments in the fourth quarter, which also affects cash flow from operations. That's in general what happens in the fourth quarter. Specifically, what happened in this quarter were a couple of things. Tax played a major role in the story for the fourth quarter. It was a help to our earnings and a hurt to our cash flows.
You had kind of two different effects. The underlying story of what's happening in tax is a positive one. What's generating the higher tax payments? Three main things. The first one is higher profitability. That generates higher taxes. That was around $400 million, $500 million of that number was driven by profitability. The second piece of that is divestments. As you divest, there's usually a tax component. Happened to be relatively higher in the fourth quarter as we've been closing out the transactions. The third component of that was settlement of some tax issues that we had around the world. We're pleased with how those have been settled. Those are relatively one-off. I'd say about $500 million of that was the profitability piece, and the balance are these relatively more one-off elements of divestments and settlements. I think that's the main story.
There's another piece of the story around the mark-to-market movements in our business and the margining in our business. Those are timing differences. As you put hedges in place, what you recognize in the financial statement is relative to the future price, but it depends on how those contracts actually close out with the physical. Those are true timing differences. Turning to your reserves question on the 1.8, I'd say around, I was trying to do the math on that. Less than a third of that was price related. Yeah.
Yeah. I think you had the mic there already or not? Yeah. Okay. Sorry. I will come to Deepan here.
Good afternoon, Christyan Malek from JP Morgan. Three questions, please. Just first of all, I just want to be clear about your capital allocation. You get to 20%, you've got all this free cash. What do you do then? Do you de-gear more, or do you return it back to shareholders? I just want to understand the priorities beyond your 20% target. Leading into the second question, to what extent will you de-gear to prepare yourself for future M&A? And within that M&A, whether it's bolt-on or more wholesale, what's the priority? Is it short cycle, so U.S. shale, or is it energy? Because you've obviously got the $1 billion-$2 billion, but I'd like to understand life beyond 2020. What does that actually incur in terms of competing for capital allocation? Third question, your CapEx target of $25 billion-$30 billion.
Does that include the efficiencies you've talked about today, or is that downside to that range?
Sorry. Come again?
Does that include the efficiencies that you framed in terms of the further technologies and things you're doing on the well, or does it incorporate, or could we look at that as downside to that range, potentially? Thank you.
Let me have a first go at answering your questions. I think we've been pretty clear. I think Jessica's also been pretty clear in the priorities for cash going forward. There's a number of things that we need to achieve. Yes, we need to get the gearing to 20%. That's the point that we have made a number of times. Will we then sort of stick with 20%? No. Probably over time, we will continue to get to a sort of gearing level that we were at before the last downturn happened. When and how that will happen, and how we will sort of pace that in conjunction with buying back is going to be, of course, very much an optimization on a quarter-by-quarter basis, depending on how much excess free cash flow we have, et cetera.
That's basically the game that, believe me, we will be playing with intense concentration to get it right. Ultimately, we've been very clear on it, we're going to buy back, for starters, $25 billion worth of shares. The intention, of course, is to significantly take away the dilution that we've had in recent years, both from the scrip program as well as from the BG acquisition. At the same time, we need to get the balance sheet back into the shape that it was before the down cycle, because we want to be ready for whatever comes next. Whatever comes next is kind of hard to predict. It may be another sort of macro event. It may be another set of opportunities, or both. We have a policy of not trailing what our intentions are exactly, and I'm not going to make an exception here.
Yeah.
Of course, we want to be able to play the game again when the next set of opportunities will come. The capital piece fits in that. We've been very clear. We have been working, of course, very clearly also through what we think are going to be the options, the opportunities, the choices that we have to make in the 2020s. We think the $25 billion-$30 billion range is the right range for us to play with. And again, if oil prices are softer, we will have no hesitation and plenty of flexibility to come down. Of course, improved capital efficiency will help us to basically still get enhanced bang for the fewer bucks that we will be spending. At the same time, also, we want to have a company that is resilient, strong, has multiple options going forward.
We still believe $25-$30 is the right range based on relatively detailed planning and modeling that we have done for all our strategic themes. And 30 is the hard ceiling, because we are also very clear that we need to return more to our shareholders if we want to be a world-class investment case. I hope that sort of deals with all your points. Theepan next.
Hi, it's Theepan Jothilingam from Exane BNP. Just coming back to cash generation, and I know you may be reticent to talk about one specific quarter, but when we're thinking about 2018 versus 2017 and the impact on cash taxes of disposals, just trying to get a bridge. I was just wondering what the impact you sort of see preliminary in terms of a 2018 versus 2017 sort of delta, if that's possible. The second point, could you perhaps explain, in layman's terms, what actually happened in terms of the Integrated Gas business? And you talk about the increased margining. Is that transitory? Is that something now that's done and the cash is consumed? Thank you.
I think there for you, Jessica.
Good. I'll do my best to make it in layman terms. We'll get that in a moment.
Find chemical engineering variation of it as well.
Your question on 2018, it's a bit difficult, and it's not because I don't want to be transparent, but every transaction's completely different. For me to give you a sense of kind of steady state, it depends on which transactions close, how they close, their ultimate structuring, et cetera. That's difficult. I don't think it should be a material differentiator for you in terms of 2018, in terms of thinking about a modeling of our cash flow is what I would say. Okay. Now hedging. What's the business fundamentals? Let me try and start there. For a relatively small portion of our portfolio, I think that's important to start with. There's parts that we try and risk manage, and in particular, cross-commodity exposure.
For perhaps buying or selling Brent or buying and selling Henry Hub, where we have kind of a net cross-commodity difference, we may choose to try and use derivatives to manage that risk, to essentially lock in a margin. That's the business fundamental. Whatever derivative you use will be marked to market, depending on those forward curves. If you have a derivative that's a call or a put on Brent or on Henry Hub, that will be marked over the life of that contract. Depending on how curves move, you either have a unrealized gain or an unrealized loss. This is part of our business. You'll see every quarter for a very long time going back, you'll see that we'll have in our Integrated Gas business unrealized gains, losses, in the headline number, we take that out, and it's not part of our clean earnings.
That's kind of the business piece of it. There's another element of it, which is the margining. Those mark-to-market positions with the exchanges, if you're in or out of the money, you need to post a margin. This happens in our business every quarter. You may not always fully appreciate that and kind of all of the entries associated with it. In this quarter, it was part of, we had a margin call, and that was part of what reduced the cash flow from operations for the Integrated Gas business. It's normal course of business, it's in our numbers. Unfortunately, it was also happening when a lot was happening on the working capital side, so we had some major payables pay down in Integrated Gas business. We also had inventory increase, as well as prices have gone up.
That also impacts our inventory, obviously, and then our working capital. All of those things came together and made the cash flow from operations look rather low, particularly relative to our earnings at a group level and in the Integrated Gas business.
Okay. Iain.
Hi, Iain Reid from Macquarie. Ben, just a question on your New Energies activities recently. You've now bought First Utility, how much of Shell should we think about as a utility style business going forward? I know it's going to take obviously some time to be material, but is this a path we should think about in terms of where you're going as a business? What are you buying utilities for? Is it for the customers? Is it to learn about how they work or what exactly are you trying to build here? Should we have a targeted mind for what the size of the market you're trying to access here in regional terms?
Okay. Only one question? Okay, good. Let me maybe address something that you didn't say, but what I think I also heard with the word utility, I sort of sensed that you were thinking of a relatively low-grade business that we are buying. Sometimes we use utility rate of returns to characterize a certain part of the business. Let me just characterize it completely differently. Yes, in New Energies, we said we would focus our strategy on two mainstreams. One is basically new fuels, think of hydrogen, biofuels. These are relatively well-established activities, of course, have great adjacencies and similarities to our existing businesses, particularly, of course, the biofuels piece, where we are already one of the largest global players. The other one was to focus on the power value chain.
What we have done, or rather what our strategy is on the power value chain, is we want to be an integrated player. That means that we will be exposed to the generating part of the chain, but also on the midstream part, particularly the optimization and trading end of the chain, and on the customer part of the chain. It will pretty much be analogous to how we participate in the oil products value chain with refining, supply and trading, and in the end, marketing. Yeah. The way we play that chain, of course, is in integrated value optimization, which gives us superior returns than just being exposed to just one part of the chain. We typically tend to be underexposed to the manufacturing end, in the OP analogy, refining, and in the power analogy, generating. Yeah.
We think we have, because of that adjacency, very relevant competencies and skills that we will bring to bear. As a matter of fact, we are doing that already in several parts of the world. We are very accomplished power traders. We make significant money on it in places like North America, where there is the liquidity and the availability of counterparties to do so. Increasingly, we will want to build that capability in different regions as well, and we want to be, as I said, able to optimize and integrate. It does require, therefore, that we are also acquiring customers here. You have to be able to have that part of the chain, too. That is relatively new, or that is a little bit more new than what we have been doing before. We have been selling power to commercial customers already for some time.
We have been acquiring companies in the U.S. in order to extend our trading position much more in a more structured marketing capability. We have seen that indeed, significant additional value can be unlocked. We're going to try that and we're going to prove that up, that it works also in places like Northwest Europe, where we believe there is great opportunity to do so. Again, we have expectations that we will have very competitive returns coming from that, particularly in relation to the risks that you run in that business. How big is that? Relatively small, of course, at this point in time. A lot of people tend to think of it for now in terms of capital employed or investment levels. We said $1 billion-$2 billion. That is, of course, still relatively modest compared to our overall investment level.
If you look at it in terms of capital employed margin, it's even smaller. Yeah. The point is we want to create that platform for us to continue to grow it much faster going forward. What is our ambition? Our ambition is to significantly participate in that growing power market. Power is the fastest growing segment of the energy system. We don't know how that growth will continue, where it will end up. There is some expectation that by the second half of the century, power will be more than 50% of the final energy consumption. We just want to, as a company with capabilities to deploy that, we want to be a competent player in it. That's the philosophy. We are now in the point of proving there are hypothesis and our business models that they actually work in practice.
We are assembling these value chains through inorganic acquisitions. You cannot grow that from scratch like you can, but it takes you years. That's why we acquire a number of companies and a number of positions, put them together, and then accelerate the growth. Yep. Okay. I was coming to you. Pass on to Oswald.
Thanks, Ben. It's Lydia from Barclays. Two questions if I could. The first one, can you talk about the decision-making process on CapEx now, just in the sense of if you're going from $25 billion to up to the top of the range. How are you making the decision on the marginal projects in keeping that disciplined approach going forward, and how is that different from what it might have been three years ago? Secondly, just picking up on Jessica, the digitization and efficiency program, I think you said [inaudible] of additional opportunities there. Can you walk us through in more detail what you're doing on that and how you're deploying that across the organization? Thanks.
You want to go first?
Sure. Do you want me to touch on both or?
No. Well, yeah, then I will talk about CapEx as well.
Okay. I'll make just a couple quick comments on capital stewardship and then go to digitalization. You probably have some things to add to digitalization as well. Capital stewardship, it's been a central theme in terms of driving improvements in the organization. We've put a number of important governance pieces in place in terms of how we think about capital, how we govern, and how we make decisions. I think it starts with being clear on what our strategy is and what is the portfolio you want aligned with that strategy and being clear where you want more or less exposure. I think we've done a very good job in the last couple of years bringing clarity to that. You all know where there's going to be more capital.
It's going to be in our Deepwater and our chemicals businesses because those are our growth priorities. I think that clarity and thought is important in terms of how you then engage in the choices. I think relatively speaking, we're rich with options, we've got a lot of internal competition that's allowed for a natural, I think, upgrading and high-grading of the choices that we have. The last couple of years, the low-price environment and our requirement that projects not only are value accretive, but they're resilient. They work in a $40 world, $50 world, again, has driven a whole new way of thinking about projects, and as I mentioned before, how we design them, how we deliver them, execute them in a very different place. I don't see how that will shift.
We're maintaining all of those same practices, ways of thinking, decision models, as prices have gone up over the last couple of quarters. Digitalization has been probably one of the more important topics for the executive team over the last year. We spent a lot of time on it as a team. There's a lot of things we could spend time on. This has been one of the important ones because we recognize the potential and how important that will be in terms of potentially disrupting our industry. Of course, we want to be the one who's in charge of that. It really affects now and potentially affects every part of our business, whether it's treasury to operational excellence on a platform, et cetera. There's a lot of initiatives that have been happening over the last couple of years.
We've put more thought in terms of how do we really drive that in a different way in the company. We've brought some great external hires in, a VP of digitalization, who is helping us think better about it, who's done these things in other companies, bringing that external thinking in. Recruiting a lot of people with the right experience, complementing it with the people who know our business very well. We've put in place these pilot lighthouse projects around the group where we're really trying to demonstrate ideas. People have to come up with an idea, translate it into action and impact within a three or four month period. It's causing us to rethink our ways of working, creating agile teams, et cetera. It's not just the technology, but it's also the ways of working.
There's a lot of different elements to this that we're working, and I'm really optimistic in terms of what we're seeing in the organization that's organically happening. I think probably for us, the challenge is more how do you take a great idea and replicate it as quickly as possible around the organization? I think we're getting our arms around that, and I expect to see a lot more from this space in the coming years.
Not much to add. Okay, good. Oswald.
Thank you very much. I'd like to ask a question on marketing. There was some commentary this morning about improved underlying marketing unit margins in the fourth quarter. I just wanted to know, is that a meaningful step up? Where that's coming from? Is that the strategy coming through of non-fuel or is that more of an umbrella effect, just slightly higher prices in the fourth quarter for marketing? Or is that really the marketing strategy starting to show up? Secondly, I guess in the Upstream, the only area that's still a bit negative is South America on an earnings basis with obviously Brazil's in there. I know there's a lot of BG acquisition money in there on the depreciation.
With two more FPSOs this year, oil prices where they are, should we expect some operating leverage in that South American Upstream business this year to get back to positive net income? Finally, I'm just curious, I see your move into Mexico obviously with Qatar Petroleum, getting them in there in quite a big fashion. Does that help you or is there something going on where that might help you get into the LNG expansion in their country? Thank you.
Okay, let me take the first and the last one, Jessica will talk about South America. Marketing, of course, it's an established strength. It was a little bit of a, maybe I wouldn't say hidden gem because I think everybody in this room will no doubt fill up with V-Power. It is, I think, maybe something that was a little bit underappreciated, in terms of the magnitude, the size, the resilience, but also the potential that it has. We have focused on an awful lot in the last years, of course, to not only high-grade a portfolio, also to be very clear with our growth. That's where we want to push a lot harder.
John Abbott has come with a strategy called Plus Ultra to not only invest a little bit in network and in growth, but also have a much more aggressive approach to growing margin. I think what you see is basically the beginnings of that strategy working out. Digitization has tremendously helped as well. Not only in terms of neat little things that we can do with customers like TapUp, the filling up pilot that we are running in Rotterdam. You can fill up without being in your car, or FareP ilots. Maybe some of you will have seen the speculation we would be going in the taxi business in London. We are not, but it is a position we had to take in order to roll out another app.
There are many ways in which we are using digitization to access other segments of the market, but also access a much more sophisticated price management methodology throughout the portfolio using big data, really understanding much more intelligently from multiple sources what is happening and how we should dynamically price in the market. I think that is something that, again, is another example of digitization, where we take advantage of completely new opportunities. On Mexico, yeah, we are very happy with Mexico, as you can imagine. Nine blocks being one out of 19 that have been awarded. We were going after 13, so that was a pretty good result. I like that. What I also like about it, Oswald, is that we had an extremely disciplined process to get to the bid parameters that we would be going for.
It's always tempting, of course, at the last moment, because you never know how others will behave, but we had a very disciplined process. We had exactly figured out which were the tiers, the high-quality positions that we needed to be in. Needless to say that we had a little bit of an inside track on Perdido, which we didn't want to disclose, hence we only disclosed the Whale discovery after the bid round. I think we knew what we were doing there. We had very clearly staked out what would be the tier 1 acreage, the tier 2 acreage, and the tier 3 acreage, and we had some really good bid parameters, which I will not disclose, about what it would mean for life cycle break-even prices. On the base of that, we did indeed win all the tier 1 positions that we were in.
I think we won everything that we were going after in the Perdido, which was good. Indeed, I think four or five of the blocks we did together with QP, which is good as well. QP is one of our top strategic partners, not just in Qatar, but also internationally. There are no quid pros. It doesn't work like that. We just have a very good working relationship with QP, so we just exchanged WhatsApp messages between myself and Saad to congratulate ourselves with how we have won. That's the extent of it, I would say, at this point in time.
Good. South America, of course, we run the business from a strategic theme basis, so I'll approach it more from a deep water perspective and an Upstream perspective more than the region, because there can be other things in that. I think you're focusing more on the Upstream side. Indeed, DD&A has been significant in impacting our earnings and causing a disconnect between the earnings and the cash flow. As projects come online and ramp up, there should be some natural adjustment to that. Also, more reserves additions also will help the DD&A profile going forward. It's on our mind and making sure we get that in the right place, but it's also why we focus more on the cash. The cash generation for the Upstream business, I think you see, has completely transformed over the last couple of years, some $4 billion for the quarter.
I think that's the substance of it and the value of it's coming out of the cash side more than the earnings side. That's really what we're focused on.
I'll come to Thomas in a moment, but I first want to go to the phones and see whether we have a question there that we can answer.
Thank you. If those of you on the phone lines would like to ask a question, please press star one. If you wish to be removed from the queue, please press star two. Again, that is star one to ask a question. For our first question, we go to Jason Kenney with Santander.
Hi, thanks for your time and for allowing me to ask a question. I just wondered if you could give us some more guidance on where Integrated Gas earnings could move and has the potential to move over the next three to four years. I know there's a lot of growth. There's a few moving parts in volumes and sales, but ultimately, it's still a bit of a black box exercise on trying to find where the margin is shifting and how supportive earnings and cash for that business might be.
Yeah. Thanks very much, Jason. Good question. Integrated Gas, of course, a very important part of our portfolio, cash engine, and a very strong cash engine going forward. I think we gave some pretty clear guidance on management day where we think it will be at the end of the decade. Maybe you want to deepen it out a little bit, Jessica?
Indeed. Underlying performance of the business, very strong. We had Gorgon ramping up. We'll have the full effect of that hopefully in 2018. We also have Prelude coming on stream over the next couple of years, which will also contribute to growing earnings. We're also growing the business aside from our projects. You see increased LNG sales volumes. It's also contributing to more earnings and more cash going forward. We do provide Our ambition from a cash generation perspective, more than an earnings perspective, and that's the basis of our world-class investment case is the $25 billion-$30 billion in organic free cash flow at the end of the decade, in 2020. We expect IG to be a major contributor of that, of some one third or just under one third of the contribution to that organic free cash flow.
Very strong today and continuing to grow up to 2020.
Okay, thank you. Let's go back to the room. Thomas first, and then pass the phone to you.
Thank you. Thomas from Credit Suisse. I do apologize. I have three quick questions. Firstly, just on the scorecard for 2017, we've talked about the positive aspects of 2017. Perhaps we can talk about the negative aspects or areas where things didn't go according to plan, excluding Pearl GTL, and what measures you're putting into place. Secondly, you had a chart where you showed Upstream platform availability or uptime, and it's improved significantly now to 95%. I wondered, and I'm assuming the definition is different between availability and actually utilization rate. There's spare capacity in Egypt, there's spare capacity in Oman as far as LNG is concerned, and I'm guessing there's a lot of spare capacity in U.S. Gulf of Mexico. I wondered in terms of the drill to fill opportunity you have today, perhaps you can talk about the upside potential.
Finally, a question both to Ben and Jessica. If you can pick one thing, a key lesson from 2017, where you said, "Wow," what would it be? Thank you.
Yeah, I think that the problem with quick questions, of course, is that I do not have quick answers. Let me try a few, and I'm sure that Jessica will fill out as well, if you can specifically talk to availability and utilization. I think on the scorecard, I think if you would ask some of our employees, they would probably say, "Wow, fantastic year. Didn't quite show up in the scorecard." I would say, "Well, no, the scorecard was exactly reflective of the performance because we have a balance for a scorecard." I think we had some outstanding financial delivery. We had some outstanding project delivery. Of course, we have been on a long track record of improving our project delivery, both in terms of schedule as well as cost delivery. Again, these scored very strongly in the scorecard.
In general, our sustainability metrics scored pretty good, with one exception, which is process safety. We had more process safety incidents that we had planned or allowed for. We are, if you look at it in the main, still on a downward trend. That trend was broken a little bit. We bumped up again. We didn't improve as much as we thought we could or should. Now, we take a deeper view on process safety incidents. In the past, we only looked at tier 1s. We now look at tier 1s and tier 2s, and tier 2 definition has a lower threshold, which makes it perhaps harder to predict and to meet because there is more variability in it. I think that part we missed. I hammer on that very, very stringently because I think process safety goes at the heart of our license to operate.
I do think that competitively, we are not bad when it comes to process safety, but we just need to continue to improve. The other thing which, and you said, well, excluding it, but I think in terms of the biggest delta in our scorecard was Pearl. Of course, you could argue, well, we could have seen Pearl coming. We decided already before Christmas to bring Pearl down. We decided also not to adjust the scorecard for that. Even though it was before the beginning of the year, we said, "Well, this was not supposed to happen," even though it was a very sophisticated failure mechanism that was very hard to forecast, and we dealt with it all fantastically well and everything else. It's one of our best performing assets from a cash perspective.
If it falls over, the company should feel it, and that's why we kept it unadjusted, and that, I think, was the single biggest hit to our scorecard. I think what is the sort of the wow factor for the year, well, I think it's a little bit what. This is probably my take on it. It is a little bit what I feel about Shell in general. The moment the problem is clear to the organization, the moment people know what it is that we need to focus on, you will see the full power of the matrix, the resourcefulness, the capacity of the people working on it, and we can achieve fantastic results. Quite often, the problem is therefore not so much that we do not have the means or the resources or whatever else to work on stuff.
The problem is that we're not clear about the problem. The moment you define the problem very clearly with clear strategic intents, and you define it very clearly with linking everybody in the matrix to the bottom line that they are connected to and it needs to be delivered, you will see some amazing performance. That, I think, is what we showed in 2017, and that's why I'm confident that we will extend that track record all the way to the ambition that we put out for the end of the decade.
That's good. Maybe just to build a bit on that, because what came to mind for me was the power of delivery. When the organization challenged itself to reduce capital costs and operating costs, particularly in the deep water business, a couple years ago, I think many people on the leadership team thought what we're delivering today was not actually possible. To see Wael Sawan, who runs that business, set a very high bar, high level of ambition. Constructively lead and manage the organization to those outcomes. Now they're looking for the next level of ambition. That's just been a really fantastic thing to watch and see. I mean that sincerely. I think when people deliver, the sense of ambition and what's possible grows. I think it's been great to watch in a number of our businesses how that's really taken off.
Utilization, spare capacity, indeed, I think this is a multibillion-dollar opportunity for us. I'd start with availability. It's been a focus of the organization. Operational excellence has been one of the key focus areas in Downstream Integrated Gas. Upstream, there's been improvements. There's definitely improvements. You see it in the numbers, but I wouldn't say we think we're entirely where we need to be. I think in Upstream in particular, getting above the 90% consistently, I think is important and there's real value there. Another element of it is the WRFM, Well Reservoir Facilities Management. That's also been an important piece of driving more cash from our business the last year. I think, again, there's more room for us to deliver in that space. The utilization piece is important.
That's part of what's driven our exploration strategy, being more focused on near-field exploration because we recognize that's more likely than not the most value accretive, lowest cost barrel is the one that feeds into an existing pipeline and existing platform, et cetera. Some places like the Gulf of Mexico and places where we have older assets, that's been a clear part of our strategy. Also in our Integrated Gas business, a number of our older LNG facilities, there's availability in those facilities as well, so that's an important part of that strategy. Again, where in a relatively short time frame, if we can solve either the resource challenge or the commercial challenge, because it depends on the place, whether it's a resource issue or kind of a non-technical risk issue. There's multibillion dollars at play and we've got a lot of teams working those issues across the company.
You will have seen the progress in places like Trinidad and Tobago, but also places like Brunei.
Yeah
Oman is a very great focus point. I think when we talk about the sort of updated strategy for Integrated Gas, it was very, very clear the number one strategic priority for investment needed to be to backfill the others that we have in existing value chains.
Yeah.
We'll go to the back now.
Thanks very much, Karen.
Yes, John.
Ben, Jessica, thanks very much. Slightly unfair one to start with, but forgive me. If you're having a choice to invest, what would you rather invest in? A Canadian oil sands company, Canadian gas company, or Shell, given that opportunity is open to you at the moment? Or do your actions tell me where you think the better investment opportunity and returns actually reside? Just a comment on that. Secondly, I just wonder, Jessica, some detail. Deferred tax or deferred tax and provisions, as ever, is a large chunk of the cash flow statement, $three and a half billion or so cash out. If you could give us any definition and also any commentary on how we might expect that number to move in 2018. That's also probably slightly unfair.
Thirdly, just if you want to comment on Groningen and everything going on offshore the Netherlands at the present time and the potential impact of various pronouncements on the business and liabilities to the business. Thank you.
That's a fair question, isn't it?
I thought the others were fair as well.
Let me take the first and the last one to start with. We haven't forgotten about the fact that we have some highly liquid securities sitting in the cupboard that we can do something with. Indeed, we have a reasonable position still in CNRL's about $3.5 billion worth. Indeed, you could argue, why don't you just liquidate it and just use that towards for a debt retirement or whatever.
It's more an equity question than debt.
Again, let me reassure you, we haven't forgotten about it. It's not as if I needed reminding on it. In the end, we also need to make value decisions on how we play this. When we divested our oil sands position, which was, I think, a very strategic move, the way we could see the assets being valued or rather the value being compensated was partly in cash. That was clear. A certain expectation on what the shares would be worth at the time if we wanted to liquidate them, but also a number of other ways and means we could take cost out, we could do further optimization, the value chain, et cetera.
All these things, in my mind, need to play out for value, therefore I tend to take a slightly more sort of strategic view on what is the best way to go about realizing all this into cash. I'm not at all oblivious to the idea that, yes, of course, the longer you hold this, the shares may appreciate, but at the same time, you're also delaying the opportunity to do something with the cash, and that's part of all the equation as well. It's evident that until now, we have decided to hold on. I'm not going to give you a forecast what I expect of the CNRL share price and what that would mean. That would be unfair. Again, let me reassure you that we don't forget about these things.
We know what we are doing, we are optimizing our decisions for value here. On Groningen-
Shell's a better investment.
You said it. On Groningen, yeah, there has been a lot of commotion, which I think is understandable in the Dutch context, and many of you may not be aware of what happened that we talked about this morning in the media, as you can imagine. Some of our Dutch guests here today will be able to relate to some of it. I think much to our surprise, I should say, and chagrin as well, for that matter, the fact that we basically started, or rather NAM started publishing its own accounts last year, which it hadn't done hitherto. It was always a part of the Shell Nederland consolidated accounts.
The fact that we disclosed the accounts made it redundant for the company to have a 403 declaration, which was basically a guarantee for suppliers to NAM to just say, "You can't see the financial statements of the company, but don't worry, you can rely on Shell to back them up," the commitments. The fact that we published the accounts made the declaration redundant was, I think, a straightforward thing. Somehow, in last weekend, this got reinterpreted as Shell walking away from its legal liabilities that it would have if NAM could not fulfill its liabilities. It was completely unwarranted. It was completely not intended. We tried to explain this. It sort of got a little bit away from us in a very sort of febrile environment with earthquakes, et cetera. We had to be very categorical about that position. NAM is a very strong company financially.
It can take on all the liabilities that will flow from damage that has been caused by earthquakes. The main point is, we had to be very clear, also to the population of Groningen, that they don't have to worry that NAM somehow walks away from its responsibility and that we don't walk away from NAM. That was the commotion that was being caused. I think it has been sort of put back to bed again. Yeah.
Tax was an important part of the Q4 story. In terms of deferred tax asset, a lot moves in that space given the size of our company. We're operating in 70-plus countries, $16 billion of earnings. Tax movements will be material and significant. A lot of the movements that happened in the fourth quarter reflect agreements we made with different countries on different items, and as part of the normal kind of course of business of a company of our size. Going into 2018, it would be difficult for me to kind of give you a sense of how that might play out. What I did say earlier was on the cash tax piece, I think I can be clear what were the main drivers of the variance between last year and this year.
I think that's relatively straightforward in terms of the increment of $1.6 billion more of cash taxes in the fourth quarter of 2017 versus 2016. I stepped through that. I think that gave you a sense of what portion of that might be recurring versus one-off. Hopefully, that was sufficiently clear. In terms of all the other movements, it would be very difficult. A lot of those, of course, are non-cash as well. That's important to keep in mind.
John.
It's Jon Rigby from UBS. Can I ask two related questions on shareholder distribution and one on the numbers? On distributions, the first is, I think you referenced the conditions in which you'd start a buyback, and I think you talked about strategic performance, visibility on 20% gearing, and recovery in the oil price. Given what you said about visibility on disposals, reference what Lucas just said about $3.5 billion in your cupboard, wouldn't that suggest that you have visibility on each of those three conditions for a share buyback right now? The second is on your dividend. I think you said you'd progress the dividend on underlying performance, which I guess your preferred measure is cash flow. You have quite a big step up in target cash flow over the next couple of years.
Should I understand it, there is a certain threshold you would expect to get to, which is sort of consistent with your existing payout before you start to then grow the dividend on the underlying progression thereafter? I'm sorry if that sounds a bit complicated. Then lastly, just on your Downstream. When you do this presentation, you tend to reference Q4 to Q4 on your Downstreams. My impression was that Q4 2016 was something of a disappointing result for your Downstream. Q3 2016, and particularly Q3 2017, were pretty spectacular quarters for your Downstream. Could you just talk through some of the moving parts that get you from Q3 2017 to Q4 2017? I understand that refining margins have come down somewhat and marketing margins have come down somewhat, it looks like there's a significantly greater delta than the macro conditions would suggest. Thanks.
Let me make a start with both of them, then Jessica will fill it out a bit more. I appreciate the desire for clarity on how exactly the use of the excess free cash flow will be. We are resisting to sort of reveal exactly how that will work because much of it, of course, will also depend on how things will play out. There is not going to be an algorithm or a formula that I can show you and say, "If X and Y and Z happens, the following is going to happen as a result of it." I think what is very important to note is, first of all, that yes, you're right, Jon, there will be a very significant step up in the free cash flow of this company going forward.
Yes, we will have no hesitation to say we are going to limit the amount of use of the free cash flow for extra growth. In other words, we are going to cap, very clearly, our investments. How then exactly the mix of that excess free cash flow will be deployed to buybacks, to dividend growth, and to further debt retirement, is something that we will play on a quarter-by-quarter basis. Let's be very clear. There will be, first of all, a strengthening of the balance sheet. There will be enhanced distributions to shareholders. We will listen very clearly to what shareholders have to say in terms of this. You may, of course, appreciate that different shareholders have different expectations as well.
Now, on the quarters and the comparisons, particularly on the Oil Products side, because you talk about Downstream, I think it's probably fair to say, let's take Chemicals out of this. Chemicals are a pretty straightforward story. The Chemicals results for the year are the best ever results at $2.6 billion. It shows the strength of that business, when it's more or less firing on all cylinders, and also the reason why we want to continue to grow our exposure to that segment of the economy. If you look at Oil Products only, and you look at Q3 last year was the best quarter ever. The refining margins were significantly bolstered by Hurricane Harvey and a number of other events that gave sort of almost a blowout of margins, particularly, of course, in North America, but also in Europe.
We were very well positioned to take advantage of it. Q3 was our best Downstream quarter on record. If you look at Q4, it's therefore a little bit difficult to say, well, let's take Q3 and then do a little bit of a haircut to deal with the seasonality effect that we typically tend to have in the Downstream in quarter four. I think it is more appropriate to look at a Q4 to Q4 basis. Now you may say, well, Q4 2016 was weak, therefore it's easy enough to say, well, if it's better, it should be a good story. Let me put it in a slightly wider perspective. This Q4 for the Downstream was the third-best Q4 on record for Shell. This was not a weak quarter per se.
This was actually pretty much in line with what we had been seeing, and actually on the high end of things, also on Oil Products. You said refining margins were just a little bit weak. October was good, November was not good, and December was atrocious. There has been a very significant fall-off in margins, particularly in the last few weeks of the year. I think altogether, if you take that into account, I think we had a pretty credible quarter on Oil Products and a pretty good quarter on the whole Downstream.
On the buybacks and the dividends question, I think Ben did a pretty good job covering that, but I'll say a few more points as well. Going back to what I said before, it's very much an integrated decision. I think all the points that you raise in terms of line of sight are valid. We've tried to be very clear in terms of what we think the company will generate over the next couple of years, and I think having that perspective is important. Again, our commitment is to embark on this buyback program as soon as we think it's prudent to do so. It's on the horizon. If you look at our numbers and what we think we're going to achieve by 2020 in terms of organic free cash flow generation, which far exceeds our dividend commitments.
Through that period, between the underlying cash generation of our business, further divestment proceeds that we'll realize this year, next year, our ability to get to the gearing level, I think is again, on the horizon for us. I think we're very clear in terms of what we're trying to achieve. Ben said it, we're urgent. I was with the Upstream leadership team a week or so ago, talking about 2018 and what our priorities were. Of course, prices increases. There's a certain amount of buoyancy in the room and also very strong delivery, so the team is feeling really good. It's also a team that wants to grow their business, and they'd love to have more capital. Talking about that with them and being very clear that our priorities are as we've said.
We're going to pay down the debt, we're going to keep capital investment between 25 and 30, even in the $70 price environment. It's important that we embark on this buyback program sooner rather than later. That's the exact words that I used. That prioritization in terms of where the excess cash is going to go, I think is very clear in the organization. Again, we want to do this prudently. We want to do it in the right sequence. We started with the scrip. We're going to work through that. We're going to keep paying down the debt as we've done. We paid down some $12 billion of our debt last year.
That's important to know and recognize. We'll continue on that journey, and we think the cash generation in the business will be sufficient to not only do that, but to start the buyback program within a good time frame.
Okay. We go to Chris, then we do Irene.
Thank you. It's Chris Kuplent from Bank of America Merrill Lynch. One for you, Ben, and one for Jessica. I was going to refer to your buckets as you like to call them. There's lots of cash engines there, which I suppose are great. I've noticed that in terms of reserve replacement, reserve life, your growth and future opportunities, those three remaining buckets don't really contribute, whether it's Chemicals, Shale or New Energies. Would it be fair to say that you are increasingly comfortable with not your 1P, but your 2P reserve life as you look at the future and go, "You know what?
Even Deepwater, even LNG now is a cash engine. Just wanted to see whether you could broadly put that into context how you're thinking about the next decade. Lastly, for you, Jessica, I wanted to see, you refer to the internal competition. I'm sure people are keen in this macro environment to FID projects, whether you could give us a flavor, A, how much of that $25 billion-$30 billion is committed already and earmarked and spoken for in 2018 and 2019, and which projects are currently in the lead? That's probably unfair, but maybe a handful. Thank you.
Thanks, Chris. I think I've said it here before. It's not because I do not have a reservoir engineering background. I am somehow less obsessed with reserves and reserve life than perhaps others might be, including some of you. For me, it's all about the longevity and the running room in the business from a cash perspective. Of course, it is very important to understand how much do we have to work on. For instance, on the Deepwater business that you referenced, it is important for me to understand when is the stock of opportunities that we have in the pipeline, when is that going to run out? When will this business go in decline unless I do something about it?
We just actually did a very detailed strategic review of the Deepwater business in the board yesterday. I can use the numbers that are current. Our Deepwater business will be at the level where we will get it to by the end of the decade, well into the next decade. By 2026, you will see that if we have no success nowhere and don't add to it, this business will go into decline. That's the reason why we are working now, well in advance, on restocking the opportunity set, participating in bid rounds in Mexico and in Brazil. We will continue to look at other bid rounds and other opportunities. Also some modest amount of frontier exploration with a view that come 2026, 2027, we will be ready to start up another tranche and another wedge of new projects.
That's the way I look at it. That's the only sensible way I look at it. I'm not going to look at some sort of R/P ratio for the Deepwater business, which is completely meaningless. I will not make any better decisions as a result of that particular number. Particularly in Deepwater, the numbers are all distorted by the way we have to account for the reserves. The same is true for Shell. The same is true for many of the other businesses. I have no hesitation to say that all our strategic themes have tremendous running room well into the 2020s. If there are going to be issues with some of them, it's going to be towards the end of the 2020s. These are just the normal issues that any business needs to address.
I do not want to have discoveries, FID-ready projects sitting on the shelf for 10 years. That would be a very bad use of our capital and our assets as well. A certain degree of just-in-time management is appropriate, yeah. Not to the point that, of course, you then tend to become sort of rather constrained towards the end. That's the way I look at the business, the longevity, the continuity, and the way we can continue to have that business running forward. You're absolutely right also by noting that we're not a pure E&P company. We have a very significant part of our cash flow, free cash flow come from non-Upstream activities, whether it's oil products, whether it's chemicals. I think in 10 years time, we'll be standing here hopefully saying a large part of our New Energies cash flow is meaningful as well.
That gives another form of resilience. It may not give you the massive upside and downside to oil price movements, it is very, very good free cash flow with relatively limited capital maintenance, which is what I like about that business as well. I think we have the right approach, we have the right strategy. I don't think we are sort of unhelpfully, myopically obsessed with metrics that are meaningless, and that's the way I like to run the business anyway.
Indeed, competition is strong for capital within the organization, I think that will continue for the coming years. I think we're fortunate for the suite of opportunities that we have in all of our businesses. All of them are consistently coming to the executive committee and asking if they can grow more, with most, if not all, having, I think, good opportunities. In terms of what's committed, of the $25 billion of spend, I think it depends what question you're trying to answer. I think we've tried to give an indication the composition of that. If that's what you're interested, an important part of that is asset integrity.
There's another piece of that which is kind of small projects, kind of easy growth options that you have within an asset, then you have kind of the next generation of truly kind of greenfield new projects. Most of our spend is kind of the first couple categories, and kind of a smaller portion of that $25 billion is that kind of true greenfield new project opportunity for us. If you're interested in kind of the resiliency question, how much flexibility do you have in that $25 billion, I think that's a different question. There's a lot of choice we have in that span of $25 billion. It gets increasingly more value destructive, there is flexibility. We can choose not to grow as much in Mexico with our marketing business. We can choose not to grow as much in Permian, things like that.
There's still a decent amount of flexibility, it's increasingly value destructive and would not make sense to go below $25 billion. In general, in January 2018, we have a good sense what we're going to spend the $25 billion on. In that sense, it's relatively committed, if you will. There's a little bit of flexibility and choice in there, most of it is clear in terms of what we're going to do for this year and next. Important decisions that are on the horizon for us, with no preference because that's not appropriate, we're looking at things like our Vito project in the Gulf of Mexico. LNG Canada, another important decision for us in the next couple of years. Our marketing business, which Ben mentioned. We're growing in Mexico, China, India. These are either new or expanding markets for us.
Relatively low, those are decision points in terms of how we're growing our business.
Irene?
Thank you. Irene Himona, Société Générale. You conduct a lot of your business through associates and JVs. In fact, about a third of your earnings is from associates. If I look at the cash dividend, you got about $5 billion last year, which is a material amount. I wonder if you can give us some granularity, some rule of thumb, anything. As you move on to the journey of delivering the $25 billion-$30 billion of free cash flow, what can we expect to see in terms of that $5 billion cash dividend that you got last year? Thank you.
You want to have a go at it? I don't think I have the number quite to hand.
Indeed. It's an important contributor. Do I see it growing disproportionately? I don't. We're not relying on that as a major contribution. Most of our growth and our cash flow is going to come from the growth of our underlying, our own business. I think it remains important. It's an important contribution to our cash, but it's not going to be a growing portion of our cash as we grow the business.
Okay. We'll do a final question. You have been very patient with me, that's the question from-
Thank you. It's Colin Smith from Panmure Gordon. Just firstly, on the underlying operating expenses, that popped up about $600 million quarter-on-quarter to just under $10 billion. I was curious to know what was driving that, particularly in the context, I think last year, you were talking about being able to keep that number under $40 billion. Given that you've got growth coming through and you're already at $9.8 billion in the fourth quarter, that maybe starts to look a bit of a stretch. Completely separately, obviously, congratulations on the Whale discovery. We look forward to seeing more detail on that. From my memory, really, there has not been much going on in Perdido, at least visibly, since the Perdido project was put in place. In that sense, it sort of feels like it came out of nowhere.
I'm not quite sure whether you think of that as being near-field exploration or something that's in a completely different category. I think when we hear near-field, it tends to mean smaller than really big discoveries. Here you apparently have got a very large discovery. I'd be interested to understand the context of that a little bit more and what you think the follow-on potential in this play might be. Thank you.
Let me take the second question a bit, then Jessica, if you want to talk a little bit more about OpEx, where I know you have a particular passion. You may have a better and a longer history on Perdido. You are absolutely right that it's an area where we have been before, quite some time ago. It's an area where we have looked at quite a bit of opportunity, particularly also on the Mexican side. This was long before the opening of Mexico, with a view that some of the knowledge we had of that fold belt stretching into Mexico would give us a perhaps unique way of working together with Pemex. I think in the end, nothing came of it, of course.
It was always knowledge that has intrigued us to look and to go after new opportunities, which we have now indeed materialized in two ways. First of all, the Whale discovery. We're not disclosing exactly how big it is. We're also still in the appraisal phase, but the fact that we have 427 meters of pay is perhaps an indication that this is not trivial. It's not going to be a tieback project. This is going to be a very material development in its own right. What we would like to do also, and our thinking is reasonably advanced on that, is to see whether we can really accelerate the development of this. Typically, if you look at developments in the Gulf of Mexico, we have been looking at between discovery and first oil, almost a decade.
We have set ourselves a target to significantly reduce that time frame, also to significantly reduce our unit development cost, and I think you saw some of that in the slides that Jessica showed, the ambitions that we have. The Whale project will be a great test bed to see how fast we can go and whether we can indeed take advantage of certain replication ideas to just really bring this into a fast-track development. Fast-track development in this way will not be a tieback, but a new development, but on a really rapid pace. If you want to close out on OpEx, I think it would be actually quite appropriate to-
Good. Excellent. OpEx Perhaps give you a little bit more of a flavor in terms of what's driving that performance in the year. Very pleased with where we landed the year in terms of underlying $37.5 billion, well below the $40 billion. That reflects delivery across the portfolio. Huge focus on our above asset costs, our overhead corporate costs, whatever you want to call it, where we've had a real impact. Finance function, we've reduced costs by roughly a third over the last couple of years, either by offshoring being an important piece of that. The growth of our business centers in places like India, Poland, Manila, increasingly more work is being moved there. That I think is real sustainable change. Important to note, it's not just about costs. They're also creating a lot of value for us in the company as well.
A lot of good underlying delivery that's translating to that lower cost basis. There's also some one-off helps in there. Speaking to your point around how sustainable it is, and I think it's an important piece in there, is a lot of reduction in our D&R in the year. If you looked at our balance sheet, our D&R provisions went from $25 billion to $20 billion over the year. Some of that flowed through the OpEx as well. Great story. The same impact we've had with our P&T organization, reducing costs in places like the Gulf of Mexico and our unconventionals business. We've applied the similar thinking to our decommissioning and restoration, and that value is coming through both in terms of our balance sheet exposure, but also in the OpEx. A lot of change in the portfolio.
There'll be some pluses and minuses with that, reducing cost. Importantly, with the Motiva transaction, we're now consolidating. That will bring another $700 million or so of OpEx into our financial statements in 2018 relative to in total. There's actually some of it showed up in Q4 as well. Those are indeed headwinds. What I'd say is our ambition is to keep on pushing the organization, and we think there's more opportunity. I personally believe there's more opportunity with standardizations, simplification, and digitalization. I don't think we're done. There are some headwinds, and we are growing the business. My business reminds me of that quite often. Again, I still think there's opportunity, and we need to keep on that agenda, and we will in 2018.
Let me reassure you that Jessica is not the only one who thinks there are more opportunities in OpEx. I think that is completely shared, not only by me, but also by our business directors. Let me just remind you a few dates before we close. First of all, thank you very much for all your questions. I know there are a few more questions in the room, we will be available, of course, after this presentation outside as well. Just a few dates. On the 26th of February, we will have the LNG team present to you here in London, the outlook for supply and demand. I know that LNG is still very much a topic on people's mind. How is that playing out? Maybe less so than a year ago, but it's still very important and instructive to come listen.
Then we have the Downstream leadership team, and they will host a Downstream open house for investors on the 21st of March, also here in London. Then, of course, we have our Q1 results on the 26th of April, and Jessica will be presenting those. I'm sure we'll be looking forward to them. With that, thank you very much for your attention, all your questions, bearing with us a little bit longer than we had planned. Hopefully, we can continue the discussion for those of you here in London, outside the room as well. Thank you again.