Please stand by. We're about to begin. Welcome to the Royal Dutch Shell 2017 Q3 announcement. There will be a presentation followed by a Q&A session. If you have a question, please press star one. If you wish to be removed from the queue, please press star two. Today's conference is being recorded. I would like to introduce Ms. Jessica Uhl. Please go ahead.
Ladies and gentlemen, welcome to the Shell third quarter 2017 results call. Before we start, let me highlight the disclaimer statement. The third quarter 2017 was another strong quarter for Shell. Our Q3 2017 CCS earnings, excluding identified items, were $4.1 billion. Cash flow from operations in the quarter was $7.6 billion, and excluding working capital movements, this was $10 billion. Our free cash flow for the quarter was $3.7 billion at an average Brent price for the quarter of around $52 per barrel. For the fifth consecutive quarter, free cash flow more than covered the cash dividend paid. Our results today show that we are successfully pulling on powerful financial levers that strengthen the balance sheet as we continue to reshape Shell's portfolio and transform the company. This competitive performance is further evidence of Shell's growing momentum and strengthens our firm belief that our strategy is working.
I'd like to share some of Shell's portfolio highlights in the third quarter, which reflects important advances across our Upstream, Downstream and Integrated Gas portfolios. Production has started at Gbaran-Ubie phase two, a key project in Nigeria's Niger Delta. Phase two follows the success of the first phase of the Gbaran-Ubie integrated oil and gas development. Peak production is expected in 2019 at around 175,000 barrels of oil equivalent per day, of which the Shell share is 30%. It's also good news for Nigeria, as gas from Gbaran-Ubie phase two will strengthen supply to the domestic market and maintain supply to the export market through NLNG. This startup is a positive step for Shell's global gas business, as additional volumes to existing plants like NLNG continue to strengthen the resilience and competitiveness of our supply portfolio.
As part of our retail growth plans, we opened our first service station in Mexico, and now we've opened a further 10 sites, with more sites due over the next few months. Our retail offering is providing Mexico's motorists with high-quality Shell fuels and retail services. As the fifth largest consumer of gasoline in the world, Mexico is an important and growing market. Over the next 10 years, if market conditions continue to develop at their current rates, Shell Retail plans to invest around $1 billion in Mexico. These investments will be channeled into expanding and improving the retail network, improving the fuel logistics infrastructure, and developing partnerships to deliver world-class products and services to consumers and businesses in Mexico. This is a major milestone for Shell and shows our ongoing commitment to Mexico.
In July, Shell's floating LNG facility arrived at its location, the Prelude Field in Western Australia. Once in operation, the project will deliver LNG to our customers around the world. In August, the Appomattox project reached another key milestone with the sail away of the hull from South Korea to the yard in Ingleside, Texas, where it arrived in early October and where construction of the project's production platform will be completed. The hull will form the base of Shell's largest floating platform in the Gulf of Mexico. This is an important milestone for a key project, which has the potential to boost production in the Gulf of Mexico by an estimated 175,000 barrels of oil equivalent per day at its peak, of which the Shell share is 79%. Project delivery is central to our competitiveness in deep water.
Not on this slide, of a different scale compared to what I just talked about, I would also like to highlight that in October, Shell signed an agreement to buy NewMotion, one of Europe's largest electric vehicle charging providers. This move will allow Shell to provide customers the flexibility to charge their electric vehicles at home, work, and on the go. When you add this customer offer to our current rollout of fast-charging points on Shell forecourts, we believe we are developing the full suite of charge solutions required to support the future of electric vehicles. Let me move to the macro environment in the quarter. Compared with Q3 2016, we've seen a strengthening of oil and gas prices. Brent was some 14% higher than year-ago levels. Our realized gas prices were some 20% higher than year-ago levels.
On the downstream side, refining margins were significantly higher than a year ago in all regions, driven mainly by supply disruption. In chemicals, industry cracker margins were impacted by higher feedstock costs, partially offset by the impact of supply tightness in Asia and Europe. In summary, excluding identified items, Shell's CCS earnings were $4.1 billion, a more than 40% increase in earnings per share from the third quarter of 2016. On a Q3 to Q3 basis, we saw higher earnings in all business segments, driven by higher oil and gas prices and stronger refining and chemicals industry conditions, which all contributed significantly to the higher earnings in Q3 2017. I will illustrate later in this presentation how production growth and increases in LNG liquefaction volumes have leveraged the positive impact of these favorable market conditions.
Return on average capital employed was 4.6%, excluding identified items, up from 2.8% in Q3 2016. Cash flow from operations was some $7.6 billion or $10 billion excluding working capital movements. Our dividends distributed in the third quarter of 2017 were $4 billion, of which $900 million were settled under the scrip program. Dividends per share were $0.47 to be compared with CCS earnings per share of $0.50. In this quarter, we sustained the improved cash flow momentum driven by a focus on the four levers: divestments, reduction in capital investment, reduction in operating costs, and delivery of new projects throughout our integrated portfolio. On a four-quarter rolling basis, cash flow from operations, excluding working capital movements, was around $40 billion. Let's now look at the drivers of this performance. Starting with production.
Compared with the third quarter 2016, new field startups and the continuing ramp-up of existing fields, in particular the FPSOs in Brazil, Kashagan in Kazakhstan, Stones in the Gulf of Mexico, and Gorgon in Australia, contributed more than 340,000 barrels of oil equivalent a day to production. The delivery of growth projects is more than offsetting the impact of field declines and divestments. Total LNG liquefaction volumes increased by 10% compared with Q3 2016. This was mainly driven by Gorgon, where three trains are online compared with one train in the same quarter last year. Moving from volumes to other drivers of our results. Oil and gas prices and downstream margins were the main drivers of higher earnings this quarter, for a total of around $2 billion when compared with Q3 2016. Higher DDA, particularly from Brazil, as projects come on stream.
An important point to make this quarter is that the Motiva transaction completed earlier this year, resulted in the full consolidation of the Norco and Convent refineries, which has added to our earnings in Q3, but also led to increased operating expenses and depreciation compared with the same quarter a year ago. Talking about earnings in a bit more detail, let me highlight the contribution of the chemicals business. Some of you attended our chemicals investor briefing a few weeks ago and hopefully gained a better appreciation of the strength and potential of this business. In chemicals, Shell delivered solid performance over the last five years, including a record quarter in Q1 2017 and $650 million in earnings excluding identified items in Q3 2017. Return on average capital employed over the last five years was on average around 15%, excluding identified items, and reached 19% in Q3 2017.
This performance has been delivered across a range of crude and gas prices and demonstrates the robustness of the portfolio at a lower oil price. What are the main contributors to these earnings? First, a more concentrated portfolio for more than 130 sites at the end of the nineties to 15 currently. A strategy of balancing types of feedstock and focusing on advantage feedstock and better operational performance. Higher capital investment levels are expected in chemicals as a growth priority, which is underpinned by the fact that we have taken three significant FIDs over the past two years. Let me highlight our current growth path on chemicals. With a competitive edge in chemical feedstocks underpinned by a strong product portfolio and proprietary Shell technology, the chemicals business is entering a new period of growth.
For example, on the Gulf Coast in the USA, we are expanding our chemical footprint at the manufacturing site in Geismar, Louisiana, making the site the largest alpha-olefins producer in the world. In China, Shell and CNOOC took the final investment decision in the first quarter of 2016 to expand the existing petrochemical complex in Nanhai, the most competitive cracker in China. In 2016, we announced the final investment decision for our petrochemicals project in Pennsylvania in the U.S. This site will use ethane from the lowest cost shale gas basin in North America to produce polyethylene at world scale. It will be the most cost-competitive polyethylene producer in the U.S. The location is also ideal because 70% of the North American polyethylene market is within a radius of 700 miles.
We have a clear strategy, a competitive and differentiated portfolio, which we are expanding and reshaping to increase margins, with focus on OpEx and operational performance as key measures of success. This drives our aspiration for this business, where we look to contribute $3.5 billion-$4 billion of earnings annually by the mid-2020s. Let me move to our cash position. On a four-quarter rolling basis, we've generated some $27 billion of free cash flow, including around $11 billion of cash proceeds from divestments. In Q3 2017, for the fifth consecutive quarter, free cash flow more than covered cash dividend paid at $52 per barrel. Our divestment program continues to make good progress on both raising cash and reshaping the company. During the quarter, the sale of the 50% share in Sadara, the petrochemicals joint venture with Saudi Aramco for $820 million was completed.
We announced the completion of our North Sea U.K. assets and the Gabon divestments this week. These two deals combined will generate additional cash proceeds of some $2.5 billion in Q4. To date, the company has completed $20 billion of divestments and has more than $7 billion in announced or in-progress divestments, on track to meet the target of $30 billion of divestments between 2016 and 2018. Compared with Q3 2016, we've reduced our net debt by around $10 billion to a level of $68 billion at the end of Q3 2017, or 25.4% of gearing. During Q3 2017, S&P raised their long-term rating on Shell to A+ from A, with a positive outlook. Dividends declared over the last 12 months were $15.5 billion. Shell's financial framework is a key element of our overall strategy. There is no change to the priorities for cash flow.
Reducing debt, paying dividends, turning off the scrip, followed by a balance of capital investment and share buybacks. We continue to drive our four performance levers to manage the financial framework, divestments, CapEx, OpEx, and new projects. These levers are adding significantly to cash flow. We're demonstrating good delivery against these levers. I want to further strengthen the momentum with a strong focus on performance management, simplicity, and costs. Fundamentally, this is an important opportunity to continue to improve Shell's competitive performance, irrespective of oil prices. This is about transforming the company for the future, more value and bottom-line focused, nimbler to drive change and improvement across all businesses. Let me close out. Our results today show that we are successfully pulling on powerful financial levers that strengthen the balance sheet.
We have delivered $40 billion of cash flow from operations, excluding working capital over the last 12 months. Over the same period, Shell's free cash flow was $27 billion, or $16 billion, excluding the cash proceeds from divestments at average Brent oil prices of $51 per barrel. We are improving our returns and delivering a better financial performance. This competitive performance is further evidence of Shell's growing momentum and strengthens our firm belief that our strategy is working. With that, let's go for your questions, please. Please, could we have just one or two each so that everyone has the opportunity to ask a question? Thank you.
Thank you. We will now begin the question-and-answer session. People dialed in, if you have a question, please press star one. If you wish to be removed from the queue, please press star two. Please limit yourself to one question per person. You may signal again to ask another question. We'll now take our first question from Oswald Clint with Bernstein.
Jessica, good afternoon. Thank you. I wanted to ask about the gearing, flat sequentially this quarter after that strong downward trend over the last nine or 12 months. Anything in that result which concerns you about the continued kind of balance sheet deleveraging and getting closer to the 20% level? Actually, any updated thoughts on when that number might be possible? That's my first question. Secondly, just on performance management and your discussion on chemicals, it looks like refinery and chemical plant availability both took a little back step in the third quarter. I know there were some fires at some of the sites, but the question is, do you think Shell will be able to get up over the 90% uptime levels across refining chemicals, or should we still be thinking about the high 80% levels for both those parts of the business? Thank you.
Great. Thank you, Oswald. In terms of the gearing outcome for the quarter, it's circumstance driven that reflects the somewhat softer cash coming from divestments for the quarter relative to prior quarters. You'll see that pick up in the fourth quarter. Clearly, with the U.K. closing yesterday, that brings a few more billion dollars into the bank. That will support, again, further deleveraging going into 2018. No concern about the direction of travel. It's really the circumstance of the quarter in terms of some of the cash proceeds. In addition to that, we had a reset of the value of the debt associated with the appreciation of the euro. Some of our debt is marked and is impacted by changes in FX rates that had a negative impact in the quarter of some billion dollars. That also contributed to the outcome.
We're absolutely on the trajectory to go towards the 20% gearing going through 2018 and expect those numbers to continue to drop during the next 12 months. In terms of the performance of our manufacturing and chemical sites, we've had a great run up until Q3. For the prior three quarters, we were above 90% at all the sites. I have a lot of confidence in our ability to operate these sites and to bring our availability up above 90%. Well, first of all, we should point out, Harvey had an impact, a material impact at our Deer Park site. That certainly impacted availability for the quarter. As you mentioned, we also had a couple other things going on at the assets.
They were relatively one-off in nature, so I wouldn't say it's pointing towards any fundamental operational issues or concerns. Some minor equipment that failed that was not expected to fail. More kind of equipment issues rather than operational capabilities. Again, operational excellence has been a focus for our downstream business. You've seen that come through in the prior quarters, and we would expect it to start trending back above 90% going forward.
Thanks. Thank you very much.
Thank you.
We'll now take our next question from Theepan Jothilingam with Exane BNP.
Hi, Jessica. It's Tapan here. I had just a quick question in terms of the growth projects. I think you indicated a contribution from growth projects this year could be up to $5 billion at sort of $50 oil. I was just wondering how much of that contribution has now accrued in the first nine months of this year. Just secondly, I was wondering, in terms of future growth projects and final investment positions, can you perhaps give us an update in terms of where you see Vito in the Gulf of Mexico and the pipeline? Thank you.
Great. Tapan, thank you for your questions. On the growth piece, indeed, what we've shared before is between 2014 and 2018, we have a number of projects coming on stream that should contribute some $10 billion in incremental CFFO in that period and a million barrels of oil equivalent a day in production. We're about halfway through that, I'd say we're about $5 billion-$7 billion through that program. It remains on track. We've had very solid delivery of those projects through the last couple of years. Going into 2018, we're looking to achieve that ambition in terms of the incremental cash flow reaching $10 billion over that period of time. That's all moving smoothly. In general, we're very comfortable with our growth program over the next couple of years.
I referenced a couple of things that are coming on stream between Prelude and Appomattox, the growth we're seeing in our sales business as well. Solid growth coming through for the next couple of years. Vito, indeed, is one of the growth options that we have in the future. It is one of many. There's a fierce competition for capital at the moment in the organization. We're looking for the most competitive, most resilient barrels in the portfolio. We believe Vito is a strong project and will be one of the options that we'll be looking at, but it's one of many, as I said before, we have a strong competition for capital in the portfolio at the moment.
Thank you.
Thank you.
We'll now take our next question from Lydia Rainforth with Barclays.
Thanks, hi, Jessica. Two questions, if I could. The first one, just on the cost base, you talked about driving competitive performance and a simpler Shell. Can we expect costs for next year to be actually lower than they are this year, even with a slightly higher oil price? The second one was just a point of clarification. On the press release this morning, the interim dividends timetable for next year, it did have scrip reference share price announcements. Can I just check that that is just a practical consideration, that isn't an indication that you're committed to the scrip dividend for all of next year? Thanks.
Being signaled with respect to the scrip. It was just normal disclosure to be clear on that. On the cost question, we're very pleased with our cost trajectory. What you see in the results, $9.5 billion of OpEx on an underlying basis of $9.1 billion. That brings four quarter performance of our operational expense at some $38 billion. Well below the less than $39 billion we had indicated. Again, the cost reduction trajectory continues. We're going to continue to pull that lever. I think there's still more for us to do in this space, we're also trying to grow at the same time. I mentioned Mexico earlier in the call. Growth requires investment. It also translates into OpEx. We've got new projects coming on stream in deep water and in unconventionals and in integrated gas.
Those also contribute to operational expense, things like the Motiva transaction, the portfolio changes also having an impact. What I will say is there's a commitment to continue to improve the performance of our company to reduce the cost framework or cost structure of our company. I expect us to continue to drive that. What the total number will be will also be a function, though, of our growth ambitions and some of the characteristics of the company.
Understood. Thanks very much.
Thank you.
We'll now take our next question from Christopher Kuplent with Bank of America.
Thank you very much. Hi, Jessica. I noticed you mentioned the S&P upgrade in your introduction. Just two mini questions around that. Were you confident that you would receive that upgrade, and to what extent are you surprised and pleased by the fact that you are still on a positive outlook? Is another notch upgrade, which I suppose that positive outlook suggests, important to you? Maybe you can put that into context of your cash flow priorities. Thank you.
Thank you, Christopher. I am pleased that the credit rating agencies are recognizing and seeing the performance of the company. What I'd say is we're focusing on the performance of the company and the underlying drivers that cause these outcomes. Indeed, we've transformed the cash flow generation of the company over the last couple of years. The cash we're generating is significantly more today at a $50 price, as I mentioned, $40 billion in CFFO over the last 12 months in a $51 environment. That's coming through, and that's contributing to the strength of our financial framework. At the same time, we've paid down debt of some $10 billion between Q3 2016 and Q3 2017. We're demonstrating a commitment to our financial framework. We're demonstrating a commitment to the priorities that we've laid out over the last 12 months. Our strategy is working.
We're generating the cash to support that financial framework and I think getting the financial framework and the company back in shape for the future. I think the credit rating outcomes are an outcome of fundamentally good performance, and we're doing all we can to continue that trajectory.
Can I just come back and ask you to perhaps give us a little bit of a ranking or a priority list in terms of that notch upgrade, where that ranks for you?
What we're focused on is the underlying performance, we're running the company to maximize value, maximize cash generation. We've talked about all the levers we're pulling. I would expect we'll continue to pull those levers. We'll continue to generate more cash. We'll pay down our debt. A natural outcome of that would be credit rating changes in the future. That's not what we're running the company for. We're running the company for maximizing value and underlying performance.
Great. Thank you.
Thank you.
We'll now take our next question from Irene Himona with SG.
Thank you. Good afternoon, Jessica. 2 Q3 focus questions, if I may. First of all, integrated gas. I note the depreciation charge increased about 40% sequentially and also year-on-year. I wonder if that level is going to be normal going forward, as Gorgon, for example, ramps up, or whether there was any impairment this quarter to justify the increase. Secondly, your Q3 realized gas price in Europe actually declined sequentially about 8%, which was a bit surprising given the fact that NBP prices actually rose 10%. I wonder what drives that lower gas realization. Thank you.
Thank you, Irene. On the first point, an opportunity just to highlight the strength of the performance of our integrated gas business in Q3. Very strong earnings coming through, underpinned by increases in production, liquefaction sales, and liquefaction volumes all coming through. Some of that growth does contribute to the higher DDA, as you've referenced. There are 2 unusual things, though, in the quarter. We had an impairment of just over $100 million related to some non-core technology that was in the integrated gas numbers. We also had a catch-up in some DDA for one of our assets, and that's also coming through. There were some unusual things that did touch DDA in the quarter, and that frankly probably under sold IG's performance for the quarter to some extent. On the second question, I think it's probably best to direct you to IR.
There's some specifics in that that's not probably easy to step through in the call. I will hand that over to IR to respond to you on. Next question, please.
We'll take our next question from Thomas Adolff with Credit Suisse.
Hi, Jessica. Two questions for me as well, please. Firstly, Shell has come far. You've done the BG deal in 2015. You started the cultural revolution in 2014, and you're continuing to reshape the portfolio for disposals, et cetera. Ben said on a 2Q call that you're about 60% past where you want to be ultimately. In this context, what other portfolio shaping moves are still necessary to hit the sweet spot of value creation and risk for the company? Secondly, going into Upstream, just looking at one of your charts and specific to declines, your portfolio decline rate looks quite attractive.
If we think about, let's say, the next five years, and we think about EOR tieback opportunities, et cetera, basically things which are a lot harder for us to model because they're smaller in nature, but combined for Shell should be quite relevant and perhaps often forgotten by the market. I wondered what the potential resource to be developed from these opportunities in the next five years and how we should think about portfolio decline rate over time. Thank you.
Great. Thank you. Starting with your first question in terms of, I think what you're asking, what are the levers that we need to pull to maximize value for the company and achieve the financial outcomes that we expect from the company? I think indeed, we've made a huge amount of progress over the last couple of years. You're seeing that come through in the numbers. I've talked about the various levers on the cost side, underlying operational expense coming down to around $38 billion on a rolling four-quarter basis. Our capital efficiency is a fundamentally different place than it was a couple of years ago. A lot of capital coming out, us delivering the same or more value for less capital than in the past, and that's really across the portfolio. You've mentioned portfolio shaping moves.
I don't think there's a lot of portfolio shaping moves we need to do necessarily in the medium term. That's not to say if there was an opportunity, we wouldn't look at it or there's something that could surface that would be interesting for us to consider. I think what we're focusing on is really to focus on the fundamentals of the company and focus on operational excellence, capital efficiency, cost efficiency. We've done a lot in that space. We think there's still some more running room for us to get where we want to be across the business. There's a lot of strengths in our portfolio. We've got chemicals generating ROACE of 19% in the quarter, Downstream at some 16%.
We, of course, want to maximize that to the extent possible, I think it's really about us focusing on the fundamentals of the company and continuing to pull the four levers that I've mentioned before. On the decline rate, I think it's a great point to raise. We've been focusing a lot on operational excellence in the upstream business. Those results are coming through. You can see in some places in our portfolio where a decline rate might be, say, 12%. With intervention WRFM techniques, we're able to bring that sometimes to 4% or 5%. Indeed, that has been a focus at some of the best, highest margin barrels we can go after. We think it is important for us, and I think we will continue to focus on that, and that will bring more value, more barrels into the organization.
That's both in our upstream business and in our integrated gas business.
Perfect.
Thank you.
Thank you.
We'll now take our next question from Michele Della Vigna with Goldman Sachs.
Hi, Jessica. It's Michele. Thank you very much for the presentation. As you mentioned, Shell has a very healthy pipeline here of new projects up for consideration, a lot of which have benefited tremendously from the cost deflation, particularly in offshore, that we've seen in the last few years. I was wondering if you could elaborate a bit more into what you find most attractive here in terms of positioning on the cost curve and in terms of future returns between some of your deepwater opportunities, the new LNG project, or potentially an acceleration of activity in your Permian acreage. Then in this context, I was wondering if you could comment on the potential decision to exit Majnoon in Iraq, and what you would need to see change to decide to stay in that country and continue to invest in that specific project. Thank you.
Thank you. Indeed, I think we have a lot of growth opportunities across the portfolio. I always want to remind people of the strength of our downstream business, our retail franchise, our chemicals business, which I touched a bit on. We're looking at growth opportunities in those businesses as well, and those can be relatively low capital, high return, short cash cycle opportunities, particularly in the retail business, and that's part of why we touched on the Mexico entry. Important to keep in mind where growth will be coming from is really across the portfolio. If you focus on upstream and IG, we've got good LNG options in our portfolio. We've got good deepwater options in our portfolio, and we've got good sales opportunities in our portfolio.
What we're looking for on the oil and gas side is the most competitive, highest return, marginal barrel or marginal ton of LNG, if you will. We've done a lot to, as I say, really reshape the potential of a number of projects. Vito is one of them. That was earlier referenced. Upstream, specifically oil and gas, we're looking at break-even prices below $50. If it's a tieback brownfield opportunity, it can be below $40. Again, we've got a number of options in this space. Similarly, in the LNG business, trying to look for the most competitive, not just within our own portfolio, but industry-wide. That's really what's driving our decision-making. How do we drive for the most competitive, highest return decisions?
We've got a number of options. For us, it's really making sure we've maximized the scrutiny and optimized the projects to the most possible, if you will. Make the decisions based on an evaluation across the portfolio. On Majnoon, first of all, I want to say that we remain committed to Iraq. We have the Basrah Gas Company position that we're very pleased with. It's an important part of our strategy. We see more options with BGC as well as other potential options within the country. It's not a country decision, it's very much a project decision. This project didn't necessarily fit in terms of our strategy in the near term. We're working very cooperatively with the government and are making that a friendly exit from that project. The timing hasn't been set yet. Again, done on very friendly terms.
We remain committed to Iraq. Are very pleased with our Basrah Gas Company position. Thank you.
We'll now take our next question from Jon Rigby with UBS.
Hi. Thank you for taking the questions. First is just on integrated gas. I noticed this may be a one-time quarter effect. CapEx ticking up, not ticking down. Yet Gorgon's rolled off. I just wondered whether 3Q maybe had some last spending on Prelude that bumped it up, or are you starting to spend a bit of
CapEx on some pre-sanctioned projects within that portfolio. Just on integrated gas CapEx. The second is, I think I heard you say that your expectation was that net debt or gearing would trend towards 20% over the course of 2018. I'm fully aware that you've identified 20%, or Shell has, as a sort of key threshold around returning to a scrip. If I look at your cash flows and your asset sales, is Shell hanging on to a number of equity stakes still? Working capital has actually started to build quite significantly over the last 12 months. CapEx is on trend for $25 billion, your low end. It looks also like the cash flow statement, there may be, through choice, some sort of voluntary payments that come through the provisioning line that you'd be making as well.
I just wanted to test you on the commitment to get that balance sheet gearing down as quickly as possible. It doesn't look like you're going after it in as aggressive a fashion as you might be able to. Thank you.
Great. Thank you, Jon. On the first question, in integrated gas, there's really nothing particularly extraordinary to point out. Ongoing investment in the business, QGC, there's ongoing well commitments that we have in drilling activity that we do as part of normal course of business. There are things like Gorgon, there are things like Prelude. There's nothing for me to kind of highlight in terms of anything unusual happening from a capital profile perspective in the integrated gas business. On net debt, indeed. We're working towards the 20%. I don't want to signal that that's necessarily within the next 12 months. What I'm saying is that the trend will continue going through 2018. We're very much committed to our cash priorities as I've laid them out and to our financial framework.
We'll continue to work through that, as I said, the $10 billion coming off between 2016 and 2017 on the debt, and we'll continue to pay down the debt into 2018. We do have equity stakes in various companies. They're not strategic positions. We will sell them, but we'll sell them for value. It's really just a matter of when and getting the right timing in terms of exiting those positions. That certainly will help in terms of generating cash and supporting the reduction in net debt. If you were to take those positions into consideration today, our gearing would come to some 23.7%. That's important to keep in mind. The other things you mentioned, working capital, that's really a story about the current price environment. There's nothing else more really to say on that front, as prices have trended up in Q3. That affects our inventory valuation.
We also sold off some inventory that became receivables as well. That's normal course of business, so I don't think there's anything fundamentally changing or being signaled in our financials this quarter. The commitment is strong and remains, and I think you'll see as we go through 2018, that we'll continue to make the steps to reduce net debt and move towards the 20%. Thank you.
We'll now take our next question from Lucas Herrmann with Deutsche Bank.
Good afternoon, Jessica. Thanks very much for your time. Just to start, a point of clarity. The retort to the question on integrated gas, you mentioned some exceptional items. Well, let's use the term exceptional items, just to make clear that they weren't included in the identified items line of -$65 million. Secondly, I completely concur with you in terms of the progress that Shell appears to be making, and the commentary around ratings agencies and how they perceive you is also wholly encouraging. I struggle to understand that we're issuing $1 billion of paper per quarter at a conceptually growing 6% yield ties in with maximizing value for shareholders.
Thirdly, just if you could give us some greater granularity around the provision line in the cash flow statement and quite why that's running at $1 billion this quarter, or quite what it comprises would be helpful, and to what extent items there are ongoing or may fall out. Thanks very much.
Great. Thank you, Lucas. A few questions there. Indeed, some of the items I referenced would have been in IG. I think you were asking about unusual versus identified, clean, et cetera. The question was originally asked around DD&A, which is a different question than what's in clean or in identified. I was explaining what was happening in DD&A. Some of that was identified, some of it wasn't necessarily identified. Just to make that distinction, if that's not sufficiently clear, you can follow up with IR. We are fully committed to maximizing shareholder returns from this company and doing everything we can to get the fundamentals right, have the right strategy, execute that strategy, and generate the cash necessary to have industry-leading return on capital employed and industry-leading shareholder distributions over time, and ultimately, number one total shareholder return.
There's a number of levers we're pulling to get to that place. Our commitment is to get our leverage and our gearing down to 20%. We've maintained our commitment to the dividend via the scrip program. When we get to a line of sight of 20%, we will take the scrip off, and then we will move into a position of balancing Capital investment growth and share buybacks. We're committed to the share buyback program and to offsetting the dilution of the scrip program that we've seen over the last couple of years. Absolutely agree that we need to maximize cash to our shareholders, and I think we're pulling all the levers to make that possible, and to be in a much better position in terms of increasing distributions to shareholders over the next couple of years.
In terms of the provision question, indeed, it's a good opportunity for me to highlight. We had an accelerated payment for our pensions in the U.S. of some $500 million in the quarter. That was an unusual payment, if you will. We accelerated that from 2018 into 2017 for value reasons, and that's coming through in the provisions, and somewhat understating the cash flow for the quarter as well. Thank you.
We'll now take our next question from Martijn Rats with Morgan Stanley.
Yeah, good afternoon. I wanted to ask you too. First of all, when it comes to Iraq, listening to you just now, it seems that you're saying that the exit from Majnoon doesn't preclude you from progressing with the Basrah Gas project. I just wanted to check that is the case and that's what you were trying to indicate. The second thing I wanted to ask you relates to LNG. On the Exxon call, the company was talking about an oversupplied market now until the mid-2020s, also during the quarter, they conceded a price cut on a renegotiation of a long-term contract, which is somewhat unusual. Taking that into account, I wanted to ask you if your own views on the outlook for LNG are starting to change.
Right. Thank you, Martijn. You're correct in terms of how you understood what I was saying about Iraq. We are very pleased with our position with Basrah Gas Company. We remain committed to the country, we believe there's future opportunity with that business and potentially other projects as well. It's very distinct from the Majnoon project itself, which we are backing out of. Again, we remain committed to the country, Basrah Gas Company, and potentially other opportunities as well. On LNG, we believe the fundamentals of the LNG business remain strong. We believe gas will be the fastest growing hydrocarbon between 2020 and 2030, we think that LNG will be the fastest growing gas molecule during that period of time. We believe it's fundamental to the energy transition.
It's fundamental to increasing energy supply that's very much needed and will continue to be needed as populations grow and quality of life increases across the planet. We think the fundamentals are very strong. Indeed, a lot of supply has come on in the last year, will continue to come on in the next one to two years. Far, the market has absorbed that supply very well. In fact, we saw spot prices trending up in the quarter. Our experience has been a very strong market, we're achieving good spot prices this quarter and in prior quarters, feeling pretty confident in terms of the business that we have and not seeing negative headwinds, if you will. We recognize that that new capacity needs to be absorbed in the next couple of years. Looking into the 2020s, there haven't been a number of large FIDs.
Given what we expect to happen with the LNG market, we think there should be some tightening in the early 2020s. The exact date, I can't say, again, the fundamentals, I think, are very strong, we remain confident in that business and our strategy with that business.
All right. Thank you.
We'll now take our next question from Jason Gammel with Jefferies.
Thanks very much. Two from me as well, please. The first one is that in the past, Jessica, you've given us an update on the expected proceeds from divestiture transactions that had not yet been announced, but were in a reasonably advanced state of negotiations. I was hoping we could get an update on that. The second question, coming back to the scrip dividend, do you actually need to print a balance sheet that has a net debt to cap ratio of 20%? You mentioned having line of sight. If you have a situation where you have the equity positions, you have transactions that are in the pipeline, and you can see reaching the 20% number, would that be sufficient for you to lift the scrip?
I guess I'd put that into context of one of your competitors who has already made the commitment to offset the dilution from the scrip dividend, despite having much more leverage on the balance sheet than you do.
Thank you, Jason. Overall, very pleased with where we are. We committed to $30 billion between 2016, 2018. We're at $20 billion if you include the projects that closed yesterday. We have another 5 to 7 that's either been announced or are in very advanced progress. We're very confident in our ability to get to the $30 billion by the end of 2018. On the scrip, key piece here is today's really to talk about the Q3 results, and want to focus on just the strengths of these results. I'm pretty excited to be presenting them. Hopefully, you're sharing the enthusiasm in terms of what this company did in the third quarter. Again, I want to go back to a point that I've been trying to make in a number of different responses.
We're really focusing on the fundamentals and ensuring that we are delivering the strategy and generating the cash to be robust, resilient, and competitive in the future. I think that's what you're seeing coming through in the numbers. We've all been very clear in terms of what our cash priorities are. It is debt repayment, maintaining the dividend, taking the scrip off, and then moving to capital allocation and buybacks and getting that balance right. We think that's the right sequence of events. We want to take the scrip off with confidence, with our financial framework where it needs to be. I think the results that you're seeing today demonstrate a company that is delivering on the strategy and should be in the position for the financial framework to get to where we want to be in the coming years. Thank you.
We'll now take our next question from Christyan Malek with J.P. Morgan.
Thank you, Jessica, and good afternoon. Firstly, I want to come back again to the framework for cash flow priorities in slide 15. Understand the priorities, to the extent that you deliver on your targets, lower gearing through the remainder of 2017 and meet your commitment to switch off the scrip in light of this improved line of sight 20%, is it unreasonable to assume that you're going to actually accelerate your cash return in 2018 of some form? The second question is with CapEx now at around $15 billion for the first nine months, it feels as a ramp up to $7 billion seems quite a big step up in Q4. Can you talk about where you are in capital efficiency and whether the $22, $23 billion target remains valid in light of what appears to be better performance on cost?
Linked to that, I think you mentioned below $50 a barrel is the prevailing breakeven in Upstream. How much lower do you think you can take breakevens in Upstream? Do you actually have an internal target you're looking to achieve over time? Thank you.
Great. Thank you, Christyan. I appreciate the interest in the scrip. I think I've covered that a number of times in terms of today's about really focusing on the very strong performance in the third quarter and being clear we're consistent in our messaging and our commitment to our financial framework and our cash priorities. In terms of the trends on capital, indeed, in the fourth quarter, we have some trending up relative to prior quarters. That's just the nature of the projects and how capital's flowing. There's also probably a little bit in there, maybe $1 billion or so that might relate to some NBD activity that we're doing that may land in the quarter or not. That's why we're not being more prescriptive. That just will be as it will be. We won't see capital above $25 billion for the year.
What's clear is that we continue to drive capital efficiency. What we're getting for our $25 billion is more than what we would have got for $25 billion one, two, three years ago. That remains a priority for us. I think these capital levels are supporting the growth that you're seeing in our numbers now and support the growth that I spoke to earlier in terms of bringing on the projects over 2018 and delivering the incremental $10 billion of cash flow between 2014 and 2018. All of those things tie together up to $25 billion for the year, strong capital efficiency, and that flowing through our results.
We'll now take our next question from Alastair Syme with Citi.
Hi. Thanks, Jessica. Third quarter's traditionally been the quarter that Royal Dutch has looked to incorporate any revisions in long-term planning assumptions. Can I just confirm that's still the way you look at things? Would it be a fair conclusion that the absence of any asset revaluations or major asset revaluations means that there has been no change to long-term oil and gas assumptions? Secondly, you've made a lot of comments through this call around the contribution of growth and also on cost improvements. Can I just ask why neither of these elements show up in slide 10? It looks on that slide as all the gain in year-on-year has been coming from the macro. Thank you.
Good. Thank you, Alastair. In the third quarter, we do our value erosion review process across the group. We're always testing if there's a trigger. You do an impairment when it's needed. We don't just wait for the third quarter, but we do a more thorough review across the portfolio. We've done that review. You see the impairments that are coming through relatively light, a good chunk of those having to do with relatively non-core activities in the company. I think overall, a good signal. We test across a range of price assumptions in terms of assessing the value. Again, I think the results demonstrate good capital efficiency, good balance sheet stewardship in terms of the outcomes that we had in the third quarter. Again, we will continue to test our assets and our portfolio should there be trigger events.
I don't want to signal that you wouldn't see anything in Q4. We continue to do that as normal course of business. I think your second question related to, I think it was a cost question, if I'm correct, in terms of what's flowing through. I'm sorry, can you just clarify that question? Sorry.
10, it just shows that on the waterfall chart, it just shows all the year-on-year gain is coming from prices and margins rather than cost and growth.
The challenge with these kinds of variance analysis is there's lots of ins and outs. Maybe just to tease out a few things that I said earlier. We had some 340,000 barrels of oil equivalent a day of new production coming on stream in the last year. That more than compensated for the divestment program and the decline. That would be a good example. On the OpEx side, underlying OpEx is 9.1. Again, that's a reduction from the prior quarter. In fact, we've had 11 quarters of cost reductions on a quarter-on-quarter basis. The underlying fundamentals of what's going on in the cost structure are very sound. Of course, there is growth happening at the same time, which is going to be an offset to some of that underlying performance.
Things like our portfolio reshaping, Convent and Norco coming in bring up to $150 million to $200 million of OpEx in the quarter. There are various ins and outs. I would point to some of the fundamentals I spoke on the production growth and the underlying OpEx in terms of the sustained improvement to the company.
We'll now take our next question from Biraj Borkhataria with RBC.
Hi. Thanks for taking my questions. I have two, please. The first one is just on cash taxes versus the P&L. Last few quarters, you've had a bit of a tailwind on the cash flows from paying lower cash taxes. I was wondering if you could just talk about whether you expect that to reverse or normalize going forward, or any color there would be appreciated. The second question is on the NewMotion acquisition. Can you talk about how that relates to your overall marketing strategy in the downstream? I would've thought you would want to keep customers either filling up or charging up at your station so you can take advantage of the non-fuels retail offering. Just wanted to get your thoughts on the rationale for offering the charge away from the forecourt. Thank you.
Good. Let me pick up on the NewMotion question first, then I'll come back to the cash taxes. Very pleased with that position we've taken. I think it touches on a number of things that we're doing as a company. We've got our new energies business up and running and looking to help drive new business models and be part and to lead the energy transition. We see the world moving towards more electrification. At the same time, we've got a very strong business in North America in power trading, so we've got an existing power position. We're trying to bring these power offerings together. We also see the trend with electric vehicle participation. We want to provide our customers whatever fuel they would like to have, and if it's electrons and if it's V-Power and if it's hydrogen, we want to be there for our customers.
We're looking to bring a portfolio of products to our customers. As I mentioned before, we're bringing electrical vehicle charging already to our forecourt, so that's part of our downstream strategy. NewMotion will help leverage that and to hopefully expand that. We do want to, as I said, provide the products that our customers want, continue to innovate, and continue to innovate the product offering to our customers. On the cash taxes, indeed, there has been a transition happening in the company as we've shifted our portfolio. We are moving relative to the past to lower tax jurisdictions. You're seeing that come through. That should continue going forward. In the Americas, as we increase our production, the relative tax rates are different than the composition of our portfolio in the past.
I think that is part of the reshaping of the portfolio, the impact has been between that geography and volume mix trending towards relatively lower effective tax rates than we saw in the past. Thank you.
Thank you very much.
We'll now take our next question from Brendan Warren with BMO Capital Markets.
Yeah. Thanks, Jessica. Most of my primary questions have been asked, but I just wanted to follow up just in terms of your slide 19, the 2017 outlook for earnings sensitivity. We've sort of seemed to have flatlined, certainly for the last couple of years of, for every $10 move in Brent, it's about $5 billion of earnings. Can you just talk about moving into next year and following your portfolio rationalization and the startup of what should be higher margin projects, such as Gorgon, for example? Should we expect to see that sort of sensitivity improve to the upside going into 2018?
Thank you, Brendan. At this point in time, there's no update. We think this remains the right rule of thumb for the business.
Okay. In terms of follow-up question, and I appreciate it's probably a capital allocation question you want to talk about in November, but we've had a lot on downstream and chemicals, and obviously you're proud to talk about Mexico today. Do you see a greater allocation of the capital budget towards downstream going further, or is this just a repositioning story in terms of where we're seeing better ROIC?
Indeed, we're seeing growth opportunities in our retail business that we'll pursue. They're relatively low CapEx options. It's a low CapEx business. We will invest in downstream to grow in markets where we think there's real opportunity. We see that opportunity in places like Mexico. Indeed, I think you will see more coming from that business, but it's not a big draw on capital. It's not a big capital allocation story tied to that growth. Thank you.
We'll now take our next question from Doug Terreson with Evercore ISI.
Good morning, Jessica. During the past year or so, management emphasis has shifted somewhat from attainment of BG synergies to enhanced performance in LNG and then also to free cash flow and growth in returns on capital. While the latter two factors are pretty well associated with positive shareholder outcomes, they require capital discipline to remain strong, which you guys have demonstrated so far. While you reiterated the general plan for spending and efficiency today, can you provide more specificity on where you think spending will be for Shell in 2018 or 2019? Or should we just wait for the meeting on that? Then second, are there any operating functional or strategic shifts that you haven't covered, because you've covered a lot today, that on the margin are worth mention?
Great. Thank you, Doug. On the capital allocation, the guidance we've provided is we believe the right amount of capital spend to support growth and achieve our strategy is between $25 billion and $30 billion. 25 being a soft floor, 30 being a hard ceiling. I think that's what you're seeing happen with our business. Lower price environment, somewhat lower, at least in the first half of the year, coming down around the 25 number. I think that's still valid. We're continuing to drive capital efficiency, we'll do everything we can to get $25 billion worth of value out of 20 going forward. The 25 to 30, I think, is appropriate for our business and our strategic ambitions. I think in terms of operating shifts, I've touched on a number of things.
I think perhaps a few more words on the downstream business, because that tends to be somewhat less focused on these calls, yet it's a huge driver, certainly of our earnings and of our cash flow over the last 12 months, showing the value of our integrated business model and just the strength of that business that we have. Our retail business, very strong, resilient through the cycle. We are achieving differentiated returns in our business because of our value offering, V-Power and our differentiated fuel offering. Our non-retail sales offering as well, very resilient. We see the business fundamentals very strong. We're investing in Mexico. We'll continue to invest in that business, and I think you'll see further strength coming from that business over time.
Just want to make sure that people appreciate what that business is offering, the 16% ROACE in downstream, the 19% ROACE in chemicals, the really fundamentally strong performance of that business.
We'll now take our next question from Rob West with Redburn Partners.
Hi, Jessica. I wanted to go back to your comments on Nigeria from your prepared remarks. Thanks for those. I'm interested because I've been reading through the Petroleum Industry Bill. I'm wondering what that means for you. I was wondering, could you comment on whether there's anything specific going through in that quite substantial legislative package that, as an operator, you really need to see to unlock some further investment and bring it into your framework of attractive returns? I'm thinking specifically about the impact on Bonga Southwest, but also smaller projects, gas, NLNG expansion, and interested if you could give us some pointers what you're looking to there.
Thank you, Rob, for your question. I first went to Nigeria, I believe, in 2010, and the PIV was being discussed then. It's been in motion for a number of years, so I think it's somewhat difficult to draw conclusions until it really looks like it's going to get across the finish line. We've been in Nigeria for decades. It's an important country for us. In general, we've been able to move it to a much better place in the last couple of years. We're very pleased with our discussions with the government, both on our onshore and our offshore activities. We remain optimistic in terms of growth opportunities in Nigeria, we're continuing to evaluate those. Yes, there are important details that need to be negotiated with the government and with our counterparties. That's somewhat normal course of business.
Overall, we believe that our position in Nigeria is strong and that the position in general has moved to a better place in the last couple of years. Thank you.
We'll now take our next question from Anish Kapadia with TPH.
Hi, Jessica. First question was just thinking about the longer term and how you're going to look to offset production decline or even have some growth in the upstream, that in the context of really a lack of exploration success that we've seen from Shell and not really much FID-able resource acquired with BG. Do you have the capacity for cash-funded acquisitions over the next year or so in a kind of current $50, $60 oil price environment if you do remove the scrip? Then just a second question in terms of where kind of market expectations are at. It looks like consensus cash flow for next year at $55 per barrel is about $43 billion. It doesn't seem like there's much growth in cash flow for next year.
Do you have confidence that you could beat that given the kind of growth that you've outlined coming through in both the upstream and the downstream? Thank you.
Great. Thank you, Anish. As I've spoken a bit about already, we have a lot of growth coming through at the moment, we see continued growth in the next couple of years. Again, it's across our portfolio. The acquisition of BG accelerated our strategy, brought a lot of growth opportunity into the company. If you look at Brazil in particular, between when we announced and where we are today, it's gone up some 100% or more in terms of total production of over 300,000 barrels a day from our Brazil operations. Similarly, we have opportunities in shale. We've been ramping that business up to over 250,000 barrels a day, and we see further opportunity over the next couple of years. We've got a lot of very real FID opportunities in our Deepwater business, in our Integrated Gas business.
I'm not worried about near-term growth, and therefore, I'm not feeling I need to build up cash for necessarily an acquisition. We're, I think, in a pretty good position, a pretty privileged position from a portfolio of options that we have across our Upstream business, our IG business, as well as our Downstream business, which I spoke of before, where we will generate growth with relatively low capital. Thank you.
We'll now take our next question from Jason Kenney with Santander.
Good afternoon. Thanks, Jessica. A short question, a long question, and then a request, if I may. The short question is, when will Upstream Americas be earnings positive on a quarterly basis? The second question is, have you seen any pressure from either the Netherlands or the U.K. government questioning your dual listing? Do you have to field questions on anything around Brexit uncertainties and whether there's reason to get rid of the dual listing for simplicity purposes, if nothing else? Then a request, if I can, now that you've got your feet under the CFO table, can we get improved financial disclosure? I'm really hoping you can say, "Yes, I will give you quarterly divisional P&L accounts going forward, preferably on a reported and adjusted basis." Do you think you could consider that at all? Thanks.
Great. Thank you, Jason. Starting with your first question, first of all, we manage our businesses by business, if you will. The UA construct isn't a really real construct for us. We manage our Deepwater business, which happens to have operations in the Gulf of Mexico, but as well as Brazil and Nigeria, Malaysia. We manage our Unconventional business, which has operations in the U.S., but also Canada and Argentina. That construct isn't the way we're running the company. We run those themes or those businesses to ensure they're the most competitive in their industry, which I think is the right way of looking at it, rather than from a regional perspective. We're driving improvements in the businesses that touch the Americas. Deepwater, huge improvement from a capital efficiency perspective, from a cost perspective.
The same is true for the Unconventionals business, where I expect to have increasing CFFO and free cash flow over time. We're starting to see that coming through now, and I expect more to come through the medium term from both of those businesses. Of course, the Americas also includes our Downstream business. I'm not quite sure if you're including that or not, and our Downstream business in the Americas is very strong. We're not receiving any pressure on the dual listing from the government. That can be a topic of interest. Our dual listing reflects a structure we put in place to allow our U.K. shareholders to not be subject to dividend withholding tax. That's what drove it. It was a value decision for our U.K. shareholder base. It's, I think, got a solid logic to it.
You may have heard there is some discussion within the Netherlands of removing the dividend withholding tax. That hasn't happened yet. If that were, then we could take a look at the structure. We'll need to wait for that to actually come to fruition before we move into decision-making in that space. Thank you for your input on the financial disclosure. We do want to be transparent. We do want to provide relevant information to our shareholders so that we can accurately provide the most relevant and compelling information for you to understand the strength of our company, and I will take it into consideration going forward. Thank you.
We'll now take our next question from Iain Reid with Macquarie.
Yeah. Hi, Jessica. It's Iain Reid, Macquarie here. I was just going to ask you another question, if you don't mind, on your regional Upstream earnings. Just curious, in the third quarter, where Africa was a very strong number, we haven't seen the strength of that sort of number in your Upstream Africa operations for some time. Is that some sort of Nigerian-driven issue? Also South America. I look at this every quarter, and every quarter it makes a loss in the Upstream. Despite the fact that obviously Brazil is going great guns, is this a kind of
Depreciation effects, you're adding obviously some of the cost of the BG acquisition in there? Right?
Good. Thank you for the questions. Again, I'll go back to how we're running the company and the way we look at our businesses. You mentioned the regions. Again, we're looking at, let's say, our deep water business. How do we make sure that deep water business is the most competitive deep water business in terms of capital efficiency and ultimately, ROACE, the returns on that capital. Again, very good progress being made across the portfolio. On South America specifically, indeed, there is a DDA impact. I referenced that in the materials as well. As we bring on these new projects, it does increase the DD&A. I would point out that the overall cash generation from our Upstream business, excluding working capital for the quarter, was some $4.7 billion.
Indeed, important to look at the cash numbers as well as the earning numbers when getting a sense of what the business is delivering. Thank you.
Any comment on that?
Good. All right. I think we have got to our last question. Thank you for your questions today. Let me remind you that we will have our management day on the 28th of November in London and on the 29th in New York. Ben and I and other members of the executive team look forward to speaking with you all then. Thank you very much.