Good afternoon. As always, it's a pleasure to be back in London. It's an even bigger pleasure to be back again at the venue where we announced the BG acquisition almost two years ago. That integration with BG was completed in 2016. Today we want to give you an update on the direction of the company. We'll talk a bit about the results. We touch on the strategy and the progress that we are making on the delivery, post the transition in 2016. Before we do all of that, of course, the disclaimer statement that you are familiar with. We're making some good progress in reshaping Shell towards the goal of being a world-class investment case. It's focusing on delivering higher returns on capital employed, on a higher free cash flow per share, and of course, on reducing debt.
Simply put, better returns for shareholders. We are on track to deliver on the 2020 expectations that we set out back at Capital Markets Day in 2016. 2016, of course, was a transition year for Shell. 2017 is the year in which we will follow through on the delivery piece. We have a portfolio strategy which contains firm steps to manage in this down cycle, including a hard ceiling on our capital spending, but also on more predictability in our spending. I believe our integrated business mix is helping to support our results in what is still a pretty challenging business environment that we are seeing today. In 2016, we saw some pretty large movements in our figures, for the BG purchase and consolidation, a higher asset base, build up in debt, and all of that, of course, amplified by lower oil prices.
I think our results today also show that we are successfully pulling on these powerful levers that we mentioned before to manage the company in the industry downturn that we are experiencing. We are focusing on reducing cost and capital investment as we also refocus the company. At the same time, we have to remember that we do have a capital program of around $25 billion in 2017. Our 2016 CCS earnings, excluding identified items, were around $7 billion. Cash flow from operations, some $21 billion. Free cash flow, excluding the BG cash element, adding into it the proceeds from the MLP and the IPO, was $2 billion, and that was at an average Brent price of $44 a barrel. Debt reduced at the end of 2016 compared to the Q3 closing levels.
In Q4, for the second consecutive quarter, the free cash flow more than covered our cash dividend. Talking about dividend, there is no change in the dividend intention. We expect the Q1 2017 dividend to be $0.47 per share. Compared to 2014, including BG, our underlying operating cost has been reduced by $10 billion on an annual basis. Our capital investment has been reduced by $20 billion on an annual basis. At the end of 2016, we are running the underlying operating cost of the combination of Shell and BG below $40 billion. That is lower than what we used to run Shell on as a standalone company less than 24 months ago. In 2017, it's expected to be lower again. This is a cost takeout performance that, in my mind, is absolutely leading in the industry.
Let's step back from the results and the numbers a little bit. Let me also be clear on what else we want from Shell. I want Shell to be a leader. That means a large market capitalization, of course, but also that we are listened to and respected for both what we do and what we say. We are reducing our carbon intensity, something that we are working very hard on. We will continue to put emphasis on this going forward. We also need to establish that beyond any shadow of doubt, we provide shared value to society. We are a force for good for society. We need to succeed in all these themes as well if we want to be truly that world-class investment case. As you know, we segment our portfolio in a number of strategic themes.
We have cash engines. They need to deliver that strong and stable return. They also need to deliver that strong and stable free cash flow, enough to cover the dividend, enough to cover the buybacks, not only through the microcycle, also leave us with enough money to fund the future. Our growth priorities, they have a clear pathway towards delivering strong returns and free cash flow in the medium term. The future opportunities should provide us with material growth in cash per share in the next decade, if not earlier. Through all of this, of course, is our intention to be in fundamentally advantaged positions throughout the portfolio. New energies, you will have seen in a recent announcement that Shell in a consortium has been awarded the tender for the Dutch offshore wind farm in Borssele III and IV.
Together, these two wind farms will have a capacity of 680 megawatts. This demonstrates that our company is preparing for and investing in the challenges, but also the opportunities that the energy transitioning is affording us. Asset sales have continued to play an important role in all of the strategic themes and will continue to do so as we reshape the company. The asset sales program is expected to total $30 billion from 2016 through to 2018. You're familiar with that. We completed $5 billion of that, $5 billion large divestments in 2016. We just announced in the last few weeks a further $5 billion. We are making very significant progress on yet another $5 billion of divestment, with more to come on top of it.
At the end of 2016, you will have noted, hopefully, that we completed the sale of our shareholding in Showa Shell for around $1.4 billion. We recently announced that SABIC will acquire our 50% share of our joint venture in SADAF for around $800 million. A few days ago, we signed agreements to sell a package of U.K. and North Sea assets to Chrysaor for a total of up to $3.8 billion, with KUFPEC for the sale of our interest in the Bongkot field and the adjoining acreage thereof offshore Thailand for $900 million. These transactions show that there is clear momentum now behind our global but value-driven $30 billion divestment program and are consistent with the company's strategy to high grade, but also simplify the portfolio following the acquisition of BG. We seek to generate value, we seek to simplify the portfolio, and we seek to reshape Shell.
Simon will cover this in quite a bit more detail later in the presentation. Again, let me remind you, this is a value-driven, not a time-driven divestment program, but I'm also confident that we will deliver on the timing piece of it. We've been reducing Shell's capital investment in a steady and a measured way in the last few years. We're planning to spend between $25 billion and $30 billion each year until 2020. It's all about reducing debt following the BG deal. It's about meeting our intentions for shareholder distributions. At a $25 billion level reflects the spend that we believe is the right level today for delivering our in-flight projects, but also for sustaining the strategy that we laid out.
Our focus is pretty much on the economic resilience of the new assets that we are pursuing and on having a predictable and high-quality investment funnel going forward. We took two major investment decisions in 2016. Both of them in chemicals for Pennsylvania and the Nanhai project, and we have significant progress today on the KGS project in the Gulf of Mexico, FID expected in the near term. Project has a break-even price of below $40 on a go-forward basis and has an expected gross peak production of 40,000 barrels per day. In 2016, our investment level was $27 billion, and that is $20 billion below what we had in 2014. In 2017, we are moving this down to an investment level of $25 billion, the bottom of the range.
That, by the way, like the $27 billion, that 25 includes also a number of non-cash items that we have to count as capital investment, but are not necessarily capital expenditures on a cash basis. In 2016, of course, we had a world-class deal delivery, that was followed by a world-class BG integration that was essentially done in 2016, completed on time, and I'm really very proud of this achievement. Of course, we continue to manage the delivery of the synergies and the reshaping of Shell as a result of all of this is starting to show in my mind. In 2016, the net reduction of staff was 6,500. That's ahead of the 5,000 employees that we said would leave Shell back in 2016.
We've progressed with the closure of some 25 offices around the world, including some pretty symbolic moves like moving from One Shell Plaza in downtown Houston to Woodcreek and here in London as well. These are really big moves for our company, not only the asset, but also how we look at the office portfolio around the world. Since startups of Stones in the Gulf of Mexico, Gorgon, of course, in Australia, Kashagan in Kazakhstan. These startups, collectively, in 2016 should add more than 300,000 barrels of oil equivalent per day and 3.9 million tons per annum, to Shell shareholders once they are fully ramped up. Finally, there's no doubt that 2016 was a challenging year, including all the deal effects that you have seen. The potential outcomes here reflect the actions of many, by all the colleagues we have in Shell.
In practice, they reflect a reset in the way we are going about our daily business, particularly in terms of the sustainable cost base that I refer to. The levers that we are pulling are material, this chart here shows the returns and the free cash flow that we generated in each of the 3 categories that I mentioned earlier: cash engines, growth priorities, future opportunities. A reminder, these are not targets, but the chart shows you the possible shape of the company. The environment can still play out differently, very differently, from what we expect today. Around the end of the decade, we expect to have reduced debt, hence the free cash flow that you see on the chart here should be part of the dividend and buyback program of the company.
The cash engines will have stabilized portfolios, and the growth priorities, the deepwater, will be delivering free cash by the end of the decade. Chemicals will still be in growth mode. In the chart you will see about $3 billion of more free cash flow per year coming in the beginning of the decade. In Shell and the new energies, the portfolios will be ready for, or maybe even already slightly entering into a much more substantial growth investment from the available resources. I also think it's important that we update you in a bit more detail on the plans in the nearer term and more details on the financial levers that we are pulling to manage our company today in this difficult environment. For that, let me hand you over to Simon for the last time this time.
Thank you, Ben. Thank you all for joining us today. It's good to be here. In fact, this is the 31st time as CFO I've had what I think has been a great privilege to address you in quarterly results. I also had the benefit, of course, of 15 quarter ends before that, so 46 quarter ends with you. It's been a pleasure, mostly. I think it's time for parole. Let me update you on the financial framework, the great progress we're making in creating value from the BG deal, a good link back to the last time we were in here, and the other assets and the projects. This morning, I did go off script a little, but that was the media. I better stay on script this afternoon.
In summary, in the quarter, excluding identified items, Shell's CCS earnings in the quarter were $1.8 billion. That's a $200 million increase on last year. On the comparative basis, we saw higher earnings in the upstream and chemicals, lower earnings from refining and trading. We also saw a higher depreciation charge in part the result of BG and a one-off impact, $500 million from a deferred tax or a series of deferred tax adjustments. Cash generation, the cash flow from operations over $9 billion in three months. Meaning after we deduct capital investment, we more than covered the dividend payout again for the second quarter running. Dividend distributed was $3.8 billion or $0.47 per share. The Brent oil prices were 13% higher than a year ago, $49 for the quarter.
Realized gas prices were actually 5% lower than a year ago, and that's partly a result of the time lag as LNG prices follow oil prices, but not immediately. On a Q4-Q4 basis, that gave us an increase in the results by around $400 million just from price movement. Refining and trading results were significantly lower. That partly reflected the weaker global refining conditions, but also the rising market challenge of taking your prices up to customers when your costs are going up. That downside was partly offset by higher chemical margins. Compared to the same quarter last year, we saw an uplift from BG volumes, very significant of course, but we also at the same time saw lower costs despite the fact last year did not include BG, but this year did.
We did see that higher depreciation, and we did see the non-cash charges, the deferred tax, not included as in identified items. You will see the usual waterfall charts at the back of your slide packs. We said 2016 was a transition year. We were completing integrating the BG acquisition. We were bringing together two large complicated balance sheets. We expected earnings volatility, and you can see it in the red bars here on the slide. Our cash generation has more clearly followed the trend in oil prices, and it emerges stronger overall by the end of the year. We did see an increase in depreciation following BG, but also an increase in interest charges with the increased debt. Depreciation for the quarter, around $6.6 billion, and on an underlying basis, $6.3 billion. Last year, the total underlying depreciation, some $23 billion.
Be around that range, $23 billion-$24 billion, going forward. Divestment impacts will be a feature in 2017, I can't promise you no noise. Maybe Jessica will, but I can't. Also draw your attention to the outlook we gave in our corporate segment, as well as the broader usual outlook in the backup. The divestments will introduce a little bit of quarter-on-quarter uncertainty. We do appreciate the challenges in modeling the short-term earnings as a result of all those moving pieces. We sometimes have the challenge as well, but we'll do our best to assist. In the meantime, we'll encourage everybody to focus on the cash. Cash obviously is inherently more stable, but it is a much better indicator of the delivery of strategy.
Turning to the reserves that we announced this morning The SEC, Securities and Exchange Commission, proved reserves equivalent were at the end of 2016, 13.2 billion barrels oil equivalent. That's an increase of 1.5 billion barrels. Additions during the year, 2.9 billion barrels. Obviously, that included, in fact, it was mostly the BG acquisition, around in total, 25% of the N15 reserves. The three-year reserve replacement ratio stands at an estimated 81%, obviously helped by the strong 2016 and BG. Integration with BG, we set out to complete by the end of last year, and we did. That I think is a world-class performance by any standards, 10 months to complete the acquisition. We stood here two years ago, and we said this will accelerate the growth strategy in deep water and in LNG.
We'd enhance the free cash flow. It creates a platform from which we'll reshape Shell. I'd say exactly the same today, only now I can say we've done all of those. Just one slight detour, you can see on this slide the growth. From the BG portfolio since we announced that deal, in Australia 70%, in Brazil 100%. BG was free cash flow positive for us last year. I don't think we would have got that company if we'd left that deal another year with that kind of performance to come. We knew it was coming. Delivering the real value from the BG deal did require the swift and effective integration, getting the best value from these projects, which we are now, but importantly, learning and then applying the best working practices from BG or from Shell and putting them across the whole of the company.
As a result, two years ago, we said $2.5 billion. We actually pretty much did that last year, 2016. We now expect $4.5 billion pre-tax basis by 2018. We did the three-year target in one. This year in 2017, we should get to around $4 billion of the synergies delivered. It'll be almost impossible to measure thereafter because we are so closely integrated now. Move on just a few words about the strategic themes, the underlying delivery. Firstly, LNG, real core part of the business. You know we moved it from a growth priority to cash engine. The increase in the LNG sales that we've seen is bigger than the increase in our liquefaction volumes. That's because the business model has fundamentally evolved to connect supply and demand under various different market conditions we play an aggregator role.
On top of what we produce, we also buy third-party LNG, some long-term contracts, some from JV partners. We also buy and sell spot LNG cargoes. We market it to a worldwide customer base. We optimize both logistics and margin. If we look at the total market, remember it was around 250 million tons per annum. It did increase by 17 million tons last year, 6%, 7%. Supply increased in Australia, primarily, lesser extent the U.S. Obviously, we saw growth in demand, new markets. The two largest interestingly were Egypt and Pakistan. We were also seeing growth in India and China, which over time will continue to drive that growth. That easily absorbed the growth in supply volumes. We did not need to rely on Europe as the balancing market. The predicted decline in market conditions and pricing just didn't occur in 2016.
In fact, we finished the year with pretty strong, high Asian winter demand and prices. From what we can tell, every cargo that could have been produced last year in LNG was produced. Nobody was sitting on its production and holding back. Now, I would highlight one BG best practice we will take on is to issue an LNG market outlook in February and March and hold a presentation like this, well, I won't, but Ben Jeske will, in London, Singapore and New Orleans. Looking at our other main cash generator, Downstream. I hope you're aware there's been a major cost, capital efficiency performance drive underway in Downstream for quite some years, certainly back to Ben's time running the business. 55 performance unit within this business focus everybody on the bottom line. We're continuing exit from the non-core positions. You heard about one of the chemicals last week.
There are assets where we don't see running room, the returns, or just attractiveness of any new investment dollars from Shell going into it. Those improvements over the cycle have enabled us, we delivered $7 billion of clean earnings last year, $10 billion of cash flow from operations, and around 15% return on capital. That's a good performance and much better than we saw seven or eight years earlier, when in fact, the refining margins were even more attractive. Our marketing activities on here, I would just highlight, that's the red earnings stream. They provide a resilient and steadily increasing stream of earnings. Refining and trading work well together as an integrated value chain to enhance returns and cash flow, they are subject to the cycle, short and long term.
Overall, Downstream should be able to deliver 10%-12% return on capital per employee through the cycle and more than $10 billion of cash flow every year. Although we have to measure these on average over a three, four-year period to capture that cycle. Moving on the growth activities. Back in 2014, maybe we were producing around 300,000 barrels a day, mostly in the Gulf, Nigeria. 2016, we added BG, we started up Stones in the Gulf of Mexico, and we started up Malikai in Malaysia. We ended the year averaging 600,000, roughly double. Ben mentioned Kaikias coming on to FID shortly in the U.S., the really important area for growth is Brazil from BG. In the Santos Pre-salt basin, last year, three new FPSO started up floating production storage units.
The last one started pretty close to the end of the year, all three of them actually still ramping up into 2017. More to come. Breakeven prices in Brazil across the board below, well below $40 a barrel. The worldwide deepwater production in Q4, as we're seeing that ramp up, was 725,000 barrels a day. That's up by more than 50% in one year. We're delivering that growth now, not sometime in the future, maybe. It's going into the bottom line now. Well on our way to 900,000 barrels a day by 2020. That growth is coming from projects already sanctioned, primarily Brazil, and of course Appomattox in the U.S. should be delivering by then. That's a business that will be a significant free cash contributor throughout the twenties. Moving on to the shales.
We continue to improve the capabilities, the competitiveness because we focus on a small number, basically five core positions, including Argentina. Following the divestment that we announced in the fourth quarter in Western Canada shales, we now have around 11 billion barrels of discovered and prospective resource within the portfolio. Advantage positions in the Permian, in Fox Creek, in Western Canada, and in Argentina. That's 11 billion barrels potential production. Just as an aside on the reserves, less than $300 million of that is actually booked today in proved reserves. The profitability is improving. Costs coming out, better recovery rates, high grading the acreage. We've gone from $15 million to $6 million a well in the Permian, moving to longer laterals, better recoveries.
We will continue to spend within the range of $2 billion-$3 billion this year, but we are shifting away from the early stage to appraisal activities, exploration appraisal. The improvement in capital efficiency and better understanding of where we can really get the best bang for the buck allows us to selectively accelerate development, be mostly in the Permian. We move to a develop, a produce focus. We could add 140,000 barrels a day by 2020 from the liquids-rich plays in the Permian and the Fox Creek. The average break-even price for those barrels, the additional Permian and Fox Creek, is around $40 a barrel. That overall will bring forward the date for the shale's cash flow neutrality.
I think the important point here is we have a great deepwater portfolio, by far the best in the industry, with the possible exception of Petrobras, and we have a very good shales portfolio. They are both going to break even looking forward at $40 or better. We have the choice. It's good to have both of these in the portfolio. That's it on the themes. Let's look at the cash flow. Close to my heart. This is an important slide. I won't say much. There's no change in the priorities. This, I think, is pretty much the same slide we used two years ago. We reduce debt, we pay the dividend, and that's followed in priority terms by a choice between buybacks and capital investment.
We are committed, subject to reducing the debt and some recovering the oil prices, to $25 billion of buybacks in the period up to 2020. We will use the extra cash that's available now for debt reduction to strengthen the credit metrics to the desired levels, and the best proxy for this is gearing around or at least heading towards 20%. The financial framework is an indivisible key element of our overall group strategy. Moving on to the four levers. We were pretty clear, I think, Capital Markets Day. We work four performance levers in the medium term to get from where we are now to that strategic shape, competitive positioning that Ben outlined. Divestments, OpEx, CapEx, new projects. Firstly, on divestments, well, we've been a little bit busy the last week or two.
In fact, I probably spent more time selling stuff than I have preparing for today. No difficult questions on the arcane elements of the balance sheet, please. Obviously, we're using asset sales to help the balance sheet, but more importantly, it's part of the strategy to reshape the company. We've completed $5 billion of deals last year. We've completed $5 billion of deals last month, and we have another $5 billion or more pretty close to completion as well. That's $15 billion in total. They are an important part of starting to reduce the debt, and the timing, particularly upstream divestments, may depend to some extent on oil prices. We won't give assets away, and this is a bit of repetition, but there's absolutely no reason today to think the $30 billion will not be achieved.
I have said previously, if it takes a bit longer in order to preserve shareholder value, then so be it. You can see we're on track, maybe ahead of track, to deliver at least half the target by the midway point, which is the middle of 2017. I'll move on to spending now. Just bear in mind the context of two years ago, some of the challenges we were given about the falling oil price and was Shell going to do enough? Did we get it, that challenge? Capital investment will be managed in the $25 billion-$30 billion range. It was $27 billion last year, but that's 40% lower than it was only two years ago when that question was being asked. $20 billion lower on an absolute basis.
That's quite a performance, I think, against the challenge of did we really understand what was needed. Track record is pretty good, that we can respond quickly in the right way, importantly, because you'll see here in the red, that's the base level CapEx, the short cycle, infill drilling, the retail investments, but we still have a very strong high-quality growth portfolio. As we look forward, if you think of the $30 billion, maybe a third is the base, a third is already committed, and a third, there are still choices. We do have choices to vary within the period. Moving on to operating cost. This one, if anything, gives more satisfaction because this is actually tougher. You can't stop spending operating expense if you're going to continue with the operation. We've delivered some major reductions here, but there is still more to come.
The underlying operating cost $39 billion, $10 billion lower, 20% lower than Shell plus BG 2014. Going forward, these numbers will be impacted by divestments, on by new project ramp-ups, and the macro, such as foreign exchange movements, will have an effect. We're not setting a headline target again. We will just do the right thing in the right way. The focus is twofold. We must sustain the improvements already made, don't let them creep back, and we'll take further cost out. There are a lot of improvement programs already agreed. We signed a few off only last week in the executive committee. We will take that cost out, and we do expect the cost, obviously, to be below $40 billion, and that will feed directly into the cash flow from operations.
There's clearly, said this before, but clearly remaining potential for multibillion dollar per year savings on an after-tax basis, even against the baseline we've already achieved. Finally, the fourth lever, one that we maybe should give a little bit more air time to as we go forward, the projects, project delivery. Those CapEx dollars have been spent on good projects. You can see the top 10 here on the left, and on the right, the cash flow and the production that they should deliver. That's why we do them, the free cash flow. The portfolio is geared to give that improvement in production, but more importantly, the cash from ops and free cash flow, both this year and well into the future. This matters more than the divestment cash flow, because divestments are one-off. This, in many cases, pertains for a very long period of time.
It may not be permanent because of decline, but these are very solid, long life cash flows. The startups combined by 2018 should produce more than 1 million barrels a day. More importantly for a CFO, around $10 billion of cash from operations at a $60 oil price. That's by 2018. All those projects are either up and running, ramping up now, or about to be so. The actual project delivery for the year was pretty consistent with our expectations. The last slide is just to summarize the potential from the levers that we're pulling. The financial framework is being addressed in the down cycle, but actually, it's more than just delivering in the two-year period. It's fundamentally fantastic opportunity, BG plus oil price, to fundamentally improve our competitive performance irrespective of the oil price.
These four levers, they will add significantly to cash flow, which hopefully will allow Jessica to sleep a little more easily than I sometimes have. With that, let me pass you over to Ben. Just to close.
Thanks, Simon. Before closing, I would like to remember that, again, we are aiming at being this world-class investment case for Shell. In the end, of course, you will measure this as total shareholder return, and so will we. I think by doing a better job on improving the returns on capital employed, by improving the free cash flow per share, by reducing debt, we can create a better investment case, that world-class investment case. These are the priorities that we are pursuing internally. I think we set out a clear pathway for you for the next few years. I think it's an ambitious pathway, but it's also a transformation of the company that started in 2016, and now we will switch to delivery in 2017 and the years ahead. Before, I think our strategy is now starting to pay off. You can see it.
In 2017, we will be investing around $25 billion in high quality and resilient projects. I'm also confident that 2017 will be another year of progress for Shell to show that we are well on track to deliver that world-class investment case. With that, we have more than an hour, if need be, to do a Q&A. Let's have your questions. Could I please ask you to just take one or two questions at a time so that we have the opportunity to give everybody a chance? We also have some questions on the phone. I think you were the first one to put your hand up.
Hi. Good afternoon, gentlemen. Christian Mallet from JP Morgan. Just one question, please, around your CapEx guidance for 2017. Just looking at the sort of break-up that you provided on slide 23, what additional levers could you pull to take that CapEx guidance lower in the same way that you surprised yourselves in 2016? Is there more headroom that you're not talking about? Thank you.
Let me have a first stab at it. Simon, I'm sure, will have some observations as well. Yes, of course, we can take that number lower. Yes, you are right if you imply that there was a little bit of a surprise in how far we could get into 2016 as well. Although we actually did see that we were making progress during the year. A lot of it, of course, deflating cost structures, a lot of it improving capital efficiency, getting more bang for our buck in the programs that we were executing. The 25 is not a cash number, by the way. The cash number is closer to 20, actually. We add back in what we have to book as capital investment, being the leases that we also have inherited from BG. Simon, I see you putting your finger up.
Simon will be able to explain that in a bit more detail if need be. Indeed, we can bring that number down if we wanted to. What we set to 25 is not a sort of a hard floor, but it is, I think, an appropriate level considering where we are with not only our in-flight projects, but also what we have in the way of a strategy. We need to fund our strategy, and I think about $25 billion roughly right to sustain what we are doing to deliver that expectation that we set out in Capital Markets Day. Make no mistake, if from a financial framework perspective, we feel there is too much pressure on the affordability of the $25 billion, yes, absolutely, we can and we will take it down.
Maybe because it may either preempt or prompt further questions, why go below 25 if you don't need to? You go below 25 if you need to or if you can drive cost out of projects you've already approved, which we have been doing. That's one of the reasons we ended up at 27. We can afford 25. Just think of the cash flow statement we've just put out for the year. These are annual figures. The cash element next year of investment is going to be 22, 23, maybe 22. We'll have a cash dividend of 10 on top of that. You've got 33 that we need. We have 21 of cash last year, $44, and actually $6 billion of working capital. That makes 27. There's a one-off tax payment really associated with divestment, which we won't repeat. That's around 28.
You add back $11 to today's oil price, you have another $5 or $6 billion. You're already balanced, and the sharp-eyed among you will notice I've omitted interest. There is a lot still to come. The projects, there's still another $8 billion to come of growth from those projects I laid out. Not all this year, but some will come this year. At today's oil price, we don't need to reduce the CapEx as long as it's all going in the right place.
Just a quick follow-up. The cash CapEx is 23 or 22?
There's some leases in it and there's some exploration expense, 22. It's closer to 20 than 25, but only just.
Thank you.
Thank you. Please, then Irene.
Hi, it's Jason Gammel with Jefferies. You've been very consistent in terms of the prioritization of cash, the uses thereof. One lever that you've been pulling is the scrip component of the dividend. I was hoping you might be able to talk about what triggers we should look for longer-term relief on the scrip. Is it a level of gearing? Is it a level of free cash flow generation? Any other signals?
Yes. It's those two, dividend free cash flow generation. What we would like, because it's more robust recycle, is that free cash flow generation comes from that growth from the projects. It's not just dividend-driven. The dividend Sorry, divestment-driven. The divestments will help bring the debt down more quickly. What we have stated is we will be more comfortable with the credit rating when the debt approaches 20% gearing or $50 billion in sort of broad terms, net debt. Those numbers have both gone up a bit because of the significant number of finance leases that were not there, when we made that statement, but it's close enough. When we are in that position, the most likely first thing that we do, without committing my colleagues, is take the scrip off. We know that it's dilutive.
You take the scrip off, you don't bring it back again 2 months later or 2 quarters later just because you're doing divestments. You need the through-cycle cash flow. There it's confidence in the free cash flow through cycle and the prices that we see in terms of the cycle. That's when that would be, I think, a good milestone, a good signal. Thereafter, you think about the buybacks, basically.
Good.
The one thing won't change will be the capital investment. That's done.
Irene?
Thank you. Irene Himona, Société Générale. I had two questions, please. Firstly, on cash flow, you called 2016 a transition year. You had a $6.2 billion cash outflow on working capital, which obviously we can't think of as normal. How are you managing that going forward? Is there any guidance you can give on that working capital? My second question on a project, which is Kashagan, you spoke about the economics of Brazil. Kashagan is a huge project, obviously. It cost as much as Gorgon. Can you talk a little bit about cash break-even or cash generation of that project? Thank you.
Anyone have a go at it?
The cash on Kashagan. The 2016 working capital movement, quite a bit of that, as we've seen, has been driven up by basically the inventory. That's the big driver, is inventories. There are other issues associated with trading, such as the margin calls that can make it a little volatile on a daily basis, let alone a quarterly. That's one of the strengths of the trading business. We can put the balance sheet behind the positions. It's volatile only in terms of the margin, not in terms of the long-term outcome. It can never be precise, but our inventory level is around, it's just over 100 million barrels. You can roughly work out from that the likely impact of movement.
What happened in 2016 was the last kick up. It was in December, so we got no benefit really in the upstream of the $55 oil price, but we saw the downside of the working capital. Kashagan cash. We had a good question this morning about what's the production from Kashagan likely to be? Which you covered. We took about 300,000 barrels a day. The capacity is going to be more than that. Let's see what the ongoing regular production is. There is clearly huge potential over time to grow, but not immediately, and hugely. We're only one-sixth of that, so 50,000 barrels a day. Our share is going out the Caspian Pipeline Consortium pipeline, it comes effectively into Urals blend, or into the Black Sea. It was cash negative, cash from operations negative last year because we had startup costs.
There's a lot of fees and still activity before the cash started to flow back. By December, it was flowing back, and there are reasonably good margins because although it's a very high CapEx, the cash margins going forward, it's not of that high a cash OpEx unit. It will, subject to stable production, be a good contributor this year versus being a negative contributor last year.
Yeah. Go ahead. There will be a continued focus, we've been very clear amongst all venture partners on further cost reductions in Kashagan as well. You can imagine, this has been a bit of an intensive care approach to get a project up and running, make sure that we iron out all the difficulties that you have with such a complex asset. Bear in mind, by the time we started it up, it was already 15 years old. We had to make sure that this went exceptionally well, and it has. I think indeed with reducing costs, stabilization of the production levels that we are now seeing, this will become a reliable cash engine. Of course, there's a whole raft of opportunities that we can subsequently look at. That will come once we are absolutely convinced that this unit is working well.
Yeah. John.
Tipan?
Yeah. Tipan. Tipan and then Jon Rigby.
Hi, it's Tipan from Exane BNP. Two questions, please. Firstly, one on cash taxes. I think you talked about the deferred tax move, Simon, but I was just wondering how we should go about modeling cash taxes going forward. Is there significant benefits in terms of the deferred tax assets or tax allowances that Shell has built up? The second question, I think you talked about disposals not being driven by timing, but more value. I just wanted to get a sense, two years on from the BG transaction, do you feel you're ahead of schedule on the disposals? Given this week's transactions, should we also expect that the next phase of disposals should be a little bit more certainly cash dilutive in the short term? I understand the high grading of the portfolio, but should we model more cash erosion?
Let me have a first pass at question two. I hope you will forgive us for not being able to give too many details on what it is that we have in the pipeline, partly because it's just not good commercial practice to do so. Secondly, because things can and will change in terms of the sequence in which they come about. It's easy enough, but of course, now standing here and say, "Well, we knew that some of the deals, of course, that we have been working on were coming." I hope you will appreciate the deals that we have done haven't been easy. Yeah. They do take time to piece together, to come up with a construct that works for both buyer and seller, and to agree the complexities around it. Think of the complexities that we would have had agreeing the North Sea deal.
There's quite a few of these still in the pipeline where it's not going to be a straightforward auctioning off, so to speak, of the asset. We do have quite a few more in the pipeline. I talked about $5 billion. Material progress on them. Think of that to be announced in the next weeks or months. Of course, on top of it, we have a whole lot more. You will also remember that earlier on, I spoke about a broader pipeline, well in excess of $30 billion that we have either activated or could activate. Of course, we are activating new projects as we free up capacity to work on this again. We only have so much deal team capacity to do complex transactions like the ones that we have been doing now.
Yes, I do think we are ahead of plan, or we are on track. If you think of it as $30 billion in 3 years. I'm very confident that, of course, certainly, with a slight easing that we have also seen in the last few quarters, that implied long-term oil prices being a little bit higher. Some of the real tough difficulties that we have seen over the last 18 months may indeed ease a little bit. How dilutive that will be on cash, I cannot give you any details without disclosing what it is that we are really working on. Maybe you can give some more guidance on it, Simon. I hope you will be able to bear with us on this, also taking a little bit of comfort from the track record that we have demonstrated.
Yeah. The recent 3 divestments all have a common characteristic, that there's strong cash flow in the next 3 to 4 years. Thereafter, you have to continue to invest or extend a license or take further risk decommissioning or otherwise. It's better that the new owners do that because they will focus more on it. It's a win-win situation. We're basically accelerating that cash flow in the deal. It is a bit dilutive, but it's all wrapped up in terms of what we would expect to deliver as we go forward. Your first point, Theepan, 2016 was a little odd because the cash tax was higher than the current tax. That was linked to cash paid on divestments, plus the fact the oil price was still going down, therefore we paid taxes on the previous year that were lower than this year's profit.
As we go forward, that will reverse. We're bringing on stream production in the U.S. and the U.K. in particular, which will benefit from tax credits and is the source of some of the deferred tax balances that we carry. We do have some in Australia as well. As they effectively are used, cash tax paid will be, in some cases, significantly below current tax.
Thanks. Jon?
Yeah. Hi, it's Jon Rigby from UBS. Can I ask a bit of a shopping list, sorry. The first is, can you maybe dive down a little bit into the downstream numbers for the fourth quarter, which despite the sort of commitment to more progressive visible earnings stream, still seem to display a degree of volatility that's not obviously explained by the macro? Maybe you could just talk about that a little more. The second is, I notice you referenced the Permian, and obviously, I think probably a bit of a hidden jewel that people have only just woken up to you owning. Part of the characteristics of the transaction you did with BG was to deepen and long cycle, so LNG, Deepwater. Do you feel comfortable with your short cycle exposure?
Maybe to sort of contradict an ongoing rumor in the market that you might sell the Permian. Actually, would you, on balance, prefer to deepen in shorter cycle over the coming years, perhaps as your financial position eases? Lastly, I take the point Simon made about the LNG market clearing, and I think it clearly contradicted a lot of people's negative views at the start of the year. You appear to have been more sanguine, but I suppose it may even have surprised you a little bit.
As you think about the next three or four years, maybe to this point of long cycle, short cycle, when you start to rank your very significant opportunities, development opportunities in new supply for LNG, would you be able to sort of talk around where the priorities lie, or which projects sit towards the top end of your list, please? Thank you.
Thanks, John. Let me say a few things on long cycle versus short cycle. I will cover some of the LNG as well, and then Simon will take the other half of that question as well as the one on the downstream. Yeah, you're absolutely right. There are two different types of exposures, two different financial characteristics that you get from long cycle, particularly if you look at Deepwater investments and Shell investments. They both, as Simon said, have, in our portfolio, break-even prices that are below the $40 mark. In that sense, you could argue that they are equally attractive. They actually have fundamentally different characteristics, and we like to have both characteristics in our portfolio. As a matter of fact, we need both characteristics in our portfolio.
What we like about the deep water business is indeed the very high free cash flow generative nature of it once you're past the investment hump, which gives a lot of resilience, of course, for the portfolio when it is stable. What we like about the Shell's portfolio is actually the ratability of the investment level. Of course, we don't quite have at a deep water side of the portfolio. You cannot ramp up and down that quickly. They come in big lumps. Once you are past an FID point, you just have to complete. The only way you sort of arm yourself against that sort of volatility is to have a strong balance sheet to be able to see your investment program through once you are committed to it. With the Shell's part, you can flex.
You have to flex for that matter, because it doesn't make sense to continue with a high investment rate when the realization price of the oil and gas that you will produce over a period of a year and a half is just not justifying that investment. Having both in a portfolio is quite attractive. They complement each other, and that's why we want to have roughly comparable strength, I wouldn't say equal strength, in both of them. I think your observation is correct on both the fact that the Permian is perhaps a hidden jewel in our portfolio. You're probably also correct when you assume that we actually would quite like to have a little bit more of it. Let's see what the future brings.
At this point in time, we, of course, will try and accelerate where we can and where it makes sense, investment in that $11 billion of potential barrels that we have in our resource base. If we see opportunities to sensibly deepen here and there, then we will continue that as well. On LNG, going forward, I think, of course, there are supply projects that Simon will talk to in a moment, but we also see two very important other components of our strategy as a priority at this point in time. That is, first of all, market development. We are, again, uniquely placed to do market development in LNG. This is also the right time to do it. The right time because we need to, of course, sign up markets with the prospect of being able to put long-term supply into it.
It is the right thing to do also from a long-term decarbonizing perspective. Gas market development is tough to do, but once you have it locked in, it's incredibly valuable to have that position. A lot of our investment effort and investment dollars will go into market development. Secondarily, a lot of it will go in sustaining existing supply chains. We have quite a few supply chains, of course, that after a long period of time, also have started to become slightly underutilized. These are, of course, very advantageous investments to jack back up. Think of positions in Trinidad, think of positions in Oman, and a few other positions where we do not have full utilization of our assets. These are two very important components of our strategy that need acting now, and we are acting on right now.
What are the big new supply projects we can bring on alongside the existing supply chains and to backfill that market development that we have been doing in the interim. Simon will be able to say a bit more about that.
Just on the supply projects, LNG, just to complete the story. Keep the kit full at the moment is the priority and develop the markets. We have delayed in the past couple of years, some big LNG projects. We had five possibles from floating in Browse in Australia, Abadi in Indonesia, and Tanzania. We had LNG Canada, and we have Lake Charles. Effectively, they're all deferred. The two that are still progressing with some urgency to get the cost in the right place, but not necessarily to take an urgent FID are Canada and Lake Charles, and back to advantage positions, basically. No particular hurry or commitment to do it, but actually you then work back from the market as to when these projects come on stream, what will the supply-demand balance look like? That's very important to do that.
We are 57 million tons of LNG sales last year in a market of 260 million-270 million tons. That's over 20%. We have to have a very good understanding, but make the most of that in terms of timing investments into the market. Downstream, commitment to reduce volatility. Well, we deliberately separated out for you the marketing and then the refining and trading. Marketing is what we term a ratable business. It's fairly predictable. We know the volumes, we know the margins, we know the customers. Yes, it goes up and down a little in terms of the competitive tension. Around the world, you can see we're able to do $ several billion a year just from that marketing stream, and it's on the chart. Refining and trading is subject to the cycle. It's subject to a few operational issues. Q4 did have a rising market.
It's not easy to follow, particularly in supply trading activities, that market. In fact, the product markets, in particular, were relatively weak, and that came back into product trading. Trading was still making a profit in its own right. It's not a major exposure or volatility in terms of the potential risk there. It's a pretty solid earnings, but it is not immune to the cycle. That was what we saw a bit in the fourth quarter. It is also what I think we see in competitors as well. Maybe this effect was bigger than we were all expecting.
The commitment to reduce volatility. We could talk forever about the philosophy here, but I'm a big believer in transparency and disclosure and working over a rolling four quarter rather than a one quarter perspective on most numbers, hence the wish to focus more on the cash. It's not just because that's the important factor. It's actually basically more stable through the period. Accounting ultimately is accounting and is impacted by assumptions and other things that you see coming through according to normal due process and just the issues arising. Mostly they're non-cash.
Thank you. We will have a question from the phones next. Operator?
Guy Baber of Simmons. Please go ahead.
Thank you guys very much for taking the question. Simon, I know you like for us to focus on the trailing four quarters, as opposed to the last two. For cash flow, the second half of 2016 obviously was very different from what you did first half of 2016. The portfolio has been changing. The environment has changed in terms of the cost that you were realizing. Should we be looking at that second half of 2016 cash flow run rate, therefore, of about $8.8 billion a quarter as more representative of what your portfolio is capable of instead of the trailing four quarters? Just trying to get a sense of the sustainability of that performance. If you could speak to maybe one-time items that may have boosted that cash flow, I think that would be helpful.
Thanks, Guy. I think I would focus on the four quarters. The first two quarters were particularly weak, and that can be weak for a variety of reasons, mainly price. The recovery in the third and fourth quarter, there's also timing of tax payments, so the first half of the year had higher tax payments, much higher tax payments. There's some one-off items in it. As we go forward, future tax payments, in addition to the comments I made earlier, they lag the profitability. That will always be the case. You pay tax after you earn the profit. The working capital, there are times when we extend additional working capital to the traders. There are times when we pull it back again. That's a deliberate choice. That's not just the inventory moving up and down. That is another factor. We do that for value.
We do that because of the supply positions that we have, the shorts and the longs lengths that we are aiming to match. The longer the period, the better, to be brutally honest, with cash flow. The first two quarters were very unrepresentative. Remember, a year and a week or so ago, the oil price was $27, which is when we asked for your support for the BG deal. That was an interesting time. That was an unrepresentative level of volatility in the market, which has a direct impact on our ongoing cash flow. The second half of the year is more representative, but some of those factors reversed in that period. As we go forward, take the year, take your view on price, remove the working capital effect, take into account what we said on cash, recognize further cost savings, recognize the project delivery.
Those are the things you need to think in and build into the model.
Good. I'll take one more question from the lines first. Thank you.
Blake Fernandez of Howard Weil, please go ahead. Folks, good afternoon. Thanks for taking the question. I had two, maybe I'll just ask both if it's easier. For one, we appreciate the outlook on the American shale ramp up to about 400,000 barrels a day. The capital associated with that $2 billion-$3 billion, do you think that that's a good run rate in what you need to spend to achieve that 400? Understanding that obviously you could see some cost reinflation there before other projects. The second question is on divestitures. If I'm not mistaken, the production associated with what you've announced so far is about 190,000 barrels a day, which is roughly about 5% of the portfolio. I believe you're marketing about 10% of the production. You're about halfway through there, yet the divestitures announced and closed so far is about $10 billion.
You're about 33% through the target. I guess long story short, do you think you're on track to only need to sell 10%, or do you think that number needs to move up a bit? Thank you.
On the second one, I wouldn't be too hung up with the numbers. I think what we said at the time was, think of this as a production slice that we are marketing or that we are thinking of. We also said we would probably get out of 5 to 10 countries altogether. Of course, the sequence in which this play out and how this will play out will always be, to a degree, unpredictable. Don't do some sort of interpolation and correlation between all of this and think that we are on or off track or ahead or that something else is coming. It will be what it will be. What we said at the time, it is material, what we are doing, and it is indeed. That's why we mentioned the volume, and that's why we mentioned the number of countries.
It is meant to be high grading and streamlining the portfolio, hence the numbers. It is not an indication of value. Simon, would you take the other question?
Yes. The shale outlook.
Yeah.
The $2 billion-$3 billion, yes, is a good run rate at the cost we're seeing at the moment. There will be two factors going forward. One will be, we'll continue to take the cost out, particularly as we look to consolidate acreage or operatorship, which enables the longer laterals. The cost inflation, yes, it may happen. We know some of the service sector has been working literally on survival cash margins, that there needs to be some flow back off that. We're in the reasonably good position of choice. We don't have to do most of this investment, and let's see how it goes. Once we start, we will finish a development in a particular area. Even if it's just 50-100 wells, that still is much smaller than, for example, an offshore development. That's how we think about it.
Once we put the contracts in place, we'll do it. $2 billion-$3 billion is certainly okay for a while. Let's see how it goes. We could spend more, so no question, not yet, I think is where we are.
Yeah. Thomas?
Thomas Adolff from Credit Suisse. Simon, I've always enjoyed covering Shell. I've got a few question. The first one I want to talk about 2016 and 2017, just very briefly about 2016, what went right and what went wrong, and how did it compare versus your budget at the start of 2016? As it relates to 2017, perhaps you can talk about some of the operational risk factors, maybe talk about Pearl GTL, and if you have bigger issues there, whether you're insured against these issues. The second question I had was on concentration risk, as I understand it, you have different definition from one country to another. As it relates to Brazil, I wondered in the upstream, whether you're interested to add more, obviously you have pre-emption right on asset that is being bid for, whether you can talk around that.
If I can be cheeky, a quick question on LNG as well. I know you're quite bullish on the longer-term outlook for LNG. Also in LNG, you have contract expiries, and I think you have quite a few of those in the 2020s, partly from the BG portfolio, but also partly from your portfolio. Once you absorb the current wave of development, how should I think about the absolute size of Shell? Should the next wave of FID merely offset these contract expiries, or should I be thinking about Shell potentially even growing from the early 2020s? Thank you.
Good questions. Let me take the third question first. Yes, we are in a position of considerable strength with our integrated gas portfolio. We've repositioned this business very clearly as a cash engine because we need it to be a cash engine at this point in time. It has a tremendous potential for cash generation. It is roughly a third of the capital employed in the company. It needs to produce strong returns as well because it is such a large core of our company. At the same time, of course, we have, Simon already mentioned, we have a tremendous amount of opportunities to grow as well. I think, at the very least, we will aim to hold the position that we have.
As the portfolio slightly matures, as contracts roll off, as joint ventures expire, the objective, of course, is to hold on to what we have. Partly it will be by continuous refreshing and renewing and getting into new sales contracts as well. A lot of our volumes, of course, are still relatively shorter term. They are 5-10 years, not all 25 years. The longer supply deals, yeah, we will continue to extend that as well, including extending them by replacing the ones that are irreplaceable with new projects. To what extent we will be able to grow that portfolio at that point in time, I'm sure we can, but we'll have to see how attractive it is at that stage of the game. We're talking here about into the 2020s. We certainly believe in the potential of LNG supply and LNG demand to grow.
We still think that gas demand will grow twice as fast as oil demand, LNG will grow twice as fast as gas on average. If that indeed plays true, we will see that there is a much larger market for us to participate in, therefore an ability to grow our absolute position without growing our share of the market. Whether that can compete for the capital at that point in time will depend on a number of factors, one of which, of course, is the competitiveness of the projects that we have. We have a significant amount of work going on at this point in time to understand how we can lower the capital cost of LNG projects. I mean, you have all commented on it as well. LNG projects has seen significant cost inflation as well. That is unsustainable.
Of course, once it is capital in the ground, the nice thing about LNG projects is they don't decline that much, so you don't have to continue to invest in them to keep them where they are. For us to bite off new bits to chew on, we have to be able to do it at lower capital cost. Ultimately, in the energy system, the fight will be in the power sector, gas versus coal. We have to be able to compete with coal also on economic grounds, therefore, we have to be able to reduce the delivered cost of gas and also better delivered cost of LNG.
You said Brazil concentration-
Brazil concentration risk, yeah. Good. Let me take that one as well. We have a strategic risk management approach that says we should not concentrate too much in a single country. We actually have different thresholds for different countries. As you can imagine, the threshold for countries like Iraq, like Nigeria, is lower than the threshold for places like Brazil, which is lower again than the threshold that we would have for Australia and the U.S. We have a graduated approach where we basically say how much capital employed or how much cash flow do we want to have coming from a single country, or how much do we want to be in the whole, which is more the approach you take for high-risk countries like Iraq. At the moment, Brazil ranks in our top three in terms of what we get from it.
Therefore, it is already quite high up in the concentration risk category. At this point in time also, the attractiveness of Brazil is very high. We still believe in the fundamentals of the Brazilian economy. We still believe, of course, in the fundamentals of the resource base that we see there. In principle, yeah, again, we could take more, and we are looking also, of course, with interest to the next licensing round that will come probably already this year. There will be another one probably next year. We'll have to take a view on how competitive these resources will be in our portfolio. The good thing we have, of course, is that our work program for the next 10 years is reasonably well fully booked.
What we need to do now is to add resource to the funnel that we are going to need in the course of the next decade, maybe even as late as the second half of the decade. It's not as if we have to jump on everything that comes across our way. We do know that there are some very attractive potential resources in Brazil. We will look at it keenly to understand how much attractiveness and how much of it we want to take on, bearing in mind that indeed we are extending the risk of Brazil. It will not necessarily be immediately increasing. Whatever we take on, of course, certainly our licensing rounds will only come on in the course of the next decade. Now on Lapa, the acquisition of Total of the Petrobras part in it, we know the asset quite well.
We just started it up, or we were part of the start-up, of course, in December last year. I hope you will forgive me for not disclosing how we are looking at that opportunity to preempt. We are very well aware of it. Yeah.
Do you want to say something about the good or bad versus budget? There were a lot of questions in
I know. You were making the notes, so you can
Well, just on GTL, worth saying, it is an operational factor in first quarter, maybe second quarter. We're effectively taking the plant down at the moment. It could take a couple of months to bring back. We don't know yet quite how long it would take. There will be an impact on the earnings. Can't give you a number on the earnings, but we did say 100,000 barrels a day lower in the integrated gas business overall, which is an aggregate both of Pearl, Woodside, and Gorgon. Gorgon coming on, Woodside coming off, and Pearl. We can't insure uninsurable except by us. What was good and bad against the budget?
We've just been through a review with the board and the scorecard so top of my head, the costs on both capital and operating expense, we did better than we expected, and I think in large part because of the reaction of the organization to the integration process of BG and visible low prices and the energy and enthusiasm and the motivation to get things right, the opportunity that was there. Some of that we're certain will flow through into 2017. There was great momentum to do the right thing, which is very good to see, whether it's in projects, finance, running the kit in the North Sea. Management of spend, simplification, et cetera, some great progress there. Safety, HSE, that's the first thing I should have mentioned. We did have three fatalities, so not good.
Overall statistics came back to a reasonably good place, bearing in mind we integrated BG and by and large, although they operated well, their statistics were not as good as Shell's. We brought them more up to a common standard. Refining and chemicals availability left a bit of money on the table, but not a lot, not that material. Upstream availability, we have a program Fit for the Future. I think Andy talked about it, some of you saw. That added around 100,000 barrels a day or 3% to production in terms of better availability, lower maintenance periods, and just reliability of the upstream kit. That was a real positive because that should be sustainable as we go forward. The last thing I'll say against the budget, we made the budget on divestments. That was the toughest one to make, to be brutally honest.
The fact that we've delivered so much in January is a good indicator. We kept saying all along ranges. You may think we were prevaricating. Every deal we've just announced in the last week, there was a really good possibility of closing it before Christmas. You don't because you go for the right deal, not just to get it into a particular timeframe. As you put the five and five, we could have done 10 last year. We can't give you an exact timing, but we want to give you the right deals.
Yeah.
Thanks. Then Lydia.
Hi, Biraj Borkhataria at RBC. Just going to slide 19, your deep water production profile. Am I right in thinking, as we move further out, the lines are a bit more fuzzy than they were in the last presentation? Just wondering if anything had changed there in terms of the longer term deep water outlook, whether that's potential divestments or IR having artistic freedom. Anything on that?
As I don't make the slides myself, I don't know exactly what the reasons for the
I do
fuzziness, but maybe you
There is enhanced fuzziness on the grounds that it's four or five years out we're talking. That makes it somewhat over-specific, and my new head of investor relations, or Jessica's new head of investor relations, will probably regret being too specific, bearing in mind divestments may play a part. There's an aim to clean up the portfolio in Gulf of Mexico to an extent. Conversely, there are investment opportunities in, for example, Nigeria, that if they go ahead, they go ahead. If they don't, they don't. The big drivers, the Appomattox, the Stones, the Brazilian program. Question mark around Vito. We've not taken a final investment decision, but it's a great project. Kaikias, we said, nearly there. That combination, we just toned down the specificity, but there's no real change in the underlying expectation.
No change in intent either. This is still very much.
Correct
a growth priority that we know what we are doing with. As you can imagine, we had three growth or three strategic themes that were impacted in a big way by BG. It was integrated gas, it was Deepwater, but also our conventional oil and gas portfolio. We completely revisit the strategic intent of all three of them, the funnel, where we are, the plans that we have for them. We worked it through with the board. We did integrated gas and Deepwater last year. Earlier in the week, we did the conventional oil and gas portfolio. We have very clear intents on all three of them going forward, post BG. On Deepwater, absolutely no change in strategic intent as we signaled in Capital Markets Day in June last year. Lydia.
Thanks. It's Lydia from Barclays. Two questions if I could. The first one on the chemical side and the divestment from the Saudi side. Given that you've talked about chemicals being a growth area, why was that one that you wanted to sell and how does that future relationship work? The second one, probably more for Simon and just in the context of 31 quarters, is this the most efficient that you've seen Shell? Just in terms of the context of historically, what is the magnitude of what you can actually do or what Shell can do going forward?
Okay. Let me talk about SADAF. SADAF has been part of our portfolio for quite a few years. It's a joint venture that we have had with SABIC, actually from the original Shell Oil days, if I remember correctly. It has also been a project or a joint venture that we have been looking at for quite some time together with SABIC. What are we going to do next with it? We needed to do something with it. We needed to invest in the value chain in order to make this project a springboard for further growth in Saudi Arabia. It needed to fit also in the strategic narrative of the kingdom, who want to have more downstream petrochemicals and also manufacturing industries around clusters like this. We've worked at it for some time.
In the end, we decided that the projects that we were looking at were not a project that we could align on. We then got into a discussion of what is the future of this venture? What sort of investments are going to be needed? Then, of course, the interest started to diverge with us, of course, knowing that this would come to an end of the joint venture agreement in 2020, and SABIC having a different view on it. Rather than to see could we extend it with a big investment program around it to sort of provide the excuse for extending it became, well, how much are we really committed to the outlook and how much of the investments that we need to do right now will be recovered on our watch?
The best thing to do was to basically amicably part, which from time to time happens in joint ventures. There's nothing special about it, no change of heart, nothing to do with our growth priorities. It's just one of these things that happens in ventures.
Is this the most efficient I've ever seen Shell?
Have you looked into the future?
You read my mind. My answer would be not yet. The reason is, and it just made me reflect, up to the late 1990s, Shell was the benchmark of a federal system, autonomous units. Every one of them, where it was in the world, Nigeria, Egypt, Brunei, they were efficient and effective. The world moved on. The world became much more global, much more standard. Our 120 different ways of running a retail site was no longer appropriate. We then went through probably a decade of bring it together, globalize it, think about functional expertise being applied. That has some very good things, but it can also lead to what you might call excess professionalism and the perfect being the enemy of the good. I would characterize the last five years, and then particularly under Ben, getting the balance right.
Where does functional expertise meet asset ownership and deliver the best bottom line outcome, whether it's being provided from the projects and technology group or my finance and IT group? There is a much better conversation, and it's not just about efficiency, it's about effectiveness as well, because the extra dollar might go on something worthwhile. Some of you have met our head of retail who would be able to persuade any of you within five minutes that the extra dollar was worth spending. We don't believe him, not every dollar, but a lot of them are, and that's what's driving the marketing results because he makes more money from spending the extra dollar. What we're having is a much better conversation about that. Why do I say not yet? Because I know where that conversation is taking us, and that underpinned the statement I made.
There is multibillion-dollar potential on OpEx alone. Add a bit more probably for the additional margin that Isfan will deliver, I'm sure. Getting that balance right is not easy in an organization as large and complex as Shell, but we're making the organization less complex and we are delivering. I have every confidence that Jessica will be able to stand here in a year's time and say, "Yes, we did make progress on this.
Thank you. Go on the phones first and then to Oswald. Operator?
This is Terry Harrison at Brinker. Please go ahead. First, congratulations on your progress and good luck to Simon. Then second, Shell has been an industry leader in recognizing the transition that's underway in energy markets and making some hard choices necessary to reposition and hopefully reward shareholders through what you refer to as your world-class investment case. On this point, when you consider that total shareholder return of the super majors has only been about 3% annually over five and 10 years, which was below some of the market indices. My question is, how do you think about the use of market indices in your comparisons to fortify your framework somewhat as one of your competitors has announced this week? Do you think that just using super major comparisons, for instance, for performance and compensation, should be strictly held to, and why or why not?
A remuneration question, I take it, with market indices. I'm not entirely sure whether I will get the question right with the answer I'm going to give, but please say so if I don't. First of all, thanks for acknowledging that we have been indeed a leader in the energy transition. We continue to do so. Our ambitions are indeed to be a company that is in the vanguard of the energy transition that we are right in the middle of, to future-proof the company, but also to make sure that we find new ways, new business models of making money in an energy system that will look different decades from here on. If I talk about TSR, yes, we have been lagging behind in TSR.
I've said before, the first nine decades of the existence of the company, we were clearly the number one, and we've lost that in the '90s, when we didn't quite participate in the consolidation of the industry that happened, and we have been fighting our way back. We want to be back in that number one position again. We think we can by focusing on strengthening our returns on capital employed, by focusing on the free cash flow per share, by making sure that we have a resilient financial framework. If I then think back on what it is that we expect to be by the end of the decade, which is $25 billion-$30 billion, a total of free cash flow, if you add in an organic piece as well, double-digit returns at $60 oil.
Compare that with $12 billion over the last three years, 8% return at $90 oil. I think that ought to drive a very significant increase in total shareholder return. I don't know what else would. What does it mean, if I think I get to the question you refer to, what does it mean for how we look at our remuneration, or rather, how the board would look at how well we are doing? Well, all of these metrics are actually in our long-term incentives. It is all about free cash flow. It is all about return. It's also an absolute cash flow because we do not want to shrink ourselves to greatness by getting out of positions and improving the total, or by improving the returns and the free cash flow per share through a divestment or liquidation of the company. It's also indeed focusing on TSR.
I do think the metrics on which we judge ourselves and the metrics that will drive the very substantial, the biggest part of the senior executive remuneration in our company, are aligned with what we promise to our shareholders. Again, I apologize if I haven't quite gotten to the heart of your question, but please clarify whether this does it. Okay, good. I said that I would go to Oswald next. Yeah.
Thank you. Back on LNG and your comments about creating new markets. Really in the context of China's recent plan last week or the week before, which seems to say oil production will keep declining, shift more into natural gas. Is that a big opportunity for you or are you already too big? You're obviously China's biggest LNG importer. Can you get bigger there or they might start to stop that kind of market size, if there's a lot more gas demand? Secondly, on exploration, maybe could you give us an update or talk about any successes last year, if there were any? I didn't note anything. I note you've changed out your head of exploration recently. Really an update on what's happening with your exploration strategy. Thank you.
Okay, let me take the second question first. On China. I think China will remain a very significant growth opportunity for us, for LNG and for natural gas. Think about it again. China's energy mix, about 6% of it is natural gas. They have clear ambitions to grow that to 10, 15, and ultimately, I suppose, to something that is much more like what we have in Europe or in the U.S., 25%-30%. That, of course, is a massive amount of gas if you think of it. A lot of it will, of course, come as pipeline gas, but an awful lot also as LNG. We still see a very strong growth in natural gas going forward. Will that happen sort of organically and automatically, et cetera? To a large extent.
For those of you who did pay attention to what China announces, I think this morning they announced another 54 gigawatts of power stations, coal-fired power stations, being canceled. I don't think they will all be replaced by wind farms. I think there will be a very significant amount of natural gas replacement for that as well. If they were all replaced by wind farms, we will look at that as well, of course. Without kidding, we see indeed a tremendous potential in China. Do we have already too much concentration risk in China? I don't think so. Of course, we need to tread careful. We need to understand how we grow our position in China and how we diversify within China itself.
One of the things we will also be doing, which is part of this market-led growth strategy that we are referring to right now, is we will be asking ourselves the question. We have been asking ourselves the question. In which countries can we set up a gas marketing and trading operation, as well as a power marketing and trading operation, where actually the regulatory framework will allow us to do so. At the moment, we are doing exactly that in China, where we can be in country trading and marketing gas and power, we will. China is an opportunity for us. India is an emerging opportunity for us. Brazil is another opportunity for us. We will be entering these markets to be our own customer.
We do not have that concentrated risk of supplying long-term contract LNG to single buyers, where you, of course, are then dependent on the quality of that long-term relationship and the credit of that particular buyer. Being more integrated into these markets is a strengthening of that position as well. We will be able to take on, in that sense, more China risk or more China market risk going forward.
Exploration, when we stood here two years ago, we said, "We do less, we'll need less." We did get the total spend down around $2 billion last year, which has meant much less frontier. You tend to hear about the frontier, maybe not the focus in the basins where we are. In the Gulf of Mexico, the primary success is around Fort Sumter, and helping support Vito and Appomattox. In fact, Appomattox gets bigger every time we look at it. Although the design won't, and that's the challenge we have is to make sure we can get the barrels through the actual facility that we're building. We had good success in the U.K. Barrel, actually, that supported the sale process, and we've got the contingent payment in there for successful development in future.
If we were just a small EMP, you'd be giving us great credit for that deal. Drilling a well, monetizing it immediately. Malaysia, again, around what we have done well. Oman, around what we have done well. Nigeria is possibly the biggest opportunity along with Trinidad going forward. You probably won't hear much about any of these. A lot of it is about keeping kit full, using existing infrastructure, working on basins we know well. The Nigeria funding scheme that's being developed, and hopefully will be implemented in the not too distant future, is a very strong incentive for everybody to start doing the right level of investment again. All of those can come together over time within the $2 billion limit that we've set ourselves going forward. There'll be less frontier work, until we see a different almost both requirement, but also opportunity.
Thank you, Martijn. Then I'll come to you.
Hi, hello. It's Martijn Rats from Morgan Stanley. I wanted to ask you two questions. First of all, you mentioned both Brazil and the Permian as examples of areas where you have breakevens below $40. I was just wondering if you could comment, relative to the size of the company, how deep is the pool of investment opportunities that work at those type of oil prices? Because more and more, we're hearing about projects that have these very low breakevens. Relative to the close to four million barrels you produce, how material is that pool? Can that pool of investment opportunities keep you going for years, or are we just talking about a handful of projects that maybe carry you for the next one or two years? The second thing I wanted to ask you about is about the Permian, following your positive comments.
My understanding is that the joint venture with Anadarko ends around the middle of the year. I was wondering if that is a material event or not, but if so, how you see that relationship going forward.
Okay. Let me start off with the first question, ask Simon to complete it, then you can think a little bit more what we want to share about our relationship with Anadarko. Which is very well noted, by the way, Martin. We actually had exactly that discussion in the board as well a little bit earlier in this week, looking at the S-curve of opportunities that we have. It is an S-curve with a very large plateau in the middle. The interesting part of it is actually reasonably evenly populated with opportunities that will come out of the unconventionals, opportunities that will come out of the conventional oil and gas business, and opportunities that will come out of deep water.
It's not as if we have everything concentrated at the front end, whether it is, say, the Permian or unconventionals and the other opportunities sitting at the tail end. My memory fails me at this point in time to remember exactly what was on the X-axis in terms of barrels and how big that would be in relation to the company. Simon's spreadsheet mind will probably quickly work that out. I would say if I more qualitatively talk through it, I think if you look at it in the deep water, we do not have any lack of depth in the opportunities. Indeed, in the sub-$40, in some cases sub-$30 range to keep on plugging away for at least a decade. We do not run out of running room of opportunities that are just not good enough.
At the same time, these are getting better all the time. It's not just a matter of getting better because we see costs further deflating. I think the regime that we now have in the company, which basically says, "Don't try to maximize NPV per project. Just give us the project with the lowest possible breakeven price." That project or that way of thinking, that paradigm shift hasn't run its entire course yet. What we see coming back is still more opportunities where people say, "Well, if you want to have resilience as your defining criterion for the project, I can come up with a better project." You will have to give in some NPV at some point in time. It means that you may build a little bit smaller.
You may not be able to tie in every satellite as quickly as you could, so some of it may come a little bit later. Hey, if you want to have resilience, we can give you that. That, in the deepwater, that particular program hasn't run its course. The same is actually true for unconventionals. If you look at the opportunities that we have in the Permian, in the other main liquid position that we have in Canada, they're actually quite significant. We have, again, a continuous discovery of depth and growth in other areas, like for instance, in Argentina, where it's a little bit harder to get to the bottom of things simply because there isn't as much intelligence available about the fields that we are looking at in the Vaca Muerta. We see that that position, potentially, is as attractive as our Permian position.
If you look at the conventional oil and gas business, it's a bit more difficult to get. Actually, when I refer to the S-curve that shows the NPV versus breakeven price, it was actually for the purpose of the conventional oil and gas business that we looked at that particular curve. There we see that we can indeed extend the life of this cash engine for quite some time. It starts to really tail off sort of in the 30s. We also know that if you don't act on these things early on, it will get late in the day if you start working on it in the 20s. That's why we have a lot of focus right now on where are what we call the stuck barrels, or what we now started calling the strategic battlegrounds, to get these barrels really recovered.
Think of the complications that we have, Simon mentioned in Nigeria. Huge potential, but how on earth do you make it commercially sensible to invest in them if you have so many funding difficulties? Same of Iraq. The same of many positions that we have in our portfolio, where potentially we see all this running room, but there are lots of practical or strategical challenges to overcome. Qualitatively, I think we are in a good place, I know that we are numerically in a good place in the themes that I mentioned, I know that our focus needs to be in the conventional oil and gas business. It's not a business that is sort of running out of running room with attractive projects in the next few years. We have at least a decade or a decade and a half to work on backfilling.
Yeah. The S-curve line wasn't all under 40, but most of it was under 50. In deepwater, Wael started off with a 50 cap, and then he's pushing it down to 45, and he's in competition with Greg, who runs shale. Wael runs deepwater. The two of them are literally in competition to bring the line down. That's pretty healthy inside the company. Yes, you're right, Anadarko does end in 2017. We're both well aware of it. We're both doing quite some work. There's a bit of a patchwork of operatorship, et cetera, at the moment. That has some implications for who makes decisions and also how far you can go laterally in terms of when you drill. There's a solution to be had where we both end up in a better place. It just is not yet agreed.
It's a win-win potential negotiation, not a zero-sum somebody wins, somebody loses. I'm pretty confident that we'll get to a point where we're both in a better position. Probably the operatorship is consolidated in a different way. It should be, at least in theory, either value neutral or some transfer of value one way or the other. That's why I said in terms of value neutral, it should be value accretive to both of us, and we should both get a fair share is what I mean.
Okay. I was going to come to you.
Sure. Thank you. Yeah, Colin Smith from Panmure Gordon. Two questions. First one, again, on chemicals. Just in the context of it being a growth priority, and looking at the indicative CapEx going forward, and bearing in mind that you're 100% in the Pennsylvania cracker, but we've never really had a lot of detail about when that project gets going. I just wondered if that was sort of included at reasonable scale from 2018, or if you could just talk a little bit about what the program is for it. That's the first question. Second one, I think, Simon, in your chart on shales, you have seven blobs, but you talked about five core positions. I just wondered if you could elucidate what those are. And I noted that you specifically included Argentina in that, and Ben just talked about the Vaca Muerta.
I wondered where you thought that was in terms of maturity and what it takes to actually get you more engaged in doing something with it, bearing in mind the fairly significant progress that some other operators have been making there in the last year or two. Thank you.
Okay. When you talk about the Pennsylvania project, keep the microphone there. Talking about 2018, do you mean the capital spend step up that we will have in 2018? Or
The overall project.
Yeah.
Where it stands.
The overall project, we sanctioned this project, of course, for affordability reasons, we also said we will have a slow start in terms of stepping up the spend on the construction phase itself. That will indeed now come, because it's ready to get there. We are still working our way through some of the permits that we need to have, that's just a normal state of affairs that you will have in any project. I think by the end of the year, certainly in 2018, we will be in significant investment mode. We haven't announced exactly when it will start up, expect that to be not any more this decade, because it is a very large greenfield project. We have gone quite a long way already in terms of getting the site ready.
You may recall, or you may not know, this was an old zinc smelter that was in need of remediation that we took over and remediated it on behalf of the government, basically now are in a position that we can start building on it. All the civil works, et cetera, are ready for that site. It is indeed a 100% project at this point in time. It is a strategic project, partly also because it is so strategically advantaged, also because it will be a re-entry for us in polyolefins. You know that we have been in polyolefins, got out of it through a very difficult, convoluted way in the past through a number of joint ventures. This will be a re-entry in a way that will sustain our position as a polyolefins player.
On the Vaca Muerta, let me say a few things, I'm sure that Simon will have a few things to add to it as well. Indeed, it is a very, geologically, from what we know at the moment, it's an extremely attractive play. At the same time, as I said, it's a little bit less well delineated, as what you would see in the Permian, where we have been sort of sticking holes in that for the last century. We are a long way off from that in Argentina. At the same time, we're also a long way off from getting a number of the commercial parameters right. Part of it is, of course, market liberalization, we still need, in terms of getting the right gas prices and even oil prices in Argentina.
On top of it, some changes will have to be made to the tax code in order for it to actually work. The tax code is not exactly conducive to the sort of depreciating behavior you will see in these assets. Accelerated depreciation is one of the issues that we need to get sorted with the Argentinian authorities. On top of it, there is just a productivity issue still at this point in time. We do not have the benefit of a very well geared up supply chain. We do not have the benefits of a live workforce, a unionized workforce in the case of Argentina that understands how to play this game efficiently. We will have to continue to work on that as well.
I do hope and expect that before the end of this decade, Argentina will be ready to really accelerate its investment, or rather that operators like us will be ready to accelerate the investment. Every time I speak with President Macri, he is very keen to understand what he needs to do in order to get us to that point. We have a very willing government, a very willing set of operators. We have an extremely willing governor of Neuquén Province, who is also very keen to do whatever it takes. This will take off. It's just a matter of lining everything up.
You guys read the slides pretty closely, you are accurate, seven positions. The five key positions, three liquids, Argentina, Permian, and Western Canada. We talk about Fox Creek. There are two plays up in Western Canada in liquids. Fox Creek is the one where we will invest to develop. Not at the same scale. It may have the quality of the Permian. It doesn't have the same scale as the Permian for us, at least not yet. There's still a little bit of learning in that area. Groundbirch and Appalachia. Groundbirch in Western Canada and Appalachia, basically the Utica-Marcellus, are the two big gas positions. The five are Argentina, Permian, Fox Creek, Appalachia, and Groundbirch. Haynesville was an acquisition from BG. It's okay, but it's not got the scale or the quality of the other positions.
We actually sold out of Haynesville, our own position some time ago. The BG position is better than the old Shell position, it's a valuable asset, it's not necessarily going to stay in the portfolio.
Okay, thank you. What I would like to do is to call it to a close now. There will be opportunity, of course, for those of you who are here to ask some further questions after this when we have a few drinks. Thank you very much for the questions that you've asked. Again, a reminder to you that as Simon already announced, we're going to do an update on LNG in London, Singapore. In February and March, we will do another one in New Orleans, in the U.S., looking at really how we see that industry going forward. Of course, we have the first quarter results scheduled on the 4th of May in this year. That is something that I will do then together with Jessica.
Normally I have the last word in these sessions, and I think it is appropriate that I give the last word to Simon on this occasion because it's his last results engagement with you. Before I do so, let me say again, how incredibly valuable Simon's legacy is in Shell. Of course, you all know Simon from the days that he was in investor relations, maybe even before. You also know how tough the journey has been since 2004, but it is a journey of a lot of progress, a lot of legacy positions being filled, being built, and established that in the end provided the springboard for us to do BG. That is a legacy where Simon's fingerprints are all over.
Of course, in the last few years, we've had this tremendous time working together on the BG acquisition, which was a period that, of course, has been transformational in many ways. Transformational for our relationship. We got to work really well together, and it's with tremendous joy and satisfaction that we can look back on what has been achieved. Simon inside the company is very, very well recognized for that, and rightly so.
Simon, I've enjoyed working with you tremendously. I wish you well going forward, but I think the last words today are yours to have. It's going to be a tough few days, I think. Today is the first sort of saying farewell. I'm not sure whether I'm saying farewell to, but hopefully a better legacy than it otherwise would have been had I not been involved. I had a bit of fun with the press this morning, I'll be slightly less off script. I first worked with you guys, actually, literally some of you guys, December 2000, when one of you came up to me and said, "If you do nothing else, move this bloody strategy meeting from the week before Christmas because nobody remembers a word you say." That was the first, and some of you may claim, the only thing I ever actually delivered that you asked.
You were absolutely right. I personally have benefited hugely from that relationship. Your ability to, and this may sound strange, simplify and get to the core of what actually matters, whether it's value or risks or some of the choices and decisions we make. Should we say, hold up the mirror to us, ask the questions in a way that people who work for us don't always do, is actually incredibly powerful and helpful. No matter how much we try and surround ourselves with a diverse, challenging, critical community, we don't always get the full story. From you guys, we do. That is important. Don't lose that. I'm sorry about the modeling. I'm not a spreadsheet guy by nature, I must say. We can do probably better, but we can never get to perfection.
The important point here is I do believe, and you have a big part to play in this, shareholders are a necessary evil. They deserve to understand how we create value through cycle in the longer term. There are a lot of people at the moment making, should we say, a name for themselves, talking about the importance of longer term investing and thinking through cycle, and then definitely a better understanding of risk. Their own organizations don't always apply this, but the fact that they're talking about it is actually good, because I believe fully in transparency and disclosure. I would not go away from quarterly results. I may just pay less attention to reading into the detail. Yes, I am a physicist. I'm going to share a couple of physics principles with you, and maybe you'd recognize them.
The first is the second law of thermodynamics, which means disorder or chaos always increases, or you have to put infinite energy into a system to create perfect order. Your spreadsheets assume perfect order. By definition, they are just one view of the future. Our choice as management is not to fight that particular second law of thermodynamics or let chaos reign. It's to put the appropriate amount of energy to get the appropriate amount of order, because believe me, energy equals, by definition, cost and complexity. Bear with us. You cannot deliver perfection because the other physics principle is the Heisenberg uncertainty principle, which I will just move a little bit off the table and say, the smaller the thing you look at, and the shorter the time period you look at it, the less certain you can be of what you're looking at.
I don't know if that translates well, think about it. If you look at a daily P&L, it's bloody meaningless. If you look at a monthly one, it's helpful, but it still doesn't tell you either some of the things you might only look at quarterly properly, or in fact, proper trends. Bear that in mind. Look at the long term, look at the value drivers, help the buy side, and help the companies, because you really have done by helping us simplify and understand. I think to an extent, I've been successful since I worked with you guys in the company because of what you taught me. Forget all of the detail engineering and stuff. Just ask the right questions.
Just think about it in value terms and think, what would if the sell side analyst or the investor was sat with me in this room while we're discussing the decision? What would they be thinking? What would they be asking? That's a mental mindset I've carried since I worked with you in the first time. I hope that has translated into better decisions. You don't get them all right. I mean, you're right about legacy positions. There may be one or two we may have done differently, maybe one or two I'd prefer we hadn't spent quite so much money on. Given the situation we were in 15 years ago, there wasn't an option to do nothing.
I hope we've ended up now, or at least we're not ended up, we're still on a journey, but we're in a position now where that platform is the best in the world. I'm pretty convinced it is, and that we now see the delivery from it. Despite what you might think and the banter that we've enjoyed over the years, I have actually enjoyed it. Thank you. Thanks for a lot of the support that you've given us, particularly a couple of years ago Sorry, a year ago when we did get the support for the BG deal. That was a really great. I second everything that Ben says. It was great working together on that. Hopefully, that will give you the bottom line that we've all sought for many years.
Thank you all, and good luck in your support for Shell in future. Thank you, and good luck to Jessica as well, of course.