Shell plc (LON:SHEL)

Investor Day 2016

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Nov 8, 2016

Okay. Thank you very much and a very warm welcome. It's a real pleasure to be here today on this rather momentous day of another strategy update in New York. We were here, of course, a year ago, but it has been a little bit less than 6 months when we did an update to Capital Markets on our strategy, the transformation strategy. And that was really the first time after the completion of the BG deal that we had the opportunity to talk to all of you about what we were going to do going forward. And today is really a little bit of an update from that Capital Markets Day in June. It's, of course, a very exciting time for us in Shell, I think also for our investors. And I'm really looking forward to the discussions that we are having later on also in the breakout sessions. Before we get going further though, let me remind you again of the disclaimer statement, which I'm sure you are familiar with. You will have seen already today in the coffee earlier on that we have quite a large cross section of Shell's senior management here today. We'll do some presentations and then we will have a short Q and A here in this hall. And then we will break, as I said, into the more detailed Q and A panel sessions that we have with each of the businesses taking care of it. And of course, you will get the opportunity to join each and every one of them. You will also have seen that John Holliwell is here, sitting there in the back. And he will be able to talk to you about the MLP in the breakout session. There's a separate breakout session that will start after all 3 other breakout sessions are done. Maarten Wetzler to give you a summary of the Integrated Gas business, how that is going. And then Simon will talk you through the progress that we are making in the financial framework. I like to think that we have achieved a lot in the last few years, but we are further improving the resilience of the company at all points in the commodity cycle where we have investments. And that means growing free cash flow per share and delivering a higher return on capital employed. And it means creating what I would like to think of as a world class investment case. So simply put, more better returns for you as our shareholders. At the same time, of course, there are some substantial and very lasting changes underway in the energy sector and not just into the far future. Some of this is pretty nearby. And some of these changes have implications for the company today. And to respond to these changes, we have a portfolio strategy that really works in multiple time bands, which contains firm steps to manage the down cycle, including a hard ceiling for our capital spending and much more predictability in our spending as well. And all of this, of course, is massively enabled by the acquisition of BG. Of course, the health and safety of our people and our neighbors and the environmental performance in general remain the top priorities for the company. And I believe we have the right culture hit, the right safety culture and our track record is improving and I think is also already competitive. And we continue with this drive, which we call goal 0 for obviously reasons to improve further in making sure that our spending reductions also do not come at the expense of leading HSSE performance that we have in the company. The downturn in the oil price obviously has an impact on Shell and the industry around us. This chart here looks at some of the large and important trends in the energy sector and in society, of course, that we think will shape our industry and Shell for the next decade and beyond. So across the top of the chart, the drivers are relatively well known, so growing population from €7,000,000,000 to 9 €1,000,000,000 by mid century, but also coupled with a higher quality of life for more people. And they are very powerful forces that inexorably drive a higher demand for energy. Government, business and society at the same time also expect, of course, that this energy comes with less CO2 attached to it. And that's altogether results in a robust demand outlook for oil and for gas and at the same time over the somewhat longer term the transition to a lower carbon energy system. And within all of these changes, the traditional value chains between energy suppliers and consumers are seeing also considerable change and, in some cases, disruption driven by factors such as energy storage, the digital world is impacting on this as well leading to much more choice for individual customers. And this will impact how energy is being consumed, but also where and by who energy investment is being triggered and made. And of course, at the same time, we also know and we probably expect that we have entered and will continue to be in an area or an era rather of higher oil price volatility. A part of it, of course, is the result of OPEC policy, but also the advent of large oil and gas resources in chills, particularly here in North America, the speed of information flow and trading and the inevitable need also for large resource development at the same time. And of course, our traditional role at Shell in developing more complex projects is impacted by things like the Shell plays and by lower oil prices in general. And we must make sure that our cost structures and our portfolio choices and the business models are adapted to allow us to also thrive in this type of setting. Let me make some comments on the energy supply mix, and there's a lot of interest in this particularly after the Paris Agreement on climate change of last year. So today, oil, gas and coal supply of 80% of primary energy worldwide. Renewables are growing, but they are growing from a small baseline, and they supply around 4% of primary energy. And 2 thirds of that 4% by the way is hydro and less than 1 third is wind, solar and other renewables. Now we as a company very strongly support the agreement that was made by governments in Paris to limit global warming to 2 degrees centigrade. But we're also concerned at the same time that the commitments that came out of COP21 are simply not enough, don't go far enough to meet that important goal, let alone the 1.5 degrees that is the real ambition. But at the same time, I also think that Shell can thrive in this 2 degree world. And we are planning on a strategy to do well in that world, whatever it is that plays out. Now that's the context for Shell's sustainable investment in oil and gas today and for putting more focus on new business models also on renewables as we go forward. That's the big picture. Let me talk to you how we are responding to this landscape overall. And more fundamentally, at the heart of all of this, let me be clear what we really want from Shell. Of course, I can't set the share price. That's up to shareholders and markets to do. But I do think we can do a better job at delivering higher and more predictable returns and by growing the free cash flow per share and underpinning all of that with a conservative financial framework. And if we do that, then we can create a better investment case, a world class investment case that should increase overall total shareholder return. And there are other areas where we want to focus on too. And I think these build into the investment case. So I want Shell to be a leader in our industry, which means large market capitalization, that we are listened to and respected for what we do and for what we say. I want us to reduce our carbon intensity. This is inevitable, and it's something we are working hard on today. We will continue to put emphasis on that trajectory of lowering carbon intensity. But we also need to establish beyond any shadow of a doubt that we bring shared value, that we are a force for good in society. Hard to express in metrics, but nevertheless very important. And we are not at a place where we need to be today. We know that. And of course, these four themes are not independent. They are interconnected. And we need to succeed in all four of them if we want to deliver a world class investment case on a sustainable basis. And as you can imagine, and as I hopefully will be able to point out to you in the presentation and the rest of the day, the BG acquisition really accelerates us on all these four core objectives. So the company we have now is segmented into a number of strategic themes. So we have our cash engines that need to deliver strong and stable returns and strong and stable free cash flow that can cover the dividends and can cover the buybacks throughout the cycle and then leave us with enough money to fund the future. We have our growth priorities. They have a clear pathway to delivering strong returns and free cash flow in the medium term. And then our future opportunities. They should provide us with that material growth in cash flow per share in the next decade. And through all of this is our intention to be in fundamentally advantaged positions with resilience and running room, incredibly important, and we'll point that out a little bit more in detail later on as well. As you can imagine, asset sales will have a role to play in all these themes because we need to reshape the company. And we have at the moment up to 10% of Shell's oil and gas production earmarked for sale, including several country positions, exits altogether and a number of midstream and downstream positions as well. And I have said it before and I will say it again, this is a value driven divestment program, not a time driven program, but it is an integral part of our portfolio high grading strategy. We have been reducing our capital investment in a steady and a measured way over the last few years. And we are planning to spend between $25,000,000,000 $30,000,000,000 each year until the end of the decade. We see this $30,000,000,000 as a ceiling, a hard ceiling. And it's all about reducing debt following the BG deal and about meeting the intentions for shareholder distributions that we communicated last year. The $25,000,000,000 level, I think, is the spend that we need to have to maintain medium term growth in the company. But if needed, we can go below that level if oil prices and therefore affordability considerations would warrant that. At the moment and at the current oil prices, we are pretty much trending towards the bottom of that range. For 2016, we expect that to be $29,000,000,000 of capital investments. And for 2017, we are now looking at around $25,000,000,000 to be expected. And that is including the non cash items. So, deduct another $2,000,000,000 at least to get to the cash capital investments. Now let's go into these themes in a bit more detail. Let me start with the cash engine. So, as I said, these are a financial backbone of our company. And since the vast majority of our productive capital is employed here, they need to deliver strong and competitive returns. And we need to make sure that these businesses are resilient and maintain their running room. They are not cash cows. They need to be the gift that keeps on giving. Have you measured the success in these businesses by their return on capital employed over the cycle and the cash flow percentage they deliver. As you can imagine, the BG deal has significantly enlarged the conventional oil and gas business that is part of these cash engines. And we now need to high grade that strategic theme to a point where it offers high returns, strong free cash flow and still has very significant running room. And that means that a lot of the assets held that I referenced earlier will also come from this strategic theme. But at the same time, we need to focus also on hardland exploration, especially near field, to improve the resilience in that portfolio, but also to sustain it. Conventional oil and gas, integrated gas, ore products and oil sands mining together need to generate the free cash flow and the returns to underpin the Let's turn to the growth priorities. So our growth priorities have a clear path way towards delivering strong returns and free cash flow in the medium term. So, they are deepwater and petrochemicals. And we are investing here only in those projects that are intrinsically advantaged. So, in projects which have better fundamentals than those projects this category amongst our competitors in these sectors. So for deepwater, that fundamentally means advantaged geology. So think of Brazil, think of the Gulf of Mexico, Nigeria and some other places. And for chemicals, it means fundamentally advantaged feedstocks such as low cost ethane here in the United States and you will have seen that we took a final investment decision on the 1,500,000 tonnecracker project in Pennsylvania earlier this year. Both these businesses, Deepwater and Chemicals, are 1st class businesses in their own right, have very significant growth potential. And that is simply because, in the case of Deepwater, we have a large inventory of ready projects that we hold because of the portfolio that we have acquired together with DG. Or in the case of petrochemicals because of the very robust demand growth that we see going forward. But we also know we can only win in these 2 strategic themes if we are absolutely best in class when it comes to project execution. These two businesses we will assess also on free cash flow and returns, but more the trajectory of free cash flow and returns. Or to put it differently, how fast can these businesses be turned into cash engines? And managing affordability in that growth part of these businesses will be a very important consideration. And if it means that we have to moderate the growth rate a little bit or maybe share equity with some strategic partners so that these growth priorities do not turn into significant drains on the business in terms of cash, then we will certainly do so. Now of course, you will hopefully agree with me that we are a well established player in deepwater. We have been in this, of course, for decades. And over 10% of our worldwide production is in deepwater, mostly here in the Gulf of Mexico, but also Brazil and Nigeria. And some of you, I think, will hopefully join us tomorrow on the trip to Brazil, and I look forward to seeing you in Rio de Janeiro and some of you in Brasilia as well. We have the deepwater technology and the capabilities that are recognized as absolutely the best in industry. Driven by Brazil and the Gulf of Mexico, we expect to see production to grow to at least 900,000 barrels of oil equivalent early in the next decade. And let me stress that this is growth that comes from discovered and from established positions and is not something that requires yet to be discovered resource. Now, petrochemicals is a fast growing actually the fastest growing hydrocarbon demand sector with an annual growth rate of around 3.7% over the last 10 years. And we pretty much expect that growth rate above GDP to continue for the next decade or more because petrochemicals after all are the building blocks of many of the things that many people around the world take for granted in modern life, but in many ways are also the enablers to reduce carbon intensity of modern society. So, they have intrinsic growth potential in them. And our strategy in chemicals is focused on activities with a clear competitive advantage, the optimized returns from different feedstock, we invest in our existing 1st class footprint, and we continue to focus on enhancing our customer relationships and on service. Having a competitive edge that we already have built and improved in chemical feedstocks underpinned by a strong product portfolio and also a proprietary shell process and product technology. This business is entering into a new period of growth for at least a decade. With the investment decision that we've made on the new cracker in Pennsylvania, the brownfield projects that we have on the way in the Gulf of Mexico and in China, we should have 8,000,000 tonnes per year on stream at the start of the next decade. So, that's an increase of 30% compared to where we are today. Let me talk a little bit about the longer term themes. So, these are businesses that have a very material upside for Shell shareholders and should provide us with material growth in cash, cash per share in the next decade. And again, through all of this, also our intention to be in fundamentally advantaged positions, again with resilience and with running room. So, our future opportunities are shales and a theme that we call new energies. In chills, and I'm sure there will be plenty of questions on that theme as well, we have around 12,000,000,000 barrels of resources and potential in North America and of course also in Argentina. And that's a very attractive position. And today, we are working on the cost structure and the commercial development options. We have, over the last few years, reduced spending in shales to some US2 $1,000,000,000 a year to manage the financial framework, and we have vigorously gone after cost reduction in a very systematic way through benchmarking and focus on what things should cost. So altogether, we have reduced our unit operating costs by some 35%, and our well costs have come down with 50% to 60%, And we continue to address overheads both in the main businesses as well as corporate overheads that this business may trigger in a very vigorous way as well. And we're actually watching at this point in time very carefully when it starts to make sense to accelerate investments again, when it's attractive enough to put money into this relatively short cycle business to produce near term cash. So for example, in West Texas, we believe that we have acreage situated in the very best parts of the Permian Delaware Basin at around 280,000 acres 47,000 barrels of oil equivalent per day production currently on stream. Production here has grown more than 80% since our acquisition of the acreage back in 2012, and that's despite the reduction in capital that we have allocated to our Shell business over the last 3 years. And on a go forward basis, we estimate that about 90% of our potential well locations in the Permian actually breakeven below $50 a barrel, and around 40% of the well locations breakeven below $40 a barrel. And with the potential that we see for further reduction in cost and also improvements in recovery, of course, and development plan optimization that we are now right in the middle of, the expected breakeven price for these wells to consistently drop further. So that's about it for shales. Let's say a few words about New Energies. Of course, we have invested in renewables, such as wind and in biofuels for many years. We actually still have a small solar business in Japan. But when I talk about new energies, I mean more than the sort of more traditional renewables. The theme also encompasses the digital revolution, so more electrification, particularly in transport, more customers with a wider choice in the energy mix. And we've made the decision that we want to build on our existing foundations and competencies in this area in renewables, and that we will put a lot more emphasis on these new energy businesses going forward. And that's a summary of the portfolio priorities. So now what about the financial side? What will we be investing in? And what should you, as our shareholders, expect from these investments? So the chart here shows the returns and the free cash flow that we generated in each of the 8 strategic themes and the 3 categories, the cash engines, the growth priorities and the future opportunities over the last few years. Now the charts here, the numbers that are not targets, the chart shows you the possible shape of the company, also bearing in mind a modest recovery in oil prices. And of course, the environment could play out in a very different way than what we are currently expecting. But around the end of the decade, we expect to have reduced debt by this time, of course, and the free cash flow you will see here should be part of the dividend and the buyback program of the company. So, the cash engines would stabilize portfolios by then, the main divestments and ramp up behind us. The growth priorities, deepwater delivering free cash flow. Chemicals still in the growth mode in the chart with $3,000,000,000 a year or more free cash flow potential ahead there, a little bit further out. And the shales and the new energies portfolios really ready for more substantial growth investment if we decide to make that step. And it's important to recognize that we have, as I said before, substantial assets in our hands today to deliver all of us. This does not depend on new discoveries, new entries, new business development. 2020 may seem a long way away for some of you, for me as well actually, because we have to get through a pretty difficult period as we are still in a very severe and brutal downturn. And I think that's therefore important that we also update you not only what we expect in 2020, but also how we see things in the near term and what are the financial levers that we can and are pulling to see our way through that difficult period. Simon will update you on all of that in a bit more detail later on. And of course, Simon will also talk about the progress that we have been making under his leadership in the integration of PG. But first, let me ask Maarten to come up and summarize the key points of the Integrated Gas business area. And after that and after Simon, I will join you back again for Q and A. So, Maarten, over to you. Thank you, Ben, and good morning. All it's good to be here today and update you on what we're doing in the Integrated Gas business. I'll focus today on the changes we're making to the priorities in Integrated Gas to optimize for growing free cash flow and returns. Integrated Gas consists of the LNG and the Gas and Liquids business of Shell, and Shell is the IOC leader in both. The acquisition of BG underpins our role as the largest independent producer and marketer of LNG. It accelerates a growth strategy that originally was going to take well into the next decade. Today, Shell is present across the full LNG value chain globally in what is still the fastest growing sector of the natural gas market. And in GTL, we take gas to the full value chain into all products in our downstream business, attracting an ever growing premium to normal oil products. And we've also established a new energies business in Shell that Ben already talked about, going after low carbon investment opportunities. And in many ways, that business complements Shell's Integrated Gas business, and we find increasingly opportunities around adjacencies between the two businesses. This is an exciting and fast moving landscape, and we will put a lot more emphasis on new energies going forward. Running through this whole agenda, we have a major drive underway to reduce cost, cash in the synergies of the BGs and transaction and improve our margins on the revenue side. So let me first go to the financial performance of Integrated Gas, where you clearly see the impact of lower oil and gas prices in recent times on the results. But you will also see in the last 12 months, with oil prices averaging only $42 a barrel that we have generated $9,000,000,000 of cash flow and 5% return on a clean basis, illustrating the resilience of this business model and of our portfolio. With BG in default, the integrated gas capital employed now stands at $88,000,000,000 This includes about $22,000,000,000 of projects that have yet to come on stream and do not yet add to our cash flow. As such, integrated gas is about 30% of Shell's total capital employed. And we will expect to deliver a robust and competitive cash flow and returns performance from the substantial cash engine going forward, building on a strong legacy of operational excellence of our LNG plants that typically produce at industry top quartile levels of availability. Let me now turn to the LNG supply and demand market dynamics. The global LNG market is growing and diversifying with more countries importing LNG, more buyers emerging in existing LNG importing countries and LNG accessing new market sectors such as transport. In fact, since 2000, LNG demand has risen by some 6% per year to reach 250,000,000 tons last year. And between now and 2030, we expect LNG demand to double, assuming that there's enough investment in additional supply to catch up with the growing demand. Those are the long term trends. But as for the nearer term, while I think a lot of the attention in this room is likely to be focused, we do expect the LNG sector to be supply driven, with about more than 100,000,000 tons of LNG still to come into the market of projects under construction. So despite most of that volume having already been contracted to end users and portfolio players, this is leading in the near term to a softening of the market. However, lower energy price in general and certainly lower energy LNG prices are leading to a demand response as well, and we can see that in the market every day. Moreover, since mid-twenty 15, the flow of LNG project supply FIDs has substantially reduced. And projects take generally about 4 to 5 years to get into production. So it will take into the next decade for new supplies that are yet to take FID to reach this market. And these two effects of additional demand being triggered by lower prices and the slow pace of supply additions provides for a plausible scenario where supply gap emerges in the early 2020s. Now to the near term. So far during 2016, the market has grown with an additional 12,000,000 tons of LNG volumes, mostly supplied from Australia and with the start of a ramp up from the U. S. As well. We're observing a very healthy growth on the demand side, more than compensating for declines in the traditional markets in North Asia and the more temporary decline in Latin America, where heavy rainfall has subdued Brazilian LNG demand. This year's demand growth has been profoundly observed in the Middle East, where demand has doubled, particularly in Egypt, Jordan and Pakistan. LNG demand grew by about 8,000,000 tons to 16. And the growing role of both India and China in the global energy mix has been mirrored in this year's energy growth, each market growing with about 4,000,000 tons year on year. In the case of China, this increase is mostly a result of the ramp up of contractual volumes bought by the main players. In the case of India, we are observing the effects of lower prices attracting more demand, policies in power and fertilizer and disappointing domestic production requiring extra imports. As a result of all of this, the global market is not yet depending so much in Europe as the LNG balancing market, with the benefits of LNG finding their way to an increasingly larger and diversified customer base around the world. Let me now update you on our LNG portfolio. As I've mentioned, the acquisition of BP further strengthens our lead in the global LNG market. Just as BG did, Shell plays an aggregator role, whereby on top of our own liquefaction volumes, we buy long term third party LNG from other suppliers under long term contracts, often our joint venture partners, but also sometimes standalone suppliers, and we market that to a worldwide customer base. We also purchase and sell spot LNG volumes to further optimize our business through logistic or market optimizations. On the market side, the recent success following the combination of Shell and BG is the appointment of Shell as one of the aggregators for the next tranche of LNG import volumes into Singapore. This builds on the XBG legacy of having an existing customer relationship in Singapore, and it combines with Shell Purcell's position as a big customer for gas in our Jurong and Boukum facilities on the downstream side. We look forward to offering flexible and competitive terms in the Singapore gas market. Now you can see on the chart that the gap between the LNG that we make and the LNG that we sell has been widening. This trend has increased with the addition of BG to our portfolio and it reflects the increased importance of providing flexibility and optionality to secure new market positions. It is a business that benefits greatly from scale, from diversity of sources of supply and source of market positions as this increases the optionality and the number of choices our traders can make on a day to day basis. Clearly, as the 2 companies come together, there is still potential to add more value, cost synergies from the combined shipping operations and trading platforms, but also revenue synergies. Now the vast majority of Shell and BG combined LNG is currently sold on long term contracts, ranging from 2 to 20 years linked to oil prices, but also occasionally to gas hub prices. These long term contracts have averaging and smoothing provisions providing buyers and sellers with valuable options beyond the headline price that they will not be able to realize in the spot market. And whilst indeed some of the volumes that we sell are sold on a short term basis, so called spot sales, The majority of these are offset by spot purchases, a classical buy sell trade where we optimize between market opportunities. The portion of the LNG bought and sold on a short term basis has been increasing in recent years. However, remember that these are not deep and liquid markets such as the ones that you see in oil or oil products. The high transportations and storage costs relative to liquid commodities will always moderate the extent to which the liquid market can develop. Most pot volumes are sourced from the resale of LNG cargoes originally supplied under long term contracts. Now through our marketing and trading arm, we are active in securing additional sales from our portfolio and we expect to close additional deals before we take new FIDs on the supply side, as well as developing our own market positions. For example, some poor parties rushed into buying LNG supply from the U. S. Gulf Coast when those supplies came on the market a few years ago, and some of them now regret having those deals in their portfolio. We are in a position through the size of our portfolio and our risk management to absorb some of these contracts from those customers and in return enter into long term more plain vanilla deals with them, typically higher volumes than the ones that they originally contracted. As a business, we make sure that we are aware of each piece of demand and each piece of open supply in the market. We are often able better than anyone else to connect these 2, much easier than individual partners who are not in all these conversations at the same time due to our global footprint and network of contacts. That network of contacts and our global marketing footprint is unique and gives us trading opportunities every day compared to the competition. As of today, around 10% of our LNG supply by 2020 remains unsold and is open to be contracted either on long term supply contracts or kept for spot trading optimizations. Now the fundamentals of this market are changing, but they remain very robust. LNG producers still need offtake contracts with creditworthy suppliers, buyers to finance new LNG projects and LNG buyers are still looking for competitive and reliable supply constructs that provide flexibility at different pricing levels, but also security of supply to keep the lights on in the countries they represent. Now let me stress that even in the soft market in the next 4 years, Shell has limited exposure to the outright spot market as we've sold most of our portfolio on long term contracts. So that spot market is more of an optimization opportunity than a threat. The majority of our contracts set the price for LNG as a percentage of the oil price, often with a constant factor that reflects the cost of shipping. Sometimes you would see in a formula like that some lower slopes at higher oil prices, lower slopes at lower oil prices, the so called S curves to give the buyer protection against high prices and the seller protection against low prices. The volumes in North America are generally priced with a function of Henry Hub and a constant reflecting the cost of liquefaction and shipping. For an LNG buyer, the attractiveness of Henry Hub is dependent on the oil and Henry Hub prices, but also they have to consider the pricing basis at which they sell to their customers. In some cases, one is more attractive than the other and vice versa. And therefore, to manage such cross commodity price exposure, recently some buyers have been looking for hybrids, combination of oil and Henry Hub exposure. And with the size of the LNG portfolio and the risk management techniques that we have to offer, we are in a very good place to deal with such buyer requests. Now, at Shell, we are also very actively developing new markets and new outlets for gas. We have capacity rights for around 40,000,000 tons per year in 10 regas terminals around the world and are actively pursuing new opportunities. As well as pursuing further classic long term sales, we are going further down the value chain behind the terminals to create and secure new premium gas demand, leveraging our marketing, but also our power trading capabilities. By lengthening that value chain, we strengthened the resilience of our portfolio, which provides us the confidence to over time commit to new investment decisions as we secure premium demand. A recent successful example of this, of creating new demand is Gibraltar. Shell will be the exclusive supplier of LNG for power generation into Gibraltar, setting up a whole new value chain, but also providing optionality to use that facility to export to other countries or to the shipping industry. And indeed, we are part of the creation of a complete new market segment for LNG, LNG to transport. LNG for shipping and heavy road transport is a very promising and potentially new material segment. If you convert the existing shipping market in the world to LNG volumes, you get about 200,000,000 tons of demand for LNG, growing to 250,000,000 tons by 2025. And if you convert the heavy trucking market globally to LNG, it would require about 500,000,000 tons of LNG to go around. Together, that's 3 times today's global LNG supply in potential demand in these two sectors. We expect this market to grow to some 40,000,000 tons by 2025, that's well within the range of analyst estimates that go from 20 to as high as 100,000,000 tons. And the optimism is partly sparked by the recent decision of the International Maritime Organization to limit the sulfur emission to set new sulfur emission limits for ships down from 3.5% to 0.5%. That's a step change in the shipping business and it will require ship owners to either install expensive scrubbers to take down their sulfur emissions or to shift to LNG and we already see that particularly in new builds in shipping, there is a shift ongoing to ship owners adopting LNG as the fuel of choice. We recently celebrated a somewhat iconic contract with Carnival Cruisers, one of the major cruise shipping operators in the world, who ordered a total of up to 13 of these major cruise ships. And we have the exclusive right the exclusive option to supply them with LNG around the world. Going forward, heavy duty road transport is indeed an important sector to serve, because trucks can't electrify and gas is quite likely the energy source of the future for heavy drill transport. LNG's development as a successful fuel will depend on many factors. It requires availability of refueling options, the right regulatory framework to foster growth and a good business case for customers to switch their fleets from diesel or from fuel oil to gas. We are working closely together across the whole value chains with OEMs, ship and fleet owners, with all participants to unlock this demand and for this cleaner and more cost competitive fuel. We have been investing ahead of the curve in this business. We already have supply points in Europe. We won the supply point rights in Singapore, and we're busy creating supply points in the Middle East and North America. It will be a ramp up of volume over time as the shipping and trucking industry convert, but it's a new sector with good affordability that we are very well placed to serve to the existence of our downstream business, we know most of the customers already. Now turning to our portfolio of new supply options. We have a rich and diverse funnel of opportunities for both greenfield and brownfield LNG supply additions. Here's an overview of the total project portfolio. LNG liquefaction volumes today run at around 29,000,000 tons per shell, with around 9,000,000 tons per year still under construction, including capacity rights from third party plants. We have slowed down the pace of investment post the BG merger and are redesigning some of those projects for better returns. This will help LNG Shell's affordability overall in the near term, but it will always also help us remain competitive in an evolving LNG market that is globalizing. Our plan is to continue with the slower pace of new investment as part of the strategy to improve our free cash flow and returns in the first instance. Later today in Breakout, I will be joined by Steve Hill, who is in charge of our LNG and Gas Marketing and by Dilara Ray Venter, who is in charge of our supply portfolio, and we look forward to deepening this sector with you. Now I hand over to Simon. Thanks, Martin. It's great to be here today in New York on what may be an auspicious day. I'd like to update you on the financial framework and the progress we've made, not are making with the BG deal. So first of all, comment on the financial framework. The strategy overall and the financial framework within that have been and will be designed to manage through multiyearmacropricecycles and the multi decade investment and returns programs that are inherent and embedded in our industry. We know we must balance near term affordability and the cost trends that we see with the fundamentally much longer term nature of the industry. And our financial framework is a key element dividend, but also the reinvestment in the business through the low point in the oil price cycle, which, of course, is where we are today. Now the strategy outlined by Ben defines the intention to generate sufficient free cash flow investment at the lower end of the price cycle to cover the cash dividend. Slide 18 in Ben's book pack is the key to how that is achieved. Now we should not be dependent on anything more than a normal level of divestments to meet this objective. Through cycle, that's been around $5,000,000,000 or $6,000,000,000 a year. For the portfolio that Ben outlined, the strategic intent should deliver this outcome by the end of the decade. The company should also generate excess free cash flow well above the dividend at mid to high points in the price cycle. I'd want to stress that the overall aim is to create value for the shareholders throughout the cycle. The financial framework supports the leading shareholder returns. It's not an objective in itself. And to be very specific, what does this actually mean through cycle? We need to do the following. Firstly, maintain a strong credit rating. Currently, we're the 2 main agencies with AA with 1, A with the other. But what we actually need to do is deliver AA equivalent cash flow to adjusted debt metrics. We have to set investment levels accordingly and for the foreseeable future, Ben explained, between $25,000,000,000 $30,000,000,000 per year, but lower if necessary. The return on capital does need to be double digit at the lower end of the price cycle, needs to move towards the mid teens at the average through the cycle. The 3 year average free cash flow looking a bit through the cycle, including the divestment, should really exceed cash dividends whatever the price is. So that's what we need to manage through the more difficult parts of the cycle. And we expect to have a balance sheet gearing somewhere between 0% 30%. That's a wide range, but that's the volatility that we do see. And we need that to maintain that throughout the cycle. And all of this is aligned with the dividend policy, which hasn't Now following an acquisition with the enterprise value of $64,000,000,000 and in a low oil price world, clearly, some of these metrics are different from our recent history, although they are pretty much as we expected when we made the announcements around the deal. So just to reflect on the deal, where are we now? The acquisition as Ben and Martin referred to was actually designed to accelerate our existing growth strategy. It was aimed to enhance our free cash flow to turbocharge the delivery of that earlier effectively and to create a platform now from which we can reshape the rest of Shell. But it's not a deal that was done just for Sizer's sake. It wasn't about doubling down on what were then the growth options and doing it again from here. It was about creating value for shareholders. So, delivering value was about rapid execution, 18 major processes around and about an effective integration. And then we completed this deal in 10 months on the 15th February this year. It was about getting value from the BG projects and learning from the best working practices that were applied throughout that company and bringing them together within Shell. And last week, we said we've effectively completed this integration on the 1st November, the day of the results. Several of our major countries, including the UK and Australia, went live with their post integration organization and plans. We are closing and running down the double office space in Houston in the United Kingdom and in Singapore. By early next year, it will be lights out. And we will be, by the 1st January, one company. Best practices from both companies brought together, detailed plans to capture the maximum value. Every one of my colleagues here, you can ask them, they know what's needed from them to deliver this value, clear accountabilities. We expect the synergies from the deal now, the total synergies to be around $4,500,000,000 annually on a pre tax basis by 2018. We originally said $2,500,000,000 but we'll do that this year, 2016, in the year of actual integration. So we've increased that $2,500,000,000 by a further $2,000,000,000 or 80%. And we will expect to achieve the interim commitment, which was $3,500,000,000 We'd expect to achieve that next year, so much quicker, much greater synergies, and that's just the cost reductions, not the total value delivery. And we'll deliver that this year and in 2017, dollars 4,000,000,000 of synergies likely next year. So where is that all going? Our cash priorities, there is no change to the priorities for cash flow that we set following the announcement. That's back in April 15, so we're talking 18 months ago now. Firstly, we need to reduce the debt. It's slightly higher than we'd originally projected, partly because of the lower oil price, partly because we took on up to $5,000,000,000 of finance leases, most of which have previously been operating leases. But the better performance since then has helped offset that. Secondly, we must support the dividend, and we have maintained that. And thirdly, we look for balance between share buybacks and capital investment. We have committed to at least $25,000,000,000 of buybacks in the period 2017 through 2020, subject to the debt reduction, but also of course to some level of recovery in the oil prices. We aim to use the extra cash for debt reduction to strengthen the credit metrics to the desired levels. Now these are complex, but the best proxy is gearing on the balance sheet of around 20%. When we get there, we'll most likely turn the scrip dividend off first before we start the buybacks. Capital investment will be kept in that range that Ben referred to, £30,000,000,000 hard ceiling, £25,000,000,000 soft floor. Now we are pulling on levers to manage the financial framework in the down cycle in the short term, the next 6, 18, 36 months. Fundamentally, this is actually an important opportunity to improve our own competitive performance, irrespective of oil prices. The combination of the addition of BG and the lower oil price has created a once in a career opportunity to deliver on the momentum that's generated. And we're focusing on 4 levers: asset sales, capital spending, operating cost reduction, and delivering new projects. They will add significant cash flow, and that's in effectively order of immediate contribution to the credit metrics. And there is, of course, a 5th lever, not on the slide, which is the oil price, the one that we don't control. But a $10 movement in the oil prices now drives our cash flow by around $5,000,000,000 and that's increasing quickly to 6 and beyond each year. Sensitivity could improve further over time, so very highly geared. And one of the drivers there is the fact that a lot of our new production comes on stream with effectively a zero cash tax rate. So the slide summarizes the potential from the levers that we're pulling, and I'll now go through them each in a little more detail. Firstly, on the asset sales, the divestment. Obviously, we're using asset sales for 2 reasons: 1, to address the financial framework, but also as an important element of that strategy to reshape the company. So up to 10% of our total oil and gas production is earmarked for sale, including several country exits, we've talked between 5% and 10%, and also selective midstream and downstream assets, value driven, not time driven, and really an integral part of shaping that portfolio improvement plan. The sales are expected still to total $30,000,000,000 for 20 16 through 2018 combined. That's about 10% of our balance sheet, just to keep it in perspective. They are, of course, important parts of starting to reduce our debt, and the timing of the divestments will depend to some extent on the oil prices and then behind that, of course, the asset market that we see. We're not planning for sales at giveaway prices. You will have seen that we've included contingent mechanisms in the 2 recent deals to retain some access to the upside. And there's no reason today to think we will not achieve the $30,000,000,000 figure. But if it takes a bit longer in order to preserve shareholder value, then so be it. A word on one of our key programs, the MLP Midstream Partners. This is a long term vehicle to monetize portions of the sizable infrastructure portfolio, but while continuing to generate integrated value across our business footprint. I'm very pleased with the progress being made today by John and his team. We sold over $2,000,000,000 so far of pipeline and terminal infrastructure assets into the MLP, and in the future, we'll continue to add assets with similar cash flow characteristics from across the North American Shell portfolio. And our own significant ongoing ownership in the MLP that aligns us with the public unitholders, some of whom may be in the room. And we do recognize that today the equity markets are somewhat challenging now for MLPs. We have many options, and we'll use the full range of these options to continue to grow the MLP prudently in any market condition. While the MLP is an important contributor in our overall divestment program, we committed to progress its growth in a controlled way that strengthens the MLP. So we're looking forward to continued success from this vehicle. I'll move now on to our capital spending. Now Ben sets out the framework. We're managing that range as we improve the capital efficiency, and Harry is here, can talk about that later in the breakout, and as we develop a more predictable flow of new projects. Andy and Martin can both talk about that. Our capital investment this year expected to be around $29,000,000,000 that's 35% lower on a pro form a basis than Shell Plus BG in 2014. It's only $26,000,000,000 on a cash basis. There's a lot of non cash items in the 29. In the prevailing low oil price environment, we will continue to drive the spending down. It will go down towards the bottom of the range, and we've already said that last week we expect to be around $25,000,000,000 headline investment next year 2017. In a higher oil price future, we will cap the spending at the top end of this range. Buybacks is the alternative. The track record here demonstrates that we can respond quickly to the macro situation by reducing our investments extremely quickly. And if we need to go lower, we will. We can achieve that through further supply chain reductions with the costs, in some cases, actually linked to lower oil prices, but also by deferring or canceling other further projects. And so on to operating costs, the third of the levers we're pulling and the one I guess we would take some comfort and confidence from in how quickly, again, we've moved here and how much further than maybe in our own expectations by this point in time. Major reductions, but still quite a lot more to come. The underlying operational costs, Shell Plus B and G in 2016, were already at an annualized run rate of $40,000,000,000 $10,000,000,000 a quarter. That's $9,000,000,000 lower, nearly 20% lower than Shell and BG only 2 years ago, 20% out of cost in 2 years. And it's a combination of the synergies from BG, the hard targets you hear about, but also the follow on benefits, the ways of working. But also what we've effectively aimed to achieve is a lower forever mentality in Shell. This is not just about batten down the hatches until the oil price goes back up again. It takes the cost out, take it out forever, and then there's only upside. So just as a reminder, 40% of our total cost base, that £40,000,000,000 is direct staff related. And we have very significant staff reduction programs underway here. This is not a pain free process, but it's being managed in an extremely professional and respectful way. Our divestments and our new project ramp ups, they also have an effect both down and up on the total cost base as have movements in foreign exchange. A strong dollar benefits our cost base. That can complicate the overall cost picture, which is one of the reasons we don't go headline on particular targets, but the underlying like for like trend is downwards and will continue downwards. And all of this builds into an improved cash flow from operations. So there's still a lot of potential like for like for multibillion dollar per year savings on an after tax basis, and those savings should stay with us throughout the cycle. So finally, on to the project flow. Developing these new sources of oil and gas should, of course, drive new cash flow and free cash flow over time. The portfolio is geared to give an improvement in production, but much more importantly, to cash flow from operations and free cash flow this year, 2017, and beyond. By 2018, our start up since 2014, GEL plus BG combined portfolio will add around 1,000,000 barrels of production capacity per day as compared to our total of around 3.6 at the moment. These are generally high margin barrels and they've all got price upside. They're in the UK, in the U. S, in Australia, in Brazil. It's a great opportunity set, and it's been considerably enhanced by the acquisition. And just as an indication for you, and you might like to include this in your modeling, we expect to see on these projects alone an average cash operating cost of around $15, dollars 1.5 per barrel oil equivalent and an average statutory tax rate around 35%, which is less than our typical upstream effective tax rate. The cash tax rate will be a lot lower than that because of our tax position in those countries. And I think this actually is the missing piece in some of the market valuations for Shell. It's also the one that is most sustainable over time. This new production is sustainable throughout the next decade and is what underpinned the strategic thinking behind the BG acquisition. So just looking at some of those individual decisions and startups, we've seen just recently the startup of Stone's floating unit in the Gulf of Mexico. We've seen the first cargo from Gorgon in Australia. We're now seeing the second train ready for production. And we've seen the first export of crude oil that was reached at Kashagan project in the Caspian in Kazakhstan. The start up this year alone should add more than 250,000 barrels a day out of that 1,000,000 and 3,900,000 tonnes per annum of new LNG for Shell shareholders once it's fully ramped up. And on the growth side, we've actually taken investment decisions on new chemicals, such chemicals investments in China and in the USA. So finally, there's no doubt that this year, 2016, it is a challenging year. Maybe we talk about that in the Q and A. So we're seeing all the deal effects. There's a bit of noise in the results as you see it. And we've seen the reduction in the cash flow in previous quarterly results because of lower oil prices and some of the negative working capital effects. But the underlying performance that will contribute sustainably is clear. There were quite a lot of proof points last year, And the potential outcomes I've talked about here reflect the actions by all of my colleagues in Shell, not just my esteemed colleagues here in the room today, the other 90,000 as well. And in practice, they do reflect a reset of the way that we're actually doing business, particularly in terms of the sustainable cost base. Gives us great confidence for the future, what we can deliver. The levers that we are pulling in the short term they're not only material in the short term, but they will sustain and support the long term. So with that, let me pass you back to Ben just to close. Thanks, Ben. Okay. Thanks, Simon. Thanks, Maarten. I think we covered a lot of ground here just now. But before we close and go into the Q and A, let me update you on the competitive position. And remember, we are aiming to create a world class investment case in Shell. Now in the end, when we talk about a world class investment case, you will measure us by total shareholder return, and we will do the same. And I think, as I said before, if we do a better job on delivering higher and more predictable returns and a higher and more predictable free cash flow per share and we underpin all of that with a conservative financial framework, then we will create that better investment case, that world class investment case that I referred to. So we set on a pathway here for you for the next few years. I think it's an ambitious pathway. It's a transformation for the company. It's higher returns and higher free cash flow and that's despite lower oil prices. And if you look at the ratio of capital invested needed for free cash flow, This has come from around 3 times in 2013 to 2015 to 1 to 1.5 times around the end of the decade. So, it's a lot more bang for the buck. There's a lot of energy and enthusiasm for this transformation path that we are on within the company. And BG, of course, is a fantastic opportunity. It's also a very natural way for the company to go after everything that it needs to go after. And I can tell you that personally, but also the Executive Committee and the Board are all incredibly energized and committed to deliver this world class investment case and to transform Shell. So that's the end of the formal presentation. What we do now is a short Q and A here. And I think we have until half past, if I'm not mistaken. So it's about 25 minutes or a bit more. So what I suggest is we keep it relatively high level. Simon will join me. The more specific questions, you can, of course, ask in the various breakout sessions, which will give you a much more intimate setting to cover them. Why don't we go first with you? Big oil companies. Yes, the spike is coming. So it yes, I should have said that. Ben, the big oil companies have employed CEO pay incentives that have often not connected to shareholder value during the past decade. In total, shareholder return TSR has been fairly underwhelming during that same period. And on this point, when you consider Shell's increased emphasis on returns on capital employed, which is kind of a proxy for economic value added and it's pretty well associated with market value added in the stock market for Shell and has been for a couple of decades. My question is how do you plan to sync this increased emphasis on value based business measures with executive pay incentives to ensure that the 2 are connected, meaning how do you plan to sync these? Or do you not think that adjustments are needed in that area? Yes. Thanks for that. Doug, it's you're absolutely right. TSR has been underwhelming, but you can always try and explain that partly by deal effects, etcetera. Of course, our share price suffered a bit as we went through the completion period. So, we feel that we haven't necessarily already benefited from the good decisions that we have taken that's yet to come. But you absolutely right. If we want to have an incentive package that is aligned with the benefits for shareholders, because there's probably a few things that we have to tweak. So, you may know that, of course, our remuneration policy is up for the vote again. We will be putting that together. Actually, I have been doing roadshows with investors over the last few weeks to sense what and to test what would be appropriate. And what you will see is that the points that we have made about driving TSR, about improving returns, about improving free cash flow or free cash flow per share, but also to make sure that we don't do that by basically shrinking the company to glory. We so also focus on headline cash flow. These are going to be the core metrics that we now think we will propose for long term incentives for our top team, our top 200 odd people in Shell. So you will see a very significant alignment with what we think are the underlying drivers for total shareholder return. And the feedback that we have so far, with some tweaks and some suggestions, I think, points us all into that direction. So it's very much the intention that indeed, not only the executive team, but the top 200 in Shell are very much aligned with what we think are not only the headlines but also the underlying drivers for the total shareholder of what that first class investment case. Let me go around the room here next. Thanks. Good morning. This is Jason Campbell with Jefferies. I had two questions please. The first is Deepwater is obviously one of your primary growth engines right now. Can you talk about the competitiveness of new projects in the deepwater, maybe in terms of breakeven cost and how you see the portfolio position there? The second question, I'm trying to get back to the cash flow from new projects. And clearly, the tax position is maybe something that's not as fully understood, Simon. So I could certainly see loss carry forwards in the United States putting that tax rate lower. Are there any others that we're missing other places where the tax position might be significantly lower than the book rate? Yes. Let me say a few things about the deepwater, and it will be covered in quite a bit more detail, Jason. So but let me say a few words about that first, and then Taneli can talk about the deferred tax asset positions that we have. So we have seen deepwater prices breakeven prices come down quite a bit. I think, on average, our portfolio is probably sort of in the low to mid-40s at the moment. And of course, it's quite a range of still a range of breakevens out there. The best breakevens and sort of below the 40s are really in Brazil. Some of the projects that we have, of course, under execution at the moment take Cabometox. We took an investment decision at the time with a breakeven price of $55 a barrel. Look forward, we have been driving that into the 40s as well during the execution phase by further optimization of execution and even some scope aspects of it as well, taking quite a few billions of costs out of that project. And if you look at the big things that are ahead of us, projects like Vito, for instance, which will be probably a use it or lose it project because we run into sort of license expiry limitations. We are really very optimistic on how far we have been able to drive cost breakeven prices breakeven economics down there as well. So I think we're not done yet. And again, by all means, ask Andy, ask Harry about the things that we are doing there. But we see a very, very healthy trend, certainly with the high quality portfolio that we have, because in the end, of course, breakeven economics are also driven by the quality of the real estate that we have. But we think we are right at the front end of the cost curve with our deepwater projects. So we get it's clear we can fill the funnel of projects with low breakeven for quite some time up to the limit of what we're prepared to allocate. Tax it's a really important issue going forward. We made some actual strategic choices. There are 2 elements going on here. First of all, our average effective tax rate in the upstream used to be over 50%, probably still is around 50%. But we've run down production in areas like Nigeria and Abu Dhabi where the marginal rate was 80% 90%. And we are replacing it by choice in Australia, in the UK, in Canada, in the United States, in Brazil, before that in Qatar. And on the new projects, the actual effective tax rate, 35%. So we were averaging over 50% and a big slug coming in averaged 35%. In addition to that, we do have effectively deferred tax assets, either carry forward losses or capital allowances against the investment we've already made. We have a big deferred tax position here in the U. S. So for several years, in essence, cash tax free from the development of the Gulf of Mexico, so stones or the Permian onshore. Canada is another country where growth in effectively the shale activity or now the profitable performance in oil sands comes with a very attractive margin. The United Kingdom is probably the next one where, first of all, the tax rates come down. But the 2 new projects, Clare and Skjallian, plus the significant improvement, and please ask Andy about this later, I'm sure he will tell you, that the underlying performance of the UK assets is back towards or maybe even in profit today at a much lower oil price. The UK for several years effectively is carrying capital allowances, which makes that income tax free. And these are really good projects coming on stream. Then Brazil and Australia, it's less so in terms of how long it will last for, But both of those do have deferred tax assets to chew up. And that's where nearly all of the new production is coming from, really powerful kickers to our underlying cash flow. Yes. Thanks. Simon, I have a financial question on LNG for you. So question is on the strategic value of LNG trading and your view on risk mitigation. So you're going to be 25% of the global LNG market. So opportunity set is huge, my view your view on risk mitigation. And also if you could quantify for us the $9,000,000,000 in cash flow from LNG over the last 12 months at $42 Brent, what percent of that was trading? Arguably, all of it was trading in the sense that trading but we are now in a position where the gas trading takes up the majority of our value at risk in the trading environment. It's higher, and that's partly because contracts are longer and the hedging mechanisms available to you are more limited. So our value at risk has gone up, but it's still relatively low compared to the totality of the business. And it will be wrong to say a specific part of the cash generation came from trading because you can only do the trading if you have both the contracts to supply and the demand contracts in your hand. But trading is, if you like, how you join them up. But it's like for like a very significant part of the value chain is managed by trading. And the value add from trading per se that you saw Martin's slide of this is what we spot purchase and spot sell. Clearly, that's the optimization element. So I can't really give a figure, but Steve and Martin later on can maybe talk a little bit more about how we think about it. But in terms of risk mitigation, I think 25% of the market is probably enough, but that's a growing market. Our share of that which is traded might actually be a bit higher than that because so much of the rest of the market is trend lined. So we need to be careful. We're not overexposed. We have previously hedged some of the price variability. At the moment, we're not covered a great deal on that because we're at the bottom of the cycle, but we have had an element of hedging that helps maintain the value at risk in an appropriate position. But because of the relatively low debt for liquidity and length of the market, there's a limit to how much we can hedge that we are exposed, which is one of the reasons Martin talked through that market today because it's such an important one. So hopefully that gave you a better feel for some of the exposures that we carry, but also the opportunity. Thank you, Ben. Paul Thanky at Wolfe Research. As a U. S. Analyst covering Exxon and Chevron all the way down to the Permian names and to Valero. There are 2 really striking things about what you said. The first is to open as aggressively as you did on CO2. I wondered if you could talk of the specific targets around what you want to do there. It's just very differentiated for 2 areas. And within the context of that, the other thing is your disposals target seems very high at $30,000,000,000 I was wondering, do the 2 marry up in some way? Do you would disposals would CO2 form part of the disposals metric? Thank you. Yes. I realize it's probably differentiated. It's a little bit more in the U. S. Than it is in Europe, where I think it's much more part of the mainstream thinking that companies like ourselves need to have a strong narrative to be credible in society. I think if you sort of peel the layers back a little bit, you will find that in the main, there isn't that much difference between the way companies in a sector look at the energy system, the transition and what you need to do. Having said that, though, I do think that, as a company, we need to focus on our carbon intensity going forward. We don't advertise it this much, but you have to bear in mind that the average carbon intensity of our portfolio is higher than the average of the energy system. It is basically because we do not have vast quantities of relatively simple and easy to produce oil. We are left usually with the more difficult stuff that national oil companies do not access or do not want to develop. So we don't necessarily start from sort of the right side of history, if you like. So we have to work much harder to neutralize that. And what we have set ourselves as a target is that we need to be better than average. So we need to be ahead of the pack when it comes to decarbonization of our primary energy production. And we probably need to get there in a few decades. And in the interim, I want us to be absolutely 1st class in terms of carbon intensity or energy efficiency if it has to do with refining and petrochemicals, where carbon intensity doesn't really mean very much because you don't provide energy. But I want this to be best in class or 1st quartile in all the areas where we do business. So in other words, if you want to be in the LNG business, our portfolio better be in the main in the 1st quartile in terms of CO2 intensity. And the same is true for Deepwater. We better have the best Deepwater portfolio, and we better have the best Refining and Petrochemicals portfolio, etcetera, etcetera. Now how does that play through? Some of it plays through by sort of factoring a shadow price for carbon into our decision making. That basically means that the kit that we do build is a little bit more future proof for the world where a, say, dollars 40 a tonne carbon price would materialize. But more fundamentally is we make really conscious choices about what are the elements in our portfolio that we want to push forward. So, if you have a choice to push forward a project with a much higher carbon intensity, it's we really need to convince ourselves this is the right thing to do. And we need to convince ourselves that there is actually a way of mitigating that further down the road if it becomes a societal and also a financial imperative to do so. So, what we have been seeing is that quite a few of our longer term portfolio choices have been cleaned up. We have taken out some of the prospects where there really wouldn't be a pathway to 1st quartile carbon intensity. And indeed, you're right. If we look at the $30,000,000,000 divestment program, we look a little bit harder at just the ones that have a sort of a carbon disadvantage, although more often, of course, the drivers when it comes to sort of longevity and sustainability are much shorter in our divestment program than carbon would suggest. So yes, we want to build a portfolio that is fit for the future. But can be competitive, environmentally and socially competitive in years' time. And you don't get there by just plain economics. You get there by making the right choices as well. Thank you. And then the follow-up is what's also striking is your yield is 3x exons essentially, I think it's a headline 7.3%. What do you think the market obviously, you're addressing this in terms of what you're telling us, but what's the message that you get back from the market as regards why there seems to be so much skepticism even about sustainability, let alone future potential growth? Yes. I'm not so sure whether there is skepticism. I think there is a growing recognition that what is it, the €125,000,000,000 enterprise value gap that we have is kind of odd if you look at many of the other factors that we have. Of course, there is differences in returns that are driven quite often by accounting conventions. But there are many other things that show that we have a very, very strong financial performance driven by a real high quality portfolio. That doesn't and let me not make the comparison with Exxon per se, but that doesn't justify the yield that we are seeing at the moment. So in other words, I firmly believe that we are significantly undervalued. Let me go to the back first. I'll come back to you in a moment. Can we go to Anish in the middle there? Hi. It's Anish Kapadia from Tudor Pickering. So I have a question for you, Ben. Thinking about the oil sands business, from what I've heard, I struggle to see how it fits into Shell's longer term vision. Now I realize in the short term, there's probably considerations, oil price that mean you don't want to get rid of that business. But if I'm thinking kind of longer term, should we think of that business no longer being part of Shell's long term vision? And then a second one for Simon on the cash flow. There's been a lot of moving parts in your cash flow, the non operational things this year. So I was wondering if you could just give us a bit more detail in terms of firstly the restructuring charges that you've taken this year. What's the cash element or the cash negative associated with the restructuring charges in 2016 and how that trends in 2017? And then a similar question on the tax side of things. Again, you've had some negative cash tax impacts relative to the P and L. I think you've had that for a few years. How do you assume that trends into 2017 in a flat oil price environment? Thank you. Thanks, Anish. Let me take the Oil Sands question first. I hope you will forgive me. We never really comment on sort of details of our portfolio plays going forward. It's just not good practice to do this. And it doesn't the fact that I dodged the question doesn't mean one or the other outcome. What we do want to do, of course, is we want to make our Oil Sands Mining business a very competitive business, and it is. At the moment, it is a strong cash generating business even at the sort of very low oil prices that we are seeing today in Canada. And if you look at Western Canadian Select, it is significantly discounted to brands. But this business is free cash flow positive and quite a bit free cash flow positive. And of course, if you look at this business in terms of the amount of ongoing maintenance capital that it needs and you then relate that to the free cash flow that it provides in terms of bang for the buck. So, the amount of free cash flow you get for every dollar that you need to put into investment programs for that business. It is the best business in our portfolio. And it will, of course, have a tremendous amount of upside also going forward. So it's not a business that we sort of despair of. It is a business that we really enjoy at the moment. Of course, a lot of progress being made over the last years, intaking cost out, a lot of help that we got from the Canadian government or the Alberta government as well in terms of improved mining regulations that's dealing with tailings, dealing with recovery factors that allowed us to optimize the business in a way that made much more business sense rather than sort of environment sense or royalty sense. So, at the moment, it's a business that I really enjoy and long may it last. Thanks. Thanks for it. It's a bit of a softball. That one, thank you very much. It's the question I was hoping might come up. But first, just back on Paul's point about yield and what are investors missing because it's very relevant. We have a big U. K. Shareholding, and I know slightly different to the U. S. Dividends matter there. We pay 1 in 8, maybe 1 in 6 of the dividends in the U. K. Pension funds investors depend on Shell to a very large extent. And therefore, any concern around the dividend gets magnified. And where are the concerns? 1, could we do the deal and could we integrate? Could we deliver the value? Secondly, if you're successful and you have all that cash flow, will you just reinvest it rather than sharing it back with the shareholders? And thirdly, will you generate the cash flow in the first place? So we've done the deal. That piece is proven. Maybe not yet understood, but it's done and the delivery is coming. Capital investment, I think Ben sort of used a look into my eyes type response back in June when he said, well, if you get more cash, will you reinvest it? The answer was no. You heard what we said. So back on to the cash flow. If I go back 12 months, our total cash generated from operations was $17,000,000,000 The oil price was $42,000,000 That was with $4,000,000,000 of negative working cap. So the underlying work excluding working capital, dollars 21,000,000,000 there's your start point. Simple answer on your one off on tax, you're absolutely right, And some one offs on severance and volume, the payments that have been made around the deal, it's $2,000,000,000 to $3,000,000,000 So you can add that back onto the $21,000,000 That's a $42 We're actually planning around a $50 oil price next year, dollars 42 to $50 step ups about $4,000,000,000 So you're already into high 20s. We have just brought on stream all the projects I've just talked about, and we are driving down the cost so that it fundamentally stays down. So I've already talked about you can add probably another $4,000,000,000 or $5,000,000,000 as those projects deliver next year. So I'm now into the towards the mid-30s of cash generation. At $50 and we haven't finished yet, but this is just to you only asked about 'seventeen. So this is to end 'seventeen. So we're in the towards the mid-30s of cash generation at $50 Our capital investment, dollars 25, headline $23,000,000 cash cost us more finance leases, etcetera, in the $25,000,000 So it's 23 cash and a $10,000,000,000 cash dividend if we leave the script on. So I need 33,000,000 and that's before any divestment. So we are increasingly confident we will cover dividend and all the reinvestment from organic cash generation. The divestments that we complete will reduce the debt, And that's a $50 and that's just a step towards 2020. Now that is the core story that addresses whether a 7% yield is reasonable or not, because the first thing we have to do is take away the concerns that to reduce the yield, we're going to cut the dividend. Now we're going to reduce the yield hopefully by getting appreciation in the market for the value of the underlying performance of the business. Thank you. Guy Baber, Simmons and Company. 2 for me. First, I thought one of the positive recent highlights was achieving that $40,000,000,000 OpEx run rate a quarter earlier than expected. Can you just talk about that a little bit more? You've achieved that target. Now what's next? You mentioned multi $1,000,000,000 potential. So can you talk about what those specific drivers might be? What that lower forever mindset that could contribute? And then secondly, and this is kind of a follow-up to the last answer, you gave a very helpful bridge to higher cash flows in the future. You also mentioned higher and more predictable returns going forward. So I wanted to focus on that predictability element because the results have been pretty volatile and difficult to predict the last few quarters. So at what point in time do we begin to see maybe a little bit more predictable set of cash flow results after a lot of these one offs begin to work their way through the portfolio with tax, working capital, redundancy charges versus cash going out. So if you could just talk about the timeline a bit, that would be helpful. On the latter one, it's relatively simple. At the moment, you see volatility because you get small differences between big numbers and the absolute numbers are still relatively small as the absolute numbers grow, the €200,000,000 €300,000,000 one off percentage on a €2,000,000,000 number is a lot bigger effect than on a €4,000,000,000 or a €6,000,000,000 number. So as we grow into the future, the volatility percentagewise should reduce again, and you'll have fewer one offs around the deal. So that's just a matter of time, I think, as it comes through. The predictability was at least in part about more the repeatability of the projects that we're doing in, say, deepwater or gas, fewer one off or unique projects, more repeatable projects, more repeatable returns. So it's long term as well as short term. On the OpEx, we, to an extent, we surprised ourselves how quickly, not in the scale, but in how quickly it's been delivered. Please ask my colleagues because they're the guys who've delivered it. I do my best on the functional cost. But in broad terms, we've got a 15 cost base, we added BG, and we said take 20% out by next year. That's what we've targeted. We do have a bit of following win from foreign exchange, strong dollar. That's given us maybe, in some cases, 30% of the improvement, but some of that's sustainable. But as we haven't finished, we should make up even without that FX boost the same kind of improvement. It's come across the board, in some cases, from delivering more quickly on programs already in place to improve our cost base. We know we are complex, and we had a great story, and I won't name names, but Ben and I do performance unit reviews with our colleagues. And last week, we reviewed 1 of the upstream units. He said, look, we've brought Shell and BG together in my area. We've taken 1,000 people out, 1,000 people in a single area. And he said, everything's got simpler, quicker. Our people survey results, the motivation of the staff has gone up. We've got better availability. We've got lower costs, and the whole place has a different feel and buzz about it. So back to my comment earlier about sometimes it is about staff, it's about doing it in a responsible way, but coming up with a win win for everybody at the end of the day. Now can we go further? A couple of points. Like for like, yes, but will we? Well, John will have a story, I'm sure, later about the marketing business. I'm reminded by our Head of Marketing that our marketing business in Downstream in the last year have made more money than either Chevron or Total Business. So their entire Upstream, Downstream put them together, Shell Marketing better than Chevron, Shell Marketing better than Total BP, sorry, not Total, so BP and Chevron. The marketing business invests to earn. We have great premium product penetration. With that performance, we let them spend a bit more. Same is a bit true of the global trading business. So there's a question of yield, what do we get back from the dollars we spend, hence no headline target, but there is for how much do you deliver. And that is how we need to think going forward. But like for like, there is still the multibillion step down, and then we may choose to spend some of it back again in generating more revenue. Yes. Reminded of the Head of Marketing when we came together with the top 200, and there's a lot of talk in the Upstream about lower for longer and lower forever. And Istvan said, actually, in the marketing business, it's more for more. And that was also, I think, a characteristic of that business. But I think 2 more questions. We have Lydia and Blake and then we I'm afraid we have to. Thanks. I'll take a break. I'll try and keep it short. It's Birgitte from Barclays. On the free cash flow targets on the longer term ones for 2019 to 2020, what stops you getting there or how much contingency is there actually built in there? So apart from the macro, is there anything that you think might stop you from getting there? Or is there a lot of contingencies in there? And the second one was just come back to that predictability question and what makes the returns more predictable. From a management information system, do you think everything is now simplified that you can actually get that predictability from your side? And I appreciate it's more difficult from Wael. Let me start with the first question, which Simon can finish and then can also think a little bit about the second question. I do think there is quite a bit of buffer even in that still, Lydia. So when we went through the deal, of course, we had to figure out how would this impact on the company. We had to come up with a prospectus that showed how the combined company would look like without, of course, having seen the intricacies and the detail of what was in BG, whether there would surprises or not, whether he had it right or wrong in some aspects of understanding the portfolio and the modeling of it. And then, of course, the big moment was already on the second on 15th February when we got the keys to the company and had an opportunity to quickly calibrate our thinking. Now by the time we got to June, you can imagine we hadn't sort of completely rehashed our business plan from bottoms up and got a complete understanding. We had to go with some pretty fast understanding what did we find vis a vis the model, what would we do, where the assumptions we had made on portfolio aspects within the BG legacy portfolio consistent? What did we find in the main assets and everything else? And by the time we came out with Capital Markets Day, we had a reasonably good understanding. But if you had asked most of the organization, are we ready to go and show to the market what we think we can do this, no, no, no, no, no, wait another 6 months, because we need more work to really understand what we have and how we're going to re optimize it. We are probably working a little bit too much with sort of shortcuts and high level correlations on how this portfolio is going to work out. So, out of necessity, we probably build in a little bit of contingency in the numbers that we came out with because probably shouldn't be saying this, but even though we stood there and said, listen, these are not targets, they are expectations of how the company could look like at the end of the decade. You will all think of them as targets, yes. So, we need to be careful that whatever we put out there is something that we can live by. We are right in the middle of finalizing our plans for 2017. And this, of course, has been a major bottom up exercise, where the combined company has sort of gone through everything in a lot more detail in a more conventional business planning way. And it's great to see that we actually come out indeed at the higher end of the expectation range. I am not going to tell you what it is, but I can tell you that what we put out for 2020 in the 1st week of June is actually a number that I feel very, very comfortable about. Just a separate perspective on that, that shape was 4 of we talked about 8 strategic themes, 4 of them should deliver free cash flow $5,000,000,000 or above. And 2 of them or 3 of them are mature businesses, John with all products, Andy with the conventional oil and gas, and Martin with the integrated gas. Dollars 5,000,000,000 is for them, it is a target. We do expect that contribution, dollars 5 each. You see decline, you see divestments, you see market pressures, but that's your discussion to have with them now. We expect deepwater to grow to that the period. So we end up with 4 businesses doing 5 each. Oil Sands is a $1,000,000,000 to $2,000,000,000 generator forever, so back to the earlier question. And we have to get shales back to at least cash neutrality. But it is the business which could grow to several $1,000,000,000 free cash flow in the 20s as well. Chemicals will be cash neutral by the end of the decade, but we're still investing heavily. By the time the projects come on stream, that will also grow to be free cash flow positive. So you can see the shape of the way it comes through and where the possible flexibilities, contingencies, all this might be of that granularity. And that's the conversation you should now have. On management information, it's been tough for last year. We banked together $300,000,000,000 of assets, multiple accounting systems. We haven't had that many material surprises, I have to say. BG were a bit simpler in the way they thought about things and a bit quicker in the way they made a few decisions. So we've learned a bit from that as So I think going forward, we'll be in a better position to help not only you, but us manage some of the short term volatility and unpredictability. But there's still a couple of quarters we'll be working a few tweaks out. Blake, last question. Blake Fernandez with Howard Weil. I'm surprised on the first question on shale of the day, but Ben you had articulated breakeven below $50 and even $40 in some cases in the Permian. Yet the longer term expectations on return on capital employed seem to be below 5%. So I guess the first question is, why is that? Is that burdened by infrastructure build out, corporate overhead allocations? And then secondly, if your return on capital employed target is above 10%, does that kind of imply that you would not be reinvesting back into shale anytime soon? Okay. Let me a go at that. I'm sure Simon will have a few points to add as well. Indeed, I'm also surprised it's the first question on Shell and actually the last question this session. All surprised there's no question about the elections, but it but maybe it will all come later. No, I think you are partly right already there. Yes, it is a very immature portfolio. So it is a portfolio that is still sort of getting into the harvest mode, but only the foothills of the harvest mode. Where we still have a very high amount of depreciation, of course, a very large asset base potentially, a lot of infrastructure, capital and cost that needs to be carried by a relatively modest amount of cash flow. That, of course, can build up quite rapidly as we continue to invest in that business and grow volume, grow cash flow and with it and grow earnings. So it's not a business that has low earnings and low returns because it is just a feeble business. It is because it is an immature business that has yet to be sort of stepped on the pedal for. Now do we have a 10% returns target and everything that falls below is therefore doomed and everything above is fine? No, that's not the way it works. And that's also why we have segmented the business in various strategic themes. We said, well, the strategic theme will have a different strategy to deliver what we call the strategic intent of that business. But the strategic intent of that business can be quite differentiated. And it needs to be competitive in its own right. It needs to be competitive in terms of returns in relation to the risk that it brings. But we are not just looking at a simple return metric as some sort of passing mark for whether a business is performing yes or not. In aggregate, of course, if you look at your cash engines, which are the mature businesses, which are stable, which should be having a return that is representative of where you can get to, yes, and because the cash engines are collectively about 2 thirds of the capital employed, yes, you better have a business that does double digit returns in aggregate. But for the businesses that are much more businesses for the future, which are less mature, while a lot of the capital is still fresh or yet to come, of course, we have to tolerate lower returns in the early years. And the same is true for New Energies. We will have a business that, because of its maturity, that will run at much lower returns. Now if you do not see a pathway to good returns going forward as we sort of invest and build that business out, then of course we shouldn't be in it. And in some cases, we probably have slightly lower intrinsic returns like take for instance oil sands mining, where we start with sort of mid single digit returns and it will take us a long time to get them back up again than businesses like Deepwater, where you would expect an integrated gas, where we would expect strong double digit, maybe up 20% returns across the cycle. So we do not have a uniform, singular, unified approach. We have very much a horses for courses approach to judging that the businesses make sense. Perfect answer. I'll just set Andy up a bit. We're about $15,000,000,000 capital employed. We're investing about $2,000,000,000 per year. And we're moving from sort of appraise and define what we have into make money from it. The primary target is cash neutrality. So how quickly is it 2018, can we bring it forward to cash neutrality? And that is a question of really the Permian, because most of our 260,000 barrel a day production at the moment is gas. It's in Appalachia. It's in Haynesville. It's in Canada. And the Permian is the key to taking that to the next step. And we just had a great review of my colleagues, deepwater, shales, how do these 2 compare both in terms of strategic attractiveness, but the way we think about capital allocation and performance and how we should think about it within the executive committee and how we therefore allocate capital and expect returns. Again, I'm sure Andy would love to share that with you at a later stage because they are very complementary for Shell. Okay, good. I think we are out of time. We have 10 minutes over. I know there's quite a few more questions left. So Simon and I will be here, of course, for the rest of the day as well. I think many of the questions you have, of course, can also be addressed in the panel sessions. And if you see either Simon or I in panel sessions and you want to ask questions that are probably better answered by us, then by all means, grab us as well. Martin is going to explain where we go from here in terms of the logistics. So, Martijn, over to you.

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