Ben van Beurden - Royal Dutch Shell Plc Simon P. Henry - Royal Dutch Shell Plc.

Jason Gammel - Jefferies International Ltd. Irene Himona - Société Générale SA (Broker) Theepan Jothilingam - Exane BNP Paribas Jon Rigby - UBS Ltd. (Broker) Guy Baber - Piper Jaffray & Co. (Broker) Blake Fernandez - Scotia Howard Weil Thomas Adolff - Credit Suisse Securities (Europe) Ltd. Biraj Borkhataria - RBC Europe Ltd. (Broker) Lydia R.

Rainforth - Barclays Capital Securities Ltd. Doug Terreson - Evercore Group LLC Oswald Clint - Sanford C. Bernstein Ltd. Martijn P. Rats - Morgan Stanley & Co. International Plc Colin Saville Smith - Panmure Gordon (UK) Ltd..

Okay, ladies and gentlemen, good afternoon. And as always, it's a pleasure to be back in London, but it's an even bigger pleasure to be back again at the venue where we announced the BG acquisition almost two years ago. And that integration with BG was completed in 2016, and today we want to give you an update on the direction of the company.

I'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. But 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.

That's focusing on delivering higher returns on capital employed, on a higher free cash flow per share, and of course on reducing debt, so 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.

And 2016 of course was a transition year for Shell, but 2017 is the year in which we will follow through on the delivery piece. We have a portfolio strategy which contains firm steps to managing this down cycle, including a higher 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.

And in 2016, we saw some pretty large movements in our figures for the BG purchase and consolidation, a higher asset base, buildup 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 costs and capital investments as we also refocus the company.

And at the same time, you 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 U.S. $7 billion, cash flow from operations some U.S. $21 billion.

Free cash flow, excluding the BG cash element but then 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. And in Q4, for the second consecutive quarter, the free cash flow more than covered our cash dividend.

I'm talking about cash and I'm 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, and that's including BG, our underlying operating costs have been reduced by $10 billion on an annual basis, and our capital investments have 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, so 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. So this is a cost takeout performance that in my mind is absolutely leading the industry.

Let's step back from the results and the numbers a little bit and let me also be clear on what else we want from Shell. So I want Shell to be a leader, and 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, and we will continue to put emphasis on this going forward. But 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.

And 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, and then not only through the micro-cycle also leave us with enough money to fund the future. Our growth priorities, we have a clear pathway towards delivering strong returns and free cash flow in the medium term.

And the future opportunities should provide us with material growth in cash per share in the next decade, if not earlier. And through all of this of course is our intention to be in fundamentally advantaged positions throughout the portfolio.

Now, new energies, you will have seen in a recent announcement that Shell and a consortium has been awarded the tender for the Dutch offshore wind farm in Borssele III and Borssele IV. Together, these two wind farms will have a capacity of 680 megawatts.

And this demonstrates that our company is preparing for and investing in the challenges but also the opportunities that the energy transition is affording us. And asset sales have continued to play an important role in all of these 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 are 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, and we are making very significant progress on yet another $5 billion of divestment and then a bit 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 UK and North Sea assets to Chrysaor for a total of up to $3.8 billion and with KUFPEC for the sale of our interest in the Bangkot field and the adjoining acreage there offshore Thailand for $900 million.

So 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.

And Simon will cover this in a quite a bit more detail later in the presentation. But 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.

Now you've seen we've been reducing Shell's capital investment in a steady and a measured way in the last few years. And we're still planning to spend between $25 billion and $30 billion each year until 2020. And it's all about reducing debt following the BG deal. It's about meeting our intentions for shareholder distributions.

The $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. And 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 in chemicals for Pennsylvania and the Nanhai project, and we have significant progress today on the Kaikias project in the Gulf of Mexico, FID expected in the near term.

The project has a breakeven 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 at the bottom of the range, and that by the way, aligns to $27 billion, that $25 billion includes also a number of non-cash items that we have to count as capital investments but are not necessarily capital expenditures on a cash basis.

In 2016 of course we had a world-class deal delivery, but then 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 continued 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 assets but also how we look at the office portfolio around the world.

Startups of Stones in the Gulf of Mexico, Gorgon of course in Australia, Kashagan in Kazakhstan, and these startups – collectively, these startups in 2016 should add more than 300,000 barrels of oil equivalent per day and 3.9 million tonnes 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 at 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 referred to.

The levers that we are pulling are material, and this chart here shows the returns and free cash flow that we generated in each of the three categories that I mentioned earlier, cash engines, growth priorities, future opportunities. And again a reminder, these are not targets, but the chart shows you the possible shape of the company.

And of course, the environment can still play out differently, very differently from what we expect today. By 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. Cash engines will have stabilized the portfolios.

In 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.

And in the shales 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.

Now I also think it's important that we update you in a bit more detail on the plans in the near term and more details on the financial levers that we are pulling to manage our company today in this difficult environment. And for that, let me hand you over to Simon for the last time this time..

divestments, OpEx, CapEx, new projects. So firstly on divestments, where we've been a little bit busy in the last week or two. In fact, I probably spent more time selling stuff than I have preparing for today, so 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 as 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 of upstream divestments, may depend to some extent on oil prices. We won't give assets away. This is bit of repetition, but there's absolutely no reason today to think the $30 billion will not be achieved.

And I have said previously, if it takes a bit longer in order to preserve shareholder value, then so be it. But 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. So 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.

The track record is pretty good that we can respond quickly, in the right way importantly, because you will 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. So 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. So 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.

And going forward, these numbers will be impacted by divestments or by new project ramp-ups, and the macro such as foreign exchange movements will have an effect. So 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 costs obviously to be below $40 billion, and that will feed directly into the cash flow from operations.

There is 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 airtime 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. So startups combined by 2018 should produce more than 1 million barrels a day, but much 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. So 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. So with that, let me pass you over to Ben, just to close..

Thanks, Simon. Now before closing, I would like you to remember that, again, we are aiming at being this world-class investment case for Shell. And in the end, of course, you will measure this as total shareholder return, and so will we.

And 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 that better investment case, that world-class investment case. So 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. I said 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.

And 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. So with that, we have more than an hour if need be to do Q&A. So 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'll also have some questions on the phone. And I think you were the first one to put your hand up..

Hi, good afternoon, gentlemen, Chris (36:40) from JPMorgan, just one question please around your CapEx guidance for 2017. Just looking at them, this was the breakup 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, and then Simon I'm sure will have some observations as well. Yes, of course, we can take that number lower.

And 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 billion is not a cash number, by the way. The cash number is closer to $20 billion actually. So we add back in what we have to book as capital investment being the leases that we also have inherited from BG. And, Simon, I see you're putting your finger up. Simon will be able to explain that in a bit more detail if need be.

But indeed, we can bring that number down if we wanted to. What we've said, the $25 billion is not a high flow, 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 our strategy.

We need to fund our strategy, and I think about $25 billion is roughly right to sustain what we are doing to deliver that expectation that we set out in Capital Markets Day.

But 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 out..

Maybe because it may either preempt or prompt further questions, why go below $25 billion if you don't need to, if you go below $25 billion if you need to or if you can drive cost out of projects you've already approved, which we have been doing. And that's one of the reasons we ended up at $27 billion.

We can afford $25 billion, just think of the cash flow statement we've just put out for the year. So these are annual figures. The cash element next year of investment is going to be $22 billion – $23 billion maybe, $22 billion. We'll have a cash dividend of $10 billion on top of that. So you've got $33 billion that we need.

We have $21 billion of cash last year at $44, and actually $6 billion of working cap, so that makes $27 billion. There's a one-off tax payment really associated with divestments which we won't repeat. That's around $28 billion. If you add back $11 to today's oil price, here's another $5 billion or $6 billion.

So you're already balanced, and the sharp eye amongst you will notice how I omitted interest. There is a lot still to come in the projects, 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 billion or $20 billion?.

There are some leases in it and there is some exploration expense, so $22 billion, it's closer to $20 billion than $25 billion, but only just..

Thank you..

Hi, it's Jason Gammel with Jefferies. You've been very consistent in terms of the prioritization of cash and the uses thereof. But one component, one lever 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 goes to dividend and free cash flow generation. What we would like because it's more robust through the cycle is that free cash flow generation comes from that growth from the projects. It's not just dividend driven. But the dividend – sorry, it's divestment driven. The divestments will help bring the debt down more quickly.

So what we have stated is we will be more comfortable with the credit rating when the debt approaches $20 billion gearing or $50 billion in broad terms net debt. Those numbers have 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. But if you take the scrip off, you don't bring it back again two months later or two quarters later just because you did divestments. You need the through cycle cash flow.

So there it's confidence in the free cash flow through cycles and the prices that we see in terms of the cycles. That's when that would be I think a good milestone, it's a good signal, and thereafter you think about the buybacks basically. The one thing that 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 and 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? And my second question on a project which is Kashagan, you spoke about the economics of Brazil. Kashagan is a huge project obviously. It costs as much as Gorgon.

Can you talk a little bit about cash breakeven or cash generation of that project? Thank you..

Do you want to go ahead..

The cash on Kashagan. And cash coming back from the 2016, their working capital movement, quite a bit of that, as we've seen, has been driven up by basically the inventory, so that's the big driver, inventories.

There are other issues associated with trading such as the margin calls that could make it a little volatile on a daily basis, let alone the quarterly. That's one of the strengths of the trading business. We can put the balance sheet behind the position. So it's volatile only in terms of the margin, not in terms of the long-term outcome.

So I could never be precise, but our inventory level is around just over 100 million barrels. So you can roughly work out from that likely and back to the movement. What happened in 2016 was the last kick up, and it was in December, so we got no benefit really in the upstream of the $55 oil price, but we saw the down side of the working capital.

Kashagan cash, we had a good question this morning about what was the production from Kashagan likely to be, which was we took basically about 300,000 barrels a day. The capacity is going to be more than that. Let's see what the ongoing regular production is, and there is clearly huge potential over time to grow but not immediately and easily.

We are only one-sixth of that at 50,000 barrels a day. Our share is going out of the Caspian pipeline, the consortium pipeline. It comes effectively into you all's blends over into the Black Sea. So it was cash negative, cash from operations negative last year because of startup costs.

There's a lot of fee still activity before the cash started to flow back, but by December it was flowing back. And there are reasonably good margins because although it's a very high CapEx, the cash margin going forward, it's not that high a cash OpEx unit.

So it will, subject to stable production, be a good contributor then this year versus being a negative contributor last year..

And there will be continued focus. We've been very clear amongst all venture partners on further cost reductions in Kashagan as well. You can imagine there has been a bit of an intensive care approach to get the project up and running, make sure that we iron out all the difficulties that you have.

It's just a complex asset, bear in mind, but at the time we started it up, it was already 15 years old. So we had to make sure that this went exceptionally well, and it has. But I think indeed with reducing costs and stabilization of the production levels that we are now seeing, this will become a reliable cash engine.

And then of course, there's a whole raft of opportunities that we can subsequently look at, but that will come once we are absolutely convinced that this unit is working well..

.

Yes, Theepan and then Jon Rigby..

Hi, it's Theepan 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 benefit 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. But I just wanted to get a sense too on the BG transaction.

Do you feel you're ahead of schedule on the disposals? And given this week's transactions, should we also expect that the next phase of disposals should be a little bit more 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. And 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 that of course now standing here and say we knew that some of the deals of course that they had been working on were coming. I hope you will appreciate the deals that we have done haven't been easy.

So they do take time to piece together to come up with a construct that works for both buyer and seller and to agree to complexities around it. Think of the complexities that we would have had agreeing the North Sea deal. And there are quite a few of these still in the pipeline.

It's not going to be a straightforward auctioning off, so to speak, of the asset. So we do have quite a few more in the pipeline. I've talked about $5 billion, material progress on them, so think of that to be announced in the next weeks or months. But then 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. And 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.

So yes, I do think we have a plan or we are on track if you think of it as $30 billion in three years, and I'm very confident that of course certainly with the 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're working on. Maybe you can give some more guidance on it, Simon, but I hope you will be able to bear with us on this, also taking a little bit comfort from the track record that we have demonstrated..

The recent three divestments all have a common characteristic of really strong cash flow in the next three to four years. Thereafter, you have to continue to invest or extend the license or take further risk, decommissioning or otherwise. And it's better that the new owners do that because they will focus more on it. So it's a win-win situation.

And so we're basically accelerating that cash flow in the deal. So 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 that 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 onstream production in the U.S.

and the UK in particular, which will benefit from tax credits, and there's the source of some of the deferred tax balances that we carry. We do have some in Australia as well. So they effectively are used. Cash tax paid will be in some cases significantly below current tax..

Thanks.

Jon?.

Hi, it's Jon Rigby from UBS. Can I ask a bit of a shopping list. The first is can you maybe dive down a little bit into the downstream numbers for the fourth quarter, which despite the commitment to more progressive visible earnings streams, still seems 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 noticed you referenced the Permian. And obviously, I think it's probably a little bit of a hidden jewel that people usually don't work up to you owning. But part of the characteristics of the transaction you did with BG was to deepen in the long-cycle, so LNG, deepwater.

Do you feel comfortable with your short-cycle exposure? And maybe to 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? And then lastly, I take the point that someone made about the LNG market clearing.

I think it clearly contradicted a lot of people's negative views to start the year, and you appear to have been more sanguine. But I suppose it may even have surprised you a little bit.

And 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 talk around where the priorities lie or which projects sit towards the top end of your list, please? Thank you..

Thanks, Jon. 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. So you are 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 shales investments. They both, as Simon said, have in our portfolio breakeven prices that are below the $40 mark. So in that sense, you could argue that they are equally attractive.

But 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 deepwater business is indeed the very high free cash flow generative nature of it.

Once you pass the investment hump, it gives a lot of resilience, of course, for the portfolio when it is stable. And what we like about the shales portfolio is actually the ratability of the investment level, which of course we don't quite have at the deepwater side of the portfolio. You cannot ramp up and down that quickly. They come in big lumps.

Once you have passed an FID point, you just have to complete. So the only way you 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.

But with the shales part, you can flex, and 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. So having both in a portfolio is quite attractive.

They complement each other, and that's why we want to have roughly about 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, maybe probably also correct when you assume that we actually would quite like to have a little bit more of it. Now 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 into the $11 billion of potential barrels that we have in our resource base. And 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, and that is first of all market development. We are again uniquely placed to do market development in LNG.

And 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. So a lot of our investment effort and investment dollars will go into market development. And secondarily, a lot of it will go in sustaining existing supply chains.

We have quite a few supply chains of course that for a long period of time also have started to become slightly underutilized, and 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.

So these are two very important components of our strategy that need acting now and we are acting on right now.

Then slightly longer term is 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, and 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, but 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 the oldest of the two. They're still progressing with some urgency to get the cost in the right place, but not necessarily to take it in the urgent to FID are Canada or in Lake Charles and back to advantaged positions basically.

And no particular hurry or commitment to do it, but actually you then work back from the market as to when these projects come onstream, what will the supply/demand balance look like. That's very important to do that. We had 57 million tonnes of LNG sales last year in a market of 260 million – 270 million tonnes. That's over 20%.

We have a very good understanding of how to make the most of that in terms of timing investments into the market. Downstream, commitment to reduce volatility, we've deliberately separated equity, the marketing and the refining and trading. Marketing is what we term a ratable business, it's fairly predictable.

We have the volumes, we have the margins, we have the customers. And yes, it goes up and down a little in terms of the competitive tension. But around the world, you can see we're able to do several billion dollars a year just from that marketing stream 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 activity, that market. In fact, the products markets in particular were relatively weak, and that came back into products trading. But trading is 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 pretty solid earnings, but it is not immune to the cycle, and that was what we saw a bit in the fourth quarter. It is also what I would think competitive as well. So maybe this effect was bigger than we were all expecting.

The commitment to reduce volatility, and we talked about it right before, the philosophy here, but a big lever in transparency and disclosure, 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. A canteen ultimately is a canteen, and is impacted by assumptions and other things that you see coming through according to normal due process and just the issues arising. But mostly they're non-cash..

Thank you. We'll 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 first to focus on the trailing four quarters as opposed to the last two. But 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 costs 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? I'm 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 will be helpful..

Thanks, Guy. I think I will 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, we also had timing of tax payment for the first half of the year. We had higher tax payments, much higher tax payments.

There were one-off items in it. And as we go forward, future tax payments, in addition to the comments I made earlier, they lag the profitability. So 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. In fact, that's a deliberate choice. That's not just the inventory moving up and down. That is another factor. So we do that for value. We do that because of the supply positions that we have, the shorts and the longs length that we are aiming to match.

So the longer the period, the better, to be very clear on this, with cash flow. But the first two quarters were very unrepresentative. Remember not 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, so that was an interesting time.

And that was an unrepresentative level of volatility in the market, which has a direct impact on our ongoing cash flow. Though 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 and build into the model..

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 to $3 billion, do you think that that's a good run rate in what you need to spend to achieve that 400,000 barrels, understanding that obviously you could see some cost reinflation there before other projects? And then 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. And I believe you're marketing about 10% of the production, so you're about halfway through there.

Yet, the divestitures announced and closed so far is about $10 billion, so 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 slide that we are marketing or that we're thinking of. We also said we would probably get out of 5 to 10 countries altogether.

Of course, the sequence in which this plays out and how this will play out will always be to a degree unpredictable. So 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. But it is not an indication of value.

Simon, would you take the other question?.

Yes, the shale outlook. The $2 billion to $3 billion, yes, is a good run rate of the costs we're seeing at the moment, and 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 being working literally on survival cash margins and that there needs to be some flowback of that. But 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. But once we start, we will finish the development in a particular area.

But there are still in this just 50 to 100 wells. It's still much smaller than, for example, an offshore development, and that's how we think about it. Once we put the contracts in place, we'll do it. So $2 billion to $3 billion is certainly okay for a while. Let's see how it goes. We could spend more, no question, but not yet. We're okay where we are..

Thomas?.

Thomas Adolff from Credit Suisse. Simon, I've always enjoyed covering Shell. I've got a few questions. The first one, I want to talk about 2016 and 2017.

And just very briefly about 2016, what went right and what went wrong, and how did it compare with your budget at the start of 2016? And 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. And as I understand it, you have different definition from one country to another. But as it relates to Brazil, I wondered in the upstream whether you're interested to add more. And obviously you have preemption right on an asset that has been bid for and whether you can talk around that.

And 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. But 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.

And 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 in 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. So it needs to produce strong returns as well because it is actually – of course, it is such a large core of our company. But at the same time, of course, we have – and 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. So 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 to 10 years, not all 25 years. And the longer supply deals, yes, 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, and LNG will grow twice as fast as gas on average. And if that indeed plays true, we will see that there is a much larger market for us to participate in, and 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. 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. You have all commented it on it as well.

LNG projects have 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. You don't have to continue to invest in them to keep them where they are.

But 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.

And therefore, we have to be able to reduce the delivered cost of gas, and also the delivered cost of LNG..

Brazil concentration risk?.

Brazil concentration risk, yes, 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. And 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.

So we have a graduated approach, where we basically see 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 hole, 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, and therefore it is already quite high up in the concentration risk category. But 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. So in principle, yes, 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, and 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 pre-booked.

So 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. So it's not as if we have to jump on everything that comes across our way. But we do know that there are some very attractive potential resources in Brazil.

So 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, but whatever we take on, of course, certainly the 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 planned the startup 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..

Do you want to answer on good or bad versus budget? There were lots of questions in there.

I know. You were making good notes, so you can....

Just on GTL, we're saying, it is an operational factor in first quarter, maybe second quarter. We're just effectively taking the plant down at the moment. It could take a couple months to bring it back. We don't know yet quite how long it would take. There will be an impact on the earnings.

We 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 the Pearl, Woodside, and Gorgon coming on, Woodside coming off, and Pearl. We can't insure the 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 is at the top of my hand.

The costs of 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 is great momentum to do the right thing, which is very good to see, whether it's in projects, finance, running the kits 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 facilities that were not good. Overall statistics came back to a reasonably good place. Keep that in mind, we integrated BG. And by and large, though they operated well, their statistics were not as good as Shell's. So we've brought them more up to the common standard.

Our refining and chemicals availability, that's 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 [Brown] talked about it.

Some of you saw, that added around 100,000 barrels a day or 3% to production, in terms of better availability, low maintenance periods, and just the reliability of the upstream kit. That was a real positive because that should be sustainable as we go forward. And the last thing I will say against the budget, we made the budget on divestments.

That was a company's point to make, to be brief on this. And 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 that we just announced in the last week, there was a really good possibility of closing it before Christmas, but you don't because you go for the right deal, not just to get it into a particular timeframe. If you put the 5 and 5, we could have done 10 last year. We can't give you an exact timing, but we want to give you the right deal..

And then Lydia..

Hi, Biraj Borkhataria at RBC.

Just going to slide 19, your deepwater production profile, am I right now in thinking as we move further out, the lines are a bit more fuzzy than they were in the last presentation, and just wondering if anything had changed there in terms of the longer-term deepwater outlook, whether that's venture divestments or IR having artistic freedom, anything on that?.

As I don't make the slides myself, I don't know exactly what were the reasons for the....

I do..

...fuzziness, 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 would probably regret being too specific, bearing in mind divestments may play a part.

There are what would be an aim to clean up the portfolio in the Gulf of Mexico to make sense. And conversely, there are investment opportunities in, for example, Nigeria that if they go ahead, they go ahead. If they don't, they don't. And so the big drivers, the Appomattox, the Stones, the Brazilian program.

Question mark around Vito, we've not taken the final investment decision, although it was a great project. Kaikias, we said we're nearly there. So a combination, we just toned down the specificity, but there's no real change in the underlying expectations..

And no change in intent either. This is still very much the 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, purely equal with the conventional oil and gas portfolio.

We have very clear intent on all three of them going forward, both BG, on deepwater, absolutely no change in the 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 chemicals side and the divestments on the SADAF 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? And 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, and what is the magnitude of what Shell can be 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. There has also been a project or a joint venture that we've 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.

And then these 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 it for some time. In the end, we decided that the project 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. And then, of course, the interests started to diverge, with us of course knowing that this would come to an end of the joint venture agreement in 2020, and SABIC had a different view on it.

So rather than to see could we extend it with a big investment program around it to provide the execution for expending it, it became 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 in our work and the best thing to do was to basically amicably part, which from time to time happens in joint ventures.

So 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 obviously in Shell?.

Have you looked into the future?.

You read my mind. My answer would be not yet. And the reason is, and just let me reflect. Up through the late 1990s, Shell was the – almost the benchmark of a federal system, autonomous unit. Every one of them, wherever it was in the world Nigeria, Egypt, Brunei, they were efficient and effective. But the world moved on.

The world became much more global, much more standard. So I have 120 different ways of running retail, so it was no longer appropriate. We then went through probably a decade of bringing it together, globalize it, think about functional expertise being applied.

So that has some very good things, but it can also lead to what one might call excess professionalism and the perfect being the enemy of the good, characterized the last five years and particularly on the bend getting the balance right.

Whether it's 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. It's not just about efficiency.

It's about effectiveness as well because the extra dollar might have gone to something worthwhile. And some of you might 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.

Now 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. And so what we're having is a much better conversation about that.

And why do I say not yet, because I know where that conversation is taking us, and that underpins the statement I made. There is multibillion dollar potential on OpEx alone and a bit more probably for the additional margin that Istvan [Kapitany] will deliver I'm sure.

And 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. And 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. We'll go on the phones first and then to Oswald..

Doug Terreson of Evercore, please go ahead..

Okay, first, congratulations on your progress and good luck to Simon. And 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.

And on this point, when you consider that total shareholder return of the super-majors has only been about 3% annually over 5 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? Or 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?.

It's a remuneration question. I'll take it, it's 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, and 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 lost that in the 1990s when we didn't quite participate in the consolidation of the industry that happened, and we have been fighting our way back.

And we want to be back in that number one position again. And we think we can by doing – 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.

And if I don't think back on what it is that we expect to be by the end of the decade, which is $25 billion to $30 billion in total free cash flow if you add in an inorganic piece as well, double-digit returns at $60 oil, compare that.

It's $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.

Now, what does that mean? If I think I get to the question you referred 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, 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 in absolute cash flow because we do not want to shrink ourselves to greatness by getting out of positions and improving the total by improving the returns and the free cash flow per share through a divestment or liquidation of the company. And it's also indeed focusing on TSR.

So I do think the metrics on which we judge ourselves and the metrics that will drive the very substantial or the biggest part of the senior executive remuneration at our company are aligned with what we promised to our shareholders.

Now again, I apologize if I haven't quite got into the heart of your question, but please clarify whether this does it. Okay, good. I said I would go to Oswald next..

Yes, thank you. Just 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 at that kind of market size if there's a lot more gas demand. And then secondly, just on exploration, maybe could you give us an update. Talk about any successes last year, if there were any. I didn't note anything, but I note that you have changed out your head of exploration recently.

So just really an update on what's happening with your exploration strategy. Thank you..

Okay, let me take the second question first. On China, yes, 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 it to 10% to 15%, and ultimately I suppose to something that is much more like what we have in Europe or in the U.S., 25% to 30%. That of course is a massive amount of gas if you think of it. A lot of it will of course come as bio-plant gas, but an awful of it also is LNG.

So we still see very strong growth in natural gas going forward. Will that happen organically and automatically, et cetera? Yes, to a large extent. But for those of you who did pay attention to what China announced I think this morning, they announced another 54 gigawatts of power stations, coal-fired power stations being cancelled.

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. And if they were all replaced with wind farms, we'll be looking at that as well, of course. But I was kidding. So 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 be – 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, we will be asking ourselves a 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? And at the moment, we are doing exactly that in China. Where we can be in country trading and marketing gas and power, we will.

So China is an opportunity for us, India is an emerging opportunity for us. Brazil is another opportunity for us. So we will be entering these markets to be our own customer.

So 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. So being more integrated into these markets is a strengthening of that position as well.

But 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'd do less, we will need less. We did get the total spend down around $2 billion last year, which is in much less frontier. And you tend to hear about the frontier, maybe not the focus in the basins where we are.

So 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 route, not the charges. Obviously, we have to make sure that we can get barrels through the actual facility that we're building. We have good success in the UK.

Beryl, 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 E&P, you'd be giving us great credit for that deal, drilling a well, monetizing it immediately. And 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 being careful, using existing infrastructure, working on basins we know well.

The Nigeria funding scheme that's been developed and hopefully will be implemented in the not too distant future is a very strong incentive for everybody to start doing right by the investment again. So all of those can come together over time within the $2 billion limit that we've set for ourselves going forward.

There will be less frontier work until we see a different, almost both requirement, but also opportunity..

Thank you, Martijn..

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, and 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 of the work we're hearing are on projects that have these very low breakevens.

But relative to with the close to 4 million barrels you produce, how material is that pool? Can that pool of investment opportunity keep you going for years, or are we just talking about like a handful of projects that maybe carry you for the next one or two years? And 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. And 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 and then you can think a little bit more when we move on to shale and our relationship with Anadarko, which is very well noted, by the way, Martijn.

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. And it is really an S-curve with a very, very large plateau in the middle.

And the interesting part of it, 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 deepwater.

So it's not as if we have everything concentrated at the front end, when it is say the Permian or unconventionals and the other opportunities sitting at the tail end.

Now, 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, but Simon's spreadsheet and mine will probably quickly work it out.

But I would say if I more qualitatively talk through it, I think if you look at it, in the deepwater we do not have any lack of that in the opportunities. Indeed, in the sub-$40, in some cases sub-$30 range, to keep on flogging away for at least a decade. So we do not run out of running room of opportunities that are just not good enough.

And at the same time, these are getting better all the time. And 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 for projects, 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. So what we see coming back is still more opportunities. People say 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 it 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. But hey, if you want to have resilience, we can give you that. So that's in the deepwater. That particular program hasn't run this course. The same is actually true for unconventionals.

If you look at the opportunities that we have in the Permian, in the other mainly liquids position that we have in Canada, they're actually quite significant.

And 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.

But 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.

And actually, when I referred 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 it particularly for. And there we see that we can indeed extend the life of this cash engine for quite some time, but it starts to really tail off in the $30s.

And we also noted 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. So that's why we have a lot of focus right now on where are what we call stuck barrels or what we now started calling the strategic battlegrounds to get these barrels really recovered.

So 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 with 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.

So what I think, I think we are in a good place, and I know that we are numerically in a good place in the themes that I mentioned. And I know that our focus needs to be in the conventional oil and gas business, but it's not a business that is 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..

Now the S-curve line was no longer $40, but most of it was under $50. The deepwater wells started off with a $50 cap, and then he's pushing it down to $45, and he's in competition with Greg [Guidry], who runs shale. So while we're on the deepwater, the two of them are literally in competition to bring the line down.

We said that's pretty healthy inside the company. And yes, you're right. Anadarko does end in 2017. We're both well aware of it. We're both doing quite some work. There is 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. So 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, but it should be, at least in theory, either value neutral or some transfer of value one way or the other. Sorry, it shouldn't be value neutral, it should be value-accretive to both of us, and we should both get our fair share ultimately..

Colin, it's going to come to you..

Yes, 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 when that project gets going.

I just wondered if that was 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. The 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 (1:43:01).

And do you talk about (1:43:03), the capital spend step-up that we will have in 2018?.

Yes..

Okay, the overall project, so we sanctioned this project, but of course for affordability reasons, we also said we will have a slower start in terms of stepping up spend on the construction phase. So that will indeed now come because it's ready to get there.

And we are still working our way through some of the permits that we need to have, but that's just the normal state of affairs that you will have in any project. But 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, but expect that to be not anymore this decade because it is a very large greenfield project, but 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 and basically now are in a position that we can start building on it. All the silver 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, but also because it will be a reentry for us in polyolefins. We had been in polyolefins, got out it through a very difficult convoluted way in the past through a number of joint ventures.

This will be a reentry in a way that will sustain our position as a polyolefins player. On the Vaca Muerta, let me say a few things, and 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.

But at the same time, as I said, it's a little bit less well delineated as what you would see in the Permian. There have been sort of sticking holes in that for the last century. We are a long way off from that in Argentina. But 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 that we still need in terms of getting the right gas prices and even oil prices in Argentina. And 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 depreciation behavior you will see in these assets.

So 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 large workforce, unionized workforce in the case of Argentina, that understands how to play this game efficiently, and we will have to continue to work on that as well.

But 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. And every time I speak with President Macri, he's very keen to understand what he needs to do in order to get us to that point.

So 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. So this will take off. It's just a matter of lining everything up..

You guys read these slides pretty closely. We've got seven positions. The five key positions, three liquids, Argentina, Permian, Western Canada. If you include 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, so there's still a little bit of learning in that area. And Groundbirch and Appalachia. So Groundbirch in Western Canada and Appalachia, basically the Utica, the Marcellus are the two big gas positions. So 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. And we actually sold in the Haynesville our own position some time ago. The BG position is better than the old Shell position. It's a valuable asset but 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 and 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. In March, we will do another one in New Orleans in the U.S. looking at really how we see that industry going forward.

Then of course, we have the first quarter results scheduled on the 4th of May in this year, and that is something that I will do then together with Jessica. Now, normally I have the last words 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.

But 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, and that is a legacy where Simon's fingerprints are all over.

So 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.

And 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 tough for you guys, I think, because I'm saying farewell. I'm not sure what I'm saying farewell to, but hopefully a better legacy than there otherwise would be had I not been involved. I had a bit of fun with the press this morning, so I'll be slightly less off script.

My first words with you guys, actually literally some of you guys, December 2000, when somebody came up, 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.

And that was the first, and some of you may claim the only thing I ever actually delivered that you asked. So 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.

And should we say hold up the mirror to us, ask the questions in a way that particularly work for us, don't always do, is actually incredibly powerful and helpful. Because no matter how much we try and surrender ourselves with a diverse challenging critical community, we don't always get the full story, but 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 cycles, and definitely a better understanding of risk.

And their own organizations that 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 details.

And yes, I am a physicist, so 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 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.

So bear with it, 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 are looking at.

Now I don't know if that translates well, but 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 define 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 detailed 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 who sat with me in this room while we're discussing the decision, what would they be thinking, what would they be asking, and that's the mental mindset I have carried since I worked with you in the first time.

So I hope that has translated into better decisions. You don't get more right. You're right about legacy positions. There may have been one or two we have done differently, maybe one or two I'd prefer we hadn't spent quite so much money on. But given the situation we were in 15 years ago, there wasn't an option to do nothing.

I hope we've ended up now – at least we've not ended up, we're still on the agenda, but we're in a position now where that platform is the best in the world. I'm pretty convinced it is and we now see the delivery from it. So despite what you might think and the banter that we've enjoyed over the years, I have actually enjoyed it. Thank you.

Thanks a lot, and a lot of the sport that you've given us, particularly a couple of years ago when we did – sorry, a year ago when we did get the support for the BG deal, that was really great to have in fact everything that pans out. It was great working together on that.

And hopefully, that will give you the bottom line that we've all sought for many years. So thank you, all, and good luck in your support for Shell in the future. Thank you and good luck to Jessica as well, of course..

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect..