Welcome to the Royal Dutch Shell, 2020 Q3 Live Q&A Session. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the call over to our first speaker, Mr. Ben van Beurden, please go ahead, sir..

Thank you very much Anna. And ladies and gentlemen, welcome. And thank you very much for joining us today. I really hope that you like the flexibility of being able to listening to the video of the results presentation ahead of this call. And please also provide your feedback to the IR team on this new format that we have for you.

But now is the time to focus on the questions and answers in this particular session. So let’s first of all, take another look at the disclaimer. And then before we move to questions, I actually would like to have a few key messages brought across. First, the Shell of today is resilient.

Our portfolio and our operations have shown remarkable resilience in incredibly challenging times. The measures that we took to preserve cash have paid off and made us stronger, both operationally, as well as financially. We have been consistently generating more operating cash flow than our peers. Secondly, the Shell of tomorrow is growing.

We are very well positioned to capture value in the energy transition, with the strong position we start from and the strategic direction that we have chosen. Our portfolio delivers strong performance today and is contagiously positioned to deliver strong performance also into the future.

We already are market leaders in businesses that are key for the energy transition. We lead the market in LNG, we’re also the market leader in our customer facing marketing businesses. So we are ahead. We have a portfolio today that others aspire to have in years from now. Third, we offer a compelling investment case today and tomorrow.

We have a clear framework for our investment case. Today we have given you more insights in our priorities for cash allocation. So we are announcing an increase of 4% in our dividends this quarter. But we’re also announcing a target milestone for our net debt of $65 billion for the near term.

And once we have achieved this milestone, we target to further increase shareholder distribution. So we are not offering the promise of future growth, but also increasing shareholder distributions for the near term. And with that let’s go to your question.

So please, can we have one or two of each so that everyone will have the opportunity to ask a question. Anna, back to you..

Thank you. [Operator Instructions] We take our first question from Clint Oswald from Bernstein. Please go ahead..

Thank you very much Ben and Jessica. The first question please. I mean, I like your message today around shareholders having first dibs on cash flow before the growth CapEx and especially the kind of new energy CapEx.

But I think it’s an incredible shift in confidence in just six months when you talked about significant mid- and long-term uncertainty in a potentially changed world just six months ago.

So I’d love to hear a little bit more about what supports this really 180-degree turnaround which is fed into your dividend decision, or has it just been, the cash flow generation has genuinely surprised you over the last six months across the group? And then secondly, please I had a specific question around the other message on customer-focused businesses and aiming to reduce emissions.

So I received my Shell go offer this week to pay a little bit more for each liter of fuel over here in the UK, so I can see what you’re up to. But I wanted to ask about carbon-neutral LNG. So on a scope three basis, and I can see what you’ve been up to, but with the carbon price assumptions I’m using, it feels relatively expensive to offer these.

So question is, I mean, could you talk around the appetite for these products? Are you receiving any type of premium pricing yet, or some costs pass through, or perhaps a carbon offset price I’m using is just way too high and you could offer me a more realistic number, please? Thank you..

Thank you. Some of the great questions to start off with. And let me take them both actually. So first of all, the six months, what has happened in the interim? I think it is fair to say that we acted with good prudence, six months ago. We did not see the clarity of – the way forward in a way that we can see now.

So indeed six months does make a difference to understand how this pandemic is playing out. And we all know, of course, we are not yet out of the woods when it comes to the economy and the damage that the pandemic can still cause to it.

But what we do know is that the measures that we took six months ago in deed to reset the dividend, which was very painful, but also to bring down our capital cost, to bring down our operating costs, these measures have really stabilized the company in terms of financial resilience.

We also know how the company operates in very, very difficult circumstances. And as you will have seen two quarters in a row, it operates very well on the very difficult circumstances. So it’s a different level of confidence that we have in the resilience of the company going forward.

And then we set, let’s be very clear, even though we reset the dividend, we offer a progressive dividend. And even though we have set the dividend lower, we are also looking at what this means for the future.

So at this point in time, I think, we can say with confidence, not only how we go forward in terms of the direction, but also what it means for the payouts that we can give to shareholders. And if you have a progressive dividend, you better have a progressive dividend. And that is what we are confirming today.

On the carbon neutrality, yes, indeed, first of all, thank you very much for stepping into our GOAL program, which indeed means in the UK that we will offset the carbon emissions of your car.

But indeed also increasingly we see this taking up in other parts of our business, not only countries, it’s very successfully launched by the way in Germany, and Austria, and Switzerland, and we are doing it also in Canada next month, but indeed also in L&G.

And we have, I think, by now, sold six cargoes carbon neutral and we combined that with our Nature Based Solutions portfolio that we have and customers want it. And that is another reason why we have confidence that there is money to be made in the energy transition also in the more traditional parts of our business.

Thanks for that first opening question. Anna can I have the next question, please..

Thank you. The next question comes from Thomas Adolff from Crédit Suisse. Please go ahead..

Good afternoon Dan and Jessica. Two questions from me as well.

Just firstly, on when your net debt target, what is so magical about this $65 billion? Does it allow you to keep a AA in a reasonable oil price environment and then linked to that, the new distribution policy is the idea also to keep the cash dividend burdens mostly unchanged as the buyback is playing an increasingly important role? And secondly, your comment on LNG, you obviously aren’t already the largest player amongst the publicly listed accompanies.

And if we assume LNG demand grows, I’d say 5% annum in the next 10 years, which is obviously slower than the 10% we’ve seen over the period, 2017-2019. And you want to grow in line with the market that essentially means doubling your business because you need 40 million tons of new capacity. You still have about 20 million of expiries.

And I was just wondering whether that’s even feasible with the opportunities that you have. Thank you..

Thanks very much Thomas. Let me take the second question, Jessica will take the first one, which by the way, was a question we anticipated. We said we will grow with the market. We see the market for energy grow. We probably are a little bit less sort of conservative in our growth outlook.

We’ve been talking about 4% or 3% to 4%, depending a little bit what timeframe you look at every one to participate in that growth. It doesn’t necessarily mean that we match it percent for percent. Within a growing market, you will want to continue to invest. On the other hand, LNG, a very long date fixed assets.

So you want to make sure that the investment decisions you take can stand the test of time. And the test of time in LNG decisions are many decades unlike for instance a deep-water investment. So we will grow with the market, not necessarily matching the market, but we believe indeed this is a good proposition for us to continue to invest in.

Jessica on the $65 billion..

Great. Thanks Thomas for your question. So the $65 billion net debt target is, as you said a threshold number for us to indicate when we’re comfortably within AA metrics. We’ve not changed our position. We’re looking to strengthen our balance sheet that’s been unchanged for the last several years.

We found gearing was a little bit messy because there are a number of accounting elements that come into play both on the numerator and the denominators. We wanted to have a more, clear and simple target to communicate with the market. But of course, we look at a variety of metrics and ways of considering our balance sheet.

The $65 billion is the threshold number that we think we need to achieve to be comfortably in the AA metrics..

Thanks, Jessica. Thanks Thomas.

Can we have the next question, please Anna?.

Thank you. The next question comes from Christyan Malek from JPMorgan. Please go ahead..

Hi, Ben, and Jessica. First of all, thank you for some positive news flow amidst everything going on. A few questions from me.

First on the fixed variable cash return so to speak once the $65 billion net debt threshold is delivered, what will determine how the variable distribution can go up to 20% to 30% of cash flows have filled between buybacks and additional special dividends? Secondly on capital allocation and CapEx is the $19 billion to $22 billion per annum, primarily oriented to 2021? I assume it is.

But as usual is it based on executing on net debt reduction target.

But how should we think about allocation priorities and drives of medium-term CapEx beyond that, including potential upward pressure on new energy spend as energy transition accelerates, especially on the lower debt, higher macro conditions? And the third and final question, apologies, as you’ve identified nine core upstream regions to disposed applications based on full-year 2020 turning upstream production around 2.45 million barrels a day, how much of that volume-based is accounted for by the nine identified core regions? In other words, what proportion of the remaining asset base becomes directly non-core? And what parameters could determine the disposal strategy around those residual positions? Thank you..

Okay. Thanks very much for the question, Christyan. I will take the questions in reverse order and do three and two and just kind of talk about one.

So first of all, on the core and lean, so for us core and lean is indeed a very important distinction to make sure that we pay the attention and look after the most important assets with the biggest running room and the most advantageous positions, with indeed the most CapEx and the most attention.

So 80% of our cash flow comes from these nine core positions. More than 80% of our investment will go in there as well, including by the way, exploration expense. So the other ventures that are in the lean model are therefore three reasons that could be there for instance, because they are still in almost incubation mode.

So, like the Surinames of this world, we just want to make sure that we can develop it, which may well be unsuccessful by the way. But if we do, indeed, it might become core. It may be that assets are without running room, but we are still quite happy with them.

And therefore we just run them for cash, or it could well be that if you want to ready them for divestment. So don’t think for a moment that all the other non-line positions are immediately divestment candidates, that may be by the way. But it also means that we can flip between core and lean.

At some point in time, core assets will go into a twilight zone and will go into the lean portfolio as well. And as I said, the other way around. The production associated with it, I don’t have that number too high, for us it’s indeed more value than volume, but please get back to the IR team, who I’m sure can fill you in on that.

In terms of the capital, so indeed 90 to 22, that is the sort of near-term spend that we have. About a quarter of that will go into what we consider now, a growth portfolio. So marketing, power, bio, hydrogen, that was by the way, 11% in the last three years. So a significant step up towards growth.

What we will do with capital in the medium-to-longer term? Well that depends.

I think, first of all, we have to get to the $65 billion, then we have to increase shareholder distributions and then indeed a time will come when we will start with a very measured and disciplined increase in capital, because after all you want just to grow the value of the company as well.

The way that will play out, we will have to ask you to be a bit more patient until February, and we can give a bit more updates on all of this as well.

Jessica?.

Great, Christyan, thanks for the question. So what we’re offering today in terms of our investment case is growing distributions starting today, as well as upside and future shareholder distributions once we increase cash flow from operations.

When we reach that milestone of $65 billion of net debt, and we’re looking to increase shareholder distributions of 20% to 30%, we continue today to have a bias, if you will, or a belief that share buybacks should play an important part in how we distribute to our shareholders and to an earlier point made today, I’m sure that our total distributions remain affordable and do not continue to kind of grow exponentially through time.

So that’s important for us. However, we’re going to see where we are at that moment in time, what is appropriate for our shareholders. And we certainly can continue to give ourselves the opportunity, the space to look at dividend levels if that seems more appropriate at that moment in time.

So we’ve retained the optionality if you will so that we can be responsive to what the market needs. But share buy backs, I believe, will continue to be an important part of the overall investment case..

Great. Thanks very much, Jessica. Anna the next question..

Thank you. The next question comes from Biraj Borkhataria from RBC. Please go ahead..

Hi, thanks for taking my questions. And appreciate the more condensed format. Thank you for that. So I’ve got one question on the downstream business. If I look at the movie made in the last decade or so is to concentrate, refining and focus on these kind of three core hubs. So I’m looking at Slide 17, the one thing in this stand out is Scotford.

And I appreciate that’s an attractive asset in the sense that it has very regional, specific dynamics. But I imagine if you wanted to sell, there will be good demand for that type of asset. So it’s not really clear to me if that fits in with your longer term vision for the company.

So could you talk a little bit about your commitment to that asset specifically? And then the second question is just on the job reductions for 2021, 79,000 people leaving. Is there any – or can you give a magnitude of the kind of severance payment on a cash basis that we should expect to come out in 2021? Any help on that will be appreciated.

Thank you..

Yes, thanks Biraj for these two questions. I’ll take the Scotford one, Jessica will take the second one on severance. On Scotford is a high quality asset. First of all, it is a very advantaged asset in the way it’s configured, in terms of both the upstream value chain, but also the downstream value chain.

It plays very well into a, what we consider to be an advantaged envelope in that part of Canada. By the way, an envelope where we have also a strong branded position. And then the other thing is you have to bear in mind Scotford is integrated with chemicals.

We do have a MEG and styrene position that is fully integrated with the refinery, which in turn, by the way is still integrated the integrator – with the upgrader. So it is a high quality asset. There is no need us to despair about the future of that asset.

We can trade around it in reasonable positions as well, even though it has no access to open water. So therefore there is – it fits within the portfolio that feed that we see for the future. Jessica on the redundancies..

Biraj, thanks for the question. We are finalizing the complete design of the organization over the coming months. So we’ll have a better insight on that final number in the coming months.

We’re expecting somewhere between $1.5 billion and $2 billion in severance costs that will be between 2021 and 2022, just depending in terms of the timing of how it’s ultimately implemented. But that’s the number..

Okay. Thanks Biraj. Anna the next question..

Thank you. The next question comes from Ryan Todd from Simmons Energy. Please go ahead..

Thanks. Maybe the first one. I mean, marketing was very strong in the quarter. Can you maybe talk about some of the near-term drivers of that? And the longer term you’ve grown, the marketing earnings at almost 10% a year over the last eight years.

Any thoughts on how you see underlying growth over the next five plus years and where you see that as a normalized share of kind of Shell earnings going forward? And then maybe for a second question you have multiple refining assets for sale and obviously you have a long-term strategy you said here to focus on a smaller number of large-scale parks.

The outlook is particularly challenging right now for refining with increasing pressure on rationalization of capacity and not a lot of obvious buyers out there.

So how do you think about divestment versus rationalization and how you may approach that over the next couple of years?.

Okay, two very good questions. I’ll take the first Jessica will take the second. So yes, I mean, you’re right, good observation.

We have been growing the performance of our marketing business, which includes, retail, B2B sales, our lubricant sales, but also things like bitumen, sulfur and other products that have come out of our refining base if you like. We have been growing at very consistently year after year.

As a matter of fact, if you look at the last month we made in a month, what we used to make in a year, 15 years ago.

And that is not because it just happened to be a very good month, it is because we have continuously upgraded that business by first of all, growing it in size, growing it in scope, bringing in things like non-fuel retailing, but also better margin management, better value propositions, et cetera, et cetera.

And we have high grade of quite a bit by getting out of market that’s where we could not be number one or number two, and in some cases, even getting out a number two market. So does that trend continue? Well I think so, I can’t predict at what clip it will continue.

But we see marketing very much as a platform for growth into the future, upon which we can also build our biofuels business, which relies on the fact that we are the largest marketer of jet fuel in the world as well, or our hydrogen business where we are also in a leading position small, but nevertheless leading in the industry.

So, marketing for us is more than just the traditional fuels retailing, it is actually a transition into the future for us. I think it will continue for some time to come, but it will change in its makeup. The near-term drivers indeed, first of all, better margin management that we have seen higher penetration of premium fuels more than 20%.

And we are also seeing an increase in the basket size in average retail customer visit in our sites. So multiple number of drivers, some of which will indeed be specific for the pandemic, but many of which will turn into longer term trends into the future..

Great. So, in terms of the refining portfolio, and how we’re going to manage the transition of that portfolio? There’s a number of different levers that will be pulled. The first one is retaining the refinery capacity in the key markets tied to our chemical business and that’s where the six energy and chemical parks will be created.

For those that don’t make it into the parks that either they’re not the right asset or not in the right location, we’re going to look to divest. We recognize the market is not great at the moment in terms of diversity and assets. We’ve had success in the past and difficult market.

So, I wouldn’t say, that’s not possible, we certainly believe that can be possible, but we recognize it’s difficult. If it’s not possible, we will consider closing and shutting down. That’s ultimately the last option we’d like to pull.

And then there’s another piece as well in the portfolio where we’ll be shifting those to two different types of operations, which we’re doing in the Philippines today and moving that to a terminal operation. So, there’s a number of levers we’ll pull. In all cases, we’re looking to maximize value.

We think we’ve got a lot of optionality in terms of how we manage over the next couple of years. We’re not dependent on divestment proceeds over the next couple of years to deliver our strategy.

So, I think we’re well placed to do this in a managed way and strategic way to end up with the position that we want with our energy and chemical parks in the future..

Great. Thanks.

Can we have the next question please Anna?.

The next question comes from Michele Vigna from Goldman Sachs. Please go ahead..

Thank you. It’s Michele. Ben and Jessica, thank you for your time. And sorry for asking one more question on your cash distribution, I very clearly see the benefit of building a conservative balance sheet.

But I’m wondering at the time when bonds are very, very highly valued, and that decades low yield, and your equity holders are suffering and unprecedented crisis of confidence and low valuation. I wonder whether from a technical standpoint, it wouldn’t be better to fast forward the start to the buyback program versus financial the gearing.

And again my question is very much tactical. It’s not driven by the priorities, which I think are fair for the long-term in terms of balance sheet dividends and buybacks.

But with this level of share price, wouldn’t it be better to effectively start earlier? And then my second question, if I may, also related to cash distribution is the range of 20% to 30% is actually quite wide for cash distribution.

Could you perhaps shed a bit more light on what would be the key elements that will drive you to the top or to the bottom of that range? Thank you..

Yes, thanks very much. May be take the second question Michele, and then Jessica will talk about first one. It’s debatable whether 20% to 30% is wide or narrow. It is a matter of fact, as you can imagine, we had a good debate about it and the board, but ultimately, we very clearly also settled on this range.

The bottom of the range obviously is roughly where we are today or a little bit higher. The top of the range, of course, we will probably want to reach also at a time when we have a significantly better cash flow performance as well.

So, how we will make the determination? First of all, the cash flow that we will use in the determination of the buybacks will be the cash flow that we will have delivered over the – say, four quarters rolling past. And the percentage where we end up will, of course, then be a determination of the confidence into the future.

That gives us indeed, arguably a range of flexibilities. But bear in mind also Michele, by the time we are in the mode of indeed stepping up distributions to shareholders beyond the progressive dividend, we also still want to be in a mode of further, the leveraging the balance sheet. That brings me to your first question, which Jessica will answer..

Good. So Michele, your tactical representation, I think, is entirely fair. And it’s a reasonable question to ask. However, we’re here to lead and thrive in the energy transition. And we have a very clear strategy. We believe, we have an important role to play.

To some extent, the success of the energy transition will depend, I think, to a large extent, on companies such as ourselves, with our capacity, our intellectual capacity, our assets, our knowledge and our experience in energy markets, to play a meaningful role in the energy transition. And we can only do that if we’re a strong company.

And for us, that means having a strong balance sheet, which I think this year has really proven to be a very important piece as we go to the energy transition.

The volatility that we’re exposed to from the commodity perspective, the volatility we’ve been exposed to from a pandemic perspective, to large extent we’re able to manage because we’re a strong company.

And if you look at the level of change that needs to happen, and the risks that will be exposed to, I firmly believe having a strong balance sheet is fundamental to our ability to deliver our strategy. And I think that’s what we’re here to do..

Absolutely.

Anna, who’s next?.

Next question comes from Irene Himona from Societe Generale. Please go ahead..

Thank you very much. Good afternoon, and congratulations on the cash flow performance in the quarter. Ben you have said yourself in the past that the oil majors are a little bit like big black boxes. And clearly, there’s no bigger black box plan integration trading optimization.

And today in your presentation, you’ve highlighted that integration is an advantage as you as you drive the strategy through energy transition.

One of your peers has tried to quantify the value to them of trading, or you prepare either today, or in the February strategy presentation to give us some concrete quantification of that value added through your integration in your ability to make the value of the portfolio much bigger than the sum of the parts. Thank you..

Thank you, Irene. And thank you for acknowledgement. And thank you for what is indeed a particularly important, but also tough to answer question.

So indeed, our trading and optimization and our supply function, if you like or business, whatever you like to call it is absolutely core to the success of our company, it actually makes the magic in many cases. And quite often, it’s very hard to show how that works without disclosing an awful lot of commercially sensitive information.

But just two points. First of all, bear in mind this is not a speculative trading business. But lots of people take funds on the market, and then either turn lucky or unlucky, and we tend to be lucky clearly for my track record. That’s not the way it works.

Basically, what we do is, we give a traders and optimizers and schedulers and operational people that mandate to work together to understand how you can add value working on molecules and electrons, through our assets, through our contracts into our markets. And that gives us opportunities to do things that others can do.

I’m happy to try again to explain a little bit more anecdotally how these things work.

But take for instance, our LNG business, everybody understands if you run a baseload trend lined LNG business, you can’t get to the results that we make, you get to those results if you are able to continuously re-optimize, reschedule re-arbitrage goes in different parts of the world.

It is impossible to show exactly what we are doing, unless we want to completely open up our entire trading book, which is something we simply cannot do even if you wanted to.

But I take your point, we have to tell a better story, how trading and optimization adds value that is clearly visible, but not necessarily always understood in its intricate details. Thanks, Irene.

Anna can we have the next question, please?.

The next question comes from Paul Cheng from Scotia. Please go ahead..

Thank you. Good afternoon. Two question please. You indicate that 25% of your future investment is going to be in the growth area.

Can you break down between marketing and the rest of the new future energy business over the next five year how does fit going to look like? And in the marketing, how big is the contribution of the lubricant in the for the sequential improvement that we see in the third quarter from the second quarter and also that for your renewable business, the future business, how important is the inorganic acquisition is going to be a part of your strategy to achieve your target over the next five years? And are you concerned seems like asset price are being beat up? The second question is on the cost reduction, the $2 billion to $2.5 billion, is there any of that part is already achieved in the third quarter? And can you break down by segment or by the type of expense with related to $2 billion to $2.5 billion? Thank you..

Thank you very much, Paul, and welcome to the call. I like the way you managed to get five questions into two, but we will take them all. And so first of all, talking about marketing. So yes, in the 25% a step up from very, sorry, growth a step up from where we used to be and marketing is a significant part of it. So 11% to 25%.

The breakdown of that 25% into what is retail, what is lubricants? What is some of the other businesses how much biohydrogen et cetera? I will have to ask you to be patient. And hope to see you back again in February, when we when we share a little bit more on how that all works. That’s not that’s not for today.

But what we can say today is that, indeed, our customer facing businesses, so our retail business and our lubricants businesses that you both refer to have had a very strong third quarter. If you take at retail as an example, quarter three to quarter three, we have seen 25% growth on a clean basis.

Take lubricants 40% growth, so very significant increase this quarter-to-quarter in what are arguably very difficult market circumstances.

Now, the other questions on the inorganic growth, power and hydrogen, Jessica?.

Good. So, on the inorganic growth for power and hydrogen, in the near term, we’re not expecting material inorganic growth. So, when we talk about the $19 billion to $22 billion of CapEx that includes inorganic growth. So clearly, we’re not expecting to do anything merit material in the near term.

However, there will be a role for inorganic activity there already has been for the last couple of years, we were making a number of acquisitions that relatively small for a company our size, and that will continue to feature as we build out our capabilities, bring in different pieces of the value chain so that we can create truly integrated business models.

So that will be an important piece. There was also I thought another question, but perhaps not, I’m not seeing it up on the screen..

Okay, thanks, Jessica. Thanks, Paul. If the IR team picked up the other question, and we’ll come back to it in a moment..

I’m sorry Ben, I do remember..

Oh, okay..

This is live. So it was on cost. That’s an important one. So, I wanted to talk to it. So that’s why. It’s a good that I have my paper here for backup. So on OpEx, there’s a lot happening. So, let me just hopefully quickly, but comprehensively cover it. We set an ambition to reduce our OpEx by $3 billion to $4 billion in 2020 in response to the pandemic.

We’re well on track on delivering that you can see that in our OpEx costs this quarter ended last quarter, we’re trending down so you know levels that we haven’t seen for years, and pulling all levers we can, a number of the levers that we’re pulling aren’t necessarily sustainable, where there’s reduced travel, we do expect at some point in time that travel will pick up.

We’ve stopped non essential project works in places like our IT department, et cetera. Again, when things normalize, we’ll expect those costs to come back into OpEx. In response to that, that’s where reshape comes in, and reshape is about how do we structurally change our cost base.

And so it’s a different set of numbers that $2 billion to $2.5 billion is a structural reduction in our human resource costs in the company and that will be coming through into the P&L starting in 2021 and into 2022..

Okay, great. Thanks for remembering that question. Because it is indeed important.

Anna can we have the next one please?.

Next question comes from Jon Rigby from UBS. Please go ahead..

Hi, Ben, hi, Jessica. Can I ask just sort of linking CapEx and this the new dividend. So, you’ve talked about 4%, increasing the dividend, you’re trying to signal there the sort of what you would expect medium term growth, or the perimeter of growth of the business to be presumably you want the dividend to sort of grow with the business.

And to that point, I think Jessica has talked about a CapEx number that preserves the perimeter of the business. And you’ve also talked about a CapEx number of $30 billion aspirationally, I think, from Management Day 2019.

So, given all the moving parts on inflation, and you’re kind of outlook, where does the current of 19 to 22 sits? And how does that relate to what you said before to get around growth? And then just on the upstream, it’s a struggle this one because, I guess you’re saying, you’re going to invest value, not volume, but value probably in the upstream is going to be one of the highest returning businesses, potentially for $1 into a business and particularly competitive with renewables.

So, how do you go about controlling how much capital you want to allocate to that business? Thank you..

Okay, two good questions. Would you take the second one, Jessica, I’ll talk a little bit to the to the first one. So, what we want to signal with the 4% DPS growth is, first of all, we are growing, our current returns above inflation.

So, if we wanted to be a stellar meaningful dividend per share growth, and the reason why we want to do this, Jon, is because we want to signal that our investment case is first of all, resilience of the company, which I hope is on display, certainly this quarter, but also through the measures that we have taken.

And on that foundation of resilience and performance, we can not only offer growth into the future with our strategy that very much leans into the energy transition, and finds value much more in the customer enter things. But at the same time, it is gem today, so, a meaningful increase in dividend. That’s our investment case.

Resilience, gem today, gem tomorrow. And I hope that indeed, over time, we will be able to demonstrate not only the resilience and the 4%, and et cetera. But we will also be able to demonstrate that the growth investments that we are making are really meaningful investments that actually can outperform many other parts of our portfolio.

So, in terms of how we allocate capital to upstream, Jessica?.

Great. Jon, a really important question and to answer it completely, I would need to provide you a complete capital allocation framework. And we’re looking to do that in our February update or strategy days. So, we’ll go into that in more depths in February, but just to give a few pieces of that story now.

Of course, we’re doing this, at the group level, what’s that going to take to what capital do we need to deploy to deliver the complete strategy, and there’s a combination of things that we need to achieve, of course, we need to provide the highest level of return with that capital, what I’ll say is, absolutely can provide compelling returns, it doesn’t always, in certain conditions, if you look at 2020, it hasn’t necessarily been a great year for returns for the upstream business.

Whereas, if you look at our marketing business, we’re still able to achieve returns of 15%, 20%, 25%.

So, we do have other options for our capital, and importantly, increasing amounts of our capital, as we think about the growth portion of our business and where marketing sits, it is about reorienting our capital to a place where actually there are very compelling returns.

The other piece is given the business we’re in and the energy transition, we are going to have to make bets, we’re going to have to build new business models and hydrogen, biofuels power, et cetera. We’ll need to deploy capital to do that.

And the challenge there is how do you de risk those business models with the right level of prudence but with the right level of ambition, and that’s the balance we’re trying to achieve as we manage capital..

Okay. Thanks very much, Jon. Thanks, Jessica. Anna, can I have the next question, please..

Thank you. The next question comes from Roger Read from Wells Fargo. Please go ahead..

Good morning, I guess good afternoon to you. I just want to put my comments and I thought, the setup this time around with the presentation up front, and then the Q&A is an improved way to go about it, especially on a busy day of earnings for a lot of us. With that my questions really focused on a couple of things.

And I recognize some of this may come out Board in February, but it seemed like Australia was a notable admission and your nine core areas.

I was just want to make sure if that was true, and if so kind of what you think, is that signal dispositions, or is that a lien area? And then my other question was in the presentation, you talked about in the integrated power business, and these are just my notes. So, if I get a little off, I apologize.

But that you could build an integrated customer focused business here, not a commodity business, I was wondering if you could go into a little more detail of what maybe that is, and how we should think about it is it kind of mean higher returns because it’s a little asset light for its trading kind of in the conventional way on top of an integrated power solution.

I was just curious what exactly you were trying to get as a message there?.

Yes, great. Thanks very much for your question, Roger, and very important questions to talk to. First of all, I need an important clarification, the nine core area so the nine core positions that we talked about aren’t upstream. So on top of that, of course, we have other positions also an integrated gas.

And Australia for us, is an integrated gas company, integrated as country sorry. Of course, other places that are indeed integrated guests that are not counted think of Trinidad and Tobago, for instance. So that’s an important clarification to make.

In terms of power indeed, it is important to think of our integrated power strategy as one that is as much as marketing business, if you like working from the customer back.

So, what does that mean? It doesn’t mean that we just want to build wind farms and solar farms and then see whether we can add some value to it with some trading or whatever else.

It is actually working back from customer value propositions that may well be a cross selling proposition, or that will may be a global proposition that we will take for instance, with a global player, or we need more than just follow or maybe some other things as well in multiple places around the world.

And then in the providing the electrons that are going to be needed to satisfy that particular customer. That may mean it will mean by the way that we will indeed also be involved in the generating business. but it doesn’t mean necessarily that we will build generating assets looking for customers, it’s rather the other way around.

So, it also means then, of course, Roger that from time to time, we will find that once we have a generating asset built, take for instance, the wind farm that we are currently building in the North Sea, we’re perfectly okay to sell that down to a large extent, provided we keep control over the electrons have come from it.

And in that way, we can actually have a generating asset on our books with a 12% plus return on it, partly because of the successful sell done and financial transaction around it. So, think of it in that way. But indeed, you’re also right; we will be able to go into a lot more detail in our February update. Thanks, Roger.

Anna, can I have the next question, please?.

Next question comes from Lydia Rainforth from Barclays. Please go ahead..

Thanks and good afternoon to both of you. Two questions if I could. And the first one is coming back to project reshape, and I certainly don’t have a lot of people that are leaving the survey to people that will be leaving that period.

But if I think about it, that $2 billion to $2.5 billion of your current cost base, doesn’t seem like very much in the context of how much you’ll see me to want to simplify Shell, and also the digital work that’s going on and that whole idea is I think the deal with Microsoft.

So, can you just talk through as to help that whether you think that numbers, something that over time, you’ll get more benefit from simplifying shell and that’s just an early phase process. And then the second part is if I go back to the prepared presentation earlier and thank you again, to that.

And you too mentioned in the low carbon part on Silicon Ranch, generating 8% to 12% returns in terms of all the projects is done. Can you just remind us how big silicon Ranch is? And time is that your preferred solar investor investment as well? Thank you..

Okay. thanks very much, Lydia. Let me start with the second question. Jessica will take the first one. But I’d also say unless Jessica knows the answer by heart, it’s probably one that you also have to get back to our IR team for.

So, silicon Ranch was an investment that we made into an established developer of solar projects in Tennessee Valley that has been very successful.

And then we took a minority share a bit of you to understand how we could participate in the build out of solar electricity in the United States, and to see whether that could indeed turn into a platform business for us, has been very, very successful and we now are considering the next steps what to do with that business entity with a general capability when it comes to solar built on.

We have an equivalent of this, by the way, Lydia, in the – in Southeast Asia, how large it exactly is, in terms of its pipeline, everything else, the IR team will get back to you.

Jessica, would you mind taking the first one on reshape and the $2 billion to $2.5 billion?.

good. A couple of things to say on the OpEx piece. So, the $2 billion to $2.5 billion is solely the human cost piece. Of course, there are a number of other initiatives that are happening across the company to reduce our cost base and simplify the company that aren’t part of that $2 billion to $2.5 billion number.

This is where we’re looking to reduce the total cost by some $3 million to $4 billion on a sustainable basis. So indeed, there are a number of other initiatives that add on to that $2 billion to $2.5 billion number. It is important to note though that our growth businesses tend to be OpEx heavy.

so particularly, our marketing business, they’re relatively CapEx light and more OpEx heavy. So, we will see our OpEx grow in the future in association with the – with our growth. So, that’s important to keep in mind..

And Lydia just to add a few numbers, which I just got psyched off. So, we have, at this point in time, 43.11% in silicon Ranch. silicon Ranch is 930 megawatts of capacity operational and a pipeline of 1.2 gigawatts..

Ben there’s also – I’m sorry, one other point, Lydia on, you’d mentioned digital and indeed, digital is an important part of our overall story as a company in terms of how we’re trying to improve and be not only more cost effective, but more value creative, because of the work in digital and then a number of partnerships have been announced in recent months around that.

We take a relatively conservative approach on how we embed those numbers into our plans. So, it’s in there, but we really look to have very clear line of sight to delivery and execution before we put those numbers out into the market.

So, I think there is continued upside on the digital front and that is not fully baked in into $3 billion to $4 billion and I would see that as being incremental..

Absolutely. Thank you very much, Lydia.

Anna, can I have the next question please?.

The next question comes from Alastair Syme of Citi. please go ahead..

Hi, Ben. Hi, Jessica. Today, you’re giving us a new branding. So, a compelling investment thesis and we’ve got a new financial framework for how we should think about capital allocation. But I don’t feel like we’re really getting anything new or incremental on how you’re going to get to higher returns and this does all really just come in February.

I hope I’m not asking you rhetorical question. But I’m just trying to reflect here that your shares are at 24-year lows..

Yes. Thank you very much, Alastair. Indeed, we have noted that as well and we believe that for our shares are a fantastic buying opportunity, because of course, the net asset value of the company is a whole lot more higher than what we currently see represented in the market cap.

Of course, in February, indeed, there will be more detail on what the plans are.

We’re not going to be able to tell you that today and we will have to lay out a pathway of how indeed two different parts of the businesses will develop a little bit more on capital – a little bit more on our capital allocation framework and what that means in the path for the future.

But I hope you will also understand Alastair that a lot of the performance of the company today, but also in the future, will depend on the macroenvironment that we will be enjoying was suffering as the case may be.

What we intend to do though is to make sure that despite the tough macro that we are experiencing and may continue to experience going forward, we have a strong performance, that means that the company can do what it intends to do and promises, and what it promises. But also, that is clearly ahead of our competition. I cannot outrun the macro.

the macro is what it is, but we can make the most of it. And what we also can do is to make sure that we gradually position the company much more for the future of energy, rather than the current state of the energy market. But I’m sure we’ll talk again, in February. Thanks, Alastair.

Anna, can I have next question, please?.

Next question comes from Lucas Herrmann of Exane. Please go ahead..

Thanks very much. Ben, Jessica, good afternoon. And also, thanks for the welcome edition of the cleaner framework. Two or three if I may, to a relatively simple, and I just wondered if somebody could comment on chemicals in Pennsylvania, and progress. and so when you think that will actually start producing.

Secondly, I wondered whether you’d care to make any comments on exploration in Mexico and given the leases that you acquired, where your thoughts are there.

And third and probably, more challenging, I’m trying to understand how you think the earnings power of your business has changed since Management Day 2019; if I go back to that time, I clearly had an assumption on debt.

But I think the indication was that you felt that the business was capable in a 60-ish environment for $55 billion to $60 billion or so of operating cash flow as we move through the periods.

If you would tell, run your eye across the business today, Ben where do you think the earnings power resides? Where has it been? Where have you seen it? And I guess it to a some good degree, that ties back to the framework you’re establishing today, where your CapEx at this time anyways, is lower, you’re talking of a range of return to shareholders? Well, it depends on the operating cash flow.

But my sense would be where you’d been indicating $20 billion to $25 billion of returns or shareholders historically, that number at the moment looks as though it’s probably, near in the order of $10 billion to $15 billion.

So how much is that? How much of that is other priorities, balance sheets, et cetera? How much of it, to a degree, is the earnings power shell is not what you thought it was or what it was going to be a year ago? That’s just because the world is different or it’s so convoluted?.

No, no. I think it’s perfectly clear, Lucas, and maybe, Jessica can deal with the question first on what has changed, if the macro would spring back, what would happen to our cash flows, but also what wouldn’t happen? And then I will take off to that the other two questions on Mexico and Pennsylvania..

A really good question, Lucas. So, thank you for that. The fundamentals of the company remained strong and that is a message we’ve been trying to get across over the last year, year and a half since 2019 and particularly, during the last few quarters with pandemic.

So, in terms of the fundamentals of the company and the earnings capability in terms of the operational capability, the quality of our assets, I would hope that Q3 would be a way of demonstrating, there continues to be considerable strength in our earnings and cash flow potential of the company.

What’s changed, obviously, the macro is fundamentally different on both in the near-term, and I’d say to some extent, to the medium term, it’s going to take a few years for things to normalize, that does put more time on the clock in terms of getting our balance sheet back to where we wanted it to be.

So, it’s going to take a little bit more time in terms of allocating capital to the balance sheet than certainly we anticipated a couple of years ago, which is I think one of the points that you raise.

So, fundamentals are strong pandemics that had a pretty profound effect on and there’s also peace around our strategy in terms of accelerating our strategy a bit. But I think it’s more story about the macro and the impact on the balance sheet and making sure we’re getting the balance right..

Yes. On the two sides that you mentioned. So, Pennsylvania Chemicals has, as you can imagine, been impacted by the pandemic. I can’t quite remember the statistics.

But I think at some point in time, just before the pandemic, we had over 6,000 people on site, and rapid succession that actually came back to dozens, simply because we needed to preserve the safety, health and well being of our employees. And bear in mind, of course, we are building this cracker in a relatively small community.

Also, in terms of medical facilities, something you have to take in into account as well. So, it’s back up again, we have a very strict and stringent testing protocol for people coming back to site. We’re taking it down a very measured way.

And indeed, we are again, in the thousands of employees working on the site and I believe as soon enough, we will be back on sort of maximum capacity that you can imagine for a construction site like this.

it will mean that the project is delayed; there is no doubt about it; but not massively so, so we are still talking about starting up in the next few years. We said at the beginning of the decade, we probably have to think about is 2022.

I would say Lucas, the Mexico is very much in the – of course, in the upstream sort of promising areas, we have in deep water, still very much focused on delivering growth that will offset some of the decline that we will have in other areas; Mexico is of course, one of these areas that have to prove itself.

But if it does, then the Mexican part of the Gulf of Mexico, we hope we can count as one of the core areas going through – going forward as well, the program that is on track. So, we are in the process of drilling our first wells. When exactly we have results, you will have to be a little bit more patient on that, I’m afraid, Lucas.

Let me move on to the next question, Anna.

Who can we can we bring in?.

Thank you. The next question comes from Christopher Kuplent, Bank of America. Please go ahead..

Thank you and thanks, Ben and Jessica, for this format.

just two follow-ups, I think both on CapEx, similar to what Lucas just mentioned that $30 billion figure still looms large, how much do you regret not being able to spend that much in the next few years? Or in other words, what are you willing to sacrifice what is going slower? And hopefully, not just because of COVID restrictions and slowdowns.

So, just wanted to feel without asking for a new number, or an updated guidance that you might give us in February, what you’ve decided to sacrifice for the coming years compared to the plan you presented last year? And second comment quickly if I may, on CapEx to 2020, the run rate suggests you are going to do an awful lot in q4 with lockdowns more or less still being with us around the world.

So, is there a chance that on the one hand, 2020 CapEx might well be pretty much below $20 billion, but at the other end that you need to catch up in 2021 if conditions allow? just again, some sort of qualitative commentary as well would be great..

Thank you. fully understood, Chris. And let me let me just be brief on both of them, but hopefully clear. You’re absolutely right. So, we are at the moment running at a run rate that is not just at the bottom end of the $19 billion to $22 billion range, if you mentioned. but it may well be that we even get below 19.

That is not because we have been ultra-disciplined. we have been doing that as well. But it’s also, because there’s some cases. we simply have not been able to continue in our projects. We just mentioned Pennsylvania. there’s others, where they had to stop work. That of course, is not a disciplined way of bringing your CapEx down.

So indeed, some of it will indeed come back as part of a mini bow wave. But we’re very clear; we stay within the $19 billion to $22 billion spent. of course, there are regrets. You talk about a 30. But listen, we were not going to spend $30 billion this year, not even next year and the original idea.

the original idea was that we were going to spend $25 billion this year and we were going to ramp that up to be in the range of $27 billion to $32 billion. Now that’s out of the window, it doesn’t happen anymore. At this point in time indeed, we have to be much more parsimonious with our capital. And indeed, it means that we have to make regrets.

To give you an idea, where their regrets are, they’re not in our growth category. So, where we now spend about 25%, of our CapEx in what we call growth that used to be 11%. But it does mean that in areas like for instance, upstream, where we used to spend close to 50% of our CapEx, it’s now more going to be 35% to 40%.

So indeed, regrets had been made, but choices had to be made simply because of affordability.

Anna, can I have the next question, please?.

Next question comes from Henry Tarr from Berenberg. Please go ahead..

Hi, there and thanks for taking my questions.

Two really; one was, when do you expect to hit the $65 billion net debt thresholds, given your current environment outlook? And then the second system on the customer focus that you’re talking about? So, how are you aiming to build up customers? And what type of customers are deeply pursuing? I saw to the show was bidding on a broadband business in the UK recently.

I guess that might be a very small part of the strategy, but is – are we likely to see more of this type of activity? Thanks..

Thanks very much, Henry. And why don’t you take the first one, Jessica? I’ll talk to customers and that will by the way be our last question as well..

In terms of the $65 billion net debt, and when our expectation around it, I think the best way to consider that question is in the context of how we’re currently performing, and the actual performance of the company, and what we believe is low moments in the cycle.

If I were to try and give you a number or a date one or two years down the road, I’d have to give you a whole suite of assumptions on the macro, on the performance of the company. all of that, of course, is relevant for a company such as ourselves.

But what you see in the third quarter is some $9 billion of cash flow from operations, excluding working capital. When oil prices are low, LNG prices are low, where there’s very little volatility in trading. There is a strong marketing business, but a number of our businesses, being impacted by the macro environment.

So, I think that’s a good indication of going back to an earlier question, the fundamental earnings and cash flow capability of the company at a low point in the cycle. And so that I think is a good indication.

That being said, working capital matters, margining matters, so that we should expect some fluctuation quarter-on-quarter, the kind of steady state in terms of the capability of the company, I think q3 is a good indication..

Okay. thanks, Jessica. And yes, on customers, let me say the broadband news that I saw as well. Don’t consider that to be sort of the mainstay of our growth plans going forward. But indeed, working from the customer bank is a very important aspect of our growth strategy.

And I think a very important aspect is to really increasingly clearly get across as a differentiator for our company. We have been a customer focused company for many, many years, decades. But at some point in time, I think we all know that the appeal of the upstream very much over took the appeal of serving customers.

But in the end, you have to bear in mind, the energy transition is going to be a trend, but the power of the customers the choices that customers made, the demands that society will have. Also, our customers will determine how the future of energy will look like.

So, we have reoriented ourselves a little bit back again, to being a clearly, customer orientated company in a way you could argue, we never lost it, because we have a very strong marketing platform that you will have seen performing very well over the last years, if not decades.

But we are going to turn that very much into the platform, which we are going to build that future of energy and that is indeed 30 million consumers that come to our retail forecourts, for which we will have other value propositions increasingly also that we serve – that we be served at a wobble companies think of the likes of Microsoft, Google, other companies, with which we can have global partnerships to work together on their decarbonisation challenge.

We believe decarbonisation meeting the Paris agreement is going to be a key driver in how the energy system is shaped, and the energy system will be shaped by our customers. And therefore, we will be part of that journey as well. And that brings me to the end of this session. So again, thank you very much for all the questions that you asked.

I know there’s a few more outstanding, but our IR team will get to you. Thank you very much for joining the call today. And I do hope that we have given you a little bit more clarity on our strategic direction and our financial framework.

But I also hope that we have given you today a real taste of how well positioned we are, because we are ready to capture the opportunities and the value that is there in the energy transition. And I also hope it has give you a little bit of hunger to know more about our strategy, because it will be a strategy that will deliver.

So that’s more to come on this and our strategy day on the 11 of February next year. And in the meantime, have a great rest of the week and please stay safe, everyone..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect..