殼牌 (SHEL) 2017 Q2 法說會逐字稿

Welcome to the Royal Dutch Shell 2017 Quarter 2 Announcements.

There will be a presentation followed by a question-and-answer session.

(Operator Instructions)

I would like to introduce the first speaker, Mr. Ben van Beurden.

Please go ahead.

Thank you very much, and thank you, everybody, for joining us on today's call.

Let's get straight into it but not without pausing for a moment on the disclaimer statement, of course.

Really pleased to report that the second quarter of the year was another strong quarter for Shell.

We had CCS earnings, excluding identified items of $3.6 billion, that compares with $1 billion in the same quarter of '16.

We also increased our cash flow from operations to $1.3 billion (sic) [$11.3 billion], that's up from $2.3 billion, again, in the previous year.

So for this quarter now, we have a solid track record over a 12-month period, with $38 billion of cash flow from operations and that's at an average oil price of less than $50 a barrel.

So we have more than covered the cash dividend for the fourth consecutive quarter.

We have reduced net debt by almost $9 billion.

We've reduced the gearing to 25.3%, that's from a 28.1% level a year ago.

So I think these are great measures of the progress that we are making, and they show that our strategy of delivering a world-class investment case is working.

They also show that we are transforming Shell through the reshaping of the portfolio as well as through structural changes in our culture and our ways of working.

Becoming a world-class investment case involves Shell also, being a leader, reducing its carbon intensity, contributing to shared value of its society.

It means having a strategy that is resilient for the long-term.

Today, I'm going to talk to you about how we are transforming Shell, so that we can become more competitive and resilient in that future and, of course, about the results so far.

And I will show you how we are strengthening our financial framework by pulling on 4 powerful levers: divestments, capital investments, operating costs and new projects.

And then our Chief Financial Officer, Jessica Uhl, will take you through the details of this quarter's result.

This time, it will focus on the Downstream business, which has reported one of its best quarterly results.

But first, I'd like to start with some of Shell's highlights in the last quarter.

You can see them here on the slide.

In June, Prelude, our floating liquefied natural gas facility, left a construction yard in South Korea and arrived 2 days ago at the gas fields [off] the coast of Australia.

The LNG that it will produce will be sold around the world and Shell expects to see cash flow from the project during 2018.

In Brazil, deepwater production started at our 10th floating production storage, an offloading vessel and a presalt field of the Santos basin.

And in the North Atlantic Ocean, production has started at the Schiehallion deepwater oil fields.

We have continued the launch of a new version of our premium fuel, V-Power.

It is now sold in more than 60 markets around the world and is the #1 differentiated fuel amongst international oil companies, delivering not only great performance and efficiency to the customers, but also high margins for our group.

So these are all important milestones for us.

They will make a significant contribution to our financial performance over time.

But another important event was the ramp-up of the production back at Pearl GTL in Qatar.

The plant is now operating at full-planned production, and that's including basals.

But I would also like to highlight that Shell is supporting the task force for climate-related financial disclosures that were set up at the request of G20 in its efforts to improve transparency around the risks and opportunities that a transition to low-carbon energy presents, and we look forward to working with the task force on the details here.

Now let me give you an update on the first of the financial levers that I mentioned at the beginning of my talk, which is divestments.

They are an important part of the reshaping of our portfolio.

And this quarter was a quarter of completions, including 2 large transactions: the sale of the majority of our oil sands business in Canada and the split of the Motiva joint venture in the U.S. We also completed the sale of our Australian aviation's fuel business and the sale of our stake in Viva Energy, which distributes the market's Shell-brand of fuels and lubricants in Africa.

More recently, we announced the sale of our stake in the Corrib gas venture in Ireland for up to $1.2 billion.

And these deals together bring us to more than $25 billion in completed, announced or in-progress divestments, setting us well on track to meet our target of $30 billion of divestments between 2016 and 2018.

So far, we have completed $15 billion of the $25 billion, and we have received $11.5 billion in cash.

We expect that these divestments will lead to higher returns as we sold businesses with a lower return on capital employed than the average for the group.

We have provided you with some figures, showing the impact of some of the main divestments on our portfolio and, of course, as you know, we included these impacts in the 2020 outlook that we provided during our Capital Markets Day last year.

Now let's take a look at the second of our financial levers: capital investment.

We've said we would operate with capital investments in the range of a soft flow of $25 billion and a hard ceiling of $30 billion and that's every year until 2020.

And we can confirm that we will be at the lower end of that range this year, with $25 billion of capital investment, and $23 billion of that is expected to be in cash.

The current economic environment, the lower end of the range is the right level that's affordable, and it's consistent with our free cash flow growth to 2020.

Of course, we continue to look for ways to use our capital more efficiently, driven partly by a deflationary market environment, but mostly by changes in the way we design and execute our projects.

You will see 3 examples here on this slide.

The first is our Appomattox deepwater project in the Gulf of Mexico.

Here, we have saved around 20% on this project compared to our original investment proposal, and that's by reducing the number of wells, renegotiating contracts with suppliers and other things.

So that's 20% since sanctioning of the project.

At our Geismar chemicals plant in Louisiana in the U.S., we have reduced costs on the construction of a fourth linear alpha olefins unit by [17%] compared to the original proposal and sanction.

And we have reduced costs also on the redevelopment of the Gannet C fields in the North Sea by more than 20%.

So now we deliver more for less, which means that growth also becomes more affordable and that we are more resilient when low oil prices prevail.

And this brings me to the third of our levers: operating costs.

Also here, I think, we have made good progress.

We have reduced underlying operating costs by more than 20%, so about $11 billion since 2014.

And that's while growing also, at the same time, the company's free cash flow.

We have spent $38 billion over the last 12 months, that is below the $40 billion level that we indicated last year.

And we have achieved these reductions, of course, by cost-cutting, but also by changing our company's culture, by changing how we work and by adopting, what we call, a lower-forever mindset.

Let me give you a few examples of what I mean.

First one is the greater use of Shell business operations.

These are operations that support the whole company from a few countries, including India, Malaysia, and the Philippines and Poland.

We think we, actually, are one of the leaders in this area and that will continue.

Shell business operations help us reduce costs, and just as importantly, also allow us to standardize, to simplify and increasingly also digitalize the way we work in operations such as IT and finance, of course, but also human resources, contracting and procurement and also now in customer services and technology.

Shell business operations hold now over 12,000 employees and they generate significant savings.

The second example comes from our Upstream business in the U.K. Taking practices from the shipping industry, we have retrained the crew on our Curlew, floating production storage and offloading vessel in the North Sea, so that they can do more maintenance themselves.

And this training has reduced our reliance on outside contractors by half since 2014, which has helped us to reduce costs by 35% between '14 and '16, while at the same time increasing the availability of our assets.

And these are just 2 examples of structural changes to the way we do business.

And we now have 13% less employees than we did at the beginning of 2016.

So to be clear, costs must continue to go down and then stay down.

The final lever I'm going to talk about today is the delivery of new projects.

As you can see from this slide, we have a portfolio of large projects that we have either delivered or are about to deliver.

By 2018, we expect these projects to be producing more than 1 million barrels of oil equivalent per day, and that represents some $10 billion of cash flow from operations at a 60% oil price.

You will see from this slide that most of these projects are now producing such as our Stones deepwater oil and gas project in the Gulf of Mexico, Kashagan field in Kazakhstan or the Queensland Curtis LNG plant in Australia and, of course, the 10 FPSOs in Brazil.

And the projects still under construction are either at an advanced stage like Prelude that I mentioned earlier or they are replicating an already successful model such as in Brazil.

So I'm confident that we are on track to deliver these projects and expect half of that $10 billion of extra cash flow already to contribute to our financial results in this year.

As much as we are focusing on our 4 financial levers, safety and day-to-day operational excellence, they remain top priorities for Shell as well.

And I would like to share with you 3 examples to illustrate this.

The first one is in the Gulf of Mexico, where better surveillance of our equipment has halved our unplanned downtime between 2015 and '17.

The second example is from our Pernis refinery in the Netherlands, where we have increased availability by 6% between 2012 and 2017 compared to the period between 2018 and -- 2008 and 2011.

And the third example is our commercial deepwater project in Malaysia, where we've had a strong process safety record in the past 2 years while at the same time reaching an availability of 98% in 2017, excellent performance, one that I'm really proud of.

And in all these examples, we have seen that operational performance going hand-in-hand with safety performance.

There is simply no trade-off between the 2.

And now let me hand you over to Jessica, who will talk to us about this quarter's financial performance in a bit more detail.

Thank you, Ben, and welcome, everyone, on the call.

As Ben has said, one of our main strategic aims is to be world-class investment case, and that means being a competitive and resilient company, with a relentless focus on performance management to deliver better returns to shareholders.

We're making good progress towards that goal.

I'm especially pleased to say that we continue to demonstrate the resilience and competitiveness of our business in this quarter.

In short, our strategy of capital efficiency, reducing costs, delivering new projects and divestments is translating into higher earnings and strong cash flow momentum.

You can see that in the figures in the slide, we've increased CCS earnings, excluding identified items, to $3.6 billion in the second quarter of this year from $1 billion in the same quarter of the prior year.

And we have generated $11.3 billion in cash flow from operations, $9 billion more than in the second quarter of 2016.

At $12.2 billion, our free cash flow includes $6.7 billion of cash proceeds from divestments.

It is $15.3 billion higher than in the second quarter of 2016.

We've increased our return on average capital employed in the second quarter to 4.2% from 2.5% in the same quarter of the previous year.

Higher oil prices and better industry conditions in Chemicals and Refining have contributed significantly to our stronger earnings in the second quarter, in addition to the growth achieved in our Upstream and Integrated Gas businesses and the improved operational performance in Downstream.

Upstream earnings have also been supported by lowered depreciation, including the impact of assets held-for-sale and divestments.

In Downstream, strong performance from Refining and Marketing has offset the effect of the split of the Motiva joint venture.

The strongest evidence of the impact of the BG acquisition and of the effectiveness of the 4 financial levers Ben has talked about is our cash flow momentum.

As this slide shows, cash flow from operations, excluding working capital, has risen to $38 billion over the past 4 quarters, when the average oil price was less than $50 per barrel.

The last time we achieved a comparable level of cash flow from operations, the oil price was close to $100 per barrel.

I would now like to look at the performance of Downstream in more detail.

As you've heard, Downstream had another strong quarter, increasing CCS earnings to $2.5 billion, almost 40% higher than in the second quarter of 2016.

The trend of improved cash generation and returns from Downstream is a great example of how we are making Shell a more competitive and resilient company.

We have strengthened our Downstream business by reducing costs and increasing asset availability while refocusing the portfolio through divestments.

We're disciplined about how we use capital, and we are leveraging the strength of our brands and marketing.

As you can see from this slide, our Downstream business now delivers around $10 billion per year in cash flow from operations, excluding working capital, and a [15%] return on capital employed at different points in the economic cycle.

The integration of our Refining, Trading and Marketing activities as well as the performance of our Chemicals business is improving margins and making Shell's portfolio more resilient to lower oil prices.

So brand and retail network are 2 great strengths of our Downstream business.

Shell is the most valuable brand in the oil and gas industry, and we're the world's largest fuel retailer.

Every day, Shell serves more than 30 million customers across our 43,000 sites and close to 80 countries.

That is more sites than Starbucks.

It is more than McDonald's.

Our Marketing business is not only profitable, delivering over $4 billion in earnings per year, it is also growing rapidly and offers attractive short-cycle investment opportunities.

As we've said, the acquisition of BG Group has worked well for us on many levels.

It has given us growth in deepwater and integrated gas, and it has been a catalyst to reduce costs across the business to make Shell a more competitive and resilient company, and we're making good progress here.

We expect to achieve $4.5 billion in synergies already by the end of 2017, assuming the same exchange rates we had at the time of the combination.

For example, we've already achieved $0.5 billion of savings in contracting and procurement.

We're delivering more and faster than we initially expected.

We're confident that we will achieve the synergies that we've announced, and they are included in our operating costs and capital investment guidance.

Put simply, we are now operating BG and Shell combined with lower costs and fewer employees than it took to operate Shell alone before the combination.

We've reduced the number of employees from 98,000 at the time of the combination to 85,000 in the middle of 2017.

What does our cash flow momentum mean for our financial framework?

It means that even though oil price was at less than $50 per barrel over the last 12 months, we were able to maintain capital investment at a level that still delivers growth, cover our cash dividend for the last 4 quarters, reduce our net debt and reduce gearing to 25% from 28% a year ago.

This gives you a sense of the resilience of our financial framework.

Still on cash flow, there is no change to our priorities.

Reducing debt, paying dividends and turning off the scrip followed by balance of capital investment and share buybacks.

As Ben has highlighted, the delivery of our divestment programs and new projects is on track.

We've also made significant progress in reducing operating costs and reducing capital investments.

We expect to pull even harder on these levers in the future.

This is an important opportunity to improve Shell's competitive performance.

Looking forward, this slide has some indication for the third quarter of 2017.

Today's quarterly results announcement provides more detail.

Okay.

Thank you, Jessica.

Let me end our presentation section here with some numbers that demonstrate that our strategy is really working.

As you can see here, we have increased our free cash flow, excluding the divestment proceeds, to $16.6 billion on a 4-quarter rolling basis.

Now compare that to an average of $5 billion in the period between 2013 and '15, at a time when oil prices had fallen more than 40% to $50 a barrel.

Strong results this quarter show that we are delivering on our strategy following the integration of BG Group.

They show that we are succeeding in reshaping the company into a world-class investment case.

The external price environment and the developments in the energy sector mean that we will remain disciplined with an absolute focus on the 4 levers within our control, namely, capital efficiency, cost reduction, the delivery of new projects and divestments to [higher] greater portfolio.

Now I look forward to updating you further on our progress during presentations by our scenarios team, the Chemicals business later in the year and, of course, during the next management days in November, and I hope that you will all be able to join us then.

But in the meantime, I'm sure there's also plenty of questions for you to ask today.

So let's open the floor for you now.

Thank you.

(Operator Instructions) We now have our first question from Oswald Clint from Bernstein.

I just have 2 questions.

The first one, Ben, is, really, you make a comment here about derisking the cash flow outlook that you have from the (inaudible) startups.

I just wanted to ask about that -- because that happened over the last 12 months, does that make you even more confident in those 2020 targets that you laid out for us last year.

Was there a certain amount of risk attached to the missed time last year that's kind of dissipated over the last 12 months?

And ultimately, the 10% return on capital employed, you're at 4.2% already, does that feel like there's -- it could actually be a higher double-digit number as you look at that number today?

And then second question was really on the repeatability of the earnings and cash flow that's coming through in the last couple of quarters.

I wondered if you could talk about in terms of production efficiency in the Upstream and kind of plant availability in Integrated Gas and Refining and Chemicals.

Just maybe put some of those numbers around the actual operations kind of within the numbers, please.

Okay.

Thanks very much, Oswald.

Let me have the first stab at it and then, I'm sure, Jessica will have a few things to say on it as well.

Yes, are we more confident that we can get to the outlook that we gave you in June last year?

Absolutely, of course, we have now 4 quarters of good results.

It is very easy from here to bridge to the numbers that we gave, the $38 billion of cash flow over the last 4 quarters, add some price effect into it, $7 billion to $8 billion, add the effects of newer projects into it, $7 billion to $9 billion, because, of course, newer projects will continue to ramp up and contribute post the end of next year.

And soon, you'll be talking to somewhere between $50 billion to $55 billion of CFFO.

Take away from it the capital investments, $25 billion up to $30 billion.

If you take the cash number, it would be a bit lower.

And exactly, you come to the numbers that we talked about at $20 billion to $25 billion organic free cash flow.

So indeed, we are on track.

That's why I'm saying, it all goes into the right direction.

So definitely, confidence is increasing.

And let's see where we are at the end of Q3.

But I've no reason to doubt that we are going to get where we need to be by the end of the decade.

And the same story, actually, applies to the return.

I could give you a similar bridge from where we are today on returns to something that is above 10%.

Now we -- of course, as we sort of engaged with you on management day, there will be a good opportunity to sort of dissect that all in a bit more detail, and, I hope, you will see that there is a lot more to it than I just mentioned, with a number of high-level statements.

On production efficiency, Jessica, would you mind taking that one and the repeatability of it and how much progress we have made and the consistency of it?

Sure, Ben.

Before I do, I just would like to take the opportunity to respond also to the ROACE question.

And first of all, to point out, we have businesses in our portfolio that are consistently delivering ROACE of 15% to 20%, as are our Downstream and Chemicals businesses.

And overall, we're going to drive our businesses to have returns on capital employed to the full extent possible.

And so there is not a ceiling.

I think we have a lot of ambition when it comes to what's possible with these assets.

We're going to continue to drive the cost agenda as well as the capital efficiency agendas, so both the numerator and the denominator really can drive the right outcomes from a ROACE perspective going forward.

On the OpEx side or the operational excellence agenda, rather, a key part of our focus areas for the business at the moment.

That's true in the Downstream business.

That's true in our Upstream business as well as our Integrated Gas business.

That is part of what's contributing to the improved performance in all of those businesses.

Downstream, in particular, we've seen the availabilities improving substantially year-on-year, going from some 88% to 90%, 92% between the manufacturing businesses and the Chemicals businesses, so clearly an important area for us.

That agenda is delivering and is contributing to the results that you see.

But again, it is across the portfolio.

In the Upstream business, Ben talked about some of the things that we're doing in other parts of the Upstream business.

In the Gulf of Mexico, we've seen marked improvements.

In Malaysia, we've seen marked improvements.

And again, we believe that one of the best ways to drive more value from our assets is simply running our assets better day in and day out, and that's what we're doing.

Okay.

Thank you.

Thanks, Oswald.

So let's have the next question.

We will now take our next question from Jon Rigby from UBS.

You advertised a lot of progress both on the underlying operating performance, debt reduction, which I guess is allied to, I mean, acceleration of the disposal plan and so we were probably at the start of this year and just a general derisking of the delivery of projects.

So I just wondered where you sit with regard to actually removing or ending the scrip dividend.

And what needs to take place for the board to feel confident in doing that?

It feels to me that you must be getting pretty close.

That's the first question.

And sort of allied to that, just in the Downstream, if I look back over the last 5 or 6 years, I think you can see it in one of your charts is that the earnings vary between about $5 billion and potentially annualized $10 billion this year or something close, you look like you're on target to spend about $5 billion on CapEx.

So how do you judge the free cash flow contribution to the Downstream -- from the Downstream to the business?

And how does that work its way into the decision-making process that you have around the dividend?

Because clearly, that's an important cash contributor to the cash coverage of that dividend.

Let me say a few things about the second one, which, I'm sure, Jessica will have something to say on as well, and she will also cover the scrip story.

Indeed, there is a wrench in our Downstream earnings, which, in a large measure, has to do with the refining cycle.

This business -- and to a lesser degree with the cycle in Chemicals, although we are exposed to a number of commodity cycles in the Chemicals business.

But by and large, refining, of course, brings volatility to our earnings, and there is just not much you can do about it.

We mitigate that to a degree, of course, by making sure that even at the bottom of the refining cycle, we have acceptable results, and we have high-graded our portfolio to achieve just that.

But it's a cyclical business.

You can't avoid, therefore, cyclical earnings effects.

If you look at the cash story and if you look at the free cash flow of these businesses, they're actually pretty strong, relatively speaking.

They are amongst our strongest contributors and including the Refining business for that matter over the cycle.

That's simply because they need very little maintenance capital to keep them where they are.

Now at the same time, we want to grow these businesses as well, particularly the Chemicals business.

It's a growth priority we want to double that business over the next 5, 6, 7 years now.

And then maybe we want to continue to keep on growing it.

Let's see where we get to first by the end of the decade or early next decade.

So we will be investing at elevated levels about $4 billion in Chemicals.

But if you were to remove all the growth that sits in there, this is a business that can sustain itself at levels that are much closer to $1 billion, $1.2 billion.

So you have to look at the Downstream into 2 different segments.

At the same time, of course, in the Marketing businesses, as we see growth opportunities in emerging markets, we want to also dedicate more capital to those segments, particularly now that the business is high-graded, restructured and fit for receiving more growth.

But they are relatively modest capital numbers, and individual projects, of course, do not sort of usually make the cut of being showcased in presentations like this.

But in general, Jon, I like the oil products business because of its free cash flow credentials.

Free cash flow per investment dollar is amongst one of the highest.

And if you were to basically stop growing your Chemicals business, it would be in exactly the same place.

Thanks, Ben.

Indeed, we are running a kind of financial framework on a portfolio basis, and clearly, oil products business is part of our cash engine that does support overall growth and investment in other parts of the portfolio.

And as Ben mentioned, it has very attractive free cash flow characteristics.

We're, of course, trying to make that even more resilient in terms of some of the strategies we're deploying in those businesses, growing our retail portion, et cetera, and making more parts of those cash flows less priced, if you will, or less oil market tied than other parts of our portfolio.

And generally, that's moving in the right direction and feeling confident in terms of the stability of the cash flow profile of the Downstream business, which should, hopefully, make us, overall, as a company, more resilient and better able to support the dividend over time.

In terms of the scrip and our cash priorities, as I mentioned before, they haven't changed our priorities are debt repayment first followed by dividend, scrip removal and then finding the right balance between repurchases and capital investment.

We made a clear commitment to the market in terms of getting our financial framework in the right place when we did the BG acquisition, took on the debt, were working through that.

We've made tremendous progress over the last year, achieving a gearing of 25% for the quarter, paying down some $3.8 billion of debt in this quarter alone.

So indeed, a lot more confidence in terms of the delivery of the business, the underlying cash generation of the business.

All of that is making us more confident.

But in terms of when the scrip comes off, we do want to be prudent in that choice.

And the macro does matter.

Our divestment program matters.

But again, if you look at the underlying cash flow generation of the business on a rolling 4-quarter basis, that was some $38 billion, excluding working capital.

Free cash flow for the company rolling 4-quarter basis, organic, so excluding any impact from divestments, was some $16 billion.

So I think we're showing results that indicate our ability to take off the scrip should we continue at this pace and with the right circumstances should be doable in the future on the horizon.

But again, we want to demonstrate the underlying performance of the business and be wise when we make that choice.

Because we certainly don't want to make that choice and then have to come back on it, because conditions change.

I think the underlying performance of the business is very supportive in terms of that coming sooner rather than later.

Okay.

Thanks, Jessica.

Thanks, Jon.

Operator, can we have the next question, please?

Absolutely.

Our next question comes from Jason Gammel from Jefferies.

My question, Ben, is really about the potential medium-term conflict between 2 of the levers that you're pulling to bring the financial framework together right now, and that would be the reduction in capital spending versus the delivery of new projects as you look beyond, let’s say, the 2020 time frame.

Can you address whether you think that capital spending in the $25 billion to $30 billion range is going to be sufficient to keep the project queue loaded up to be able to continue to generate cash flow growth from new projects sort of in that post-2020 time frame?

And maybe just as a subcomponent of that question, do you expect to achieve any new project sanctions over the course of, let's say, the next 18 months, particularly in your key Upstream growth engine in the deepwater?

Okay.

Good questions.

Thanks, Jason.

Yes, I must admit that question we have heard before.

And I think it's important to be very clear about it.

When we look at $25 billion to $30 billion range that we mentioned it, it is, of course, driven by affordability, but it's also driven by the objectives that we have set ourselves of achieving that world-class investment case.

It is not an arbitrary number.

It is a number that is also made up of what we know is committed spend, what we can see coming in the near term and what we really want to have lined up as the future projects, of course, with a certain degree of knowability as to when exactly which sequence will take place.

But -- so in other words, there is actually thought, planning, and analysis that has gone into these numbers.

Now at this point in time, as I said in the little speech earlier on, we think spending at the bottom of this range is about right.

You can see, if you listened to what Jessica just said, we will be able to get this spending program at our current operating cash flow, we will be able to comfortably cover the cash dividend, pay down the debt, and you can see us indeed moving towards that moment when we will do another scrip.

But then the other question you have to ask, which is your question, Jason, is that $25 billion, shouldn't that be a little bit higher?

Are you underinvesting?

No, I don't think we are.

If you sort of fast forward a little bit because we only for you fast forward it to the end of the decade, but believe me, we also fast forward to the end of next decade to understand how this is playing out, we believe that $25 billion to $30 billion is the right level to significantly continue to grow the business.

If we wanted to, we can go lower, of course.

I think we can -- if you wanted to keep the business where it is, and I'm not talking here about volume metrics, but talking about the financial performance of the business at reference conditions.

I think we can keep the business at its current level, at levels that are probably around $20 billion or even lower than $20 billion a year.

Of course, we can go even lower than that, but then we would be looking at a shrinking business.

So I think there is, indeed, a range of choices here.

The choice that we have taken is that we want to continue to grow the business.

And at $25 billion, we do that, and we do it in a way that is completely affordable.

And it's also, I think, completely compatible with the capacity of the organization that we have at the moment.

Jessica?

Thank you, Jason.

Just perhaps a couple of more points on the first question, and then I'll turn to the second question.

I think it's important to note the significant impact we've had in terms of capital efficiency in our business and $25 billion today is perhaps more like $31 billion, $32 billion in the past.

So I think it's important to kind of reset what $25 billion buys us and what we can accomplish with $25 billion than perhaps what $25 billion looked like in the past.

And of course, we're continuing to drive that agenda.

And as Ben mentioned, with projects like Appo, we're continuing to deliver efficiencies in these projects even under construction, and we don't think we're done with that agenda.

So I think perhaps there needs to be a better reframe around what these numbers represent in terms of activity and future value for the company.

From a growth perspective, I personally do not feel constrained.

I don't feel a trade-off.

We've got a huge growth agenda already.

We're delivering a lot of growth at the moment.

We feel like we're making the right choices from a capital perspective, from a management attention perspective.

We're also trying to do other areas of growth in our marketing business, which are low capital spend opportunities for us.

So in terms of managing the overall growth of our cash flow, we're feeling comfortable and not feeling constrained from a capital spending perspective.

In terms of sanctions, we offered some detail in terms of the projects that we're considering sanctioning in the next couple of years in the backup.

So that provides a bit more detail.

Indeed, there's a couple of deepwater opportunities for us in Nigeria and in the Gulf of Mexico.

What I would say, overall, is we're going to make these choices based on value.

All of these projects are competing for capital either within their strategic theme or across the company.

We are looking forward to the ones that are the most competitive, the most resilient, the lowest breakeven price and then also to get the timing right.

And things like timing matters very much for our LNG choices.

There's enough LNG at the moment in the market.

In the early 2020s, that will start to -- demand will start exceeding the supply.

We believe there will need to be more LNG brought into the market.

But getting that timing right is important.

So I think there's an element of what's the market telling us from a timing perspective, when is the right time to build the project, and then, of course, choosing the most value-accretive project from, I think, a pretty good portfolio of options.

Good.

Thank you, Jessica.

Thanks, Jason.

Can I have the next question, please, operator?

Absolutely.

Our next question comes from Thomas Adolff from Crédit Suisse.

I have 2 questions, please.

Firstly, on disposals.

I recall your former CFO saying that Shell has identified twice the level targeted over 2016 and '18, so that's over $60 billion.

Now that you are close to reaching that $30 billion target, potentially ahead of plan, how should we think about the overall target, more than $30 billion?

Or once the $30 billion is done, the deal is done, and beyond 2018, we go to the usual annual run rate for asset sales?

And in the case of more disposals beyond the normal run rate, would there be appetite for further inorganic deals to use these extra proceeds to further high grade your portfolio perhaps in areas you treat today longer term in nature?

The second question, I guess, going back to 2014, before the downturn, I'm just very curious where, Ben, where you said, "Oh, I'm surprised that this was possible." And I'm referring to things that you can control internally, perhaps things where you thought you could face internal opposition to certain changes.

And with that on the cultural evolution that you talked about earlier on, where are we?

Have we reached the halfway mark?

Or are we further advanced?

And is that why you talked about earlier this morning that we could be fit for an oil price of $40?

Good questions, Thomas.

Why -- you take the first one, Jessica.

I can think about the second one.

Okay.

In terms of the disposal program -- divestment program, first of all, the overall objective of the program is to ensure we high grade our portfolio and align our portfolio with our strategy that was part of bringing BG in.

We've got more options in terms of growth, certainly a larger portfolio, and it's an opportune time to remove the tail and further high grade.

So that's been an important part of the overall process.

We've gotten through, I think, a good chunk of that.

There's still more to go, some $5 billion in terms of meeting that original target.

But again, we'll continue to manage the tail.

We'll continue to challenge the organization, are we the best owner of these assets?

And in that sense, the program's never really over.

I don't think we'll be moving from, let's say, we're going to go from $30 billion to $40 billion.

But as you mentioned, we're going to have an ongoing approach to high-grading our portfolio over time and upgrading the portfolio.

And on the annual basis, we should be seeing some $5 billion to $10 billion of divestments of kind of normal courses of business.

In terms of inorganic deals, I think I don't expect we're considering anything particularly major at this point in time.

But of course, we will be looking for opportunities as appropriate.

I wouldn't say it's necessarily on our agenda.

Again, I've already talked about, we're pretty pleased with the growth profile that we have at the moment.

Some of the kind of new businesses that we're looking at, New Energies, there may be opportunities.

I think they'd be relatively small in scale at this point in time.

But again, I think that's probably more on a margin conversation than really fundamental in terms of how we're managing our capital program and our portfolio going forward.

Okay.

On the second one, it's a very good and very open question, of course.

So it's a bit of a choice how you answer it.

Let me say a few things, though.

And let me start off with the one that is maybe obvious, but it may be not.

But definitely when I came into this job, I didn't think I would do a large acquisition, not because I didn't think -- we couldn't do it, but simply it wasn't in my mind.

And we ended up doing one, and I'm very happy and very proud that we did it.

It feels not only good that, of course, after sort of looked at BG for 15-plus years, we found a moment that it was right to do it just in time, I should say, but also what it has brought us in terms of not only rejuvenation of the portfolio and opportunities, but also rejuvenation of the culture, the way of working, the impetus that it has provided to do things differently, I think, has been very rewarding as well.

So was that something I considered impossible?

No, not necessarily.

But it was definitely [not] something that I had on my mind when I came into this job.

What I had on my mind coming in was how can we drive a much, much stronger bottom-line orientation away from the focus of excellence, deep competence, doing the right things, being efficient and waiting for the result to then follow to complement that with a, also, let's work back from the outcomes that we need to have.

And I think we've made progress there as well.

It feels differently in the organization, the sort of appraisals that we're having, different types of appraisals.

I think we have a much more strong focus on delivery of credible results, better understanding of what competitive performance really looks like financially, et cetera.

And I would say, yes, I'm quite happy with where we are.

But are we there?

No.

I would say, we're probably 60% of the way.

And let me say 2 more things, and again, I could go on much longer [as well], but that would probably be inappropriate.

I think strategic intents have really helped us to focus.

I think they have provided more clarity within the organization about what are the things that we need to get right.

What do we really expect from a deepwater business, what do we really expect from a Chemicals business, what do they need to contribute, which ones can we grow?

We can't grow them all at the same time.

So how do we have different time horizons?

I think that has really helped clarify in the organization how we want to prioritize things.

So that's a big deal as well.

And with it, I think, a much more centralized discipline on capital spending, which is something that, again, I wasn't considering as impossible, but I think we have made there are a lot of progress.

On the latter one, centralized decision-making on capital, I think we're pretty much there.

But thanks for the question.

And operator, can we have the next one, please.

Certainly.

Our next question comes from Christyan Malek from JPMorgan.

Three questions, forgive me.

First, today, you've referenced the lower-forever mentality.

In the 2016 annual report, you've got a market overview section that Brent around 2020 may average 60% to 80% higher than the '16 average.

That would imply an oil price in the range of $70 to $80.

So how do I square that?

And related to that, you are cash neutral at $50 a barrel.

But surely a lower-forever outlook would imply a more realistic [gravitational] center sort of around $40.

The second question is regarding the capital framework.

Is there a pain threshold (inaudible) that will prevent you from executing those priorities?

Or is it a critical part of the low gearing.

To put it another way, if oil goes below $40, would you kick the can down the road on the scrip removal?

And the third, slightly unrelated to the quarter, but in light of the various corruption cases that hit the oil sector, which seem to be more and more frequent, is there anything you think needs to be done better at the industry level to deal with violation of the FCPA?

And I say this in light of the endowment from the Italian prosecution in the year on block OPL 245 in Nigeria.

Okay.

That's a rich list of questions there, Christyan.

Let me say a few things on lower forever.

Maybe you can say also something about scrip, Jessica.

And then I will also take care of the FCPA comment you made.

And let me start with the FCPA comment.

I think we are very clear about our business principles.

We have had our business principles for a long time.

We enforce them with vigor and conviction.

There is absolutely no room for unethical conduct in our organization and definitely not when it comes to bribery and corruption.

Everybody in our organization knows that and everybody knows also what the consequences of violating that rule is, which is, you do not work for us anymore, and we will refer you to the appropriate authorities, if need be.

And there is absolutely no doubt in the organization that, that's the culture that we would like to have, that's the conduct that we would like to have, and that's definitely the way we enforce it.

So now having said that, is our industry an industry that operates in places where there is a troublesome environment here and there?

Yes, absolutely.

And that's also exactly one of the reasons why we have to be so diligent when it comes to these values and these rules, precisely because it's what people in the frontline of operations would actually like.

They would much rather would have a black-and-white clarity than one of exercise your judgment, which basically means that you put the onus back on the people that are being confronted with the issues.

So therefore, you will find that also in places where corruption in society is endemic or established, that the Shell people, who operate in there, find it actually quite good, pleasant and comforting that they have a company that has their back when they have to say, no, I work for Shell, I don't do these things.

And I think that's a value that is not only sort of makes common sense for a company from a sort of a business perspective, et cetera.

I think it is what we need to do if we want to be a company with long life and a company with a good standing and reputation.

One of the key things we need to get right, in my mind, is that we are being seen as a welcome participant in society, and indeed, where possible, even a force for good.

I'm not going to comment in detail on OPL 245.

We've done that before.

If you want to read up on it, I would refer you to our website where we give you a little bit more background that we have disclosed the reason for it.

It is a live legal case and I hope you'll understand that.

Lower forever.

Yes, that's the mindset.

Yes, I -- to be perfectly honest, I do think we will have quite a bit of movement in the oil price going forward.

And there is a better than 50-50 chance that we will see oil prices trend up as the fundamentals of supply and demand reassert themselves over the longer period of time.

Can talk about maybe separately as well.

But that's not the mindset that we want to have in the organization.

We do not want to have the mindset that higher oil prices are around the corner to help us out.

So the mindset with which we work is lower forever for operating cost levels, lower forever also for efficiency metrics, et cetera, et cetera.

In terms of practical planning, we take a very conservative outlook.

So we understand how much cash we have coming in.

Therefore, we can understand also what is affordable in terms of an investment level.

And that, of course, is driven not by see how low you can go, but more like what is the realistic sort of conservative outlook.

In some places of our annual disclosures, we referred to higher prices.

But these are often the prices that we reference.

For instance, how would a certain outlook look like?

And quite often then, we actually reference market's averages, so that you can see it's not our oil price outlook, but the average oil price outlook of the market.

Let me pause there, and Jessica, I hand it off to you to talk about the other points.

And if there is anything to come back to me, then let me know.

Right.

Perhaps just a couple more words on the lower-forever piece.

Just to point out, there was, I think, [sustaining] cash neutral at $50, I would just want to emphasize that in the last 12 months, our organic free cash flow has been $16 billion.

So I think that's important to keep in mind that at $50, generating significant organic free cash flow, so that's at today's prices.

In terms of thinking about a world of $40, I just want to point out a few things.

First of all, we are sanctioning projects for breakeven prices that are at $40 or below.

That's more or less the threshold we're applying to our Upstream business.

In our LNG business, we're looking at the technical costs of $5 billion.

So in terms of the direction we're sending to the organization, it's about having the most resilient, the most competitive marginal barrel, marginal mtpa of LNG in the industry.

And that's very much the mindset that we're trying to drive in the organization to ensure that we have the most capital-efficient, and ultimately, the most competitive production going forward.

I'd also want to say we tested many ranges in prices and have tests on prices that are below current prices.

In terms of the scrip and a $40 world, $40 world is a different world.

It's a different financial framework, if you will.

We certainly ensure that our financial framework is robust under many scenarios and many low scenarios, so overall have confidence in terms of our ability to manage our financial framework and make choices.

But I think that is a different world.

I think the industry would respond as well.

There would be different -- kind of different opportunities and different options with respect to capital choices, et cetera.

So I wouldn't necessarily want to speculate.

And again, I'd go back to the fact that we're generating significant free cash flow today at $50.

We're making capital choices for a world that's much less than $50 and ensuring that our financial framework is robust even to very low moments through the cycle.

Okay.

Thanks, Jessica.

Can we have the next question, please, operator?

Certainly.

We'll now take our next question from Lydia Rainforth from Barclays.

A couple of questions, if I could.

Back to the scrip option on the capital allocation side.

Is there a way that you would consider actually doing a share repurchase before you sell the scrip just in terms of the additional facility that, that might give you without having to turn off the scrip fully?

The second one was just in terms of the cost base figuring at $38 billion, which is below that $40 billion number at the start of the year.

Can you just talk a little bit more about the direction of travel of that toward the year-end?

And apologies, one very final one.

Ben, you were talking about, at the beginning, the priority of reducing carbon intensity.

Can you talk through what metric you think is the most appropriate for us to assess that one?

Thank you, Lydia.

Good questions.

Let me start with the carbon intensity, say a few words about costs and then Jessica will take that one as well and the scrip one and the repurchase one.

Yes, capital intensity, we've said we want to be a company that thrives in the energy transition.

That means a number of things, but amongst others, it also means that we have to have a portfolio of assets and business models that are, shall we say, competitive or at least future proof in a world where carbon build increasingly become a constraining factor or [be] put a price on or somehow be needed to come down.

We at the moment, of course, have a number of metrics that we look at that are a proxy for or directly related to carbon intensity.

They are part of our scorecard on which we remunerate our entire organization, and that is the carbon intensity of our refining operations, our chemical operations as well as the amount of flaring that takes place.

Between these 3 categories, that's about 60-plus percent of our total greenhouse gas emissions.

So it's a very significant part of our emission base.

The reason why we've chosen those is because we can -- we think we can set targets for them.

Flaring, of course, we want to eliminate, operational flaring.

So it's, basically, a year-on-year reduction target.

And when it comes to the intensity or the carbon efficiency of our refining and chemicals footprint, actually, there's industry benchmarking that can help you take a look at the sort of achievable unnecessary emissions there.

Is that going to be enough?

I don't think so, to be perfectly honest.

This whole world is moving, of course, very rapidly.

You will have observed the discussions that we had around our AGM.

I made a commitment there that we needed to be in a dialogue with our shareholders to understand better what our Paris commitments are and to give periodic updates of it, and we will be doing that.

That commitment was made, and that will be, obviously, honored.

An important part of it also is, and this is why, I would imagine, also, investors are interested in it or should be interested in it, is our business resilient in the sort of future that we see, and even in the longer run is it still relevant.

And it's exactly for those reasons that these questions need to be answered appropriately, honestly and correctly that we have embraced the TCFD efforts or the G20 efforts, the Task Force on Financial Carbon -- Climate-Related Financial Disclosures, sorry.

We've been involved there quite a bit.

I've spoken myself a few times with Governor Carney.

We have been interacting with the task force at Jessica's level.

We have decided to completely embrace this, but a few caveats like we can't put the stuff in the 20-F.

It is -- that's not what the 20-F is intended for.

But in principle, we love the idea of having a credible, recognized methodology to demonstrate that our business that we have at the moment is also resilient in the next 5 to 10 years, come what may.

I'm confident that we are.

That's the work that we do all the time, also with the board.

But we have to demonstrate it in a way that is recognized by financial markets as a credible assessment methodology.

And we are working with the TCFD to work it out in detail and to, therefore, be, if you like, the poster child of doing it correctly in the oil and gas industry.

The other thing we need to get right is in the longer term, because financial markets are only interested in the next 5 to 10 years when it comes to stability, et cetera.

But what about the company in the 30s, in the 40s, in the 50s.

Are we still relevant?

And here, it's also much a matter of stress testing and understanding what could happen to us, et cetera.

It is more scenario thinking, how can the energy system evolve, how can we adapt?

Also there, we do a lot of work, because we are a long-term company.

And also here, we can demonstrate that we maintain relevance.

A part of it, of course, is because of the ease of portfolio adjustment.

If you invest $25 billion to $30 billion a year in a company with a $280 billion balance sheet, you have a new company every decade.

So we can adjust quite a bit, and we can see things coming.

But also here, there is no established methodology of proving that up.

And therefore, again, we welcome the fact that a body as credible as the FSB is actually working on providing that sort of objective measure.

Now that's a long answer, but I hope it will also sort of address a few other questions that could have been there down the line.

And it is an important thing we need to get right.

Why don't I pause here, Jessica, and you talk about the cost and scrip.

Great.

Thank you Lydia for the question.

There was a phrase that Shell used at the beginning of the 19th century, which I find compelling and charming, which is you can be sure of Shell, and I think that's important when trying to respond to this question.

We've given the market a clear perspective in terms of what our cash priorities are, the financial framework we're working towards.

And we have a plan, we're delivering against that plan and we believe it's the right plan for the company.

It's not that we want to be dogmatic, it's not that we don’t consider different options in terms of the financial framework.

But there's a lot of careful consideration that goes into it.

And we do believe stepping through our priorities by giving debt where it needs to be, focusing on dividends and then giving scrip off and then moving to repurchases and balancing with capital investment is the right path forward.

It's not that there aren't alternatives, but again, we've made commitments.

We think commitments matter.

We want to demonstrate our delivery against those commitments.

And ultimately, we're focusing on the fundamentals.

We want to have the company have cash flow, underlying cash flow that supports our dividends on a cash basis and that's really what we want to get right.

We think we're definitely on the path.

We've made a few references to the key numbers as proof points.

The $38 billion of CFFO, last 12 months basis, excluding working capital, $16 billion of organic free cash flow I think demonstrates we are moving the company in that direction.

We are eager to get the scrip off.

It's clearly a priority, but again, we want to do it in the right sequence and we want it to be done based on fundamentals and not kind of interrupt that by trying to make near-term kind of interventions, if you will, but really to focus on the fundamentals and hope in the medium term we can get to where we want to be, both from a debt perspective and removing the scrip.

From a cost perspective, things are moving in a good direction.

Our clean OpEx on a rolling 12 quarter -- 12-month 4 quarter basis is $38 billion, which is well below the [40] number that we indicated.

I think Ben may have mentioned before, this isn't enough.

We are going to continue to push the organization.

We are not taking the pedal off the cost, peddling it, we're not taking our foot off the pedal when it comes to the cost agenda.

We think there's more to come from that space.

We're going to continue to drive it.

But we're pleased with the 38, but expect there's more to come.

Okay.

Good.

Thanks very much.

Let's have the next question.

We will now take our next question from Alastair Syme from Citi.

A couple of questions.

There's obviously a very large debate going on the oil market about the role of the Permian and the future supply.

You've got a strong position in the core of the Permian.

So I guess, my question is where do you rank that investment and that asset versus other capital options you have in the upstream?

And my follow-up, which is not necessarily directly related but kind of is.

LNG, Canada and Lake Charles both sit in the potential FID queue.

What has to happen to make one or both of those projects work?

Okay.

Thanks Alastair.

Good questions.

Let me talk a little bit about LNG, Canada, Lake Charles.

Would you like to take the Permian, Jessica?

I think they are both good projects.

I think LNG Canada, I used to say, is the best project in Canada.

I can probably now say it’s the only remaining project in Canada.

And we are still looking to sort of refine the plans for it by taking cost out further.

We were clearly not at the point that this was considered to be competitive enough when the industry started to change on us.

And we potentially could have taken an investment decision.

And we are in the middle of doing that.

So wherever we need to get to with this project, it's 2 points really.

First of all, do we think we have a project with a breakeven price that is very resilient.

So this needs to be a project that can, of course, survive also under down cycles.

It has many sort of fundamental advantages in terms of its feed gas position that is somewhat more stranded than anywhere else in North America and proximity to premium markets et cetera.

But the key thing, of course, is do we have the confidence that the capital will come out, where we think we can get it to.

Having sort of witnessed cost escalation cycles in Canada, that's, of course, big in our mind.

And then the second that we need to get to, in addition to what is the sort of credible breakeven price and is it competitive enough, the second point that we need to get to is the timing.

How does it fit in to the sequence?

These things are related.

If you have the best possible project and the cost of supply curve for new projects, you are a little bit less obsessed with the timing because you will be able to get it into the market.

Of course, we are able also to take a large part of the supply ourselves in our own portfolio of shorts.

But nevertheless, we need to get as Jessica said earlier on, we need to get the timing roughly right.

That we think we can.

If we look at an investment decision in the next 18 months or so, this is going to be a project that could start producing right at the moment when the market, spot market, short-term market, is getting very tight, again.

So projects will be able to find a home in the lead up to it.

And in a way, the same is true for Lake Charles.

We have to take a look on it too.

I would also dare say Lake Charles is the best LNG project on the U.S. Gulf Coast.

But again, we need to get it to a point -- there's a bit of restructuring required there as well of a different nature in LNG Canada.

But we need to get it to a point that it is really competitive.

It's really resilient.

And we believe it is the right moment to lend this project in the market, when it starts up.

Can we do 2 projects at the same time?

Yes, we can.

We have room for that.

But can we absorb both projects at the same time in the market?

We have to think a little bit harder for that.

Definitely, not exactly at the same time.

Good.

Alastair, turning to Permian.

Again I go back to the point I think I made a bit earlier around our overall approach to capital allocation and ensuring we're getting the most value accretive competitive projects sanctioned.

And in that sense we're looking for the most competitive marginal barrel and that can be from our conventional oil and gas business, it could be from our Deepwater business, it could be from our shale's business.

And all of them are actively competing for that capital.

I think that's really driven the right behaviors in the organization and all of those businesses have been driving the breakeven prices down.

And frankly, all of them can compete with one another, in ways that perhaps weren't possible just a couple of years ago.

In the shale's business, we are spending some $2 billion to $3 billion in capital already.

Permian alone over $1 billion.

So we're making significant investments in that asset.

We're pleased with that asset.

But at the same time, we have great opportunities in Deepwater, either near field or potentially new projects.

Again, those projects are being assessed, whether they are the most kind of capital efficient and the most value accretive, we're sanctioning projects in the Deepwater with breakeven prices on a go-forward basis of less than $40 a barrel.

So I think competing very much with the other marginal barrel opportunities.

So again, like the assets, we're investing a good chunk of money already in the shales business.

We'll continue to have that competition between the businesses for the best marginal barrel.

But we've got a great Deepwater business, unique capabilities, unique positions.

All of that combines into having I believe some of the most competitive barrels possible in the Deepwater business.

Thanks Jessica.

Can we have the next question, operator?

Absolutely.

Our next question comes from Biraj Borkhataria from RBC.

I had a few.

Firstly, on the OpEx run rate, [so that] is $38 billion.

I know you don't like to give targets, but could you say whether you have line of sight to the $35 billion at this point?

That's the first question.

Second one is on your finance charges or interest paid.

I'm a little bit surprised to not see the interest charge fall as your debt is coming down.

So I was wondering if you can just talk about as you get to that 20% gearing, is there a figure -- interest figure that you can guide us to on a more normalized basis?

And then one maybe going back to your big strategy day in 2016.

One of the big deltas on a theme-by-theme basis was conventional oil and gas, which was negative free cash flow in the old world and you want to generate $5 billion a year.

I was wondering if you can talk about that business today or that theme today, where you are now and whether you've been happy with the progress made so far.

Okay.

Thanks, Biraj.

Why don't I start with the last one a little bit and then Jessica will take the other two.

Yes, the conventional oil and gas business, of course, bear in mind that, that was a also I think back of June last year that wasn't quite near the bottom, but it was, of course, still in a very, very severe downturn that we were looking at the business and the numbers.

In the meantime, of course, we have done a tremendous amount of work in the entire portfolio but definitely also in conventional oil and gas.

I think you're right.

In the conventional oil and gas business, we had some of the most troubling performance on a number of fronts.

But it was not a business without potential.

What we have done with it is first of all, a significant amount of high grading.

Look to the list of things that we're getting out of, the conventional oil and gas components, are all of course, businesses that were in one form or other, not any more strategic or otherwise trouble for us, that has really helped.

And we have done a tremendous amount of improving the remainder of the business.

These things are correlated.

If you have a very strong program, which we did have, and do have still, the gold fit for the future, which was actually sort of born within the conventional oil and gas heartlands.

You can really drive a lot of improvement, not only by getting the people to focus on the right things and having a cadence of improvement programs and reviews et cetera, having what we called in place chief irritants to make sure everybody sort of kept focused on the right things, but if people also see that the consequence of not getting there is exit from the portfolio, there's an extra motivation to spur them along.

So where we have gotten to is and maybe this is something we should cover also in the management days in November.

A tremendous amount of progress in what is the remaining part of the conventional oil and gas portfolio.

Very significant reductions in operating costs, very significant improvements in uptime.

And crucially, also a much stronger and more successful focus on what we call WRFM.

So basically, restoring production, improving reservoir monitoring and performance, running the assets much more to the [linear] diagram so that we can sweat them harder et cetera, et cetera.

Where we are now, I think is in a much better place.

This business is holding its own.

It is not good enough.

We need to get still more out of it and there is much more scope to do so.

But it is in a fundamentally different place from where it has been before.

And in terms of cash, it is actually doing not too badly.

What is the remaining problem I have with the conventional oil and gas business, which is how do we maintain its longevity through the 30s.

So where we see still a business that will be performing well on the free cash flow basis in the 20s.

If I look to the latter half of the 20s, you will see that the free cash flow is the product of a declining operating cash flow and a declining investment.

And therefore, we need to work now on what we call the strategic battleground to unlock barrels that we have in our contingent resources, but still need to be brought into production.

And they are currently not progressing, because either they are sitting behind challenged fiscals or they are sitting behind challenged capital intensity levels or they have otherwise complications.

I think we're working our way through that as well.

So I hope that we can continue to present the conventional oil and gas business as a real core of our portfolio and not something that we basically run as a cash cow and deplete it.

But maybe it's [in] one of these businesses that we need to put a spotlight on a little bit more when we come back in November for you.

Jessica?

Great.

So Biraj thank you for offering us a target, if we're not providing one of 35.

What I would say is 2 things.

I think hopefully what you're hearing from Ben and myself is a high degree of ambition and what we're currently delivering, as Ben just said, not good enough.

So I think we're going to continue to drive that number down, even though we've achieved a lot in the last 2 years going from $50 billion to $40 billion between '14 and '16 and then further a couple of billion dollars down on a rolling 12-month basis to the $38 billion that you quoted.

So the ambition remains high to continue to drive that down.

I'd also mention the divestment program is not kind of inconsequential in terms of the impact on the overall profile of our financial statements and our operational expense as well.

We have provided some of those details.

[It seems] like oil sands coming out, Motiva being consolidated et cetera and a large growth program really will change the composition of a number of lines in our financial statements.

And so I think it's important to take that into consideration in terms of really understanding the underlying performance of the business and also the impact of timing as we go through these divestments, which will again have a major impact on the financial statements.

In terms of the finance charges, it's probably not entirely visible what's happening because these numbers often have a number of things in them, interest payments, lease impacts, et cetera.

And you can speak with IR team for more detail, but in fact, interest payments Q1 to Q2 did decline and we will expect them to continue to decline as we pay down debt further.

So that should be what you're seeing coming through the results going forward as we pay down the debt, in fact the interest will continue to decline over time.

Thanks Jessica.

I think we're down to the final question.

Operator?

We will now take our last question from Christopher Kuplent from BofA.

I'll try and keep it short, but I do have 2 questions.

Firstly, I feel like you have had several opportunities today in questions that were asked to go back to earlier guidance you've given us and refer to having line of sight to get gearing back at 20%, as a precondition for removing the scrip or starting share buybacks.

If I may, remind you, we've now since you stopped the share buyback program, looked at more than $10 billion of scrip issuance.

So to get to 2020, aren't you concerned you're running out of time keeping the scrip in place?

And coming back to John's earlier question, don't you feel you've got good line of sight moving gearing down towards 20%?

So that's question #1.

A bit of a repeat on earlier questions.

Apologies for that.

And lastly, very specifically, can you comment on what your perception is around risk that you've got exposure to around Nord Stream 2 considering the U.S. Senate and House moves?

Okay.

Thanks, Christopher.

I will take the second one.

I'm sure that Jessica is happy to go over the first one, one more time, but I will say also a few things maybe to make sure that we provide a consistent perspective.

On Nord Stream, I think it is still, I wouldn't say early days, but we need to see how this thing plays out.

So we have, of course, seen the Senate bill, slightly modified version going through the House.

We now can expect that bill to go back to the Senate and probably before the week is up, it will be on President Trump's desk.

Let's see what happens.

But if we assume that the bill gets enacted, then really we are still have to go through the phase of rulemaking, to understand exactly how that bill should be implemented.

And only after that phase is done, will we be clear what the implications are.

Now you can, of course, speculate about what will happen.

I think that is at this point in time unhelpful.

Plenty of people speculating already.

And indeed let me just say there is a wide range of what this could mean.

In the meantime, of course, we are in Nord Stream 2. We are authorized to be in Nord Stream 2. We have authorization of the Dutch government, which is the way it works for us, as a Dutch company investing or interacting with the Nord Stream project through Dutch subsidiaries as well.

And we're working on that authorization to the commitments of the agreements that we have with Gazprom.

And we are just honoring these commitments because we're so minded and because we are also obliged and we will continue to do that until we have clarity on what the sanctions mean.

And let's be very clear, if we find ourselves not being able to take the next commitment in that project, because it would be outlawed through sanctions, well then we have no choice.

We will comply with the law and obey the sanctions that have been put upon us.

But before we get there, there's probably a little bit more water that has to flow through the Rhine.

We also have, of course, a potential response from Brussels who are concerned with the extra territoriality of the legislation.

We don't know how that plays out either.

And therefore, it is somewhat speculative, what is happening here.

Make no mistake, we follow this very closely.

Because it indeed it does have implications.

And as I'm sure, other vendors will have told you as well or you can figure out yourself.

It also has implications beyond Nord Stream 2, not just for us but for energy provision in general in Europe.

So that's why it is an important topic.

Back to the scrip and the 20%.

Yes, I think we have been very consistent and clear and indeed a bit on the better off, you can be sure of Shell.

We have been saying the same thing all along.

We have 2 I wouldn't say conflicting but competing objectives that we have to work on in harmony.

One is to service our debtors and to take care of debt market and debt market sentiment and the other one, of course, equity markets and we need to have both right.

And what we have very early on in this process decided, and I think it is still the right decision is that we need to have a certain measure of financial buffer in our framework through debt reduction before we can turn off the scrip and pay out the full dividend.

Ideally, of course, that would have happened a lot earlier.

We have been very clear, we want to get sort of towards the 20% range, before we turn up the scrip and start buying back and again, we have been extremely consistent on it.

You can focus a little bit on what does line of sight mean.

Is 25% line of sight to 20?

Well I would say no.

Otherwise, we would have announced something different today.

But we are definitely on the right track and you can probably figure out that we will get there in a certain time frame, which depends a little bit, of course, on how oil prices will develop as well.

Make no mistake, Christopher, I dislike the scrip as much as many of our other investors and I full well realize that, of course, the longer we have scrip on, the bigger the headline dividend is and the larger the buyback program to compensate for it.

But compensate for it, we will and I'm very minded to make sure that we put a significant dent in our headline dividend by a very material buyback program and the first $25 billion of that already, of course, being mentioned.

But ultimately, it is an act of balancing and judgment, when we have to get it right, when we have to do it.

As Jessica said, we cannot find ourselves doing this prematurely or doing it regretting it or finding ourselves in a corner.

And I think the judgment that we have on this is still appropriate.

It is -- we're not on autopilot on this.

We debate this from time-to-time and this is where we come out.

But partly, why we are where we are is because we are confident of how things are developing, because of how they have developed over the last few quarters.

Maybe that's a long way of saying something similar than Jessica said earlier, but opportunity for you to have the last word as a CFO, Jessica.

I do want it to be very clear, our commitment to taking the scrip off as soon as it's appropriate to do so.

So if I used different language, I would not want that to leave any other impression than that one.

It is about getting our gearing down to 20%, getting our debt to the right levels and taking the scrip off as soon as possible.

We are absolutely committed to doing that.

Again, we're focusing on the fundamentals of the company and driving our cash flow to a different level, driving our profitability to a different level.

This will make us a healthier company, a resilient company that ultimately can pay our dividends by cash year in year out and that's really what we're driving our company to be.

And again, to get the scrip off as soon as we possibly can.

Good.

That seems to be the right endnote for this session.

So thank you very much, again, for all your questions.

As usual very helpful and good and insightful ones as well.

Let me remind you that we have, of course, third quarter results coming up.

They will be announced on the 2nd of November of this year and we look forward to talking to all of you then.

Thank you very much.

This concludes the Royal Dutch Shell 2017 Quarter 2 Announcement Presentation.

Thank you all for participating.