殼牌 (SHEL) 2021 Q4 法說會逐字稿

Welcome to Shell plc Full Year and Fourth Quarter 2021 Results Announcement Q&A. Today's session will be recorded. (Operator Instructions)

Well, welcome, everyone, to the live Q&A on Shell's full year and fourth quarter 2021 results. We continue to deliver strong cash flows and earnings while we are progressing our transformation into a net-zero emissions business. This performance is, of course, the result of the strength of our strategy delivery and our portfolio. That's what we call Powering Progress profitably and purposefully.

Now today, Jessica and I will be answering your questions. (Operator Instructions) And with that, could we have the first question, please, Cecilia.

The first question comes from Oswald Clint from Bernstein.

Ben, could I ask one -- just one question to you. It's really on one of your slides today, you're talking about 5,000 businesses seeking net zero. And it feels like to me that majority of these don't really have a good idea how to get there, how to get there physically, and it's clearly a massive opportunity. And we've gone as far to think of Shell as this future energy Amazon-type platform. So perhaps I'm dreaming, but with that sort of context, I wanted to get you to describe perhaps a typical conversation you and your teams are having with these businesses at the moment and really how you're thinking of doing it profitably. Is this product you have on the shelf? Or you're looking into products that you still have to make and the profitability is just not quite as clear? That's the question, please.

And then Jessica, please, if I could just ask about CapEx guidance this year, and specifically Chemicals and Products and the Marketing divisions. Both of them look around $5 billion. Obviously, depreciation is less than half of that number in both. So I wanted to get a sense of some of the bigger projects or investments or buckets that are in those 2 businesses this year. Feels pretty high levels of spend. And I just want to understand, is it biofuels capacity? Is it EV chargers? Is it stations? Obviously, there's some M&A potential in there. So if you could just talk about that, please, it'd be fantastic.

Yes. Great. Thank you very much, Oswald. Yes, indeed, 5,000 companies and, of course, many more coming. Many companies, of course, have been very clear in their mind that they need to get to net-zero and are ready to make that pledge, but not necessarily always quite knowing how they will get there.

What we have been doing, Oswald, as I've said before, is we reorganized the company. And we are now looking into the market on a segment-by-segment basis, sector-by-sector basis. And these 5,000 companies and more, of course, are spread over a number of sectors. So the discussions will be different. If you are talking to an airline, you will have different type of discussions than when you're talking to a taxi fleet company or where you're talking to a tech company. And sometimes, of course, they are quite conventional discussions already. "Well, I buy lubricants from you, but I also want to do other things. Can you help me?" And quite often, of course, is that a matter of bringing the might of Shell to that customer and say, "Well, let me listen to your challenges and let me find out what solution would work for you."

Sometimes, these discussions, of course, run higher up in the company and all the way up to, of course, an EVP for that business or the director for that business. And in some cases, I get personally involved talking to the CEO of these companies as well. If you want to do some strategic deal with Amazon, quite often, it does require me to also get involved.

And -- but the discussions are quite often indeed discovery and rather than us telling this is a solution that we have for you, it is more trying to find out, "What is the challenge that you need to overcome?" And more often than not, we find that we have a formidable range of solutions to bring. Quite often, of course, then meaning that we also have to take some bold actions by building the supply chain to that customer or seeing the new opportunities like in hydrogen, for instance. Talking to trucking companies about how hydrogen can help them out is great, but it does mean that we still have to deliver on delivering the supply chain, of course.

So it is a little bit variable. It depends a little bit on what type of company and what type of sector. But it is a different type of dynamic than the dynamic that we had, of course, for our first 130 years, which was all about we can make these products, how do we sell them. It's just the other way around, and that's what we call customer back. Jessica?

Great. So thank you, Oswald, for the question relating to CapEx and our guidance for the year. Just to make sure everyone's aware, we've indicated that CapEx for 2022, we're looking at $23 billion to $27 billion. We expect to be on the low end of that. So that's somewhat of a step-up, but I think a modest step-up from what we spent in 2021, around $20 billion.

So the first thing to highlight in this is that we want to grow our business, and Ben spoke a bit about some of the areas where we're looking to grow the business, but we want to do it in a measured way. And we want to maintain the capital discipline that we've established in the company over the last couple of years. We also get a lot more for every dollar we spend, and we certainly want to have that continue going forward as well.

In terms of where that money will go and why the step-up that you're seeing in our Chemicals and Products business as well as our Marketing business. Oswald, you touched on, I think, all of the main points that I would like to raise. So in our Marketing business, our mobility business, you'll see a step-up in relation to our EV business. There's a lot of great things happening in that business as we expand our charge points around the world. We've made a lot of progress in China. We've made a lot of progress here in the U.K. and very -- feeling very good about that business and looking to continue to expand that business to meet our ambitious targets for the middle of the decade.

You also mentioned biofuels. That does show up in our marketing spend as well. We've sanctioned 2 plants, 2 half a plants so that we can provide our own source of biofuels. Those investments will start kicking in, in the next couple of years. And as you mentioned as well, we are building out our sites in places like China, India and other markets. So across that spectrum of our Marketing business, that's what's contributing to that slightly higher amount of CapEx being allocated.

In our Chemicals and Products business, the main contributor to that is our -- finishing up the Pennsylvania Chemicals project this year, which should hopefully be up and running by the end of the year. And that's really the primary -- primarily large piece of CapEx that you'll see in that part of our business. The rest is mostly around run and maintain. We're also doing some energy transition spend in that money as well as we try and improve our own Scope 1 and Scope 2 emissions in our Chemicals and Refining portfolios specifically.

Okay. Thanks, Jessica. Thanks, Oswald. Cecilia, who's next?

Lydia Rainforth from Barclays.

I have 2 questions, if I could as well. The first one then, on your start of year message, you talked about going faster, being bolder, being more daring. Can you help me understand what that actually means in practice? And is that different to where you were thinking a year ago?

And then the second one, just to come back to this idea of Energy as a Service and the 5,000 companies. Is the idea that, that helps you build market share? Or is it a case that actually if you're reducing emissions by, let's say, 1 million tonnes that the margin for you would be $10 a tonne? So almost trying to think about it as a carbon management business.

Great questions, Lydia. And thanks for reading my notes. I always read yours as well, of course. Bolder and faster, I said it in my end-of-year message, and overscores also -- very much meant for the staff in Shell.

Why did I say that? Well, we have tremendous opportunities in this energy transition. But that do require perhaps a slightly different mindset. I talked earlier on about this customer back, and we'll talk about it in a moment as well. But it also means that people have to think different about, "What is the opportunity? And what risk? And how do I take that risk intelligently?" And let me just give you 2 examples.

So take, for instance, hydrogen. If we want to build a new hydrogen plant, you can't take the conventional approach of just saying, "Oh, let's do some analysis about market developments in this area and how can we build this up and what will happen, et cetera." The market isn't there. So does it mean that we then can adopt a "Build it and they will come" attitude? No, not entirely, but maybe a little bit. Maybe we have to understand, can we shape that market as it comes into being? What risks can we take as this market is building up? What do we do with the hydrogen before all these customers start showing up with the hydrogen trucks, if that is what we are aiming for, for that particular facility? So you need to have a slightly different mindset.

We talked about customers getting to net-zero. Sometimes these discussions we have with customers about, "What do you need? What can we do for you?" would also bring things out where we just say, "Well, yes, I think we can do that. We don't have that ready or handy for you, but we're happy to commit to it." And that doesn't mean that we basically go short on everything. We can't do that either. But you can take intelligent risks and say, "Okay. Fine. We're ready to commit that. Let's work with that customer. How we're going to build that supply chain for that particular opportunity or customer need?"

And as I said, sometimes that requires a different sort of way of dealing with the challenges, the opportunities, the risks than we are used to, of course, in shall we say, a somewhat old world where we basically had more conventional planning tools.

Now on your second question, which is very much related to it, Lydia, yes, if we provide Energy as a Service or if we do customer back, indeed, it does mean that we develop new types of customers as well. Does it mean that our share can grow? Maybe in some cases, yes, absolutely. But I predominantly still look at that as basically high-grading the quality of our portfolio of customers and products.

In years to come, we will find that we have to put real carbon constraints on the product portfolios that we put out there. And we have to find good ways, and we are finding good ways, therefore, to reform the demand that we are serving from a higher carbon demand to a lower carbon demand while at the same time actually upgrading the cash flows as well. That is what the energy challenge is all about for us. And therefore, making sure that people look at this opportunity as upgrade opportunities is as important, if not more important, than simply growing market share. But probably a little bit of both will happen because before the market will completely transition to a low-carbon market, it will just be adding low carbon demand onto the existing demand as well. So it's a little bit of both, but for me, the high-grading, Lydia, is the more important objective to pursue. Thank you very much.

The next question is from Martijn Rats from Morgan Stanley.

The first one I wanted to ask is much more practical. So we've seen huge rises, of course, in JKM LNG prices. And I know that historically, your LNG portfolio is largely built around oil-indexed contracts with S curves that we don't really know. But nevertheless, there is still a significant chunk that is on a spot basis. And we've seen a strong beat, of course, in Integrated Gas.

The rise in JKM is so large that it's sort of not a rounding error anymore. So I was hoping you could provide perhaps some commentary about like how -- if this is sustained, and forward curves does suggest that, how is this going to feed through into earnings over the next couple of quarters? I'd be most interested in that.

And then secondly, I simply wanted to ask your assessment of how you see the recovery in oil and gas demand ongoing, as in you often sit on more real-time data than many of us. What is your assessment of how demand is coming back, is not coming back? Where is it accelerating? Where is it stalling? I was hoping you could say a few things from a macro perspective.

Yes. Thanks, Martijn. Let me start with the second question. Jessica will take the first one. I think recovery of oil and gas demand, of course, is very much an evidence. If you just look at how fast, particularly the East, of course, has recovered, it is -- you can say it's booming. It's a 12% rise in gas demand in China, tremendous pull there for also for LNG. And of course, many of these things have to do with just the tail end of the pandemic but then, of course, also the drive for decarbonization, which I think we will see more and more of. And a very important part of decarbonization is conversion of coal-fired power to gas-fired power, but also, of course, industry, residential heating, et cetera. Many of the demand drivers is not just LNG or gas for power generation. 2/3 is actually nonpower generation. And therefore, general economic activity is also driving a significant part of it.

I think the sector that stays behind a little bit, I would say, is more on the liquid side. So it is still aviation. I think many of the other liquid sectors, road transport, shipping are back, and we see actually quite a few constraints. And if you look at the overall liquids demand, of course, you'll see, Martijn, that, that is largely sort of restored to where it was from before the pandemic.

I think the big point, of course, is not so much the demand recovery. It is actually how supply is lagging because in the meantime, of course, the industry has with capital discipline, but also to preserve financial resilience, been quite parsimonious with investments. And as a result of it, we actually see a significant struggle for supply to keep up with demand. And I think that is going to be with us for some time to come. Jessica?

Great. Martijn, in terms of the LNG industry today and what we should be expecting going into the first quarter, indeed, an absolute standout quarter for our LNG business in the fourth quarter. Really great to see what that business, the portfolio and the capabilities of our trading and optimization team can deliver in these circumstances. It is relatively unprecedented, both in terms of the absolute level that prices have achieved, but importantly, also the duration in which these high levels of prices have been maintained in the industry. So that's really unprecedented.

There's reason to believe that some of those dynamics could continue for the reasons that Ben had just mentioned. There are genuine supply issues that are being felt across the energy system, and that does put pressure on gas prices. We're certainly seeing that in Europe and in LNG specifically. And that could continue for some time in terms of into the first and second quarter.

In terms of Shell specifically, we managed extremely well during the fourth quarter. Some of the supply issues that we had in the third quarter continued to the fourth quarter, but the team worked hard in terms of managing some of those risks, I think, learned a bit from the third quarter. And that learning from the third quarter and the innate power of our portfolio and, as I said, the capabilities really came through.

Going from almost $2 billion of earnings to $4 billion of earnings over that quarter was realized in 2 parts of the business. Part of that came through the asset side of the business and the other piece from the trading and optimization side of our business. So it's not just an entirely trading story that you're seeing in those earnings. It's also the positive effect of the macro environment on our assets as well. And so that should continue.

The trading and the optimization piece is a bit harder to predict. It's very dependent on the circumstances in the market and the timing of cargoes, et cetera. Again, the team did a stellar job in the fourth quarter of really optimizing that. I'm optimistic that, that can continue through the first quarter, but we still do have some supply challenges that we're continuing to manage. I think most of those will be behind us by the end of Q2.

So I think there's favorable conditions for the first quarter, certainly from our asset perspective. The trading side, again, I think we proved our strength in Q4. And I hope the team can achieve perhaps not quite the same levels, but almost the same levels in the first quarter. I think the conditions are there.

I will point out, though, there's 2 things that are playing out in the first quarter. We have maintenance in Pearl in the first quarter. So please keep that in mind. And of course, Prelude, we're bringing that back online after having a power interruption issue in the last quarter.

Okay. Thanks, Martijn. And bear in mind also, of course, that in February, we will do our annual LNG update, while we'll be hosting it together with Steve. So please preserve some questions for them as well. Cecilia, who's next?

Biraj Borkhataria from RBC.

First one is on the buyback. On an underlying basis, excluding the Permian proceeds, it looks like you're at the top end of the 20% to 30% payout on cash flow using the last 4 quarters as a reference point. I suppose if the macro holds, the cash flow numbers move up. But can you comment on your thinking on how you're deciding where you fit in that 20% to 30% range? Presumably, debt will keep moving lower. So the balance sheet is not constrained. But I'm just trying to understand how you as a management team and the Board are thinking about it.

And then the second question is actually on your balance sheet. You're sitting on $36 billion of cash. And I think you've prepaid some debt in the fourth quarter, which resulted in some penalties, but I suppose in the grand scheme of things still made sense. But just conceptually, sitting on that much cash in this environment seems a little bit odd. So I'm just trying to understand your thinking there and whether we should expect any early repayments for 2022.

Yes. Thanks, Biraj. I'll bite off the top end, and then most of it will be answered by Jessica. I think you worked out a percentage correctly. It's where we said, it's higher up in the range. It's somewhere between 29% and 30%. So well done there. And of course, you have to bear in mind this particular financial framework was set out when there was a different outlook that we were facing.

So let's, first of all, deliver that first half of the year. We've been very clear about what we want to do. Also bear in mind, of course, at this stage, buying back $4 billion a quarter is probably sort of the maximum run rate that we can do unless we ask for permission to also buy off market, which is something that we are indeed considering. And then let's indeed take a look on how things play out and whether the upper limit is still the right way to think about it.

We have said we will pay out on a historical basis. So we don't pay out prospective cash. We pay out cash that we have earned. And I think, therefore, it's appropriate for you to just wait a little bit until we are at the cusp of Q2 and we come back to you with what's going to happen next.

But Jessica, quite a few more questions unanswered. So why don't you take them?

Thanks, Ben, and thanks, Biraj. Indeed, so 2021 was an exceptional year for us in terms of cash generation. And $55 billion of CFFO, excluding working capital; $40 billion of free cash flow; $27 billion of organic free cash flow, these are obviously material amounts being generated by the company, reflection of the strength of our portfolio, the strength of our operational excellence and our performance really coming through, particularly in IG and Upstream in the last quarter.

That has put us in a very different place than where we were just a year ago. We've paid down our debt by some $23 billion. I can honestly say we didn't anticipate that. We were still in the 40s in terms of Brent prices as we were leaving 2020. And so we're in a very, very different place than we expected, a very strong place financially. And so that does set a different context in terms of how these decisions are being made, whether it be the level of share buybacks, our CapEx levels and the balance sheet levels.

I think the balance sheet right now is very strong. We're comfortable with where it is. So it is less of a priority. Strength is always a priority. But in terms of needing to allocate disproportionately to balance sheet, I think we can step a bit back from that. And it's more a question of how we want to prudently, appropriately, in a measured way, grow CapEx, and that's why we're at the lower end of the range of $23 billion to $27 billion. And then the share buyback, which Ben just spoke about, considerable cash being generated, and that's what's really driving the $8.5 billion share buybacks that we've outlined for the first half.

The level of cash that we have on the balance sheet is a reflection of where we were a year ago and being well prepared to manage any volatility and any risk and ensure the financial resiliency of the company. Again, we weren't anticipating Brent reaching $90 this year, and that's what the balance sheet reflects and the cash levels reflect. We did do some early redemption of debt that caused an interest expense that shows up in Corporate this quarter, which some of you have -- may have seen. It was a positive NPV transaction for us. We will continue to look at opportunities to optimize the balance sheet, optimize our cash levels. And if we see similar opportunities, then we may, in fact, do that, but we'll do that -- we'll let you know when that happens rather than kind of indicating that prospectively. But I think, hopefully, I've given you a sense of some of the considerations that we're making across the spectrum of capital allocation.

Thanks, Jessica. Thanks, Biraj. Cecilia, who's next?

Irene Himona from Societe Generale.

Congratulations on the excellent results. My first question relates to what Jessica just talked about, the capital allocation priority #2, which is net debt supportive of credit rating. You mentioned that -- Jessica, that it's not that much of a priority. Just obviously thinking ahead and in this price environment, you will continue to generate very substantial free cash flow. We are, however, towards the high end of the cycle, even if the cycle lasts a little bit longer. How should we think about -- that was my question. How much lower would you want gearing, for example, to be at the top end of the cycle given that you've managed to reduce it so far last year?

My second question was on your approach to asset disposals. I mean in this extraordinary price environment, it's quite likely that price views will begin to diverge. Others might see more value in some of your assets than you judge them to be worth to you. So would you contemplate some other additional sizable asset disposals driven by value creation, should someone offer you a good price?

Thanks, Irene. Let me take the second one and, Jessica, if you talk about net debt and the position in the cycle, which is an interesting perspective as well. Of course, we always look at asset disposals, Irene. We have to take a view on how do we keep our portfolio fresh, which are the assets where we believe they are better off in the hands of others, and where do we believe we want to put new investment dollars. Is that in continuing to harvest the value left in an asset? Or are we better off building a new asset which has longer running room?

We always look at that throughout the cycle. We have -- we permanently manage a funnel of $10 billion, $20 billion of divestment prospects, which we can activate, pull forward, push back depending a little bit on where we are in the market and the cycle. So yes, you can expect us to continue to work on divestments, not quite at the $15 billion level, I would say, every year. But across the cycle, work with an average of $4 billion per year is not a bad place to start. But indeed, with a very strong macro, it does make sense to think harder is this the moment to harvest some of the live assets that are probably better off in the hands of others. Jessica?

Great. Irene, thank you for the question. In terms of balance sheet strength and kind of the ultimate destination, as I mentioned, we're really pleased in terms of the improvement that we've seen on our net debt over 2021, down some $23 billion, as I just mentioned. And so we're much further ahead on that journey than I expected us to be a mere 12 months ago. So we're comfortable with that.

Now a bit more strengthening is not a bad thing. It certainly gives us financial resiliency and flexibility. If nothing else in the last 12 to 24 months, we've seen how quickly the macro can change from one direction to the other. So I would -- while it all feels quite buoyant right now, 6, 12, 18 months from today, we could be in a different position. And of course, that's what we always need to keep in mind with respect to our balance sheet and kind of not get too far ahead of ourselves.

So I think we'll look at it quarter-by-quarter before really making any kind of material adjustments to our capital allocation framework. I think we're in a good place. As I mentioned, the current macro and the current performance of the company will give us, I think, a lot of optionality, if you will, with respect to shareholder distributions. That's a great place for us to be.

On the capital side, it does give us more room to grow CapEx. But we're clear, we want to maintain our capital discipline. We want to grow in a measured way. We want to prove out business models while also being bold and ambitious, but trying to get that balance right. And so not getting too caught up in the moment when it's -- when things are really, really high and, similarly, not getting too caught up in the moment when things dip down as well. I mean that's our job. Our job is to work through these cycles. And I think we're in a great position right now in terms of managing volatility, and importantly, being able to fund the energy transition and help transform the company.

Thanks, Jessica. Thanks, Irene.

Our next question is from Michele Della Vigna from Goldman Sachs.

Congratulations. I had 2 questions. The first one is about the EU green taxonomy. It will start to be applied this year in terms of taxonomy-eligible revenues and investment. I was wondering if you could give us perhaps an early indication of where you think you are likely to score in terms of percentage there, given how important this is going to be for the ESG strategies of so many European investors.

And secondly, cost inflation is the theme at the moment. It's emerging across many industries. It seems like so far in oil and gas, the only area of really material inflation is U.S. onshore. But I was wondering if perhaps there are other areas that are concerning you at the moment. And if we look at your CapEx increase, which your guidance is about 15%, 20% in 2022, how much of that is activity versus price increases?

Thanks, Michele. I'll take the second one, and Jessica will talk about the EU green taxonomy. Yes, we see some price inflation as well. Of course, most of the price inflation that is being talked about today is, of course, in cost of living and clearly driven also by energy prices.

If you look into our supply chain, though, it's a slightly different story. I think probably where we see most of the supply chain cost inflation is actually in the renewable space. So wind turbines, significantly up, but also battery costs, we see the raw materials there also being significantly affected by inflation and supply chain. That's something that we are watching very carefully because, of course, quite often, you bid on projects where you have to take a view on how costs then subsequently will develop as well. And that's probably the most significant part.

In other parts of the supply chain, depending a little bit where you look in terms of steel or construction cost, other materials, yes, there is -- there are inflation percentages. But most of them, if I'd analyze it a little bit further, it is actually more base year effect. So in other words, we come off a year where we had a lot of cost deflation because of lowering activity and now you see a little bit of a recovery. So yes, you may be looking at an 8% rise in cost, but that's off a 7% drop in cost last year. That's most of what we see in the more conventional supply chains.

And if I then look at overall unit operating cost, we are quite still confident that we can continue to drive costs further down from where we are today. So we don't see that inflationary aspect in the supply chain coming through into our cost of operations.

On the project side, actually the step-up that we are talking about, which is a modest step-up, of course, is predominantly activity. So we want to allocate more capital to certain parts of our portfolio. That is not cost inflation. That is simply because we want to do more. And also there, we are quite confident that with all the changes that we are pursuing in P&T, we can continue to drive down costs further. We don't think we are back at where we need to be or where we were 2 decades ago. So also there, more running room to come.

On the first question?

Yes. So on the EU taxonomy, first of all, as you're likely aware, Michele -- and because I know you know the subject well, I've read some of the reports you've written on the EU taxonomy, which I think were quite good, by the way. As a plc, we're not actually subject to the requirements of the taxonomy. But nonetheless, we have had a team in place working to prepare disclosures according to the taxonomy. Once again, as you're likely aware, there's a lot of important details that haven't been sorted out, both in terms of the scope of what's in the taxonomy, but also how to actually practically apply some of the concepts.

Nonetheless, we're working through all of that, and I would expect there'll be -- we'll be providing disclosures on that over the course of 2022 and bringing some of that into our annual report as well. So we're fully committed in terms of making sure we understand the intent of it as well as being able to represent our business in that context.

It's another important way of describing or understanding how the world needs to move to a green future. It's an important piece of it, but there's a lot of details that need to be sorted. And importantly, we'll have to see how the market responds to it and if the market thinks this is a good way of considering whether a company is on the right path or not. Part of the challenge that we have is that there's a lot of very worthy efforts out there that are trying to determine whether companies are on the right or wrong side of the greenhouse gas reduction agenda. Of course, we think we're very much on the right side of that and are trying to drive it with our absolute emission targets for Scope 1 and 2 and our intensity targets, where we believe we've taken the full scope into consideration. And we'll continue to report across that breadth and -- but as society, we'll have to figure out what's the best way for really assessing a company and the company's performance, and taxonomy, I expect, will be one of the important considerations in that area.

Thank you very much, Jessica. And maybe another point to bring in here, which I think is quite important. In determining whether a company is Paris-compliant or not, quite often, the focus on just capital spend is just incomplete, is just inappropriate. It is actually not just a capital spend, it's also the operating cost. Because much of our green agenda is much more OpEx-denominated than it is CapEx-denominated. And if you add it all up, OpEx and CapEx, we spend about $55 billion a year. More than 1/3 of that we actually spend on the green agenda. And I think that's an important point to bear in mind as well.

But anyway, thanks for the question, and more to come on this one.

Our next question is from Roger Read from Wells Fargo.

I'd like to hit on 2 things. One, a question on execution just within the existing operations. Obviously, we've had things like Prelude that have had hiccups. I was just curious, though, as you look across your overall portfolio and with the -- I don't know if I'd call it above normal, but relatively heavy level of maintenance coming in Q1, how that should be considered.

And then the second part is a follow-up on one of your comments from earlier about real carbon constraint. I was just curious, what does that really mean to you? Is it a global price of carbon? Is it piecing together all the regional markets? Is it a tax -- a credit? Just kind of what your thoughts are and what would be the best approach overall?

Yes. Okay. Thanks, Roger. Let me take the second question. Jessica, if you want to take the first one, including the one on Prelude. I think -- Roger, I think when I talk about real carbon constraints, it is making sure that we, as a business, can grow our cash flows while at the same time reducing our carbon footprint. And sometimes, indeed, we will be helped by a carbon price that may exist in a market where our customers are indeed being encouraged to take low-carbon energy products. And therefore, we can supply them to them. And therefore, we can decarbonize while still growing our business with them. But in some other areas, that may not work like that.

So take, for instance, the example of aviation. In my mind, putting a price on a ticket or even putting a price on jet fuel is just not going to decarbonize the aviation sector. What needs to happen there is that we will have to have regional, and ideally, global mandates on the amount of biojet that needs to be blended into the jet fuel pool.

So what I would love to do when this process gets underway, and of course, we are building our biojet plants and some jurisdictions are indeed now introducing blending mandates but only small mandates, 5% of biojet by 2030, which is just not enough if you consider it in the bigger scheme of things. But what I would love to do is to give our aviation business the task to grow their business but with a lower carbon footprint. So you figure out together with your customers how we are going to bring competitive biofuels to market in a way that they want to buy, need to buy, work together with regulators making it happen, et cetera, et cetera.

A similar story, Equitel, for instance, for their heavy-duty trucking sector, where I would love to have our trucking business figuring out, "How can I grow my business without just selling more diesel? So can we somehow find ways and means to sell bio-LNG, hydrogen, biofuels in general? And how do I work together with my customers, and maybe with regulators, depending on which jurisdiction we are working in, to grow that business?"

So at this point in time, it is a shift from, "Well, if the opportunity is there, we may actually take advantage from it" to "How do I make sure that this opportunity will come? I'm the one shaping it, and I'm actually the one building the customer loyalty and the solution space and the infrastructure very early on in the journey so that we have lock-in of future profitability." That is what our strategy is all about when it comes to pursuing net-zero. And we have this strategy on a sector-by-sector basis because it will be different, again, sector by sector.

I hope it helps a little bit, Roger, but it -- but I'm sure we will be coming back to this in future calls as well. Jessica, operational?

In terms of operational performance, operational excellence is a priority for all of our businesses across Shell. And you would find for every business, every asset, there is an ambition to move to top-quartile performance to the extent that they're not already there. So that is a clear focus for our business. It's one of the main drivers of value. And you saw that commitment to operational excellence in our numbers in the fourth quarter, particularly in our Upstream business, what you see is earnings and cash generation that are much higher than they were, say, just a few years ago in a comparable price environment.

And there's a portfolio piece to that, our value over volume strategy coming into the fore, that's contributing to that outcome. But importantly, it's been a focus across all of our assets to really get the most out of the performance. And the recovery from Ida in the Gulf of Mexico, which I mentioned in the video, I think, is an excellent example of the capability of Shell to deal with extraordinary kind of unplanned events and bring those assets back online safely, on time and under the expected cost of recovery.

Similarly, in IG, very strong performance across the portfolio. The challenges we've had in IG have largely been around gas supply, which is different than kind of an operational performance issue. And it's been primarily from third parties. So it's not really Shell per se. We own it. We've got to fix the problem. But it's not a kind of operational excellence issue for us in IG specifically.

Now there's a couple of other pieces to that in terms of performance. It's not all perfect. And so Prelude, we had an event in the fourth quarter, an electric event that was very kind of specific. It was not kind of a process issue or kind of a wider operational issue. It was kind of equipment failure. That will take us some time to work through and get that back online and get that back online safely. Safety is always the first priority in terms of responding to occurrences like this. But I'd say on the whole, those types of issues across our portfolio have been declining over the last few years.

If you think about the first quarter of 2021 and some of the maintenance that you referred to, what's happening there is we have in Pearl a scheduled turnaround. It was completely planned. That's normal for that asset. So there's nothing extraordinary there. I've mentioned Prelude and getting that up and running. And then we have in our Refining business Norco, which was impacted by Hurricane Ida. That's been a bit harder for us to bring back online. And then Scotford, we had a turnaround also that affected us in the fourth quarter.

So I think on balance -- there's a couple of soft spots, but on balance, I think, very strong performance in the fourth quarter. And in the first quarter, for the most part, it's about planned activity, which is kind of normal, what you would expect with the scale and scope of the company.

Excellent. Thank you very much, Jessica. Roger, thank you very much.

Our next question is Christyan Malek from JPMorgan.

It's Christyan Malek. So 2 questions. The first question relates to Slide 18. Maybe it sounds cynical but if I had no idea about the company and simply looked at this slide in isolation, mentions capital allocation versus cash flow generation, I'd wonder why you weren't increasing your Upstream CapEx to generate more cash, especially given it represents 50% of total CFFO. I mean surely, you'd want to take advantage of prices being backwardated. And your reserves ratios are improving. And so I'd say, in the context of generalists' concerns, that renewable energy simply can't make money over the long term given how much money is -- how much money or capital is going into it. That's the first question.

The second question pertains to the 20% to 30% range and absolute quantum of cash return in 2025 and beyond as Shell pivots the business through transition. So while your current yield is fantastic, and congratulations on delivering, I'd like to ask, how sustainable is it if you plan to move to an effectively sort of lower-returns business? And it might be kind of unfair to put it, but I get a lot of questions from global PMs asking how do you think you can compete with the U.S. majors on cash return over the medium term who are very long oil and gas and by definition can generate premium cash flow.

Yes. Thanks very much, Christyan. I'm afraid I have to disagree with you on a few points, namely that you can't make money in renewables. If you define it very narrowly to renewable assets, it's maybe one story. But of course, you don't necessarily invest in renewable assets to be supplying the commodity or the merchant market in a particular country or region. We want to build an integrated business, which I said works from the customer back. And many a time, of course, the opportunities are there for the entire value chain.

Building a hydrogen business that will be high return is not necessarily the return I can make on the electrolyzer. It is the entire return that we will be able to make in serving the trucking business in Europe, for instance, which is made up of many more component parts than just the naked asset.

The other thing you have to bear in mind, of course, is that yes, you may look at individual projects and we may have a differentiated return requirement for certain projects over others. So for instance, yes, higher for Upstream, maybe lower for some of the Marketing and also energy transition projects, but that simply is because for every successful project that we execute in Upstream, there are also significant costs that are not recoverable. So in other words, we have to deal with dry holes. We have to deal with the fact that projects sometimes can disappoint because of the subsurface being disappointing. And many a time, of course, the investment decision that you take in an Upstream project, you make after a significant amount of cash has already been sunk in it. So therefore, you have to look at full cycle economics here. And what we are sharing with you is the economics forward looking at the sanction decision.

So therefore, I do believe certainly that if you take a risk-adjusted approach, that the way we have competition going on for capital, it is actually a level playing field. And it is not just investing in assets. It is investing in building businesses.

Now you're absolutely right. In today's environment, many of the short-cycle projects that we are doing and tiebacks, et cetera, have a much better prospect. And that is also where, indeed, we are allocating capital, too. But in the long run, we also have to build a business that is fit for the future. So the company is fit for the future, and that is also a focus we need to have. And we cannot have that focus on a cyclical basis. They would just say, well, today, it looks good tomorrow, not anymore. And therefore, look through the cycle, look across the entire value chain, look at life cycle cost and look at it at risk-adjusted basis, and then indeed, you'd come to the right conclusions.

Thank you, Christyan.

Our next question is Lucas Herrmann from Exane.

A couple, if I might. Can I push you a little bit on Pearl just in terms of the time of -- the timing of the -- or the duration of the maintenance program? And I presume that vast majority of the guidance you've given, the reduction in volumes in Integrated Gas is associated with Pearl. So in short, is this going to be down for a quarter? And is this -- you're operating on one train this year and you'll operate on -- or you'll look to undertake maintenance on the second next, just to give me an idea because, obviously, it's a very large cash flow asset.

And secondly, can I just ask how much -- I mean, going back to the CapEx observation that Christyan made. And actually, I'd probably go the other way than in the -- strikes me that CapEx last year in your Upstream was $6 billion. You're guiding towards $8 billion this year. The Permian has fallen out, which must have been a considerable few hundred million. So it's more around, where is the incremental spend actually going? What are you driving it towards? Is it predominantly short cycle? Some more explanation if possible. That's it.

Yes. Thanks very much, Lucas. I'll leave Jessica to talk a little bit about the Pearl details because I do not have them off the top of my head. For a moment, I was thinking you might ask, why don't you defer it when the prices are right? Of course, these are unbelievably complex logistics operations that you have to put together for such a large turnaround event. So you cannot quickly move it around your planet and then that's the end of it. But we'll get back to you with a bit more detail. Hopefully, Jessica has that to hand as well.

I think -- yes. So we've been very clear. We will invest roughly $8 billion in Upstream. And indeed, you're also right that, that then doesn't include any more in the Permian. But we have plenty of good opportunities to invest in. Now where will we go? Mostly in the core assets. Again, we have said 80% of our spend is in the core assets, and that is no different for 2020 -- sorry, 2022.

And therefore, expect more to go into deepwater, where we have quite a few good opportunities that we are executing on and maybe a few more to come. It will also be in -- hopefully, in acquisition of new activities that we can continue to invest in.

So it is -- is it short cycle? Well, to the extent that you call deepwater short cycle, perhaps it is. But I -- again, I have no hesitation to say that by -- getting out of the Permian, still allocating $8 billion to Upstream. We will simply high-grade the spend to those areas where we believe we have most of the running room.

Jessica, on Pearl?

Sure. So touching on some of the statements I made earlier. For the outlook for the first quarter in 2022 for Integrated Gas, the volumes are being impacted by both Prelude and Pearl. Those are the main drivers. Pearl should be through -- mostly through the first quarter. I'm not expecting kind of more material impacts beyond the first quarter from a Pearl perspective or in the portfolio perspective. I mean those ongoing maintenance, that happens throughout our asset base. But in terms of Pearl, I'm not expecting that to be significant for the whole year.

And of course, we've got the quarterly update note that we'll provide as we go into the first quarter, and we'll provide any more insight should there be any further updates at that point in time. But for Integrated Gas, it's really those 2 assets. Of course, Pearl is not LNG-related. You, I'm sure, know that already, but just to make sure that everyone on the call has that in mind. It's the GTL asset and the Prelude asset which does affect LNG volumes.

Thanks, Lucas.

Our next question is from Christopher Kuplent from Bank of America.

Can I just continue along Lucas' lines, please, then and actually make the point that it seems your 1% to 2% per annum production decline outlook is indeed still here after taking out a considerable chunk from the Permian? So I wonder how you would address that particular point that you're spending more, but yet your overall volume outlook appears poorer.

And a question again on CapEx but elsewhere. Jessica, you talked earlier about Penn Chem obviously swallowing up a significant chunk of your Chemicals allocation for this year. What are your thoughts beyond '22 for Chemicals? I remember a few years ago, you were talking about sustaining capital in Chemicals to be significantly below $2 billion. So I wonder whether you can comment on that.

And if I may, even if it's just a short yes, any excess cash flow from higher oil and gas prices, in particular? Who knows what's to come? Ben, I assume you continue to have a preference for using more buybacks even though you are already at the maximum. Or are you indeed suggesting that dividends could go up faster as well?

Yes. Thanks, Chris. Let me take the last one quickly then. That is a short yes. And I said earlier on, I realize maybe I need to deepen that comment a little bit more. So we can do more buybacks, of course, now that we are unifying -- or have unified the 2 lines of shares. So we're roughly double. But it's -- but -- okay, so that gives us about $4 billion a quarter. I think it would be good if we would have more freedom. So we are looking at bringing a resolution forward for our AGM to see whether we can also buy back on the Euronext, for instance, which will give us almost a doubling of that number again. And therefore, we can do a whole lot more, particularly if it needs to be concentrated, for instance, in 1 or 2 quarters.

So yes, if the opportunities are there. I still believe that our shares are undervalued, and therefore, it does make sense to return in the form of buybacks. That may, of course, change over time, but not at this point in time.

I think on your comment, yes, it doesn't quite work like that. Now that we have the $8 billion, but minus the Permian, our 1% to 2% somehow changes. I think by and large, what we mean to signal here, there will be a gentle decline in the volumes in our Upstream business as this business indeed is being, over a very long period of time, harvested well into the next decade, by the way, but at the same time also as we drive this business with a value over volume approach. And again, I think we started talking about value over volume about 9 years ago, and it's still very much alive. And you see the effect of it.

So today, we are producing a materially better result in our Upstream business with comparable price levels that we saw, for instance, in 2018 with significantly lower volumes. So indeed, it is a continuous high-grading of the business, making sure that this is also a business that continues to deliver the free cash flow that we are going to need to, of course, fund shareholder returns but also to fund the rest of the strategy. So yes, the 1% to 2% is still there, even though we have taken, of course, a bit of a step-down with the Permian divestment. Jessica?

Good. And I would say the 1% to 2% is from a lower base. So it's picking up from the Permian volumes coming out. So it's not entirely apples-and-apples to the prior 1% to 2%, which was at a higher number. So just -- so that's clear for people.

On the CapEx side and what's driving the CapEx levels in our Chemicals and Products businesses, as you mentioned, it is the Penn Chem, finishing that up in 2022. There's other important investments we're making. We're investing in plastics to chemicals. That's also driving some of the CapEx. We're continuing to look at growth opportunities. And there's other energy transition spend that we're doing because we're looking to drive overall carbon profile of the company to a very different place. And we think, ultimately, that's going to become a competitive advantage for us as well.

On the Refining side, which is in those numbers as well, we're continuing to repurpose those assets as well. Part of that is supporting HEFA and the creation of biofuels. But across kind of the spectrum, also our hydrogen agenda, which is getting played out in places like Rhineland, those are also coming into these numbers. So for Refining, it's about repurposing for the future, for the energy parks of the future; and for Chemicals, it's the Penn Chem, it's plastics to chemicals and other energy transition spend on top of the normal maintenance that you would expect in the portfolio.

Okay. Thanks very much, Jessica. And Chris, thanks very much.

The next question comes from Alastair Syme from Citi.

A couple of questions. In 2020, my understanding is you undertook a major restructuring that was labeled about repositioning the company for your energy transition. And there are press reports out there that suggest that some of your high-level management that was put in place then sort of a year later seems to have departed the organization. So I just wanted to understand what's going on and whether maybe you're struggling to maintain holding on to talent in what's a pretty hot market area.

And then, Ben, I just wanted to pick up on your earlier comment about life cycle costs and maybe talk about that in the context of ScotWind. My understanding is there's not going to be electron on that until 2030. Payback's maybe another 15 years after that. So how can you give investors -- or how do you think you can give investors confidence on life cycle costs when you're not going to be a dollar in the money until maybe the mid-2040s?

Yes. Thanks very much, Alastair. And indeed, we will have to learn the concepts of life cycle costs also in different types of businesses. But I can tell you already, the amount of exploration we will do in the wind speeds in Scotland is going to be relatively minor, and it's going to be, of course, significantly less expensive as well. So yes, some of these projects is building a funnel that will be able to last us for many years and decades so that we have a backlog of projects to work on.

And of course, the trick will be to have a funnel with relatively low maintenance costs so that we can take these projects off when we are ready to pursue them or when we need them without necessarily incurring a lot of costs, unlike of course, many of the upstream projects where quite often, between taking the license and taking the FID is a decade, and that's not a cheap decade. We spent a lot of money in the decade doing seismic, doing exploration, doing appraisal, quite often, doing 2 or 3 designs, et cetera. And by the time you are ready to take your investment decision, of course, you have spent a significant amount of sunk cost, which is the reason why we have a higher hurdle for projects that are being sanctioned at that point in time. That will be different for projects like ScotWind, where, by the way, we are very pleased that we have been able to win that 5-gigawatt wind farm for our floating technology.

Yes, on the talent, it -- indeed, we did do a significant reorganization reshape. We think we've taken out well over $2 billion of cost structurally, significant amount of staff as well, unfortunately. And indeed, we have also repositioned the structure of the company.

Now I think you're referring probably to our power business, and particularly to the departure of Elisabeth Brinton. Let me be very clear. So I recruited Elisabeth when she came in as the Head of Strategy for Power, and I was very impressed with the work that she did. And therefore, I appointed her as the Executive Vice President for our RES business when that position came up.

I think Elisabeth has done a very good job. She has taken that strategy, turned it into much more of a reality. But indeed, at some point in time, another opportunity and a change in her priorities in life came along back in the United States. So we depart on very good terms and very grateful for the contribution that she has made. And now we move into the next phase.

What you will have seen is that we have replaced her with actually 2 executive vice presidents. So we have a very strong person that we recruited from Orsted, Thomas Brostrom, who will be looking at the generation part of that business as an EVP; and then Steve Hill, who you will be familiar with also from our gas marketing business, who actually also did power trading. He now takes care of the marketing side, both on the gas and power side. So we have a very strong, dual-headed approach for the entire value chain here, building on the legacy that Elisabeth will leave behind. And there is nothing more to it.

We will now take our final question today from Jason Gabelman from Cowen.

I just wanted to ask first another one on the financial framework. And if I'm reading between the lines, it does sound like you're reassessing that a bit now that the -- you may be are a bit more confident in the market outlook. Are you specifically looking at what you're going to do on cash returns as a percentage of -- sorry, hey, yes, can you hear me?

We can hear you, but you cut out a little bit. Would you mind going once over the question again, Jason? Apologies for that.

Yes. Sorry, yes. No, sorry for that. Yes, I just wanted to ask on the financial framework and specifically the cash returns, it does sound like you're reassessing that now that you're a bit more confident in the market outlook. Is that a fair assessment of your comments today? And when do you think you'll have a decision on if there will be a change on the cash return metrics based on cash flow from ops?

And my second question is on something that wasn't discussed. There's obviously a proposal out there for Shell to break into different parts. And Shell has said, "We see a lot of value in the integration of the business." Have you studied that at more in depth since that proposal came out? And what's the response been from shareholders to that proposal?

Yes. Thanks very much, Jason. And by all means, we're not squeezing you in. We're happy to take your questions. Let me take the second one on Third Point, and Jessica will talk about -- a little bit more about what we meant by the comment on the financial framework. Well, let me, first of all, say congratulations to Third Point and Dan Loeb for an excellent moment in which they stepped into the stock and the results that I have no doubt are enjoying at the moment. That was a very smart move. Of course, we were a significantly undervalued company. And by the way, I still believe that the share price has more running room ahead of it, of course.

Now we have been talking to Third Point. We have listened to the ideas, which, by the way, are ideas for us also to build on. And by the way, we do this all the time with all shareholders. "What ideas do you have? Where can we improve?" And many a time, of course, individual shareholders will see some of the moves that we make or some of the changes that we made or some of the disclosures that we did or some of the other activities that we have done, that we'll see back that actually, that was exactly what they were proposing. And there is, therefore, no difference in terms of how we deal with Third Point.

So I do believe we have to look at why is it that there is still a gap from what I believe is the full valuation of our company versus what is the current enterprise value. We have to then weigh that also against what would be the pros and cons. So yes, indeed, are we studying ideas like this? Yes, but then again, we more or less do this all the time. We continuously reflect on what we hear back, and we incorporate some of these ideas or new insights in our strategy going forward. So that's all I can say about it at this point in time.

On your second question, have we heard from many other investors the encouragement to break up? No, not really. But again, it doesn't mean that we shouldn't be looking at how more and how better can we make sure that our total value is best reflected in what you see in our shares. Jessica?

Jason, thank you for the question on the financial framework. What we're trying to -- one of the points I wanted to get across today was that the current framework that we're operating within was conceived in a very different macro environment. And we've generated far more cash in 2021 than we certainly had planned for, and we had strengthened the balance sheet at a pace much faster than expected because of the macro environment and because of the performance of the company.

The 20% to 30%, there's a bit of a balance we need to strike, which is, on the one hand, we want to provide a clear, consistent framework that shareholders understand, that the market understands and can help frame the way we're thinking about capital allocation on the one hand. But on the other hand, we obviously need to respond to the market that we're in. And we're in a very favorable market. And the distribution profile that we've announced today in terms of the first half of 2022 reflects that very positive macro environment as well as the positive performance of the company.

What I would say is that, obviously, we do reflect on the reality of today. There's nothing kind of new to announce. I think when there is something to announce, we'll do it. But the 20% to 30%, if anything, is -- should be considered a floor. That's the minimum we would do. There certainly wouldn't be anything that would stop us going over 30%, but that is a decision for the Board. And if the market continues to be as it is today, I think there is reason for us to consider different allocation, but I think we need to do that with a little bit more experience and the actual reality playing through and not get ahead of ourselves. And we'll certainly let you know and the market now as soon as we are thinking shifts in any way.

Okay. Well, that feels like a good moment to indeed wrap it up. And thank you very much for all your questions and for joining today. I realize we didn't get to all of you there in the queue, but our IR team has taken down your names, and we'll call you back. But nevertheless, I hope that the questions that we get to have given you insights into how we are delivering our strategy, what our financial performance has been in 2021 and, of course, how we look at 2022 and what the outlook for the year really is.

As I already mentioned earlier on, we also have the annual LNG Outlook and the Shell Insights event for Integrated Gas. We will have that later in the month. That will be hosted by Wael Sawan and Steve Hill, and they will be looking forward to seeing you there again.

And that's it for now. So I wish you a very pleasant end of the week and hope you and your families stay safe and stay well. Thank you very much.