2016-03-12 11:00:00
SHELL NET INCOME DOWN 87%
STRATEGIC REPORT
CHAIRMAN'S MESSAGE
There is no doubt that 2015 was a turbulent year, with low oil and gas prices having a far-reaching impact on the energy industry.
We have taken the opportunity to strengthen our business by reducing our operating expenses and capital investment, while continuing to divest assets that are not central to our long-term strategy.
Our acquisition of BG Group plc (BG) – one of the largest takeovers in UK corporate history – in February 2016will help sharpen our focus on liquefied natural gas (LNG) and deep-water exploration and production.
Combined, we are stronger, more competitive and better-equipped financially to continue to play an important role in meeting global energy demand for decades to come. It underscores our role as one of the largest independent oil and gas producers. Increased cash flows from our newly acquired assets will also help to support dividend payments and future investment.
A major challenge facing society is how to meet the needs of a growing global population, while limiting the amount of carbon dioxide (CO2)inour atmosphere. This requires a mix of urgent action, realism and long-term planning by governments and industry alike. It will also require unprecedented co-operation, investment and innovation.
It was encouraging to see governments reach a global climate agreement in Paris in December. The agreement should now encourage countries to develop policies that balance environmental concerns with enabling a decent quality of life for more people.
Delivering the energy essential for economic development and the wellbeing of billions of people will require huge and sustained investment.
Limiting the amount of CO2in our atmosphere also requires major investments in advanced technologies, such as carbon capture and storage (CCS). Oil and gas, which make up over 50% of global energy supplies today, will need to continue to provide a large part of the world's energy for decades to come.
The International Energy Agency estimates that over $25 trillion of investment will be needed in oil and gas supply alone from 2015 to 2040.
So the long-term investment case for oil and gas remains strong, despite the fall in oil prices over the last 18 months. The concern is that prices seen in late 2015 and early 2016 may be too low to spur investment in projects that are needed to ensure long-term supplies. Without sufficient investment, the risk of demand exceeding supply will increase.
We know that understanding the world's future energy needs will help us improve our competitiveness.
We have evolved over the last few decades from a company focused almost entirely on oil to one of the world's leading suppliers of gas, the cleanest-burning hydrocarbon. Gas is already playing a role in tackling carbon emissions. Switching from coal to gas for power generation is one way to reduce emissions of CO2, while increasing energy supply to a growing global population, including more than 1 billion people who lack access to electricity today.
We are working on multiple fronts to play our part in the energy transition.
For example, we are now one of the world's largest suppliers of low-carbon biofuel through our Raízen joint venture in Brazil, which produces ethanol from sugar cane. We are in the early stages of developing biofuels that could further reduce the environmental impact of the transport sector. Our high-performance lubricants can already contribute to improved energy efficiency for motorists and we are working with vehicle manufacturers to improve them further. We are also increasingly offering LNG as a transport fuel and are exploring the potential of hydrogen.
CCS is an especially important technology for reducing CO2emissions from a range of industries. Quest, which we opened in 2015, captures and safely stores around one-third of the annual CO2emissions from an oil sands bitumen processing facility in Canada. We are sharing information on its design and processes so that it can serve as a blueprint for others.
Strong government support is needed to encourage many more businesses around the world to invest in CCS. The Paris climate agreement provided a promising platform for society to develop a solution to climate change. Governments now need to implement policies that will stimulate investment in all technologies that can contribute to a lower-carbon future.
Despite some of the toughest operating conditions that our industry has seen, we are in a stronger position to weather current market volatility and play our part in the energy transition.
Let me take this opportunity to thank our shareholders for supporting the BG acquisition at a very challenging time for the industry. Your Board of Directors is committed to delivering the value from this important investment.
Chad Holliday
Chairman
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CHIEF EXECUTIVE OFFICER'S REVIEW
It was a highly challenging year for the industry, but our integrated business and improved operational performance helped soften the impact of lower energy prices.
In these difficult economic times, our acquisition of BG Group plc (BG), which came into effect on February 15, 2016, will make us stronger.
The global portfolio we acquired is a good complement to our own. The combination will help us concentrate on more profitable pillars of our business, particularly deep water and liquefied natural gas (LNG). We are entering an exciting new era for Shell.
We continued our focus on safety. However, sadly seven people working for Shell in 2015 lost their lives. A fire at our Bukom refinery in Singapore also led to six workers being injured. Such tragic events underscore the importance of unwavering vigilance.
RESULTS
Earnings on a current cost of supplies basis attributable to Royal Dutch Shell plc shareholders were $3.8 billion in 2015, compared with $19.0 billion in 2014.
Lower oil prices and charges related to our exit from Alaska and decision to stop work on the Carmon Creek project in Canada contributed to our Upstream business making a loss in 2015. Strong performances by our Integrated Gas and Downstream businesses helped offset some of the impact of low energy prices. This is a reminder of the importance of remaining an integrated energy company.
Responding to the changing industry landscape, we reduced our operating expenses and capital investment by a combined $12.5 billion in 2015 compared with 2014. We distributed$12.0 billion to shareholders in dividends in 2015, including thosetaken as shares under our Scrip Dividend Programme.
Divestments amounted to $5.5 billion in 2015, and to more than $20 billion for 2014-2015. This exceeded our target of $15 billion for the period. The asset sales are part of our ongoing strategy of reducing costs and concentrating on markets where we can be most competitive.
Our oil and gas production averaged around 3 million barrels of oil equivalent per day in 2015. We started production at a major project off the coast of Nigeria which, combined with increased output from existing projects, helped partially offset the impact on production from naturally declining fields and divestments.
RENEWED FOCUS
We continue to lower our costs and take tough decisions on projects that, in the current oil-price environment, may be uncompetitive or unaffordable. For example, we stopped construction of the Carmon Creek in-situ oil project in 2015 and exited the development of the Bab sour gas project in the United Arab Emirates in early 2016. We are also postponing final investment decisions on the Bonga South West project off the coast of Nigeria and the LNG Canada facility.
Despite the current market uncertainty, it is important that we continue to invest wisely to achieve the most competitive portfolio we can. For example, we have decided to expand capacity at our Pernis refinery in the Netherlands and embark on a major expansion at our Geismar plant in the USA, reflecting the strong growth potential in chemicals for Shell.
In 2015, we announced the final investment decision to go ahead with the Appomattox deep-water project in the Gulf of Mexico.
We are prepared to reduce investments further, if evolving market conditions call for that. But we want to protect our growth prospects in a world where long-term demand for energy will continue to rise. Greater energy efficiency and cleaner technologies are needed to help keep pace with energy demand growth, while limiting carbon dioxide (CO2) emissions in the fight against climate change.
Meeting the energy needs of a growing world population means oil and gas are expected to continue to play vital roles in global energy supply into the latter half of the century.
Carbon capture and storage (CCS) systems that safely trap CO2 deep underground can play an important part in the energy future. Shell started its first major CCS facility, Quest, in Canada in 2015. Government-led carbon pricing mechanisms can provide impartial and long-term incentives to invest in effective lower-carbon technologies, such as CCS.
Natural gas, the cleanest-burning hydrocarbon, can play a role in limiting emissions if more of it is used instead of coal for power generation. Gas is also making a growing contribution as a transport fuel.
As a whole, the oil and gas industry is going through a difficult period.
However, our financial fortitude before the downturn and our sound strategy are helping us through the rough weather.
The acquisition of BG reinforces and reinvigorates us, and I am confident that our combined strength greatly improves our ability to thrive in a challenging business environment.
Ben van Beurden
Chief Executive Officer
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