Shell plc (SHEL) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Royal Dutch Shell 2019 Q4 Announcement. Today's call is being recorded. There will be a presentation, followed by a Q&A session. [Operator Instructions] I would like to introduce the first speaker, Mr. Ben van Beurden.

Thank you very much, operator. And ladies and gentlemen, welcome to our fourth quarter results call, and thank you very much for joining us on a, no doubt, very busy day. You will all be familiar with the disclaimer, but please take another good look at it, because it’s time to update you on the delivery and the performance of our Company in 2019. I think, we are seeing good cash flow performance. And the current cash flows could bring us to $28 billion $33 billion in organic free cash flow by the end of this year, if we see an improvement in macro conditions to our reference price conditions. That’s what we said we would achieve for 2020. Now, the tough macro headwinds that we have seen could also impact our ability to deliver on that. But we have built a resilient business and with continued discipline we expect to succeed. As you know, our strategy is to deliver a world-class investment case, it is to thrive in the energy transition, and to maintain a strong societal license to operate. Of course, being a world-class investment is about generating strong returns and financial resilience. Thriving in the energy transition is about being a world-class investment for decades to come. And a strong societal license to operate is about having the support of society for the things we do. I think, 2019 was a year of progress towards all three ambitions and we continue to transform Shell into a simpler company that can deliver higher returns. And Shell needed all that strength for 2019. Because, even with it, recent levels of profitability have been lower. And there are three reasons for this. First, oil and gas prices. A year of price volatility across our businesses will, I’m sure, not have escaped your attention. In 2018, the average oil price was $71 per barrel, while in 2019, oil prices averaged around $64. And that of course has impacted our earnings and cash flow. And the geopolitical landscape and risk dynamics continue to remain challenging, even if we now could also see some positive signs in the macroeconomic outlook. The second point to make is about weaker economic activity impacting margins, and particularly in refining, and most certainly in chemicals. Specifically, lower GDP growth rates and a supply-demand imbalance in chemicals have impacted performance there. And the third and final point to make in relation to the factors holding back our earnings is about one-offs and unusual items. These are items such as our deferred tax charges in Q4 last year, and the higher charges related to the provision for restoration and decommissioning obligations. Also, with our assets starting-up, depreciation of these major assets has commenced and we will at the same time of course see increasing revenues as we progress through their ramp-up phase. You will hear about some of these projects a little later. Despite these three impacts, in 2019 our cash flow from operations, excluding working capital, was almost $47 billion and with working capital movements amounting to a negative impact of around $5 billion for 2019. This then translates to more than $20 billion in organic free cash flow. And these three impacts, the oil and gas prices, challenging downstream business environment and the one-offs have had an effect on our earnings and cash flow generation. But, they do not change the foundations of our financial framework. The foundations remain firm. On the share buybacks, as highlighted by Jessica last quarter, the release of each tranche is reviewed every quarter and is subject to the broader macro conditions and debt reduction. Progress on organic free cash flow is itself of course linked to an oil price of $60 per barrel real terms 2016, which is around $65 per barrel in 2020 money, and mid-cycle downstream margins. As I’ve already outlined, these have been all unhelpful in 2019, in the context of broader macroeconomic conditions. And this is why, in Q3, we said that reducing our gearing and the share buyback program may take additional time. Having made our review and considering all these factors, we are able to announce that the next round of the share buyback program will be set at $1 billion. I hope you will agree that in our sector it is essential to have a resilient balance sheet to manage this type of volatility. Of course, we will need to continue with the self-help we have delivered in previous years, for example, the discipline that we have shown in our investments throughout 2019, spending around $24 billion. And despite adding further customer-facing assets, such as in power, which traditionally incurs higher OpEx, our headline OpEx for 2019, if you exclude the IFRS 16 effects, has remained largely flat when compared to 2018. And we plan to continue this discipline. Our current plan for 2020 is for Shell to spend at the lower end again of the $24 billion to $29 billion cash CapEx range. We will detail some of these investments a little later, including our progress towards building a low-carbon power business. But before I go into all those details on our financial performance, I want to first focus on safety. If you look at these charts, there are two perspectives you can take. And the first is that we have come a long way in a short period. But, the second is that we have not continued the progress that we have made over the past few years. And both perspectives are in fact accurate. But of course, it is the second perspective that causes me most concern. Because safety is necessary for progress towards each of our three strategic ambitions. And while safety performance at our facilities has improved, our performance on personal safety in 2019 was simply not good enough with seven work-related fatalities occurring in Shell-operated entities. Our sympathy and condolences are with all the families involved and those who were close to these colleagues. But these incidents are terrible reminders also of the importance of a relentless and uncompromising focus on HSSE performance. We simply must do better and we will. Before I give you more detail on our progress and financial performance, I thought I would first want to provide a brief reminder again of the overall Shell strategy. At our Management Day in June 2019, we showed you how we have characterized our portfolio and this is serving us well to focus our investment priorities, to execute our strategy of driving delivery. We have grouped our businesses into strategic themes, core upstream themes which generate strong cash flow, we have leading transition themes which will be critical for us to capitalize on as the energy transition progresses to a lower carbon future, and then we have an emerging power theme, which will capture value from the growth in the electricity consumption. These groupings continue to provide clarity about our strategy and expectations in relation to returns, as well as risks and opportunities. Our financial framework has not changed. It is to have a balance sheet that is resilient through the cycle and to continue investing in our portfolio so that we can generate the cash capacity to increase distributions to our shareholders. So, I believe Shell’s strategy is clear and I can tell you, it will not change. And I think, we have made progress on the delivery of our differentiated strategy in 2019. In our core upstream business, we have seen a maturation of projects reaching final investment decision, have seen several start-ups. We now have a very strong position in deep water where we generate high margins through a very-focused cost management and operational excellence program. In our leading transition theme, our marketing businesses continue to deliver. And they have already established themselves as both the world’s number one mobility retailer, and our lubricants business is the global market leader as well. In fact, when we look at the clean earnings for our marketing businesses, 2019 was their best year in the last decade. And our LNG business, with its trading, marketing, and optimization team continues to go from strength to strength. And finally, our emerging power theme, where we are building a competitive and integrated business. But, you will hear more about that a little bit later. So, as I’ve said, in ‘19 we have made good progress on our strategy and looking forward we will continue to ensure there is a strong customer focus, where we will create value by offering our customers the products and services they want and they need. We will maintain our capital allocation to ensure we have diversified risk, but also to strike a healthy balance with the opportunities we see. We will maintain our capital allocation discipline and continue to shape our business to allow us to capitalize on the energy transition, creating a more resilient portfolio that also enables a low-carbon future. And we will continue building a truly integrated business, to further unlock the value across the energy value chain. I would like to spend a little time now on one of the crucial things which has put us on this path to success, which is capital efficiency. Our projects and technology organization is responsible for the safe and efficient delivery of nearly two-thirds of Shell’s total capital spend. And by systematically applying capital efficiency improvements, we have been able to structurally and to sustainably reduce costs across our project portfolio. Competitive scoping, systems engineering, efficient execution, recovering value in the supply chain, all these things have been crucial to our achievements. Think for example, efficient execution, the Gato do Mato-3 well, which off the coast of Brazil, was the fastest well ever drilled down to top reservoir in the history of the Brazilian pre-salt industry. And the results of this efficiency can of course be seen in our capital spend. Independent Project Analysis or IPA shows that more than 70% of the major projects we sanctioned in 2018 and 2019 have a unit development cost that is either best-in-class or top quartile. And we have reduced the portfolio unit development cost for upstream and integrated gas projects by more than 50% since the end of 2014. Of course, this makes the Company more resilient at lower oil prices. And our average forward-looking breakeven price for projects that we took a final investment decision in 2019, was under $30 per barrel. And this focus on efficiency will continue. It will continue to be a feature of what we do in each of our strategic themes and we will continue to build resilience and returns on the back of it. And now, having given you a slightly broader perspective, let’s move to have a closer look at the progress in upstream and integrated gas for 2019. So, through 2019, we have continued with our investments in our upstream and LNG businesses. The world still needs oil and gas, and will continue to need it for decades to come. So, Shell will continue to responsibly invest in these businesses. In 2019, we have seen several projects reach a final investment decision, with other projects moving into operation. I would highlight just two of these. First, Prelude. In June last year, our floating liquefied natural gas facility offshore Australia delivered its first LNG cargo to customers in Asia. And once we reach steady-state operations, we expect one carrier a week to offload LNG, LPG or condensate. And second, Appomattox in the Gulf of Mexico, which achieved its first production also in 2019. Appomattox continues to ramp up, producing around 75,000 barrels of oil equivalent per day from four wells now, with 14 more wells in the total drilling program yet to come on line. So, this means production from Appomattox will increase in a phased manner as we bring more wells on line in 2020. So, both Prelude and Appomattox will help us improve our organic free cash flow through 2020. And while it is important to look at our SEC proved reserves base, it doesn’t represent a truly integrated and diverse portfolio that we have, or our very important principle of value over volume. Our SEC proved reserves at the end of 2019 were 11.1 billion barrels of oil equivalent. And our reserves replacement ratio for 2019 is 65%. But, I want to also reiterate again that not all barrels are equal and that we will not chase production volumes for reserves, but will always focus on cash generation and returns, both in the near as well as the longer term. Progress in bringing new projects on-stream is important, but also our ceaseless work to high-grade our broader asset portfolio. In 2019, this high-grading resulted in divestments totaling $5 billion across all businesses. And this work will continue. Our ambition is to deliver more than $10 billion of asset divestments across 2019 and 2020. And we are actively working a funnel of opportunities that is actually materially greater than this and therefore we see potential to deliver more than this ambition. And it’s work like this, as well as building a resilient business that is core to progressing towards our ambition of being a world-class investment case. Let me now turn to one of our market-leading businesses, retail. Our resilient marketing businesses generate strong returns, demonstrating the strength of our scale, brand and customer offering. In our retail business, we currently serve more than 30 million customers each and every day with more than 45,000 sites in almost 80 countries. But our aim is to deliver on our 2025 retail growth targets, which we shared at our downstream Open House in 2018. And in short, that means to reach 55,000 service stations in more than 90 countries, serving more than 40 million customers every day. And we will do this by extending our leading position through using three strengths, our scale, our brand recognition with differentiated product and service offerings, and our excellent customer focus. Let me highlight three examples of the progress we have made to achieve this growth. First, through the scale of our facilities. We aim to expand in key growth markets like China, India, Indonesia, Mexico and Russia through adding 5,000 new sites across these markets by 2025. Now, since 2017, in addition to optimizing our existing portfolio position, we have already added around 1,000 sites in these markets. The second example is through increasing our scale in established markets by adding 5,000 new sites by 2025, again compared to 2017. And so far, in addition to optimizing our existing portfolio position, we have also added 1,500 sites there. And the final example of our growth is through expanding our customer product and service offerings through additional convenience stores at retail sites. We want to add 5,000 convenience stores across our retail network by the end of 2025, again compared to 2017. And to date, we have delivered more than 1,500 of these. So, from the original commitments that we highlighted at our downstream Open House event in 2018 to the end of 2019, you can see there has been strong growth in our customer-facing retail business, which, as I shared earlier, of course, has helped our marketing businesses in 2019 have their best year in the last decade. Now, earlier I promised you a closer look at some of the progress we made with our power portfolio. So, let’s look at the developments in this part of the business. If the world is to tackle climate change, it must consume more of its energy in the form of electricity. So, we see this sector as a huge growth opportunity. And that is why Shell continues to lay the foundations of an integrated power business. And this can be seen in three core areas. First, supplying power to businesses and homes. We have long been one of the top three power traders and wholesale suppliers in North America. But, we also have a growing power trading business in Europe and we are entering into other markets, including Australia. So, last quarter, we acquired ERM Power. It’s one of Australia's largest energy retailers supplying businesses in Australia. And in the UK, we acquired Hudson Energy, and we are now providing 100% renewable electricity to more than 900,000 households through Shell Energy in UK. As homes and businesses increasingly generate their own renewable power, they need to store it and then need to redistribute it back into the grid. And through sonnen and Limejump, we now provide smart energy storage solutions to these customers. The second core area is renewable generation. And here we see great potential in wind. In addition to our operating wind farms onshore in the U.S., we are actively pursuing large-scale opportunities in offshore wind there. And just recently, Mayflower Wind Energy, in which we are a joint venture partner, was chosen by the state of Massachusetts to supply 804 megawatts of clean, renewable power there. We are of course also building capabilities in solar power generation, not only by investing in commercial and industrial solar projects ourselves, but also by working with our partner companies, Silicon Ranch and Cleantech Solar. Our solar development partners help commercial and industrial customers such as Facebook to meet their renewable energy commitments. Our recent investment in EOLFI in France and ESCO Pacific in Australia again further support the growth in our renewable power generation business. And the final core area in our power business is helping power to customers with electric vehicles. So, in 2019, we acquired Greenlots, which is an EV charging company, providing customers the ability to charge their vehicles at nearly 6,000 charge ports across North America. And this acquisition followed our acquisition of NewMotion, which offers European drivers access to around 50,000 private electric charge ports and to a public charging network in 35 countries. And through our cooperation with IONITY and our own Shell Recharge offer, we continue to grow the number of fast charge ports at Shell’s retail stations. And while we are very excited about the growth in our power business, the outcome of the recent Eneco transaction demonstrates that we are also a very-disciplined investor and will not compromise on our long-term return objectives. Since the formation of New Energies in 2016, we have invested some $2.3 billion in the business that’s excluding operating costs, and the majority of that was investing directly to power. On top of this, we have entered into commitments to solar, wind and energy access projects, including the offshore wind project at Mayflower Wind Energy that I highlighted a little bit earlier. And this all also adds up to an additional $1 billion to $2.5 billion of capital spend in the coming years, subject a little bit to confirmation of the financial structure of these ventures. Now these types of customer-facing businesses typically incur higher OpEx and it is therefore important to make our investments sustainable that we pursue the most competitive opportunities in line with our ambition to build an integrated power business that delivers 8% to 12% return on average capital employed. But investing in power is one of many solutions that will help us thrive through the Energy Transition, and we have made further progress on our strategy across a number of fronts and I would like to quickly step you through that. Thriving in the energy transition is about being a world-class investment case for decades to come. So, investing today, so that we are in step with society as society makes progress towards the goal of Paris, a goal that we wholeheartedly embrace. Our ambition is to cut the carbon intensity of the energy products we sell, reducing greenhouse gases emitted on average with each unit of energy we sell, by around half by 2050, and as an interim measure by around 20% by 2035. But of course, we as a company can only control our own emissions. But, by changing the mix of energy products we supply, we aim to help our customers to lower their emissions as well. When I look at 2019, I think we have made some important progress here as well. For a start, we published our net carbon footprint performance for the period 2016 to 2018. And of course we will continue to report our progress on this. But, with this ambition, the most important progress will always be seen in the mix of the energy products we are offering our customers. And just one great example is the carbon offset program that we introduced for our retail customers in the Netherlands and the UK. But we also structured an innovative revolving credit facility totaling $10 billion with interest payments linked to the progress that we will make on our net carbon footprint ambition. I also wanted to touch briefly on our strategic ambition to have a strong societal license to operate and strengthening the support of society for what we do by providing transparency and leadership on the societal issues of our day. And that was why we reviewed the industry associations that we participate in just to make sure that they are aligned with us on climate change. As a result, we left one of those organizations. And crucially, earlier in 2019, we published the results of that review for all to see. But another example, in December, we published our first Tax Contribution report. And this report details the corporate income tax that Shell companies paid around the world in 2018. We hope that this report will help create a better understanding of our businesses and the taxes that we pay. Because that tax is part of our contribution to society as well. And contributing to society is a critical part of securing a societal license to operate. During 2019, we sought to contribute further by seeking to kick start a new level of cooperation within society aimed at addressing climate change. Addressing the use of energy is essential to tackling climate change. But that’s not just a matter of looking at the supply of energy, but at demand as well. And to that end, Shell has been part of efforts to bring entire sectors together to work out how to de-carbonize each sector’s energy use all the way to net zero. The Getting to Zero Coalition, which was announced at the UN Climate Summit in New York, is a good example of the type of action that we need. So, it was launched with three companies, Maersk, Citigroup and Shell, and the Danish government. And it was a joint effort to put a net-zero emissions ship to sea by 2030. And there are now over 90 companies involved. And this is only the start, and only one sector. But that work will continue in 2020. So, now that you have seen some of the progress that we have made in 2019, let’s see how this rolls up to our full-year financial performance. In 2019, we generated earnings excluding identified items of around $16.5 billion, and that’s in spite of the volatile macroeconomic environment that I have already outlined. Our organic free cash flow was more than $20 billion, but that includes a negative working capital impact of around $5 billion, and that’s all at an average Brent price of $64 per barrel through 2019, and very importantly, below average historical downstream conditions. Our share buyback program has reached some $15 billion in shares purchased since we started it in 2018, and that actually fully offsets all the scrip dividends that we issued post the BG Group combination. Shell’s return on average capital employed was 6.9% at the end of 2019, and gearing was at 29.3%. Our cash capital expenditure in 2019 was $24 billion. And that as you know is at the lower end of our guidance for the year, and of course it reflects the disciplined approach that we to investments. Jessica will talk in a bit more detail about the quarterly financials a little later. But, before I go any further, I would just like to take a step back and allow you to see how the performance of our individual strategic themes is adding up. So, this is a bit of a busy chart, but I hope it will help you. Because here, we have our organic free cash flow figures since 2017, broken out by strategic theme, alongside the 2020 outlook from Management Day in June last year. So since 2017, the average Brent price per barrel has gone from $54 in 2017, to $71 in 2018, and $64 in 2019. And through all of this volatility, our underlying investments in the business have continued. In 2019, as I already said, our total organic free cash flow was some $20 billion and that includes around $5 billion of negative working capital movements. And you will appreciate that we are a very diversified business, and looking across the strategic themes, there are some that are doing better than others. Let me take them a little bit in turn. I’ll start with our deep water business. Our deep water business is progressing in terms of cash delivery and although it’s still ramping up, of course with projects such as Appomattox adding to cash flows in 2020. If I look at Shales, we did not achieve the level of cash flows that we expected for 2019. However, despite the weaker gas macro, which of course hit the business quite severely, we are progressing with our organic free cash flow delivery as we continue to ramp up production in the Permian. The integrated gas business is delivering very well, both in terms of asset and trading and optimization performance. And this business of course is also playing a key role in leading transition themes. And our power business is aligned to where it needs to be at this stage, with further investments to continue building this business, as you have heard before. Shell has a very strong portfolio position, generating cash flows from a set of very-diversified and integrated sources. It is clear for Shell that the macro we have seen that there are challenges in organic cash flow generation from three of our themes, conventional oil and gas, chemicals and the refining business, sits in the oil product theme. The commodity cycle that we are in impacts the ability of these strategic themes to generate the returns and the free cash flow that we know they can. So, let’s take the momentum and start with our conventional oil and gas business. It continues to operate well, but this part of the business of course has experienced challenges with the current macro conditions in both oil and gas. That has led to more than $1 billion free cash flow impact compared to 2018. The free cash flows in 2019 were further impacted by tax one-offs and negative working capital movements, together around $2 billion. So, adjusting these elements back to organic free cash flow would have been more than $6 billion. For chemicals, our 2019 organic free cash flow was an outflow actually of $3 billion. And again, between 2018 and 2019, the degrading price environment impacted this result in chemicals by some $1 billion, with a further impact of $1 billion from negative working capital movement. So again, if you adjust these elements back, the organic free cash flow would have been a negative $1 billion. This business, as one of our leading transition themes, is growing, so there will be differences from year to year as we see Pennsylvania Chemicals continue through its construction phase. Next, our oil products business, which between 2018 and 2019, also experienced a negative macro impact of around $1 billion of organic free cash flow, and a further negative working capital impact of around $7 billion. So, again, if you adjust for these elements, the 2019 organic free cash flow for our oil products business would have been around $7 billion. Now, we can’t simply unwind the effects from softer prices in 2019. And while the macro is a risk, our focus to attain a high level of operational performance continues, and we will manage our operating and our capital cost choices very carefully. Now, I started this presentation talking about delivery, the promises made to our shareholders. We said we would high grade our portfolio through divestments and we are doing so. And we have refreshed our people strategy to sustainably deliver industry-leading performance. Our ambition is to deliver more than $10 billion of asset divestments across 2019 and 2020. And as I’ve said, we are actively working a funnel of opportunities that is materially greater than this, so we see potential to deliver more than the ambition across 2019 and 2020. We said we would invest our capital in a disciplined and an efficient manner, and we are just doing that. And in 2020, we will continue to invest across our portfolio, with the expectation to be at the lower end of the $24 billion to $29 billion range. And this includes around 50% of our capital allocation being directed towards our leading transition themes, which will be critical for us to capitalize on the energy transition to a lower-carbon future. We also said we would generate cash flows as we start-up new assets, and Appomattox and Prelude are the latest evidence that we are it as well. We also committed to a share buyback program and we continue to deliver this intention. We have further work to do. And to an extent we are also dealing with some negative market dynamics, but only to an extent. We have done and will continue to do all we can to ensure Shell is resilient no matter what the macro climate is, with a focus on costs, on tight control of capital spending, efficient project delivery and a relentless drive to high-grade our portfolio. So, as I said at the start, we are seeing good cash flow performance, cash flows that could bring us to $28 billion to $33 billion in organic free cash flow by the end of this year, if we see improvement in macro conditions. That’s what we said we would achieve for 2020. Now, let me hand over to Jessica to talk you through the quarter.

Thank you, Ben, and to everyone for joining the call today. Now, you’ve heard about the broader 2019 progress, let me begin with our Q4 2019 financial highlights. As Ben has highlighted, we continue to see pressure on prices and margins for oil, gas, refining and chemicals. In downstream, we see current prices being well below the historical averages over the past several years. You can see this in one of the appendices in the slides. Now, for the quarter, our Q4 2019 cash flow from operations, excluding working capital movements, was $12.3 billion. Brent was at an average price of $63 per barrel and our organic free cash flow was $3.9 billion. Earnings amounted to $2.9 billion and our return on average capital employed was 6.9%. For Q4 2019, our gearing was 29.3%, or 25% on an IAS 17 basis, an increase of 1.4% from Q3 2019. Our cash capital expenditure in the quarter was $6.9 billion. And as Ben highlighted, our full-year cash capital expenditure for 2020 is expected to be at the lower end of the $24 billion to $29 billion range. Ben has touched on our share buyback program, which reached some $15 billion in shares purchased since we started the program in July 2018, fully offsetting all scrip dividends issued post the BG combination, and the next tranche of up to $1 billion begins today. Now before I move to our earnings and cash flow in more detail, let's turn to our Q4 portfolio highlights. We've made much progress in 2019 towards delivering our strategy. In Q4, we focused on producing more from even better portfolio, strengthening our upstream while expanding our Power portfolio. And just to highlight one. In November, along with our partners and operator, Petrobras, we announced the start-up of oil and gas production at the P-68 floating production storage and offloading unit located offshore in Brazil. This FPSO can process up to 150,000 barrels of oil and 6 million cubic meters of natural gas daily. This new production at P-68 adds to Shell's deepwater portfolio in Brazil and continues to prove Brazil's place as a heartland in our upstream portfolio, where we have 16 active FPSOs. And total Shell share production has reached 400,000 barrels of oil equivalent per day. These portfolio developments and start-ups as well as our new FPSO help prepare Shell for the future. Now, let us look at our earnings in more detail. Earnings in the fourth quarter were $2.9 billion, some 49% lower than in Q4 2018. This decrease was largely due to lower prices and margins, well write-offs and a reassessment of deferred taxes. Following our annual balance sheet review, our identified items reflect the impact from impairments in the quarter of $2.2 billion mainly associated with natural gas assets in the United States. In our integrated gas business, total production was 3% lower compared with the fourth quarter of 2018. This was a result of the transfer of the Salym asset into upstream, largely offset by new fields ramping up in Australia and Trinidad and Tobago. LNG liquefaction volumes increased by around 5% compared with the fourth quarter 2018 mainly as a result of additional capacity from the Prelude floating LNG facility in Elba. Integrated gas earnings were $2 billion, down $400 million, reflecting lower realized LNG, oil and gas prices, higher depreciation with several projects ramping up, partly offset by stronger contributions from LNG, gas and power trading and optimization. In upstream, earnings were some $800 million, reflecting deferred tax charges, higher margins from provisions related to restoration and decommissioning obligations, lower oil and gas prices and increased well write-off. Fourth quarter upstream production was broadly in line with the same quarter a year ago. However, upstream production was subject to divestments and other portfolio effects. And excluding these, production was up 3% over the same period. In downstream, earnings were $1.4 billion in the fourth quarter, down from $2.1 billion in the same quarter last year. This reflects lower refining, chemicals and marketing margins. In the corporate segment, our underlying earnings, excluding identified items, reflect the impact resulting from IFRS 16 as well as tax impacts. Now that we've covered our earnings, let me turn to cash flow. Our cash flow from operations, excluding working capital movements, amounted to $12.3 billion. This is $600 million lower than in Q4 last year. Cash flow from operations in Q4 2018 was positively impacted by some $9 billion of working capital movements, mainly in downstream, due to inventory price and volume movements. In our integrated gas business, cash flow from operations in Q4 2019 was $3.5 billion, some $2.3 billion lower than in Q4 2018. In upstream, our cash flow from operations was $4.2 billion, around $2.7 billion lower than in the same quarter a year ago. In our downstream business, our cash flow from operations was $2.3 billion, some $6.5 billion lower than in Q4 2018. As mentioned, this was driven by wind capital movements. Now we presented the Q4 results, and you have seen how Shell's strategy and portfolio has enabled the delivery of competitive cash flow performance in 2019 despite challenging macroeconomic conditions. Let's review how we've been doing over a longer period. With the full year results out, we consider the financial trends across an extended period. Our earnings trend showed a balanced composition across our businesses, with integrated gas remaining resilient in a volatile market. Our cash flow trend across the same period remains strong despite the challenging macro conditions, which has impacted each of our businesses. We've maintained our focus on capital stewardship with continued portfolio high grading, driving capital-efficient growth. Looking at our gearing. This was 29.3% at the end of Q4 2019, higher than what we saw in 2018, and it includes the impact of IFRS 16 and IFRIC. With the current outlook on macro, equity movements and lease accounting, gearing is likely to stay above 25% during 2020 on an IFRS 16 basis. Our net debt at the end of Q4 2019 was around $79 billion on an IFRS 16 basis and on $63 billion on an IAS 17 basis. We remain committed to deleveraging our balance sheet and maintaining AA equivalent credit metrics. Over the past number of years, we've created a strong foundation to deliver a world-class investment case to our shareholders well into the next decade and beyond. Despite what we've experienced and continue to see in the macro, there are no changes to how we look at our priorities for cash. Our outlook is subject to the broader economic dynamics in oil and gas prices, but also refining and chemicals margins. And it's tied to an improved price and margin environment at real terms 2016 $60 per barrel or around $65 per barrel in 2020 real terms and also mid-cycle downstream. We will continue to pay dividends, invest in the business to sustain cash flow and pay down debt to reduce gearing, while any cash surplus will be invested as a considered choice to either further grow our business or increase distributions to shareholders. As you've heard, we believe it's important to remain within the financial framework we have established. We need to be able to move with the macro and remain flexible to the conditions we see. For the current conditions, we feel the current buyback amount is the right level. As I've said, we review the share buyback amount on a quarter-by-quarter basis, ensuring we do not lose sight of the original intent of the program. While our intention to buy back $25 billion of shares remains unchanged, the pace of the program is subject to our progress on debt reduction and macro conditions. A resilient balance sheet, combined with the strategy, portfolio and operational capability we have established, will enable significant levels of cash generation to the next decade. Now, let me hand back over to Ben.

Thanks, Jessica. So, Shell delivered competitive cash flow performance in 2019, and that's despite challenging macroeconomic conditions in refining and in chemicals as well as lower oil and gas prices. We generated $46 billion, $47 billion of cash flow from operations, that's excluding working capital, and distributed $25 billion in dividends and share buybacks to our shareholders. And our work through 2019 to thrive in the energy transition progressed well and will continue. To be a world-class investment for the decades to come, we are investing today, so that we are in step with society as it makes progress towards the goal of the Paris agreement, again, a goal that we wholeheartedly embrace. And finally, as Jessica said, our focus for 2020 remains the same. We will remain focused on delivering with a disciplined approach to capital investment and a focus on growing both our cash flow and returns. Now, with that, let's go over to the Q&A section. Could I as usual just have one or two from each one of you, so that we have the opportunity for everyone to ask a question. And operator, who can we give the questions to first?

Thank you we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Oswald Clint with Bernstein.

Ben, if I could just -- I mean, thank you for Slide 14 and your commentary around the free cash flow by division. I just wanted to put the buyback decision this morning in context of what you outlined last 3Q back in October. I just want to reconcile back to that. So back then, you said $8 billion to $9 billion less cash flow over 6 quarters, which kind of fits $5 billion to $6 billion for 2020 at the conditions back then, which you're seeing today. So $6 billion less cash flow is -- leaves you with $4 billion and, therefore, that's $1 billion per quarter. So are you really saying we should expect $1 billion a quarter through this year, which kind of matches Jessica's point by gearing being over 25%? And that's your base case assumption for 2020 that oil, chemicals, refining, gas just doesn't really improve from today's levels. And obviously, if it does, then, of course, there is some upside to that number. That's the first question, please. And then just on Chemicals, it's obviously a pretty disappointing number this quarter. I always remember the comments about being breakeven at trough cycle margin levels. We're -- I guess, we're at those, but we're not breaking even. We're actually losing money. So maybe just an extra layer deeper, please. I mean, what's really wrong here? Can you lower the fixed costs in this business any further? Is there 1 of your 3 key regions that's particularly weak? Is it NAFTA? Or primarily, is it your base or your intermediate products? And shouldn't you expect some run cuts or some restocking here in 2020? That's the second question.

Okay. Oswald, thank you very much. I'll take both of them, and I'm sure that Jessica would like to add on the first one. Let me start with the second one, though, Chemicals. Yes, absolutely. It is a cyclical business. We said we want to get that business in the shape, that it can still hold its head up at the bottom of the trough. I guess and I hope that we are at the bottom of the trough. It is pretty brutal, particularly in the east. And indeed, we do have difficulties keeping our assets fully utilized because significantly, demand is actually, in some cases, disappearing. And therefore, yes, I think we can consider this probably indeed at the bottom of the trough. We are losing money this quarter. You're absolutely right. It's not a massive amount, of course. And then it depends a little bit about what is considered the bottom of the trough. Is it this quarter? Is it this year? I think on average, we're doing more than somewhere between $2 billion to $2.5 billion a year. We do roughly 0 now. I would consider that sort of in line with where I expected that business to be. I think, indeed, Asia is probably the toughest because that is where most of the demand disruption temporarily happens. And of course, we run our Asia business predominantly on NAFTA-related feedstocks. Whereas in the U.S., we still have some benefit from the fact that also NGLs are really at a very low point, which, by the way, is then, of course, hurting as another part of the business. Let me say a few things about the numerical part that you had in the first question. I wish I could be as deterministic as you want our answer to be. It really isn't -- you look forward, and you see that at this point in time, of course, we are in very tough conditions. It's not just the oil price, but it's also gas prices that are significantly lower and disconnected. LNG prices, NGL prices are significantly lower. Refining margins are actually weak, and we're very weak in Q4. And Chemicals, we just talked about. So in that type of setting, you just know that you have to take a more prudent approach. You think $1 billion is roughly right. We will scale that up if we see that we have more breathing space. But there is no further sort of scientific magic to it to figure out what is the right number. We will have to go on that on a quarter-by-quarter basis. Jessica?

I think that's good, Ben. I think, for me, the key piece here is what we're doing is completely consistent with how we have framed our financial framework and our priorities for cash. And we've always mentioned or indicated that the pace of our share buybacks would be subject to debt reduction and subject to the macro. We're seeing a very difficult macro. And therefore, you see different choices being made and the pace of the buyback program being impacted. And we signaled that in Q3. Things have not materially improved over the last quarter. And as we look forward, there's not a lot of reason for a huge amount of optimism or to have a strategy of hope with respect to the macro environment. So we're trying to make the right prudent decision. We'll make that decision every quarter. If things improve, as Ben said, we can look to pick up the pace of the buyback program. If it deteriorates further, then we'll have to take further considerations as well. But everything has integrity with our strategy and with our financial framework and, again, just trying to get the right balance between strengthening the balance sheet and increasing shareholder distributions at the same time.

Our next question is from Martijn Rats with Morgan Stanley.

It's Martijn of Morgan Stanley. I want to ask you 2 things. First of all, can I ask you to reflect on the Eneco bid? Because that was an acquisition that I and I think many of us kind of thought would fit nicely in Shell's sort of new energy strategy. But nevertheless, the outcome wasn't favorable. And I was wondering if, for those types of assets, and this has also been true in some of the wind auctions that you participated in, with an oil and gas cost of capital, are you ever going to be competitive when bidding for those assets? And secondly, what I briefly wanted to ask is there are quite a lot of indications that Shell has done really very well this year out of IMO and IMO-related trades, and I was wondering if that had been a material contribution to your trading result this year.

Okay. Let me take the one. I think you're absolutely right. It really fits very nicely. I think the makeup of that portfolio was very much in line with how we saw the sort of shape of the Power portfolio that we want to have. We could see all sorts of interesting synergies, et cetera, et cetera. But yes, in the end, you know for what price it went. That was simply not compatible with what we expected from this business, both synergy delivery and integration in our portfolio. So indeed, we could never afford that type of money. It is indeed always higher, of course, to sell a good company with a good strategic fit in a public auction, and we have to probably reflect on that. But I think we could and should try these things as well. You are absolutely right also that we tend to lose quite a few wind tenders, but I'm actually quite heartened by that. At least, we don't buy our way into it. And we win a few as well. And we win them at our terms, not at the terms that we think we need to get to in order to win them. So, I think the jury is still out. I think we have a good strategy, a good approach and a good philosophy to get to the sort of return requirements of 8% to 12%, and I don't think we have to compromise or we have to fear that with our oil and gas mindset or capital cost, we could not succeed in these businesses. Jessica, on IMO and more generally trading?

Yes. So our trading and supply at Shell have made important contributions to each of our businesses, our upstream business, our downstream business as well as integrated gas in 2019. I think very good performance across the Board. In terms of the IMO contribution, as I've spoken to, I think, in prior quarters, it can be a bit difficult to isolate what's IMO-related versus other kind of dislocations that happened in the market over 2019. So I think there's some benefit that we've seen from IMO. But again, it's really how the whole market's working and our ability to move as the market moves. Some of the Saudi Arabia disruptions, et cetera, made some contributions in Q3 in particular. So IMO was good. Overall strong performance for trading, but, frankly, that's typical for that part of our operation in terms of making meaningful contributions to each of our businesses.

Our next question is from Thomas Adolff with Credit Suisse.

Jessica, Ben, two questions for me as well. Firstly, presumably, the Board recently went through the scorecard for 2019. And based on what you said in the presentation, it sounds there were many boxes ticked. But I wonder whether there were any boxes that were left unticked are areas less related to the macro and working capital? And perhaps in relation to that, Ben, from your point of view, what was the key takeaway from 2019, the key lessons learned as the CEO of Royal Dutch Shell? Secondly, just coming back to the macro. Your peers are also exposed to the same macro drivers, yet your share price has underperformed to your European peers quite materially since the start of 2018. Why do you think that's the case? Perhaps your targets for shareholder returns were unfortunately based on too optimistic macro forecast with a limited contingency buffer.

Thanks, Thomas. As always, a deep question from you. I think the -- yes, we indeed did discuss the scorecards and the remuneration of the top team in Shell. That is part of the Board that we do at the end of the year. You can read all of it up in our remuneration report in the 20-F. I don't think we disclosed it any time before that. Yes. It's fair enough that, indeed, although quite a few boxes were ticked, there's also, of course, challenges. And some of the challenges I already referred to are on safety, we didn't do particularly well. And we have to face some very significant and serious scrutiny from the Board on that and justly so. I think the performance deterioration in the second quarter of the year, it -- of course, there's always a lot of discussion. Were we prepared for that? Could we see this coming? Did we take advantage of it where we could? Et cetera, et cetera. That's also a significant scrutiny. And some of it, of course, also shows up in the scorecard outcome. But let me not try to drill that particular part of the annual report. I think the key lessons learned, boy, it's -- there's quite a few to be learned. And let me take 2 that perhaps resonate or maybe also not. I think still that despite the very tough macro that we are facing here, I mean if there's a synchronized downturn in almost every parameter that we are dependent on, we actually returned $25 billion to shareholders. I think even though the Board might say, "My goodness, it has been a tough second half of the year," we could also say, "Yes, but this is what we delivered, $47 billion of cash flow from operations." That's not a mean feat with the sort of experience that we've had in the second half of the year. Let's see on next week, tomorrow and next week plays out. But I wouldn't be surprised if we were now, for the 14th quarter in a row, number 1 when it comes to CFFO. So it's tough. And we feel it, but it's not as if we are under water here. So the resilience of the portfolio, maybe that wasn't quite a lesson that you were sort of expecting, was actually an important reflection for all us yesterday. Now, the other thing that really, I think, came home to me and probably made an even deeper imprint on me is the speed with which societal attitudes are changing around our business. We cannot ignore that. And the narrative that we are part of the solution, that the transition is going to be more profound and complex and everything else than we ever imagined and whatever else, that narrative is actually not playing out in the minds of many. And therefore, it becomes even more important to be really skillful but also being really clear with actions, what it is that we are doing to deliver the outcomes of tariffs. Because if we don't do this, I believe many players that are here on the call in the financial sector will also feel that it's their obligation to show what needs to happen to this sector. And I believe we need to show that we are on the right side of this equation, that we are doing whatever it needs to make sure that we meet that goal. And that has become a whole lot tougher in the last year in the mind of the public. That's also positive, by the way. But I think that is a point that we are reflecting on, not just as an executive committee, but a lot of time being spent also in the Board on it. Let me leave it at that. Thanks for the question, Thomas.

Our next question is from Jason Gammel with Jefferies.

I have two unrelated questions, actually. The first question, you are taking capital down to the low end of the guidance range for 2020. And I guess I'm really wondering whether that means any reduction in activity levels from what we were seeing in 2019? Or does the lack of inflation and the roll-off of major capital project spend allow you to stay, more or less, on the activity levels that you anticipated? And then the second question is related to the LNG business, which seems to still be performing pretty well, given the weakness in gas prices. There recently has been a lot of media discussion around customers wanting to reopen contracts that are linked to long-term oil prices, given the weakness in -- or the very low spot LNG prices. Can you talk about how that could potentially affect your own portfolio?

Yes. Thanks, Jason. I'll say a few things on the second question, and then Jessica will probably fill that out a bit more and deal with the first question as well. I think we hear this a lot, of course. Spot prices are down. That affects us, but it affects us in more than one way. We also take advantage from it. We are biased on that market. And quite often also in low spot price market conditions, we are able to take advantage of the dynamic that happens around it. So you see that, indeed, our business is doing quite well. That is not despite the low prices, but quite often also helped by low prices -- spot prices, that is. The reopening of contracts. Of course, there is always pressure for price reviews. There's always reasons on both sides, by the way, to do price reviews. In the main, we have not seen any deterioration in the way we have been able to prolongate or renew the LNG contract that has come up for renewal. There is not a specific trend or worrying trend, definitely not, that I'm aware of. But Jessica, can you answer that?

Indeed, no. I think the main point is there's an ongoing adjustment or review that happens at any point in time in the portfolio. We've consistently managed that well. We offer a number of things to our LNG customers in terms of being able to provide index flexibility, volume flexibility, et cetera, and that's valued. And so in terms of just managing that business, we don't see anything unusual or of concern. And to date, we've been able to manage that, I think, quite effectively. In terms of the capital program and the level for 2020, it's consistent with what we've done in 2019, where we had a lot of activity. And I would refer you back to the points that Ben was raising earlier in the call around our unit development cost and the significant progress we've made to really shift capital efficiency within the company. So, what we get today for every dollar of spend is materially more than what we got in the past. And that's probably the most important part of the story in terms of our capital program. But of course, in a challenging macro, we're being very disciplined about everything that we sanction. We have $20 billion in sustaining CapEx. Anything above that is growth CapEx. We're investing in growth, but the bar is raised at moments like this to ensure we're getting the highest-quality project sanctions and the highest-return projects sanctioned, which I think is not a bad thing from my perspective. So, I think it's -- we're managing with discipline. And we're not retreating from growth. We're simply managing in a disciplined way, and we're able to get more from our capital because of the capital efficiency we've been able to deliver across our business.

Our next question is from Jon Rigby with UBS.

Can I ask a few questions? One is on the Slide 14, which I suspect is going to be a popular slide. It seems to me that in a challenging environment, some of these businesses are doing very well, actually, as you point out, Deep Water and integrated gas in particular. But, Ben, as you also point out, Shale and probably arguably Oil Products is not doing so well. So, I guess two questions on that. Is the macro assumption that sits behind some of the free cash flow assumptions or projections for some of the subsegments too optimistic, do you think, to sort of realistically plan the performance? Or is there some performance improvement, I'm thinking particularly in Shales, that we should expect to see over the next 1 to 2 years? If you can just sort of disaggregate that between sort of performance improvement and macro, that would be helpful, please. The second is, if the macro does improve through this year -- you've obviously done 2 things: you've adjusted your CapEx down to the bottom of your range; and you've also lowered your buyback to below the projected number. So if you start to generate additional excess cash flow over and above what you think you're going to get today, where would that incremental dollar go? Would it be to fulfill the commitment around the buybacks the first instance? Or would you be also looking to increase CapEx and make a value judgment at that point in time?

Well, the second one, I can be quite categoric in if we do see an improved sort of fortune in the macro, of course, meeting our commitments is priority number 1. Yes. So there's 3 things we need to get right, Jon, and you know this very well: We have to make sure that we invest in growth. We have to make sure that we get our net debt down. And we have to make sure that we buy back shares in order to derisk the dividend. And I think prioritizing at this point in time a little bit more on the net debt reduction is appropriate, given the situation that we are in, in the industry. If we have a little bit more cash, then I would like to spend that alongside net debt reduction on buybacks. And if we can fulfill these requirements, then of course, we can think about ramping up CapEx. You -- the other thing you have to bear in mind, you can't ramp up CapEx meaningfully from next month to the next. So when we say it's bottom of the range, that's pretty much, of course, then also set for the year. On the first one, I think your question is very good. So it -- and I hope this will be a popular slide because we agonized a lot how to present this slide. But I think it is, again, providing transparency about where we are and where we see the deltas. And to talk about oil products, again, sure, you can say, "Well, that's not very good, isn't it at minus $700 million free cash flow?" But then again, $1 billion for the macro in this -- just in this year and $7 billion for working capital movements, they are -- it's not as if we have been too optimistic. These are just corrections we have to make if you want to present the business at what we consider to be representative average conditions. Working capital movements are never permanent, of course. So I think it is appropriate to -- if you want to examine how well the business is doing, to add these things back. On Shales, I take your point. Yes. So it -- we see the ramp-up. It is behind. Of course, we can explain why it is what it is. It is predominantly low gas prices. It is predominantly also low NGL prices. So therefore, you can say, "Well, the macro didn't collaborate." But as a result of it, there's also, therefore, less continuing appetite to invest in this business. So the macro is indeed also holding back to ramp up, as it should. Now if that improves, of course, we will correct for it. But it is a legitimate question to ask yourself, when do we see this improvement? Will, indeed, NGLs and gas and everything else and the bottlenecks that we see in the different theaters, how quickly will that change back? I think we have to be transparent with that. That's what we try to do here. Of course, shale isn't the best contributor to the lot. And again, if you take it on aggregate, Jon, $20 billion organic free cash flow, add back $5 billion for the working capital, you're at $25 billion. Add back another $2 billion for the macro corrections and then think of the growth that we are still delivering as we ramp up. And therefore, you can see that we ought to be able to come out in the range at the reference conditions that we mentioned. Okay, good. I hope we nailed that slide now.

Our next question is from Lydia Rainforth with Barclays.

Actually, you answered all my questions on Slide 14. So I have a different one. Just in terms of the debt levels on the gearing side, is gearing really the right number to focus on now? Because given there has been equity write-downs coming through, should we really be thinking about looking at things like net debt EBITDA or absolute debt levels, given the expansion into the emerging oil business and particularly given -- as Martijn said earlier, there's a different cost of capital for that, and that sort of being able to leverage that a little bit more may actually give you the sort of greater returns that you want from that side? And then secondly, just on the productivity side and the improvements in cost and CapEx discipline on that side. The one area that seems with -- for the fourth quarter seems like a step-up was on the OpEx side and again, those corporate charges. Are you seeing any kind of inflation coming through that or is that just normal seasonal side? And if you could just walk through a little bit of what you're doing on that debt?

Thanks, Lydia. Jessica, why don't you take them?

Great. So Lydia, on the first question in terms of gearing, I think it's a really good question. We've been using gearing as a proxy to describe strengthening our balance sheet, but that is not the only metric we're working towards. And it is an incomplete, an imperfect measure, as most individual measures are. So, I think thinking about net debt, thinking about gearing, the credit rating agencies look at FFO to net debt number. And we do similarly because what's driving our gearing target is not so much a specific number or even the credit rating agencies in and of themselves, but it's the desire to have a strong balance sheet. And all of these things need to be considered, and that's what we're working towards. We just use gearing as a way of kind of simply conveying to the market that we're looking to essentially reduce net debt and lower gearing. On the productivity side or on the OpEx side, not seeing a lot of pressure from an inflationary perspective. There is a lot of seasonality. There's things like provisions that come into play, et cetera. So there's -- I don't think there's anything of substance to note. I would say from an OpEx composition standpoint, it is important to recognize that the businesses that we're looking to grow are businesses like power and other businesses in our new energy space, our marketing businesses. These businesses are relatively OpEx heavy. So I would expect some growth in our OpEx through time as we look to grow those businesses. Our commitment to continue discipline in OpEx and looking to drive more efficiency is unchanged. We're still working the digitalization agenda. We still have a strong business center agenda, where we're continuing to move activities. So there's a lot of levers being pulled to make sure we're getting the right cost profile for the company. But be aware that some of these businesses that we're looking to grow have a different OpEx profile than the businesses of the past.

Our next question is from Christyan Malek with JP Morgan.

Two questions. My first is clearly, the macro backdrop is unique as far as every part of energy complex is under pressure. Now while you can't control these prevailing conditions, you can make the right assumptions in your outlook and calibrate your gearing and buyback accordingly. And I know this question has been asked. But not to sound like a broken mic, but your cash breakeven remains stubbornly high in the mid-60s, which begs the question, do you think you have the right macro framework? And would you be willing to share what exactly are your assumptions in refining and pet chem, gas and oil prices over the next 3 years? The second question, capital discipline has been strong. I understand that you've been very efficient and resilient. But how exactly will you adjust the portfolio through the cyclical downturn in the mid and downstream if it remains prolonged? I don't sense any urgency adjusting costs and possible restructuring to mitigate the margin headwind. So what I really want to understand is if the year-to-date gas price, refining and pet chem margins stay where they are, what happens next?

Good questions, Christyan. I will ask Jessica to go first, and then there's a few points that I'm sure I will want to add at the end of it.

Good. So Christyan, you had a number of different elements to that first question. So I'm going to try and respond to what I think you were asking kind of in substance. I have complete confidence in our strategy and our portfolio and our capital allocation framework that we're operating under and the financial framework and the way that we're guiding the company through this moment in time. So I don't see anything kind of structurally amiss, which I think you're alluding to. We are generating -- we've been focusing on improving the quality of cash generation for the company across the board to deliver cash today and in the near term to support further investment to grow the company, to strengthen the balance sheet and increase shareholder distributions. We've accomplished much of that over the last couple of years. So, last year, we delivered some $25 billion in shareholder distributions, $10 billion in buybacks. That's an impressive amount when we're in a moment of very challenging macro conditions. And so I think the company, given the backdrop it's against, has done a very good job of shaping itself in terms of the portfolio to drive these cash flows and enable us to achieve that level of share buybacks while still investing $24 billion into the company. So a huge -- strong investment levels, strengthening the foundation of the company, increasing shareholder distributions. And indeed, the balance sheet, we've made progress over the last couple of years. That slowed in 2019. We're now rebalancing a bit, as you see in this quarter, to make sure that we're paying sufficient attention to the macro with respect to the balance sheet in the near term. So I don't see something in that strategy, in that approach that isn't working. It's more challenging in moments like this. But I think that the underlying cash flow generation of the company is supporting what we're trying to achieve as a company. In terms of adjusting the portfolio particularly in the downstream, I think we signaled a pretty significant portfolio change is expected in our refining business over the next several years. So some of this change has been anticipated. So I think we've already signaled significant change already with that business, and we'll continue to work through that and continue to fine-tune strategy as needed. On the Chemicals side, this is a difficult moment. There's been difficult moment in the past. We do think this is cyclical. And the fundamentals around our Chemicals business remain strong in terms of the correlation of Chemicals growth to GDP growth and its contribution to economic growth and its potential contribution to the energy transition as well. So, those fundamentals are strong. This is a difficult moment. We're not surprised by this and believe this is something that is typical of the industry and something that we'll work through. I don't see at the moment any reason to think very differently about our strategy with respect to Chemicals.

Yes. Well, I think that's all well said. It's -- I think, Christyan, it comes back to probably a belief set that we hold and that, from time to time, gets tested. But nevertheless, we keep on holding it, which is that there is a certain amount of mean reversion in the market. So, we tend to have a framework. We're not going to disclose it, but we tend to have a framework of premises and margins and outlooks that assume that on a money of a day basis, everything reverses to mean, and mean being historical averages. Now that may not hold true. And in some cases, we have seen that it's challenging if you see fundamental shifts across trade flows that are permanent across, for instance, the refining portfolio, and therefore, you have seen this taking action. But in businesses that are very liquid, international and open, like for instance Chemicals, and in some of the refining portfolios that we have left, we believe reversion to mean is a valid approach to thinking about it. If you want to take another look at it, quite often, of course, we get accused that we are procyclical with our investments. And I would say, hey, at the moment, we are pretty countercyclical when it comes to Chemicals, not because of choice, but we are investing quite heavily at a time that the margins are very poor. And of course, it will be great if at the time, we get some of our production up and running. We are enjoying that in the up cycle as well. Again, you can never really get this right if you wanted to design it like this, but it just happens to be happening to us right now. So let me leave it at that.

Our next question is from Irene Himona with SocGen.

Ben and Jessica, two questions, please. So firstly, on Emerging Power, Ben, you told us earlier that cumulatively, I think, since the business was formed, you have invested $2.3 billion with some remaining commitments. Your strategic plan points to an annual investment in that business from next year of between $2 billion and $3 billion a year. So I wonder, are you lagging behind the plan? Or should we anticipate looking forward quite an acceleration, quite a step-up in investing in that business? And then my second question, I'm sorry to go back to that. So you are pointing to gearing remaining at over 25% despite having pulled the available levers of reducing the buyback, CapEx at the low end and $5 billion of disposals. At the current macro outlook or even if there's a deterioration temporarily, what would be the ceiling or the maximum gearing level above which the Board would actually feel uncomfortable and which might lead you to suspend the buyback for a quarter or two?

Okay. Thanks, Irene. Good questions. Let me take the first one. Jessica will talk to the next. Yes, I think on power, maybe good to clarify a few points. Indeed, we said we would do $1 billion to $2 billion in the period up to the end of this year. And then we would, of course, hope to step up our investments to the $3 billion simply because we have to make pace to grow this business if we see that there is success in it. Now, today, you will forgive us, I hope, for being at the bottom end of the range because everything is at the bottom end of the range simply because we are in a macro condition where we cannot afford to have everything at the top of the range. So if you want to have the aggregate at 24, that is actually the sum of all the individual themes being at the bottom of the range. But on top of it, Irene, in this year, of course, we also had to make sure that we could accommodate the Eneco acquisition if we had been successful with it. So we very consciously make sure that we held back so that the Eneco acquisition was actually digestible in a period that we thought could be still quite challenging. Now that unfortunately didn't happen. So now, indeed, we are a little bit behind. We have to do other things. We are catching up with some of the other things that we held off to make the room for the potential Eneco invoice. And -- but we'll see how that plays out. Will there be a further step-up in the next decade? I hope so. But as it is with every strategic theme in our portfolio, it all depends on affordability, in addition to the opportunities that we can spend the money on. Jessica, what about the gearing ceiling that the Board will hold us to?

Good. Thanks, Irene. As we've indicated, we're looking to bring gearing down to 25%, and that's still the direction of travel and the ambition we have for ourselves. As mentioned a few minutes ago, gearing is an imperfect measure. There's a number of things that influence that metric: changes in pension valuation because of interest rate changes, changes in accounting, such as IFRIC. That can create that -- can make that number a bit noisy and give some unpredictable outcomes in a given quarter because of those changes that aren't necessarily in our control. And because of that, in terms of our decision-making process, we'll look at a range of things. And so it wouldn't just be a gearing number. We're going to look at things like net debt and FFO to net debt over time as well. So, I wouldn't say that there's just one number. I think gearing is a convenient way of describing that we're looking to strengthen the balance sheet, which we'll continue to do over the course of 2020. Every decision on the share buyback is a holistic decision where we're looking at the status of the company today, the quality of the cash flows, the nature of the cash flows, the nature of the risk profile that we're experiencing today. We also look forward 12, 24 months. And that holistic view in terms of where the company is and the expectations of the macro all come into play in ensuring we're getting the right balance, as I said before, between maintaining the right level of investment to support our cash flows going forward, strengthening the balance sheet and increasing shareholder distributions. So, it's a holistic decision. It takes many things into account. And it's not simply one number or one ceiling that will drive an outcome.

Okay. Thanks very much, Jessica. I see there's quite a few people still in the queue, and we are almost at the end of the allotted time. We're going to go a little bit over with your permission, so we can deal with as many questions that are left.

Our next question is from Roger Read with Wells Fargo.

Questions I had, you've mentioned the macros, a tough environment here. So you can't change that. I was curious you've mentioned digitization and -- or digitalization and some other things. What else can you do on the cost side? What is it that Shell can do irrespective of what the macro is going to offer you? Second question, getting again to the gearing. 25% as a goal, should it be lower? And not just other metrics, but just generally speaking, take total debt down to something under 20% as a long-term goal? I mean if you look at the differences between the companies on this side of the pond and your side, debt is definitely lower over here and valuations are higher. And I'm curious if you think that's part of the reason for that.

Yes. Good questions, Roger. Let me say a few things about cost. I'm sure that Jessica is very much on top of it. We'll say a few more things, and I can also deal with the debt and the gearing question. You're absolutely right. We can't change the macro. And despite all the promises of digital, digital can't change the macro either, of course. But it is indeed an important tool to make sure that we are more cost effective, that we also spread our assets better. That's also a very important aspect of overlook. And of course, it is also working much harder on the overall supply chain. We have, in total, about $42 billion that we spend on the supply chain every year. That is for operating cost as well as, of course, capital cost. And we have a very, very disciplined approach, I would like to think probably the strongest approach in the industry to make sure that for each of the categories, we are absolutely first quartile. We're not quite there yet. So I would say about 60% of the categories that we have, 60% spend is absolutely best-in-class, but that leaves still 40% to work on. Some are a bit harder to work on. Some are actually still reasonably right for further working on. But it requires a new way of thinking, quite often strategic partnerships with suppliers. It requires a much better analysis of what should something cost rather than what is the competitive process to bring the cost down. And we have very significant capability built over time to understand what we should aim to pay for something rather than to try and find out through a competitive price discovery process. That's just one example. But we have quite a few examples to make sure that we really tackle the cost and, on top of it, are also not afraid to spend more if the yield on that cost is actually quite healthy. So the whole process that we have in the downstream businesses, particularly, to understand at the margin, how much income do I get on a dollar of spend? And is there at a tail, perhaps some unproductive spend that we can just cut because it doesn't really make a difference? That is also something that we have turned into a very hard driving discipline, often also, of course, enabled by digital. But let me, as a few examples, leave it at that and see whether Jessica wants to add to it but then also deal with your debt question.

Great. So Roger, on the levers we have to pull from a cost perspective, there's a tremendous amount of activity that's going on across the corporation. From a corporate perspective, how we run HR, how we run finance, digitalization is an important piece of that. So putting in the latest tools and technology to radically reduce the cost of our corporate functions while also improving user friendliness and customer friendliness as well. So also, the user experience is an important piece of our agenda. That's continued to be delivered. Within businesses, every business has a digital program and a cost agenda in place. Our unconventional business presented one of their activities to the Board this week. It's called iShales, where we're using digital technology, working with various partners and suppliers to think of the next generation of ways to develop shale projects and operate shale projects. We think there's still some 30% to 40% in savings from an operating cost and the development cost that we can achieve with these technologies. You hear -- you see the same thing in our larger projects as well. We've achieved a lot in terms of unit development cost, but we have the next generation of change that we're pursuing. So I think there's still a lot of space for us in traditional cost management but certainly on the digital side that we haven't fully realized. And I would expect in the next couple of years for those initiatives to have a more significant bottom line impact. On the 25% gearing, I think it's a good point. It's a great point. And in terms of thinking about debt levels through the cycle, I would consider this a relatively low point in the cycle. And as we've indicated in the past, we're going to look for kind of a 15% to 25% range, depending on where we are in the cycle. So in a mid-cycle, I would expect us to get closer to 20% rather than 25%. So I think that's the right way to be thinking about things. And indeed, that's how we're thinking about our financial framework and how we want to move the company once the cycle is a bit more forgiving.

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

I have two longer term questions, if I may. First of all, in the past, you indicated a desire to increase your exposure to shale, particularly in the Permian. Now you were right to wait. The price of those assets have come down. Clearly, your balance sheet at the moment probably wants to achieve some degearing. But do you still consider this to be an important strategic move for the long term? Or your priorities have shifted in this age of de-carbonization? And then a second question is that on the nature-based solutions, in particular, reforestation, you've been the first company to offer net 0 carbon fuels using rate credit. But at the moment, a lot of other consumer companies are following that strategy in order to offer net 0 carbon goods. And I was wondering if there perhaps could be a risk that the cost of this credit inflates substantially over time? And do you believe you've got the right scale of portfolio there?

They're excellent questions, Michele. Yes, I think -- thanks for acknowledging our strategic patience when it comes to shale. I think we'll have a bit more patience where we are at the moment. I think at this point in time, of course, with the framework where it is, I think anything inorganic would not be the right thing to do, I would say. We also see, of course, some of the pressures that we have been talking about a little bit magnified in the shale areas. There are some good areas, by the way, that we are still working on. We are still growing in the Permian. We are still looking at spending more in places like Argentina because we believe it has strong fundamentals. But I think we have to continue to be prudent with the timing and perhaps even with the choice in the first place. How de-carbonization plays into that can, indeed, also be a consideration. On NBS, I think your question is spot on. It -- first of all, indeed, we have been successful. We have 2 markets now working. And in both markets, we have more than 20% uptake. In the U.K., we're actually closer to 25%, which are 25% of our customers drive on net 0 fuels from Shell. But indeed, that market is finite, the market for these credits. And therefore, you cannot just rely on the open market. You have to originate the credits yourself. And that's what we have been doing. We have earmarked $300 million worth of investment in nature-based projects to generate our own credit. And I actually hope that the price of these credits and the cost of these credits actually go up a little bit because my biggest concern with nature-based solutions is that a low price, which we actually have seen in the recent past, is actually also creating low-quality projects that ultimately turn out to be not sustainable. So, we have to make sure that we hit a bit of a sweet spot, where we pay the right amount for the right type of product that can sustain itself and is not going to be in the end an Achilles heel for this concept of reforestation as an important tool for mitigation. So it is a matter of, as I said, a trade-off. And I believe we are getting it right by involving ourselves in the supply chain as well. But very good question. Thank you.

Our next question is from Biraj Borkhataria with Royal Bank of Canada.

I've got 2, please. The first one is on asset sales. It looks, particularly in the upstream, like incredibly tough market for sellers. Could you just give some insight as to what underpins the $5 billion in 2020 and what you're thinking about in terms of upstream versus downstream, et cetera? And then the second question is longer term but on capital allocation. The industry overall has got a habit of overbuilding capacity. And that results then in a downturn as the supply gets soaked up. But right now, you have multiple of those at the same time in chems and LNG. Particularly in LNG, Shell and some of your peers are all talking about a supply gap in the mid-2020s. But at the same time, you see multiple companies positioning for that supply gap. And that kind of behavior repeats consistently. So I guess the question is, what can you do for that to not lead into everyone's margins getting reduced as all the supply comes on at the same time?

Yes. Good question, Biraj. I'll take the second one, and Jessica will take the first one. I think the cyclical nature and the fact that it's quite often driven by a build cycle is indeed a challenge in our industry. We cannot collude together to figure out when will be the right time to build. So some of it, you just have to take. And you have to make sure that you read the signals correctly and therefore do not pile in at a time when it's not very wise to pile in. But at the same time, you also have to make sure that if you can't get that right, which almost by definition you can't, that your project is always going to be competitive also at a time that it's really tough to get into the market. Of course, we can sit here and say, "Well, we're all really uncertain about the LNG business." The best strategy we have is to just not participate in it because at least we can't be disappointed. But of course, that's also not a long-term viable proposition. So every time we make a choice, we have to make sure we understand the fundamentals of this business through the cycle or the cycles because every LNG plant we build or every petrochemical plant we build will, through its lifetime, go through multiple cycles. It is simply unavoidable. And therefore, making sure that it is competitive come what may is a very important consideration in every investment decision that we take. In terms of asset sales, Jessica?

In terms of asset sales, indeed, it is a relatively tough market to be selling assets when as we've spoken a lot about today, the macro environment is not particularly supportive. Of course, that was true in the last couple of years, to some extent, particularly upstream. And I think we're able to achieve pretty good -- very good results in terms of the divestment program in a difficult macro on the upstream side in the last couple of years. So, while it can be difficult, we've had success in the past. That gives me some optimism. But nonetheless, that's something we'll need to watch carefully. We're looking at improving, upgrading the portfolio across our businesses. So I think there's opportunity in our downstream assets as well as our integrated gas assets and our upstream assets to do some further portfolio high grading, and I would expect there to be some activity that touches each of those businesses.

Our next question is from Peter Low with Redburn.

Just one quick clarification. Should the current macro environment persist and completion of the 2020 buyback does spill into 2021, would that have any knock-on implications for your 2021 to 2025 distribution target? Or how do you think about the relationship between kind of the delivery of those 2 targets?

Yes. Thanks very much, Peter. I think it's a fair question to ask. It -- of course, if we enter into the '21 to '25 period not from a 0 position but from a minus position, then obviously that will have its impact on the beginning of that period. It's, I think, very premature at this stage of the game to say, well, we know exactly how that first 5 years of this decade is going to play out. Yes, if the current macro conditions persist for a long period into the coming 5 years, I'm sure it will have its impact on how we have to look at that period. On the other hand, if the macro conditions turn up and turn up well, a different story will persist. I think we cannot on a quarterly basis sort of see how this goes. On an annual basis, we will tell you what our view is. But at this point in time, it's very clear also in my mind that nothing really has changed in the strategy that we will follow for the period '21 to '25. Thanks, Peter.

Our next question is from Ryan Todd with Simmons Energy.

Great. Maybe the first one on the longer-term capital budget. So you mentioned the improvements in capital efficiency and productivity that are helping to lower this year's budget towards the low end of the range. Given those improvements in capital efficiency and as well as, I guess, prioritizations for use of cash given the environment, is there a read-through the potential downside risk to the $30 billion target annually post from 2021 on? And then maybe one quick follow-up on Slide 14, the inflection in free cash flow in the shale business in 2020. Is there a change of pace or deceleration associated with that outlook? Or is that largely the result of improvements in capital efficiency, cost structure and scale?

Thanks very much, Ryan. Let me take the first one. Jessica, the second one. Yes, I think in the end, of course, the outlook that we provided, we provided a set of reference conditions, where we felt we had the affordability to spend up to $30 billion of CapEx per year on average. If we see a different picture, we will have to adjust how that will work. Much in the same way, of course, as we have done in the last few years, where we've also seen that in tough years, we find ourselves spending at the bottom of the range. And in years where it's -- where we have the affordability to do so, we spend at the top of the range. So, there is also a range, of course, for that period, in '21 to '25. We said we would do no more than $32 billion. And I would hope that the range is sort of $27 billion to $32 billion, but we give ourselves considerable flexibility, depending on the macro that we will encounter. Still, as I said, at this point in time, we expect to spend an average $30 billion. But if that is not affordable, we will not hesitate to spend less. Jessica?

Ryan, your question on the shale's profile '19, '20 -- and again, I want to make sure I'm answering the right question. As Ben mentioned, there's a number of things impacting the outcome for 2019. The macro gas NGL has an impact on the cash that the Permian asset generates, in particular. There's also weather events that disrupted operations in 2019 and because of that environment, also pacing capital and investment to reflect the current macro environment and the cash flow generation at the time. Assuming those things improve, so if the macro improves, and we maintain investment levels, then achieving the 1 to 2 should -- we remain committed to. It's a question really around does the macro support that kind of cash flow generation? Do we not have unusual kind of weather events that interrupt operations? And we continue to ramp up at the pace that we would like to ramp up the asset.

Our last question is from Colin Smith with Panmure Gordon.

Just first in connection with the discussions you've had on the de-carbonization agenda. Can you just confirm that the actions you're taking, the targets you've got do, in your mind, mean that you're addressing Scope 3 emissions? I was just thinking about the comments at the very beginning, which seem to suggest you just perhaps thought it was Scope 1 and Scope 2. And then my second question is, again, in relation to Slide 14. It sounds as though, actually, the bulk of the lack of cash generation was down to the negative working capital. I wondered if you could discuss a little bit about how you think that might play out through the course of this year, both in terms of pricing and maybe absolute inventory numbers. And I'm mindful here of the $11 billion swing that has been between fourth quarter '18 and fourth quarter '19.

Okay. Thanks, Colin. Let me take the first one. Jessica will take the second one. Yes, our de-carbonization efforts include Scope 3. We believe the only sensible way for any company for that matter to address that contribution to the Paris agenda is to understand how their products, so what they put into society, is adding or subtracting to greenhouse gas emissions. The way we do that is through an intensity target. So, what we have worked out is that if society needs to meet the goal of the Paris Agreement, it needs to have an energy mix that has a carbon intensity that is roughly 40 grams of CO2 per megajoule. Apologies for the engineering units. But the reason I mentioned the 40 is that if you look at our current Shell carbon intensity of our product mix, it's at 80. So if we see that we need to get to 40 by 2050, it effectively means that we have to have the carbon intensity of the energy products that we sell. And that includes the Scope 3 emissions, of course. Now to do that, we can pull a number of levers, but we can never get to 40 or to the 50% reduction without significantly changing the mix of the products that we have. So we will have to do -- in addition to all the good stuff we can do in our own assets, we have to do more renewable power, more biofuels, more renewable hydrogen, but also things like nature-based solutions, carbon capture and storage, et cetera, et cetera, et cetera. We can, of course, only do that if we find that there is actually a societal need for that. And that's why we are not just doing things on our own. We're actually working with the use sectors in the economy to understand how we can help them de-carbonize so that we can sell de-carbonized products to them. So it is very much the strategy that we are following today and that we hope to ramp up in the course of 2020, as the discussion is now slowly moving from, hey, it's all about constraining supply to, hey, it's all about de-carbonizing demand. Jessica?

On the working capital, just to remind everyone, last year, we had a pretty significant release of working capital at the end of 2018. That was as prices dropped from around 80 to the mid-50s. And that resulted in almost a $7 billion release in working capital, largely in the downstream business. And what drove that was to a large extent, price, but also there is a volume piece. If you go to 2019 and the $5 billion use of working capital, some of that is just to be expected, a bit of writing from the significant decrease that we experienced in 2018. If you just focus on the inventory, which you were referring to, the change in 2019 is entirely price-driven. It's not volume-driven for the year. So assuming prices don't move, then -- and volumes I don't expect to be materially different through the year, they'll go up and they'll go down, but let's just say we end in largely the same place. We shouldn't expect the same draw on working capital that we had in 2019. But of course, like many parts of our business, our working capital is subject to the price environment, which obviously we don't control. There's also AR and AP that's playing into that. For 2019, that was more in our upstream and integrated gas business and kind of normal course of business and not significant certainly from a downstream perspective. So I think that's normal course. And again, depending on the price environment, it's quite possible we don't need much working capital in 2020.

Okay. Well, thanks very much for that answer. And thank you very much for all your questions. Thanks also for joining the call today and being patient with us to go 20 minutes over. I'd like to remind that we have a number of events coming up that you would be interested in, I hope. First of all, we have our annual LNG Outlook. That's scheduled for the 20th of February. We will, of course, report our first quarter results on the 30th of April. And for those aficionados that love AGMs, that's going to take place in May this year. So I hope to see you all there. Thank you very much.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.