Welcome to the Royal Dutch Shell 2020 Q2 Results Announcement. Today's call is being recorded. [Operator Instructions]. I would now like to introduce the first speaker, Ben Beurden. Please go ahead.

Thank you very much, Rachel. And ladies and gentlemen, welcome to our second quarter 2020 results call. Thank you very much for joining us today. We realize it's a very busy day today. I hope that you and your families and friends and colleagues are safe and well and that you are taking good care through these very extraordinary times that we are facing at the moment. Before I get going, let me point out to you again the disclaimer statement. But as I said, these are extraordinary times. They are challenging times for our business, many others, of course, as well. You will see the effect of COVID-19 and the overall global economic weakness and what they have meant for Shell in the second quarter when Jessica speaks shortly about the results. And while there's, of course, nothing that Shell can do about the times we find ourselves in, we can always run our business well. We can keep it resilient, and that is exactly our focus. So today, I would like to give you some insight into the actions, the big ones, the small ones, that Shell is taking. So yes, we are in the midst of a global crisis, but we are working to make sure we come out of it much stronger and much fitter. Through the second quarter, we continued operating our assets with minimal disruption, and we saw resilient cash, and that shows both the quality of our assets and our people. The near-term macro demanded quick action, and we took decisive measures to protect value, to strengthen our balance sheet and preserve cash. It was included rethinking and substantially reducing our cost as well as rebasing our dividend and not continuing with the next tranche of the share buyback program. We quickly changed…

Thank you, Ben, and to everyone for joining the call today. I hope you and your families are all safe and well. As Ben just said, Shell is becoming a simpler, leaner, more focused organization. We are changing the company even as our cash priorities remain the same. We can do this because of the strong fundamentals of our business. To show you where the strength comes from, I'm going to speak to you of our resilient cash generation and sector-leading cash flow. So let me start by outlining Shell's financial performance in the second quarter. Our Q2 2020 cash flow from operations, excluding working capital movements, was $6.5 billion, and our adjusted earnings amounted to $638 million in the quarter. Return on average capital employed was 5.3%. At the end of Q2 2020, our gearing increased to 32.7%. 2.8% of this was driven by impairments and pension remeasurements impacting the equity side of the equation. Our cash capital expenditure in the quarter was $3.6 billion, which was kept low, mainly due to the countermeasures highlighted earlier by Ben. Now let us look at our Q2 earnings in more detail. Q2 2020 earnings were down, reflecting the impacts of COVID-19 on energy demand, prices and margins. Adjusted earnings this quarter were $638 million. Integrated Gas adjusted earnings were $362 million due to lower realized oil and LNG prices as well as unfavorable movements in deferred tax positions and well write-off compared with the second quarter 2019. In Upstream, production reduced by about 7% compared with the second quarter 2019, but sales volumes were up due to the timing of liftings, mainly in Brazil. We reported an adjusted loss of $1.5 billion, largely reflecting lower realized oil and gas prices. In oil products, adjusted earnings were $2.4 billion in the second…

Okay. Thanks, Jessica. So let me sum it up. On the one hand, this was a quarter that confirmed our earlier expectations on the challenging macroeconomic condition. But then on the other hand, it was also a quarter that confirmed our competitive advantages. And this starts with what we have today, strong portfolio with strong fundamentals, market leader of a resilient and growing LNG business with a portfolio that is continuously optimized by our trading capabilities, world-class deepwater asset with very low breakeven prices and Tier 1 resources, the Brazilian presold in the Gulf of Mexico. Sector-leading marketing business. This offers high returns and has been steadily growing, bringing the brand of choice for customers worldwide. But this strong portfolio is managed with disciplined execution, and we are taking tough decisions to strengthen the balance sheet. And we are extracting more value out of the already high-value portfolio, leading the peer group on cash generation. And if you look ahead, our strategy embeds the transition to the cleaner energy system in every single one of our business. We're making sound choices, not only looking at the financial side of the balance sheet, but also future-proofing our portfolio. We're taking steps to remain competitive, but also reorienting Shell for the future, seeking higher returns through all our businesses, that's grow value per share, delivering superior returns for our shareholders. But this is our investment proposition, platform growing shareholder value. Now we are looking forward to providing you with a comprehensive update on all of this on our next Strategy Day, which will be on the 11th of February 2021. With that, let's go for your questions. [Operator Instructions].

[Operator Instructions]. We'll take a question from Oswald Clint with Bernstein.

Ben, I'm sorry, just a broad or high-level question, actually, on the topic of hydrogen that something Shell know pretty well, and I see it's blended into your wind project yesterday in the Netherlands. And actually it'll be great if you could talk about expected returns on that project. But the bigger question is, with everything that's happening with hydrogen, is there a risk or are you worried about some of these projects in the Middle East, solar turning into ammonia and transporting ammonia, and then you could crack that back to hydrogen that can be blended into gas residentially, even into power stations and even talking about burning ammonia? So is this potentially some serious threat to gas and LNG demand risk, I guess, in much longer term? And then secondly, a little bit closer to the quarter. Chemicals pretty strong. One of the best quarters you've had, I think, in the last 12 months, at least. Utilization was down, so it's cost reduction and you gave a lot of good group examples there within your comments. But which one was applicable to Chemicals? How did you get the cost out of a finely-tuned Chemical business? And frankly, I mean you didn't downgrade your Chemical margins in the macro reset. So can you just give us what are you looking at? Or when can we expect this next Chemical upcycle to really begin?

Thanks very much, Oswald. Really a nice set of questions. I'll take a stab at both of them and then hand over to Jessica. The hydrogen story, yes, it's -- and for those of you who have not paid close attention to that particular press release yesterday evening so we -- in winning the HKN wind tender in the Netherlands, we also have as part of the integration into the Downstream value chain division that we should build a very large hydrogen plant in Rotterdam fueled by green electricity. We will use that hydrogen for which there is, at this point in time, not a high-graded, high-quality market other than, say, industrial use. We will use that hydrogen initially in our refining and chemical facilities, but then with a view that we, over time, upgrade it to hydrogen for heavy-duty road transport, building that business in Northwest Europe from the Port of Rotterdam throughout the distribution systems of Northwest Europe. I think that's a typical example, in my mind, of how these businesses can play to our strength. Many a time when we talk about new energies or power, people think of us just being another wind farm developer. And in reality, of course, it needs to be much more sophisticated if we really want to play to our strengths and if you really want to have superior returns that you can build on the back of it. It'll be a bit presumptuous, I think, at this point in time, Oswald, to say, well, these are the returns. This is a market that we have to -- but -- and that will take us some time. But I do believe it will set us up very well already as one of the largest, if not the largest, hydrogen player in…

Perhaps two points. Just on the first one to emphasize, things like HKN and getting into the wind project in the Netherlands is really the kind of the starting point of creating options and designing and implementing new business models for the low-carbon energy future. And linking that to our existing capabilities and where we believe the energy system is moving ultimately to hydrogen -- excuse me, pointed to something. And the integrated value chain that we can create, starting with this wind position, converting it to hydrogen and then bringing it into the transport sector or to the manufacturing sector, that will create differentiated business models for us that I think we're uniquely placed to deliver against and also differentiated return potential. So it's not the unsubsidized wind project return that we're interested in. We're interested in that bigger story, that bigger idea around the integrated value that we believe significant value and returns can be created. On the Chemicals business, a couple of points to pull out of the story. Feedstock has also contributed to some of the better performance that we're seeing in the quarter. So some of the lower costs, the lower prices are helping part of our business. And of course, as Ben mentioned, all of the belt-tightening that we're doing across the organization, every corner of the company is being touched and that's also being reflected in the operating cost for Chemicals.

To Alastair Syme with Citi.

Can I just ask about impairment? I was still trying to figure out how much of the macro change is ultimately COVID-related versus something that's been maybe building in your thinking for some time. For instance, I made the observation that the plan to rationalize the refining footprint from 15 to 10 assets has been in place for some time. So what sort of why wait until now to impair? And then the second question, just to pull on the strap-line that Shell is becoming a leaner, more focused company. It sounds very similar to something I remember at the time of the BG acquisition. So I wonder really what that means and how you think you'll measure success on that metric.

Okay. Thanks, Alastair. Would you take the impairment question first, Jessica? I'll work to more focus.

Yes. So the impairments are a reflection or an outcome of our resetting our long-term prices for oil, gas and refining margins, in particular. That was the main driver, price. But of course, we've completely changed our CapEx profile in the near term, and that also has implications. The ultimate value will realize from some of our assets. So both the price change and the shift in some of the developments that we'll do, given the CapEx program that we're following, also has an impact. Now how much of that is COVID versus kind of other circumstances, a significant portion of it is COVID. Certainly, the near-term outlook is largely, if not entirely, driven by the macroeconomic implications of what COVID has unleashed. But indeed, as you mentioned, Alastair, there are some strategic elements that we have been speaking to for the last couple of years. So our outlook on the refining sector and where we believe we can create value and where we see the refining business fitting into the future of energy and the future low-carbon energy system, certainly is influencing our view on the assets and the potential that we see with the assets, but that came into play as well, both in terms of our margin outlook as well as kind of the investment profile that we have for our assets.

And then on the more focus, I do, first of all, believe, Alastair, that the BG acquisition gave us more focus. So on the back of it, we created from 2 strong parts of our portfolio, 2 really strong crown jewels and maybe even helped the third one. So our deepwater business, which was a good business, became a really core focus area in our portfolio as we added the BG deepwater assets into it. And very clearly, now it is a foundation piece going forward. And the same can be said about our LNG business where we -- basically through combining number one, two, and if you go a bit further deep, the Repsol acquisition, also #3, into a really significant, now global player that is totally unrivaled. We -- you could argue that some of our trading capabilities were further boosted as well, and that's our third crown jewel that we have. And then in the process, we went out of oil sands. We rationalized the portfolio in one relatively concentrated effort with $30 billion of assets that we got out of, with another $10 billion being worked on, the half of which has been delivered already last year. So yes, indeed, the portfolio has become much more concentrated on back of that BG deal. Now can we do that again? Well, in a different way, yes, we can. I do believe that if, indeed, we reduce our refining footprint, we probably have a much more high-graded view on how we want to cluster our manufacturing assets in general together. So Refining and Chemicals, I think, is now really down to a very high-quality core footprint around which we can trade and optimize and that can serve multiple segments of the economy so that, again, will be a…

We'll hear from Michele Vigna with Goldman Sachs.

Ben and Jessica, it's Michele. I wanted to ask you two questions. The first one is about cash distributions to shareholders. You operate in a highly cyclical business, and it's important to preserve flexibility. But I was wondering how you're thinking about the current cash distribution model of progressive dividend and buybacks in upcycles versus a possible model of progressive -- of variable dividends with a guaranteed floor and the more cyclical element to it as well? And then secondly, in terms of investment opportunities, you continue to upgrade your portfolio. I was wondering if the economic environment improves and you can increase your CapEx back towards the mid-20s, which project and which area would you give priority to for that extra investment?

Okay. Very good. Thanks very much, Michele. Why don't you take the shareholder distribution question first, Jessica? I will talk a little bit about the CapEx and upgrade portfolio.

Thank you for the question. And it's a very important question and one that we spend a considerable amount of time considering and looking at different alternatives and options to ensure that the dividend policy that we have is right for the company and, hopefully, right for our shareholders. It's also an area that we've actively sought input from our shareholders on as well, and we continue to do that. I think particularly at this moment in time, given, as you said, this high degree of cyclicality that we're experiencing and particularly with the uncertainty around the outlook, our view is that certain level of stability is warranted and appropriate and getting to a dividend level that is sustainable and resilient through the cycle and through considerable stress, which brought us to the dividend level that we're having today. As things recover, at this moment in time, we think the progressive dividend is the right way to go. Of course, we can top that up with share buybacks, and I would expect that would be a feature as we have excess cash in terms of the nature of shareholder distributions going forward. But at this moment in time, I think right now, we see the value of stability and introducing a high degree of volatility around the dividend, particularly at this moment in time, didn't look like the right choice for us, but we actively review it. And as the company changes, cash flow changes over the next 5 to 10 years, different models may be appropriate, and we'll continue to actively consider it. But with the progressive dividend, combined with share buybacks, we think that's likely the right outcome for us at this moment in time.

And then on the portfolio development and where to grow CapEx back, of course, we will give you a lot more detail in the Strategy Day when we get there, and we have done a lot of work, and we have a better view on, indeed, how that economic recovery is playing out. But there's a few hints already, of course, in today's material and also if you look back at our Management Day last year. So if you look back at our Management Day last year, we were going to keep Upstream basically in sustained mode. We were going to put disproportionate growth into the transition themes, and we were going to mature over time a Power business that will position us for the future. If you look at our capital program today, which, of course, we had to vigorously scale back, you will basically see that we are not sustaining our Upstream with the sort of capital nurturing that we give it. We still try to grow our transition themes where we can, partly also because there's projects underway. And we preserve a certain amount of money for good opportunities in the Power theme. Now if we find ourselves a bit more cash to spend and if we want to prioritize some of that cash back again to growing capital project portfolio, first of all, we will have plenty to choose from because a lot of it has been squeezed out of this year, potentially even next year into years to come. So we will have a very rich cupboard to pick from and we will, of course, pick the best projects. But you will probably see the same sort of trend as a trend between today's program, what we were talking about last year. So in other words, a preference for leaning into the energy transition, a desire to build the business of the future, but all of that having to compete with what you could almost call the base projects in Upstream that bring a certain return around and that we also have to sustain in order to provide the cash for the future. So I think that healthy tension where the different sort of strategic vectors compete for capital, we will maintain, but we will have a clear view to understand our capital allocation, we lean into the energy system of the future. With more details to come, Michele, in February next year.

We'll hear from Thomas Adolff with Crédit Suisse.

Jessica, Ben, two questions for me as well. Just firstly, on Trading. Trading, obviously, is a key part of how you run and optimize your business and your value chain, be it in oil, gas and in the future, electricity. And in this quarter, you generated strong earnings in oil. They're still in gas products' life. But generally speaking, how differentiated and how difficult is it to replicate such business model as yours? And then secondly, as it relates to the electricity business, and I'm excluding trading optimization here. In your view, what is the competitive advantage that Shell brings versus in terms of the incumbents, the utility companies? And what are the benefits or trade-offs of having everything under one roof?

Okay. Very good. Thanks, Thomas, two very important questions. Usually, I would talk about Electricity business and Jessica about Trading. Why don't we flip it around? I will talk about Trading, and Jessica will talk about the logic that we want to deploy in our Power business. So is Trading really differentiated? Or if you -- if there is a strong contango in the market, well, people who actually are so minded can make money, whether you are a good or a bad trader. Well, first of all, let me say, indeed, we did make money off the conventional contango plays. We did very well, and we have a lot of opportunities to do so. But it's not just a conventional contango plays we make money with. We are very well positioned to enter into contango plays of nonbenchmark crudes that we understand a whole lot better than your average commodity trader in the market. We can also make money out of contango plays in blending components, particularly in fuel oil where the reconstitution of these components into end products, having gone through a contango phase, can be value that is very hard to see unless you truly understand structure and the nature of the business. So yes, contango plays have been important, but I think we do contango on steroids. Then if you look at second factor of value creation, it's around volatility. And of course, a lot of people can make money in volatility. A lot of people, by the way, can also lose a lot of money. But what we see, again, is arbitrage opportunities that we can capture, and we can probably see and understand and lock in these arbitrage opportunities a bit better than some of the others. That is because we are very well…

Great. Thank you, Thomas, for the question. And let me speak to a number of points where I think Shell brings distinct competitive advantage to the Power sector. Start off with, we are the second largest marketer of power in the U.S., which is the largest market available -- energy market available to private players. And we've created that position over the last 10, 15 years, and that gives us capability insight that we're increasingly leveraging in other parts of the world, whether that be in Europe, in Australia or Brazil. So we have experience and capability today in the power system that is unique, certainly in our sector. If you think about the future and the future of the energy system, power will be essential into the decarbonization of the economy. And going back to the project we were just speaking about, HKN, it's a great example of what the future of energy is going to look like, what the future business models are going to look like. I think there's a few companies that can compete with Shell in terms of trying to create these integrated business models and value chains. There's a few companies that could participate in the building and operations of these large wind farms, then build the largest electrolyzer planet to convert that to hydrogen and then bring that to refineries, our own refineries which has certain amount of derisking in it, but importantly, then to build out the hydrogen molecule flows for transport in Europe. And I don't think there's any other company that can span that in the same way, bringing capabilities that we have today and positions that we have today to serve the business models and the future energy flows. Our position in energy around the globe, I think, again,…

And next, we have Biraj Borkhataria.

I have also two, please. The first one is on the CrossWind announcement yesterday. Obviously, there's a bunch of elements attached to that, that you've run through and it does strike me as something very Shell like to find innovative ways to do things. I guess the question I have is, is these innovations are not always good for the shareholders? So maybe could you talk about the extra elements of that project and what it does for project returns? I'm just trying to understand whether -- or understand the benefits of being a fast mover versus a fast follower in that type of business. And then the second question is on your Shales business. There's obviously a lot of focus on new energies at the moment, but you're still planning to spend $1.5 million on Shales this year, which is more than in new energies. And a couple of years ago, you and all your peers were extremely positive on that theme and talked about growing the business. And I just wonder, at this point, given your view on commodity prices, could you outline why you need to be in that business at all? It doesn't appear that you have an obvious strategic advantage. The track record isn't great. And you've got plenty of competition that is willing to plough more money in that business model, which hasn't been proven, especially at scale. So would you consider exiting? That would be -- just some thoughts on that would be helpful.

Thanks, Biraj. Let me talk about CrossWind, and Jessica will say a few words about Shales and the strategic logic and what we're trying to achieve there. Indeed, I thank you for recognizing that doing a project like CrossWind with a broader value chain hanging off it is very Shell like. I think that is an important observation. We like to think that as well for the reasons that Jessica just mentioned. We are able to actually assemble a future value chain, not just building a wind farm and trying to sell it in the merchant market in the Netherlands, but assembling an entire value chain around it. That again will set us up to win. What the returns of these value chains are? Well, let me focus on the power project first. We think the power project is competitive. But the -- and what exactly the returns are? We normally don't disclose very much depends, of course, also on your outlook on the power market. But then again, setting up the value chains of the future, forward integrating it into hydrogen for transportation and industrial use is actually a pathfinding way that will, in the midterm, I think, give differentiated returns, simply because we are capturing markets where people want to decarbonize, but do not have the available tools to do so. So before such a technology becomes common good and completely commoditizes and becomes subject to the usual competitive forces, there is a sweet spot where, indeed, very good revs can be captured. But to enter that sweet spot, indeed, you have to take risk. Or sometimes, you have to figure out ways and means to make the economics work, sometimes even with government support and other ways to sort of level the playing field against the conventional…

Yes. So on Shales, fundamentals of Shales can translate to what we believe is a high-return business. If you've got the right assets, you've got the right capability and you steward the resources appropriately, we can see our way to high returns with our Shales business. Our Permian asset, we think, is one of the kind of crown jewels in the Shale industry. The capability we've developed in terms of our wells' performance, we believe it's best-in-class. And our stewardship of capital and the kind of unit development costs we've been able to achieve and what we're doing on the operational expense side that Ben spoke to earlier, speaks to, I think, the quality of our management as well as the quality of our stewardship. So when you put those different elements together, it can be a very exciting business and a very competitive business in the Upstream sector. And of course, at this moment in time, I think it's challenging for many Upstream businesses to look particularly good at the very low point in the cycle. So I wouldn't use this moment to necessarily judge the quality of the sector nor the quality of the business. But again, you need to have each of those elements in play in order to achieve good return business. A couple of other points I would -- I think, are worth mentioning. I think the Shales business has been an important area of innovation for the Upstream business. We've gained a lot from our participation in our Shales business that we've translated to other parts of Shell, where we've tested some of our digital technologies, innovative ways we're working with data and learning how to do the Upstream business out of a very different pace. So I think there's other knock-on benefits of continuing to operate in that sector. In addition, as most of you know, there is a high degree of flexibility. So when you think about the portfolio and the ability to ramp up and ramp down, which can be difficult in other parts of the Upstream business, that's one of the elements that Shale brings to the party that other parts of the Upstream business doesn't. And then finally, there's the integration opportunity, particularly in North America, that we have and that is a source of potential of further value creation, either connecting to our Downstream business or through our trading by optimization activities as well as from a risk management perspective and that's served us well over the last couple of years. I think there's a number of reasons to believe it is a difficult moment in the cycle. But the fundamentals, if you run the business well, are worth it.

Certainly, we'll hear from Lydia Rainforth with Barclays.

Two questions again. The first one, when we're talking about the idea of fundamentally restructuring and simplifying Shell, is that what you need to do to get to that $3 billion to $4 billion of operating expense reduction by next year? Or is it [Technical Difficulty]. And secondly, there's something you talked about in the opening remarks about being clear, both on the customer and shareholder value. If I reflect on that, we have seen a lot of changes in the last 6 months, be it the move towards net 0, the dividend change, the lower oil and gas price assumptions, the Downstream impairments. So there has been a lot of things that changed. Has your thinking [Technical Difficulty] the strategy? And where are we going from here?

Thanks very much, Lydia. You were on the line broke up a little bit, but I believe I got what it is that you said. It's -- let me try to see whether I can get to your next question, which I thought was -- there's a lot of change as our strategy fundamentally changed. I'll say a few words about the fundamental change and the relation to cost. And I'm sure that Jessica will have a few things to add there as well. We discussed that also in great detail over the last few weeks and yesterday with the Board. I think on the sort of the change that you mentioned, stronger customer centricity. Indeed, we have come out with a sharpened ambition. We have better articulated what it means to be in line with Paris. I think these are natural progressions from strategy that we probably entered into years ago, when we said we want to be part of the energy system of the future. And that means that we have to change the product portfolio, probably has to mean that we have to have a slightly different investment mix. And progressively, we have found out that we have to actually work from the customer back, particularly if you want to have a focus on reducing Scope 3 emissions and finding the business models of the future that will do so. So I wouldn't say that things that you've heard in that space are somehow radical rethink. They are progressive insight that is founded by the idea that if you want to thrive in the energy transition, if you want to be around in another 100 years' time, we need to evolve as we have evolved over the last 100. Now indeed, it's tempting to think that, that…

Lydia, thank you for the question. I was going to start with the strategy, but I'll start instead with the cost piece. When we set out the target for the market in the first quarter to reduce our OpEx by some $3 billion to $4 billion by the end of Q1 2021 relative to 2019, that was before we initiated this larger look at our organization and how do we ensure we're designed and organizing our resources to deliver on our strategy going forward. That was looking at what are the measures that we can take in the next 12 months to reduce our costs. And you see that happening already today. So our costs in the second quarter were down by some $1 billion relative to Q1 and, importantly, on an underlying basis, down some $2 billion from Q2 2019. So these are the immediate measures we've put in place. There's things like reducing travel costs, there's the stopping of the bonus for this year, which is about $1 billion and reducing activity, repacing growth spend, et cetera. And I have a lot of confidence that we'll achieve that reduction over the next 12 months. But not all of those reductions are sustainable, and they are short term -- a number of them are short-term measures. This is where the reshape program that we're doing looks to then sustainably change the way we work to ensure we're designed to support delivery of our strategy and ultimately be a simpler company and have lower costs. But that will be really felt kind of 2021, 2022 as those changes are put in place. So there are different numbers and kind of different activity levels that are driving those outcomes, probably comparable numbers [Technical Difficulty] impact. But the first one is really kind of the short-term measures. Well, the restructuring program or the resizing program, that is more about how do we sustainably change the way we work, both in terms of delivering our strategy, but also to be more simpler and lower cost going forward. On the strategy one that Ben has more than well covered very well, I just want to -- I would characterize it as, as Ben said, progressive insights, that is kind of an evolution of the strategy. I think the important point for me is that it's increased pace and increased intensity. It's not that they're new ideas or new concept. A lot of this has been embedded in our thinking when we had the strategic pillar of driving to the energy transition. We believe that the appetite and the opportunity is accelerating. And it's with that in mind that we're looking to move probably more quickly and more intensely than perhaps 12 or 24 months ago.

We'll hear from Jon Rigby with UBS.

A question or two, please. First, on the impairments, you've alluded a couple of times to accounting issues. You also then talked about the benefits of locking together some of the Shell activities, the BG activities in LNG. You obviously reported a huge trading benefit and talked about the recurring nature of the optimization around assets and so on. And my question really is, is there a genuine -- particularly in the Downstream and Integrated Gas, is there a genuine impairment in value that you're signaling with this Q2 impairment charge? And when you considered and looked at this, was there an option to sort of think about the sort of consolidated activities of the business rather than the way that the legacy and assets had originally been constituted because it seems to me is there's been a lot of repurposing over the last few years? That's first question. And the second one is, I noticed that you took about a $5 billion charge through equity for the pension fund. And the pension fund, there's an obligation, I think, of about $95 billion at the end of the year of 2019. So not much short of your market capitalization. And that's a big swing. So I just wondered whether, a, is there a way of managing that going forward? Or is that an obligation that we're going to have to live with and some of the implications that come with that, which are often not good? And the second is, is there a potential for increased cash out going forward to fund that pension obligation?

Very good questions. So Jon, let me make a beginning on the impairment point and then hand over to Jessica, who will undoubtedly add some to it and then can also cover with the pension fund adjustment. So if I understand your question correctly, Jon, so how can you square the idea that we would impair assets, say, for instance, in Integrated Gas, where you've seen actually the largest impairment occur, when there is so much associated trading value, for instance, with that asset? And is it indeed correct to take the impairment in the way that we have done. That is a very good question, but we are absolutely bound by accounting convention, where we have to look at the cash-generating unit, which is often just very narrowly defined to the asset that sits on the books. The intangible value that sits in our trading organization that adds a lot of extrinsic value to such an asset because it's part of a portfolio within which we can trade and optimize around that asset. We can, from an earnings perspective, segment that income perhaps back to that asset that is not possible to use as a methodology when we go through the accounting process of impairing of value erosion review on assets. That's narrow. So that means that, indeed, in some cases, yes, we have to recognize that the asset was on the books with more value than it strictly speaking has on an intrinsic basis, but it doesn't necessarily mean that, that value has disappeared. And we have that not only in our gas business, we also have that in other businesses, but the assets are part of a broader value creation network as value creation extrinsic to the asset cannot be taken into account when looking at the valuation of that asset on. Let's see whether I have that sufficiently correct for Jessica to add something to it. And then maybe if you can also talk to the pension fund question, Jessica.

Sure. Jon, thank you for the questions. And I think Ben covered it well. We engaged deeply on this with our internal accountants and our auditors as well because some of the answers that are right from an accounting perspective are not intuitive from a business perspective for the reasons that you've mentioned, Jon, and Ben has as well. So we're doing this technically correct. But does that mean that the impairment reflects the true kind of economic value of that asset in the value chain? In many cases, it doesn't. And so there are many instances in assets that were impaired this quarter, where they provide tremendous value to our Integrated Gas business, to our Downstream business, and as I mentioned in my speech, where we see some of these assets to be very strategic for us in the future. But that is -- we're doing things right from an accounting perspective, but it may not make intuitive business sense. That being said, there are some assets that -- where there is value, some of the exploration assets that we're not going to pursue. But I'd say, a significant number of the larger assets that were impacted are ones that we see significant strategic and economic value going forward. Pension fund. It's a really important question and good to raise and acknowledge that is a large number from a liability perspective. We also have significant assets against those liabilities. And what you're seeing is kind of the net of those 2 things. The impact on that balance does change, driven by the interest rate environment. That's been the single largest driver of change in the last couple of years. Sometimes that has gone in our favor. So last quarter, we had opposite effect of a comparable amount as interest…

We'll hear from Christyan Malek with JPMorgan.

Yes. It's Christyan Malek with JPMorgan. First, the outlook for demand. Shell prides itself on being integrated in most end markets yet this crisis is sort of seeing the entire energy complex contracts in unprecedented way. What green shoots are you seeing, if any, in the outlook for crude demand when compared to your views a quarter ago? Has anything, I guess, changed the better or worse? And I guess, secondly, in allied to that. I wanted to ask you more about the portfolio reshaping as far as being fit in the future vis-à-vis your volatility and not the least, energy transition? But February next year does seem quite a long time away, and I'm not sure I can take away from this call the major changes on the horizon or not, especially in what you would consider core versus noncore. Are you open to divestment? You mentioned deepwater LNG marketing quite a bit. And would it be fair to say that you may need a more radical overall in the business? And what I'm trying to get to is, can you at least provide a basic framework into helping us model Shell Version 2.0, the backdrop being that one could argue the financial frame as it stands, either need the major cash injection or higher all-in order to deliver the investment needed to materially scale up new energies?

Okay. Thanks, Christyan. I'm not entirely sure whether I got everything because there was a bit of a disturbance on the line as well for me. The demand outlook, it's, of course, a very important question. I'll talk to that a little bit. Jessica, you okay to do some of the portfolio reshaping? It is, of course, very hard to predict exactly where demand will go going forward. It -- in some sectors, we see the beginnings of a recovery. I mentioned earlier, the Chemical sector that is still a very significant driver for oil and gas demand as well. But of course, for us, it's also a significant part of cash flow if it works well, and we see the beginnings of a recovery trajectory, we believe. On the more conventional fuel side and, therefore, oil, I think it's very mixed. So in some sectors, we see actually quite good recovery. So take, for instance, motor gasoline and diesel, there's a fair degree of recovery, particularly in countries that are a bit further down the first wave. We see actually, in some cases, a stronger demand than we saw before the pandemic. That's not -- that we have, but it's in a few cases, absolutely true, partly because people tend to use public transport less and a more safe and secure in their own car for commuting. We see countries coming out of lockdown, of course, going into a bit of a fast recovery on personal mobility fuels. And then there is a wide spread in this. So we see resilient demand in China, as I said, ahead of last year. The biggest growth we are actually seeing in Russia, that's 13% up. But the worst-performing market is India, 45% down. So we are dealing with a very wide…

Yes. Christyan, it was a little bit difficult to hear you. So hopefully, I'm answering the right question. The main takeaway I had from your question was, do we have right portfolio as it fits for the future? So that's what I'm going to speak to and, hopefully, that touches on the elements that you wanted us to touch on. I'd start off with what I believe is a view that the quality of our portfolio today is evident in the very strong cash generation that you see in the quarter against a very difficult backdrop, difficult prices, difficult margins, difficult volume levels and yet the capacity to generate $6.5 billion. I was kind of expecting, Christyan, you might ask us about the breakeven price because usually -- and this would be a good quarter to have that conversation, given the cash generated.

It was asked...

Against this profile. So I -- in terms of the quality of the portfolio, I think the results, certainly from a cash generation, large extent, speaks for itself in terms of the quality of the assets that we have in IG and in our deepwater business and our marketing business, which continues to show a lot of resilience through a number of different macroeconomic backdrops. That being said, we want to continue to improve, make more robust, more resilient, more competitive our portfolio, so we're never off that train. On the refining side, we've been clear that we're going to reduce the number to some 15 to less than 10, and that is about having the assets that best align with our strategy and where we think we can competitively differentiate. And with those assets to continue to retool them for a low-carbon energy future. That will be the work that we're doing in the portfolio over the coming years. And then there's a piece of leaning into the energy transition. So what are we going to do with our capital as the economy recovers? It will recover at some point in time, and we will have surplus cash. And when we have that surplus cash, we want to grow the company. Where are we going to look, and Ben talked about leaning into the energy transition. And just to make sure when we use those words, energy transition, that we're clear what that means. It's not just our Power business, it is our Chemicals business, it's our retail business, it's our lubricants business as well as power, hydrogen, biofuels. This is the future of the energy system. This is where we believe we can meet and where we're going to be building out these businesses. And there are different degrees of maturity. Obviously, the Chemicals business, retail business, lubricants business, those are all much more mature businesses. And so your ability to invest more and see the returns and have confidence in that capital program is greater. Our hydrogen, biofuels, those are continuing to be maturing businesses and business models, so we're going to invest in those, but we're going to be prudent and make sure that we have confidence in the business model and the return profile. We'll take some risk, but we want to take prudent risk as we build out these new businesses and business models of the future.

We'll move to Henry Tarr with Berenberg.

So two quick ones, hopefully. Firstly, have you started marketing any of the refineries already? And is there any interest in those assets in what looks like a relatively challenged space longer term? And then secondly, at this point, balance sheet permitting, do you have any appetite for M&A with distressed assets available in certain sections, particularly, looking at the U.S. where you suggest that Shale remains a core part of the business?

Thanks very much, Henry, and two very relevant questions. So yes, we are marketing our refineries at the moment. We have five active, and they are actually in active discussions. So this is not like we've put out some information package. We are actually in discussions, and they are at various stages of [Technical Difficulty]. Selling refineries is not a very trivial process. There's, of course, all sorts of, you can imagine, long-term liability issues and other things that have to be taken care of as well. But we started, when I worked in that business in 2004 with 55 refineries, now down to 15. So we know how to also not only run them, but also to get rid of them. And that's what we will be doing. On the M&A front, of course, we always have to look at opportunities in the market that you would expect us to do so. And of course, there could well be opportunities available. But we've also, I think, been very clear about what our priorities for cash are. So you can rely on the things that we have set when it comes to allocation of capital between the different priorities that we have. And we have to live within the frameworks that we have set out. Does that mean that we can do small-sized acquisitions that fit within the framework? Yes, absolutely. And that's why we are indeed looking, but we have to obey the constraints that we have set to ourselves, if we want to continue to market ourselves as a disciplined allocator of capital and one that preserves the financial resilience of the [Technical Difficulty].

We'll move to Jason with Jefferies.

Ben, in your prepared comments, you mentioned that in a more stable environment, you would allocate capital to deleveraging, increasing growth CapEx and increasing shareholder returns. But I guess the question I have is, what's the priority there? Because you have talked several times about needing to step up capital spending for growth, and you've also talked about getting the leverage ratio back down into the guidance range. The second question that I had is, I thought it was quite interesting you made a comment about evolving some refineries into low carbon chains. And I was hoping that you might expand a little bit on what you meant there. Is that converting into biodiesel refinery? Is that further integrating into petrochemicals? Just anything you can add there would be helpful and maybe even your outlook for the biodiesel market.

Okay. Great question, Jason. I'll take the second one, Jessica the first. Yes. So what we -- what I think is reasonably clear, I hope, from our outlook is. We believe the future of refining tech or pure refining is going to be challenged. Doesn't mean you can't make money in it? But you have to have a sophisticated position in it, but that means refineries with high complexity, very well placed, deeply connected into well operating trading networks, so we can do all the tricks that I referred to earlier on in this call, but also, of course, more deeply integrated with other parts of the business. Conventional way of doing it, of course, is petrochemicals. But there's other ways you can do this. We can think indeed of bio components. We can think of also bringing green power, hydrogen and other ways of integrating to it. Now so what you will see us do over time is indeed high grading. That's sort of more broad manufacturing part of our overall asset portfolio to just that, very sophisticated, multipurpose energy parks, if you like, integrated with product facilities. So what that means, in some cases, may well be reducing the straight-run fuels in a refinery, so rightsizing it down to a more fit-for-purpose output, but then repurposing some of the units to do other things with. So you can repurpose, say, for instance, hydrocracking units to be a feedstock provider for extremely high-quality base oils for lubricants. And then you're tapping into a completely different market. You can indeed integrate some of the biofuel technologies in units that then make more money than to just do, say, hydro processing. Or you can bring a deeper integration formula with petrochemicals in areas where that is possible. And so what you will see us do is just that. So it's probably going to be a combination of shrinking the fuel make, repurposing units in such a refinery to other types of processing capabilities and in the process, producing higher-quality products or products that are less susceptible to the pressures that we are seeing at the moment. Very simple and conventional ways. If I just bring it to life with one more example is to say, for instance, why would I want to upgrade the bottom of the barrel to sort of middle distillate, if I can also turn it into bitumen? And that may not sound like a very sexy proposition, but I can tell you, if you are the most sophisticated bitumen marketer in the world, which we also are, it can actually be an incredibly profitable proposition. So it is tricks like this that you will see us do over the coming quarters. Jessica?

Thank you, Jason, for the question on our capital allocation and how are we going to prioritize cash as we return to a stable environment, hopefully sooner rather than later. We've tried to be very clear about our cash priorities. We've spoken to them in the same way for the last 3 years. And I want to be very clear that paying of our interest, our dividend and, importantly, ensuring that sufficient CapEx to maintain our assets and doing that all within a AA frame is a top priority for us. And so the resilience of our balance sheet and acting prudently at this moment in time is absolutely front of mind and what drove the decisions that we've been making over the last 6 months and, in particular, the dividend decision. When the world returns to a more stable place and prices and margins recover and our cash flow recovers in that environment, we're looking to get to comfortably within AA range. We don't have to be at the bottom of our targets. We don't have to necessarily be in the middle of the target, but we want to be comfortably within it and have confidence in the outlook. Once we're in that position, we are going to look at continuing to grow the company, so CapEx. We've put a lot of things on hold. And of course, everything hangs off of investing in the company and creating more value and generating cash that we're able to fund even greater shareholder distributions and work further growth going forward. So the investment in the company and investing in future cash flow growth is important. It's also very important that we have a compelling investment proposition for our shareholders. And increasing returns for our shareholders is also front of mind. We want to be #1 from a total shareholder return perspective, and that's only going to happen if we increase dividends or do buybacks and/or through share price appreciation. And I hope that all 3 of those things are featured in our very near future. So ensuring that we've got the right return profile for our shareholders is absolutely front in mind. But we've got to keep all of these things in balance. Right now, the priority, given the circumstances that we're in and the outlook and the uncertainty around the outlook, focusing on the balance sheet, I believe, is absolutely the right thing to do. At one point in time, we'll be out of this moment. We'll have a strong balance sheet. We'll get comfortably in the AA metrics. We'll be looking to invest in the future of this company and creating value and, importantly, ensuring that we've got a competitive and leading turn profile for our shareholders.

I see there's a few more questions. So I know we are over time, but I want to make sure we do justice to all of you. So we're going to continue until the questions are done.

Martijn Rats with Morgan Stanley.

Yes. Martijn, not of JPMorgan. I'll keep it to one just because it's a long call already. Ben, you were recently quoted in a Dutch newspaper, talking about moving the headquarters to the U.K., and I briefly wanted to take you up sort of on that comment. It seemed a little out of context, but I wanted to sort of make sure I raise it and not specifically at that point, but actually the broader sort of issue of the vacation of the shares. How do you think about that? And also as part of that, what did you actually say about moving headquarters to the U.K.?

Thanks, Martijn. As both of you -- both you and I are Dutch speakers, I think you can actually read the interview in the Shell Dutch blog and see what exactly I said. I hadn't quite expected it to be actually a headline on the front page, I must admit. But it was entirely correct and true what I said. So it's very clear, we are a unified company that is quite often insufficiently well understood. We are 100% British plc, but we are headquartered in the Netherlands. That means that we are subject to the tax regime of the Netherlands. That was a conscious choice we made at the time in 2005 when we did the unification. Consequence of all of that was that we had to live with a unified share, but with 2 classes, if you like, or a single class but 2 versions of it, the As and the Bs, one with withholding tax and the other without withholding tax on the dividend. The expectation at the time was that the dividend withholding tax in the Netherlands would disappear. And at that point in time, we would indeed be able to simplify a dual share position as well. That hasn't happened. We've been in dialogue with the Dutch government for a long time on that. We have looked at all sorts of alternatives. But so far, we have not been able to exactly resolve it. Now is that an issue for us at this point in time? No, it's not. But it gives us certain limitations that we have to obey. So for instance, when we did the BG acquisition, we had to get permission upfront from the Dutch fisk to issue B shares to be able to do the acquisition. We got the permission, obviously,…

We'll hear from Irene Himona with Societe Generale.

One question from me as well, I guess, for Jessica. If we assume that the unprecedented volatility of the first half doesn't repeat, if we stay where we are, more or less in terms of pricing, can you say whether you're managing working capital so as to release cash in the second half of the year, please?

Thanks, Irene. I think, Jessica, if you would take that one?

Yes. So Irene, the working capital increase in this quarter was driven by the increase in price predominantly at about 2/3, and then 1/3 of it was associated with increase in volumes. And that, of course, is the basis of how we secure the trading upside that we saw in the quarter. So the most important driver, typically, of our working capital changes, particularly with respect to inventory, which tends to be what drives the working capital number each quarter, is really price driven. So that's not so much a connection to the volatility. Volatility is probably connected to the volumes, but I think that's really difficult to kind of call. We -- that's part of the strength of our balance sheet is to use that to create value. So to the extent that we see value out there, then we're going to maintain those volumes. But if that's not the case, then potentially, you'd see a rundown in the inventory levels in the coming months. Hopefully, that's helpful.

Let me add one point to it. We manage working capital on a relatively intensive basis. It is cash after all. And of course, while we can make good returns on working capital, as you have seen this quarter, it doesn't mean that it's on tap in the trading organization. So we have a very strict management framework with involvement from the treasury to make sure that we deploy working capital in a very disciplined way as well.

We'll move to Christopher Kuplent, Bank of America.

Two questions, please. And please call me impatient, but both of them are trying to look ahead to your capital markets update and your 2025 outlook. Firstly, even if CapEx under a nonrecessionary environment steps up, currently, you're spending about 5% on emerging power. And I think it wasn't so long ago that I heard Martijn say, you wanted to become the largest electricity company in the world in the 2030. So would you agree that 5% of group CapEx is probably not the right level for the coming decade? Just to see where the direction is going. I don't want to put any words in your mouth. And secondly, you impaired assets down on a lower short-term price deck, but you still left the 60 brands real term. And can you comment whether that is also going to be the very oil price that you used in the past for your 2025 outlook or whether actually impairment tests are completely separate from your view of the next 5 years as you're updating that plan to February?

Thanks very much, Christopher, and we understand that you are impatient. I'm sure you're not the only one on this. You're also absolutely right that, indeed, with the constrained and reduced impaired back capital program that we have this year, everything had to give a little bit. And it -- and even though we may have been a little bit more prepared to still preserve a good de minimis investment program in Power, it definitely did not escape very, very close scrutiny as well. So with this diet, can we succeed in our ambitions through the decade? Well, I can safely say, no. But then a decade is a long time. And a lot of things will happen and have to happen for us to evolve to the company we want to be. If indeed, this environment would stay with us for the rest of the decade, well, I guess we would be living in a totally different world at the end of the decade as well. So I'm not at the point where I just say everything is permanently different, and it will only be like this going forward. Of course, there will be a recovery. Of course, there will be more capital for us to play with. Of course, we will have again an abundance of choices to make. We will not be on a very, very strict diet. And indeed, we -- if you are talking about a decade here, Christopher, let me set it very clearly as a preface, in the next decade, there will also be inorganic opportunities available to us if we play our strategic guides very well. So with that, I think you all have to wait indeed for the 11th of February before we can say a little bit more about it. Jessica?

Thank you, Chris, for the question on the impairments and the price lines. In terms of the decision or the choice made in terms of our outlook on prices in April, May this year, to be clear for the Upstream and IG business, that reflected a changed view in the outlook of prices, a reduction of some 15% to 20%, whereas in the Downstream business, it was around 30%. So we did change our long-term outlook, in addition to kind of the short- to medium-term outlook out to 2022. As part of the processes of -- we take a lot of input in terms of making the decisions of what is the right price line from an impairment perspective. We compare that against peers, against consultants, against analysts, bank reports, et cetera. In that comparison, we show up to be relatively conservative in the first few years and kind of middle of the pack to the lower part of the pack for the later years. So just to get a sense of where we are in the range of informed opinions on the price line, this is an impairment line. Basis of what we do our strategy on and basis of what we plan on isn't necessarily these numbers. Importantly, we're consistently looking at a range of outcomes because of the dynamic elements that we've been speaking to, not only of the short term, but of the long term as well. But I think it's an indication of a view, and it's certainly important in terms of the balance sheet valuation, and you have to pick one number when you do the impairment line. And we try and do that in a way that's informed and wise. And I think that these numbers represent that, but it's not necessarily the one view or the only view, particularly, when thinking from a strategic perspective and planning for the business.

Okay. Thanks very much. And I think actually, that brings us to the end of the call. We've gone over a bit. And I apologize for that, but I hope you found it nevertheless valuable. Thank you very much for staying with us for this extra time. Thank you very much for all your questions and, of course, for joining the call in the first place. If there's any further questions outstanding, our IR team will make sure that they get properly answered. Of course, we will have third quarter results as well. They are on the 29th of October. And we look forward to talking to you then. And then, of course, we have the Strategy Day, which we will do on the 11th of February 2021. And let me tell you, I look forward to seeing you then. And with that, I hope you will have a good rest of your day and, indeed, a good summer. Thank you very much.

And that will conclude today's call. We thank you for your participation.