Washington, D.C. 20549
Tel. no: 011 31 70 377 9111
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: none
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
4,406,063,759 A ordinary shares with a nominal value of €0.07 each.
3,739,277,889 B ordinary shares with a nominal value of €0.07 each.
Copies of notices and communications from the Securities and Exchange Commission should be sent to:
Attn: Linda M. Szymanski
[A] Segment earnings are presented on a current cost of supplies basis. See Note 5 to the “Consolidated Financial Statements” on pages 129-130.
[B] See “Non-GAAP measures reconciliations” on pages 195-196.
[C] See Note 15 to the “Consolidated Financial Statements” on page 137.
The selected financial data set out below are derived, in part, from the “Consolidated Financial Statements”. This data should be read in conjunction with the “Consolidated Financial Statements” and related Notes, as well as with this Strategic Report. BG was consolidated within Shell’s results with effect from February 2016.
[A] See “Non-GAAP measures reconciliations” on pages 195-196.
[A] As reported by the operator.
[B] Interest, or part of the interest, is held via indirect shareholding.
[A] See “Non-GAAP measures reconciliations” on pages 195-196.
[A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 standard cubic feet (scf) per barrel.
[B] Included 36 million barrels of oil equivalent (boe) consumed in operations (natural gas: 197 thousand million standard cubic feet; synthetic crude oil: 2 million barrels).
[C] Included 8 million boe consumed in operations (natural gas: 44 thousand million scf).
[D] Included 5 million boe of reserves attributable to non-controlling interest in Shell subsidiaries.
[E] In March 2017, we agreed to sell, in a series of transactions, all of our in-situ and undeveloped oil sands interests in Canada and reduce our interest in the Athabasca Oil Sands Project from 60% to 10%. See Note 30 to the “Consolidated Financial Statements” on page 152. Proved reserves associated with these oil sands interests and our 60% interest in the AOSP were 2 billion barrels at December 31, 2016.
[A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.
[A] Includes joint ventures and associates. Where a joint venture or an associate has properties outside its base country, those properties are not shown in this table.
[B] In several countries where “Shell operator” is indicated, Shell is the operator of some but not all exploration and/or production ventures.
[C] Shell suspended all exploration and production activities in Syria in December 2011.
[A] Reflects 100% of production of subsidiaries except in respect of production-sharing contracts (PSCs), where the figures shown represent the entitlement of the subsidiaries concerned under those contracts.
[B] Comprises countries where 2016 production was lower than 7,300 thousand barrels or where specific disclosures are prohibited.
[A] Reflects 100% of production of subsidiaries except in respect of PSCs, where the figures shown represent the entitlement of the subsidiaries concerned under those contracts.
[B] Comprises countries where 2016 production was lower than 41,795 million scf or where specific disclosures are prohibited.
[A] Included Shell’s 14% share of Woodside Petroleum Limited (Woodside) from June 2014 to April 2016 (previously: 23%). Woodside is a publicly listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are estimated. The accounting classification of Woodside was changed from an associate to an investment in securities in April 2016.
[A] Included Shell’s 14% share of Woodside from June 2014 to April 2016 (previously: 23%). Woodside a publicly listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are estimated. The accounting classification of Woodside was changed from an associate to an investment in securities in April 2016.
[A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.
[B] Included Shell’s 14% share of Woodside from June 2014 to April 2016 (previously: 23%). Woodside is a publicly listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are estimated. The accounting classification of Woodside was changed from an associate to an investment in securities in April 2016.
[A] See Note 5 to the “Consolidated Financial Statements” on pages 129-130. Segment earnings are presented on a current cost of supplies basis.
[B] See “Non-GAAP measures reconciliations” on pages 195-196.
[C] The basis of calculation differs from that used for the “Refinery and chemical plant availability” measure in “Performance indicators” on page 20, which excludes downtime due to uncontrollable factors.
[A] Shell interest is rounded to the nearest whole percentage point; Shell share of production capacity may differ.
[B] Calendar day capacity is the maximum sustainable capacity adjusted for normal unit downtime.
[C] In September 2016, we agreed to sell the Fredericia refinery.
[D] Not operated by Shell.
[E] We have signed agreements with SRI as a result of which we will assume sole ownership of the Convent and Norco refineries and SRI will assume sole ownership of the Port Arthur refinery (see “Downstream” on page 42).
■ Integrated refinery and chemical complex.
● Refinery complex with cogeneration capacity.
♦ Refinery complex with chemical unit(s).
[A] Major chemical plants are large integrated chemical facilities, typically producing a range of chemical products from an array of feedstocks, and are a core part of our global Chemicals business.
[B] Shell share of capacity of subsidiaries, joint arrangements and associates (Shell and non-Shell-operated), excluding capacity of the Infineum additives joint ventures.
[C] Higher olefins are linear alpha and internal olefins (products range from C6-C2024).
[D] Not operated by Shell.
[E] In January 2017, we agreed to sell our interest.
A Aromatics, lower olefins.
I Intermediates.
P Polyethylene, polypropylene.
O Other.
[A] Other chemical locations reflect locations with smaller chemical units, typically serving more local markets.
A Aromatics, lower olefins.
I Intermediates.
[B] On Shell’s financing activities, together with the Shell share of joint ventures and associates’ net foreign exchange (gains)/losses on financing activities.
[C] Other earnings mainly comprise headquarters and central functions’ costs not recovered from business segments, and net gains on sale of properties.
[A] See the “Consolidated Statement of Cash Flows” on page 121.
[A] Excludes shares issued to affiliated purchasers pursuant to the Scrip Dividend Programme.
[B] American Depository Shares.
[C] Includes stamp duty and brokers’ commission.
[A] It is expected that holders of B shares will receive dividends through the dividend access mechanism applicable to such shares. The dividend access mechanism is described more fully on page 177.
[B] The euro and sterling equivalents announcement date is March 10, 2017, which therefore is also the date when the total announced in respect of the year can be calculated.
Attendance during 2016 for all Board and Board committee meetings is given in the table below.
[A] The first figure represents attendance and the second figure the possible number of meetings. For example, 9/9 signifies attendance at nine out of nine possible meetings. Where a Director stood down from a Board committee during the year, or was appointed during the year, only meetings before standing down or after the date of appointment are shown.
AUDIT COMMITTEE REPORT
Dear Shareholders,
I am pleased to present our annual Audit Committee Report, which provides insights into our work and the issues we dealt with during 2016.
As the Audit Committee (AC), we assist the Board in fulfilling its oversight responsibilities in areas such as the integrity of financial reporting, the effectiveness of the risk management and internal control system and related governance and compliance matters. We are also responsible for making a recommendation to the Board on the appointment or reappointment of the external auditor. The integration of BG following its acquisition in February, as well as the transition to Ernst & Young LLP (EY) as our new external auditor, required additional focus from the AC in 2016.
In respect of the integration of BG, we spent considerable time reviewing and considering the purchase price allocation; the integration of the BG operations and assets; the integration into our accounting and reporting processes, including consolidation into Shell’s financial statements, and the application of Shell’s control framework. We are satisfied that this work has been carried out in a rigorous and robust manner. You will find more details later in this report.
Following the completion of the tender process and on the recommendation of the AC, EY was appointed as external auditor of the Company for the financial year 2016. In anticipation of the appointment, the transition activities began on October 1, 2015, when EY started shadowing PricewaterhouseCoopers LLP (PwC) in its audit engagement with the Company. The AC closely monitored the transition from PwC to EY and was satisfied with the process.
The AC also carefully monitored auditor independence in accordance with the conflict of interest and independence protocol established with EY, and further agreed with EY that one of EY’s lead partners for each of Shell’s businesses would join the lead audit partner at every AC meeting.
In 2016, we held six AC meetings where we were briefed on and discussed a variety of topics including certain special topics such as information risk management and tax transparency reporting. We received briefings from the Chief Internal Auditor on audit outcomes and considered recommended remedial actions thereof, as well as completion of such actions. Specific attention was given to issues we considered significant in relation to Shell’s 2016 Consolidated Financial Statements, as discussed in more detail later in this report together with how we addressed them. In January 2016, we held one extraordinary meeting relating to the publication of an update on Shell’s fourth quarter 2015 and full year unaudited results in respect of the completion of the BG acquisition.
We supported the first viability statement made in the 2015 Director’s Report, in accordance with new best practice from the UK Corporate Governance Code (the Code) effective from 2015. In 2016 we considered whether the three-year period selected by the Board for the review of Shell’s prospects, in line with the operating plan, was appropriate. We concluded that this was the case; prevailing peer practice is also to focus on the operating plan period, which generally led to use of a three-year term. The factors which we further considered in support of the viability statement are discussed later in this report.
Finally, we conducted our annual performance evaluation, internally facilitated by the Secretary to the AC and supplemented by a questionnaire circulated to the AC members. We concluded that the AC was effective and able to fulfil its role in accordance with its terms of reference, which can be found at www.shell.com/investor. As part of the evaluation session the AC discussed the priorities, in addition to the standing items, for its 2017 agenda, including further discussions on risk, BG integration, information risk management, trading and supply, and governance of non-Shell-operated joint ventures.
Euleen Goh
Chair of the Audit Committee
March 8, 2017
Composition of the Audit Committee
During 2016, the members of the AC were Euleen Goh (Chair of the AC), Guy Elliott, Gerard Kleisterlee and Linda G. Stuntz, all of whom are financially literate, independent, Non-executive Directors. Guy Elliott stepped down as Chair of the AC with effect from January 1, 2016, with Euleen Goh succeeding him as of this date. In respect of the year ended December 31, 2016, for the purposes of the Code, both Euleen Goh and Guy Elliott qualify as persons with “recent and relevant financial experience” and, for the purposes of US securities laws, each is an “audit committee financial expert”. The AC had six ordinary meetings and one extraordinary meeting during the year; the AC members’ attendances are shown on page 69.
Responsibilities
The key responsibilities of the AC are to assist the Board in fulfilling its oversight responsibilities in relation to: financial reporting; the effectiveness of the system of risk management and internal control; compliance with applicable external legal and regulatory requirements; monitoring the qualifications, expertise, resources and independence of both the internal and external auditors; and assessing the internal and external auditors’ performance and effectiveness each year. The AC keeps the Board informed of its activities and recommendations. Where the AC is not satisfied with, or if it considers that action or improvement is required concerning any aspect of financial reporting, risk management and internal control, compliance or audit-related activities, it promptly reports these concerns to the Board.
Activities
The AC covers a variety of topics in its meetings. These include both standing items that the AC considers as a matter of course, typically in relation to the quarterly unaudited financial statements, control issues, accounting policies and judgements and reporting matters, and a range of specific topics relevant to Shell’s control framework. The AC invites the Chief Executive Officer, the Chief Financial Officer, the Legal Director, the Chief Internal Auditor, the Executive Vice President Controller, the Vice President Accounting and Reporting and the external auditor to attend each meeting. The Chair of the Board also regularly attends the meetings. Other members of management attend when requested. At every meeting, the AC holds private sessions separately with the external auditor and the Chief Internal Auditor without members of management, except for the Legal Director, being present.
During 2016, the AC received comprehensive reports from management and the internal and external auditors. In particular, it discussed with the Chief Financial Officer, the Executive Vice President Controller, the Vice President Accounting and Reporting and the external auditor issues that arose on accounting policies, practices and reporting, and reviewed aggregated whistle-blowing reports, internal audit reports and analyses of financial reporting matters. The AC further assessed the robustness of information and risk management, security measures including cyber security, and the effectiveness of financial controls, and discussed with the Chief Ethics and Compliance Officer her annual report on compliance matters including regulatory developments and compliance risks. The AC also discussed the Company’s Annual Report and Accounts, half-year report and quarterly unaudited financial statements with management and the external auditor. The AC reviewed and discussed the internal audit function’s annual audit plan. It also reviewed the internal audit’s performance self-assessment report focusing on impact of the audits, audit quality and compliance, and operational excellence. The AC assessed the performance of the internal audit function as effective. The AC also reviewed, considered and approved the external audit plan including the audit scope and materiality levels. In addition to the items discussed under significant issues on pages 80-81, the AC also requested reports on matters that it deemed appropriate, for example: BG’s proved oil and gas reserves; the recoverability of receivables from certain governments; the implementation of a new systems platform for products trading in the USA; litigation matters, including the review of the provisions taken; tax transparency; and new and impending regulatory requirements. It also discussed the status of information risk management with the Chief Information Officer to receive assurance on the appropriate levels of controls and activities undertaken.
79 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
As requested by the Board, the AC advised the Board of its view that the Annual Report including the financial statements for the year ended December 31, 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s position and performance, business model and strategy (see the “Directors’ Report” on page 65). To arrive at this conclusion, the AC critically assessed drafts of the Annual Report including the financial statements and discussed with management the process undertaken to ensure that these requirements were met. This process included: verifying that the contents of the Annual Report are consistent with the information shared with the Board and management during the year to support their assessment of Shell’s position and performance; ensuring that consistent materiality thresholds are applied for favourable and unfavourable items; taking into account comments from the external auditor; and receiving assurance from the Executive Committee. The AC further reviewed and considered the Directors’ half-year and full-year statements with respect to the going concern basis of accounting. The AC considered and concluded that the three-year time horizon selected by the Board in 2015 for the assessment of Shell’s longer-term viability was still appropriate. As noted in the viability statement, the Board also reviews the strategic plan which takes account of longer-term forecasts. Factors considered included: external environment factors such as oil and gas prices; the
financial framework; Shell’s business portfolio developments; and the project funnel to support future growth. The AC endorsed the statement in the “Directors’ Report” on page 65.
SYSTEM OF Risk MANAGEMENT and Internal CONTROL
In 2016, the AC reviewed, discussed and briefed the Board on the regular reports on risks, controls and assurance, including the annual assessment of the system of risk management and internal control, in order to monitor the effectiveness of the procedures for internal control over financial reporting, compliance and operational matters. This included the Company’s evaluation of the internal control system as required under Section 404 of the Sarbanes-Oxley Act.
Significant issues
The AC assessed the following significant accounting and reporting issues that arose in relation to Shell’s 2016 Consolidated Financial Statements. The AC was satisfied with how each of these issues was addressed. As part of this assessment, the AC received reports, requested and received clarification from management, and sought assurance and received input from the internal and external auditors.
Significant issues | | |
Subject | Issue | How the AC addressed the issue |
ACQUISITION OF BG GROUP PLC See Notes 4, 8 and 9 to the “Consolidated Financial Statements” on pages 128, 131-132 and 132-134. | Shell is required to recognise BG’s net assets at their acquisition-date fair values. Determining these values (the “purchase price allocation”) is a significant exercise and under IFRS there is a window of 12 months for them to be finalised. The provisional fair values were disclosed in the Unaudited Condensed Consolidated Interim Financial Statements for the first quarter, updated in the third quarter and finalised in the fourth quarter. BG results must be reported within Shell’s Consolidated Financial Statements from the date of acquisition. This requires the application of Shell’s control framework, and reporting in accordance with Shell’s accounting policies. | The AC received information to explain the basis for the purchase price allocation, with a focus on property, plant and equipment and intangible assets’ valuations, and supported management’s conclusions including the final amount of goodwill recognised on the acquisition. The AC also reviewed the integration of BG into Shell’s accounting and reporting processes, and satisfied itself with the information included within Shell’s Consolidated Financial Statements post acquisition. The AC reviewed the judgements made which, for example, resulted in the recognition of certain leases as finance leases on Shell’s balance sheet, whereas BG had treated them as operating leases, therefore off balance sheet. |
IMPAIRMENTS See Notes 2 and 9 to the “Consolidated Financial Statements” on pages 122-127 and 132-134. | The carrying amount of an asset should be tested for impairment when there is a change in circumstances such as a reduction in performance, other than short-term, or being classified as held for sale. Oil and gas prices were on average lower in 2016 than in 2015. Management reflected these lower prices in the short term but did not change the long term price forecasts. A downward revision in forecasts would be a trigger for impairment testing. | The AC reviewed various impairment charges in respect of Upstream, Integrated Gas, and Downstream assets. These impairments were mainly triggered by asset performance, disposals and project cancellations. In the context of potential impairment triggers, Shell’s oil and gas price outlook was reviewed against market developments, benchmarks and the potential impact of certain price sensitivities were considered. |
DEPRECIATION, DEPLETION AND AMORTISATION See Note 2 to the “Consolidated Financial Statements” on pages 122-127. | Upstream production assets are generally depreciated on a unit-of-production basis over proved developed reserves, which are calculated in accordance with requirements based on yearly average prices. In the current price environment it was considered necessary to apply other approaches for certain assets, in order that the periodic depreciation charges more appropriately reflect the expected utilisation of those assets. | The AC reviewed the justification to use alternatives to determine the reserves base applied in calculating unit-of-production depreciation for certain Upstream assets, such as using management’s expectations of future oil and gas prices rather than yearly average prices. It agreed that this provides a more appropriate phasing of periodic depreciation charges. |
80 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
Provisions for redundancy AND onerous contracts See Note 19 to the “Consolidated Financial Statements” on page 143. | Management’s effort to reduce costs, particularly following the BG acquisition, has included redundancy programmes and rationalisation of facilities. In the continuing lower oil and gas price environment, it is also necessary to review whether the future costs of certain other contracts are expected to exceed the benefits. Judgement is necessary in each case in determining when a provision should be recognised and, if so, in estimating the amount. | The AC received information on and accepted the amounts and timing of recognition of provisions for redundancy in the second and third quarters. The AC also discussed and accepted the outcome of the onerous contracts review, specifically provisions for idle rigs in Upstream and tolling contracts in Europe and the USA in Integrated Gas and Downstream and for real estate leases as a result of the rationalisation of office space in various locations. |
TAXATION See Notes 2 and 17 to the “Consolidated Financial Statements” on pages 122-127 and 139-140. | The determination of tax assets and liabilities requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. In particular the recognition of deferred tax assets requires management to make assumptions regarding future profitability and is therefore inherently uncertain. | The AC reviewed management updates and external auditor assessments on certain tax matters. The AC discussed the recoverability of deferred tax assets and accepted the resulting assessments of the deferred tax positions. |
DISPOSALS See Note 6 to the “Consolidated Financial Statements” on page 131. | Shell has announced a major disposal programme for 2016-2018. Prior to expected disposal, judgement is required in determining when an asset has reached held for sale status, which has accounting consequences. Judgement may also be required in the accounting on disposal, for example in estimating the amount of any liabilities which have been retained by Shell. | The AC examined the accounting for assets held for sale and consequential disposals, including Downstream assets in Denmark and Malaysia, Upstream assets in Canada, Egypt, the UK and the USA, and Integrated Gas assets in New Zealand. Particular attention was given to the accounting for any retained obligations, the assumptions used in determining any resulting charges and the tax treatment. |
ExternaL auditor
At the AGM in May 2016, the tender process [A] for the appointment of the external auditor for the financial year 2016, which had started in mid-2014, was concluded by shareholder approval for the appointment of EY as the Company’s external auditor for the year ending December 31, 2016. This approval ratified the appointment of EY by the Board in April 2016 to fill the casual vacancy created by the resignation of PwC following the completion of its audit of the Company’s 2015 financial statements. The tender was carried out in compliance with The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 effective January 1, 2015, as issued by the Competition & Markets Authority in the UK.
[A] In October 2015, Shell published a disclosure on its website providing a detailed overview of the auditor tender process, which can be found on www.shell.com/investor
During 2016, the AC considered the outcome of the Financial Reporting Council’s Audit Quality Inspection Annual Report 2015/16 on EY. The AC monitored the transition from PwC to EY as the new external auditor and evaluated the effectiveness of EY and the external audit process in its first year as auditor, taking into account the results of Shell management’s internal survey relating to EY’s performance over the financial year 2016 as well as management’s review and recommendations and its own experiences with the external auditor. Key criteria of the evaluation included: professionalism in areas including competence, integrity and objectivity; efficiency, covering aspects such as service level, cost efficiency and innovation in the audit process; thought leadership and value added; and compliance with relevant legislative, regulatory and professional requirements. The AC concluded that EY had performed effectively.
Following due consideration, the AC will recommend to the Board to propose to the 2017 AGM that EY be re-appointed as the external auditor of the Company for the year ended December 31, 2017. There are no contractual obligations that restrict the AC’s ability to make such a recommendation.
As required under UK and US auditing standards, the AC received a letter from EY confirming its independence.
EY presented its views on the Annual Report including the financial statements for the year ended December 31, 2016, to the AC and to the Board.
NON-AUDIT SERVICES
The AC has a policy on the engagement of the external auditor to supply non-audit services. This policy, designed to safeguard auditor objectivity and independence, includes guidelines on permitted and non-permitted services, and on services requiring specific approval by the AC.
Examples of non-permitted services are actuarial services, bookkeeping services, valuation services (unless the services are unrelated to financial reporting), management or recruitment services, legal services and expert services unrelated to the audit, tax advice and broker or dealer, investment adviser or banking services.
For other services, because of their knowledge, experience and/or for reasons of confidentiality, it can be more efficient or prudent to engage the external auditor rather than another party. Under the policy, permitted services must not present a conflict of interest. The AC reviews quarterly reports from management on the extent of the permitted non-audit services provided in accordance with the policy or for which specific approval is being sought. Non-audit services in the following categories can be contracted without further individual prior approval provided the fee value for each contract does not exceed $500,000:
▪ | tax compliance work that is part of the assurance process for the audit of the Consolidated or Parent Company Financial Statements or the accounts of subsidiaries; |
▪ | regulatory compliance audits; and |
▪ | verification of non-financial data for public disclosure. |
Any other non-audit services must be specifically approved by the AC before the external auditor is contracted.
The scope of the permitted non-audit services contracted with the external auditor in 2016 consisted mainly of interim reviews and other audit-related assurance services and the associated compensation amounted to 6% of total auditor’s remuneration.
The AC has adopted an amended policy on the engagement of the external auditor to supply non-audit services effective January 1, 2017, in accordance with the Revised Ethical Standard 2016, issued by the Financial Reporting Council in June 2016.
FEES
Note 29 to the “Consolidated Financial Statements” on page 152 provides a specification of the auditor’s remuneration.
81 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
DIRECTORS’ REMUNERATION REPORT
PRINCIPLES
The principles underpinning the Remuneration Committee’s (REMCO) approach to executive remuneration serve as the foundation for everything we do, and are listed below.
■ | Alignment with Shell’s strategy: the Executive Directors’ compensation package should be strongly linked to the achievement of stretch targets that are seen as indicators of the execution of Shell’s strategy. |
■ | Pay for performance: the majority of the Executive Directors’ compensation (excluding benefits and pensions) should be linked directly to Shell’s performance through variable pay instruments. |
■ | Competitiveness: remuneration levels should be determined by reference internally against Shell Senior Management and externally against companies of comparable size, complexity and global scope. |
■ | Long-term creation of shareholder value: Executive Directors should align their interests with those of shareholders by holding shares in Royal Dutch Shell plc (the Company). |
■ | Consistency: the remuneration structure for Executive Directors should generally be consistent with the remuneration structure for Shell’s Senior Management. This consistency builds a culture of alignment with Shell’s purpose and a common approach to sharing in Shell’s success. |
■ | Compliance: decisions should be made in the context of the Shell General Business Principles and REMCO should ensure compliance with applicable laws and corporate governance requirements when designing and implementing policies and plans. |
■ | Risk assessment: the remuneration structures and rewards should meet risk-assessment tests to ensure that shareholder interests are safeguarded and that inappropriate actions are avoided. |
STATEMENT BY THE CHAIR OF THE REMUNERATION COMMITTEE
Dear Shareholders,
I am pleased to present the Directors’ Remuneration Report for the year ended December 31, 2016. This includes: (i) our Annual Report on Remuneration for 2016 as well as implementation of the proposed Directors’ Remuneration Policy in 2017, in accordance with the principles above; and (ii) the proposed Directors’ Remuneration Policy which, subject to shareholder approval at the 2017 Annual General Meeting (AGM), will take effect from May 23, 2017, and will be effective until the 2020 AGM, unless a further policy is proposed by the Company and approved by shareholders in the meantime. At the 2017 AGM, the proposed Directors’ Remuneration Policy will be put to a binding shareholder vote and the Annual Report on Remuneration for 2016 will be put to an advisory shareholder vote.
In 2016, REMCO performed a wide-ranging review as part of the three-year cycle required by law. The timing has been helpful in allowing us to ensure our remuneration structure is effective in the context of Shell’s new strategic direction and the acquisition of BG Group plc (BG).
We as REMCO believe that Shell’s overall remuneration policy must strongly support Shell’s strategy. The Board sets the strategy and REMCO decides how to reward its successful delivery. It is an important principle that remuneration does not lead change. It is strategy that drives change and remuneration that follows. We also believe in remuneration structures that are consistent with those of the wider workforce and align all staff with Shell’s purpose and performance. As a result, we have maintained a remuneration policy that is consistent with how we pay people across Shell. This consistent remuneration landscape includes paying at competitive market levels. It also includes a mixture of fixed and variable pay for most, shared performance metrics and common benefit plans. At Executive Director level, we are committed to additional elements, notably the requirement to maintain a personal shareholding. In our conversations with you, the shareholders, you made clear that, like us, you wish to see the new strategic direction reflected in pay. You also encouraged further simplicity in remuneration. Overall, your input suggests that our existing policy is generally appropriate and we have therefore built upon this as a starting point.
HOW THE NEW STRATEGY HAS UNDERPINNED THE REMUNERATION REVIEW
During its Capital Markets Day 2016, Shell outlined its new direction and how the acquisition of BG fitted into it. Shell intends to be a world-class investment. Achieving this requires sustained focus on generating higher returns and free cash flow (FCF), which is the sum of cash flow from operating activities and cash flow from investing activities, underpinned by a conservative balance sheet. This strategy is designed to finance the dividend and provide the funds Shell needs to invest in its growth. As always, safety and environmental stewardship are central to all Shell does.
To ensure alignment with Shell’s strategy to be a world-class investment, we have made some key changes with effect from January 1, 2017, within the boundaries of the existing policy approved by shareholders at the 2014 AGM:
■ | New emphasis on FCF – this replaces earnings per share (EPS) as a measure in the Long-term Incentive Plan (LTIP). One specific priority that flows from Shell’s acquisition of BG is the need to optimise the expanded portfolio. Cash generated from divestments will be used to help reduce debt and pay dividends. While Shell is using divestments to move towards its intended mix of assets following the acquisition, FCF will be measured on an absolute basis. Once the portfolio is optimised FCF may be measured against BP, Chevron, ExxonMobil and Total (“the other oil majors”). |
■ | New metrics for greenhouse gas (GHG) management – these now form 10% of the annual bonus scorecard. To support the efforts Shell is already making, and based on recommendations from the Corporate and Social Responsibility Committee, we have selected scorecard measures focused on three specific business areas: refining, chemical plants and flaring in upstream assets. This goes beyond carbon dioxide (CO2) to include other GHGs such as methane. |
■ | Re-balancing of operational excellence measures in the scorecard – the acquisition of BG means there are fewer new projects and, as a result, the weighting for this area will fall. It is worth noting, however, that targets were made more challenging. We will also now include non-Shell-operated joint ventures as part of this measure because more of Shell’s capital is invested in such projects than in those it operates. The new strategy also underlines the importance of liquefied natural gas (LNG). As a result, we will raise the weighting of the LNG measure from 6% to 12.5%. |
■ | Governance strengthened – the bonus will be removed from the termination policy for Executive Directors appointed on or after January 1, 2017. |
Shareholders often ask me about the energy transition. We have thought hard about the points you raised and considered at length how best to reflect this in remuneration. This was also a theme of the 2015 “Aiming for A” shareholder resolution. As I have outlined above, we have moved to ensure the bonus reflects progress in managing Shell’s GHG emissions. But the energy transition is wider than that and Shell’s role as an energy provider also goes further. The Board discussed Shell's energy transition approach and approved a proposal from management to create a New Energies business, dedicated to finding attractive business opportunities for Shell in the context of energy transition. We will embed the progress in New Energies into the personal performance agreement with the CEO. The energy transition however, still is in its early phase and for the coming decade(s) energy supply will continue to depend for a significant portion on fossil fuels. For Shell, consistent high volume production of oil and gas will be the driver of cash flow generation. Therefore operational excellence, expressed in oil and gas production, LNG liquefaction volumes and project delivery, remain important in Shell's performance reward structure.
82 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
LISTENING TO YOUR FEEDBACK
We have taken on board your view that the remuneration structure should be simplified and share ownership is one area where we have acted. Our approach here is designed to help maintain executive focus on the long term and to ensure that the interests of our senior management are aligned with those of shareholders. Significant shareholding requirements remain in place. Furthermore, subject to shareholder approval of the proposed Directors’ Remuneration Policy at the 2017 AGM, the bonus scheme will be streamlined so that there is no separate plan to defer the proportion paid in shares, with the effect that the bonus would simply be paid half in cash, and half in shares subject to a three-year holding period. The LTIP, after a three-year performance period, is delivered entirely in shares subject to a three-year holding period. The LTIP holding period will now align with the bonus holding period in applying even after leaving Shell, to further encourage a long-term approach to decision-making.
Some shareholders have asked us to consider awarding “restricted shares”, which have no performance conditions attached, to bolster long-term alignment of executive interests with those of shareholders. We will keep listening to feedback from you but, at this time, there is no consensus on this among shareholders. As things stand, REMCO believes in tying variable pay to performance with rewards linked to delivery. We also feel that the high shareholding requirements for Shell’s Executive Directors fulfil the intent behind restricted share schemes: creating long-term shareholder value.
Some of you have highlighted the ongoing public debate over levels of executive remuneration and I assure you that REMCO is sensitive to that discussion. We have changed the benchmarking comparator group for our executive remuneration, but that does not create an upward pressure. Also, when making pay decisions for Executive Directors, REMCO considers a number of factors related to pay and conditions for the wider workforce. In our view the important point is that all employees are fairly and competitively paid and we benchmark this at all levels and by market. Also remuneration for Executive Directors must make sense and show consistency in the internal hierarchy. As a consequence REMCO has been careful with pay increases. In fact, REMCO has maintained similar starting base salaries for each new CEO over the past decade and also bonus and LTIP opportunities have remained at similar levels.
REMCO will continue to actively monitor evolving market practice and provide information to shareholders that is helpful in assessing the appropriateness of pay. However, with a workforce spread around the globe and an executive remuneration structure designed to have significant variability depending on performance, we feel that reporting a single figure based pay ratio will not be helpful in steering the debate.
Finally, Shell has for some time adopted a “no adjustments” philosophy to remuneration performance metrics: we do not move the target goalposts when the broader business context changes. Most shareholders I have spoken to tell me they appreciate the transparency this creates, particularly when oil prices are decreasing. We continue to believe in this “no adjustments” philosophy.
2016 PERFORMANCE CONTEXT
2016 was a challenging year given the external environment. It was also a major transition year within Shell following the acquisition of BG, with many parts of the organisation having to juggle change and challenges. Within this context, Shell delivered strongly on change and operations, underpinned by solid sustainable development outcomes, but cash flow was lower than expected. This performance context has resulted in the annual bonus scorecard outcomes described below.
The Board is committed to delivering the value from the BG acquisition and REMCO supported this by introducing a synergy target in the bonus scorecard for 2016. We completed the BG acquisition and integration, capturing more value than anticipated, and this is reflected in the synergies scorecard outcome.
By the end of 2016 we had made good progress against our strategy to become a world-class investment case. However, cash flow from operating activities was below threshold for the year. This was mainly due to the impact of lower oil, gas and LNG prices in Upstream and Integrated Gas. Downstream cash flow was also lower, mainly due to weaker refining margins and higher working capital.
The project delivery score was outstanding, reflecting the organisation’s extra efforts to deliver projects within budget and on schedule. Our production volumes achieved a score of outstanding supported by strong operational performance across various assets and higher entitlement from production-sharing contracts. Our LNG liquefaction volumes scored above target although they were impacted by lower feedgas availability. Our combined refinery and chemicals plant availability measure was below target due to increased planned and unplanned maintenance.
Sustainable development was on target with our process safety performance in particular making a step-change improvement.
DECISIONS MADE
Against the above-mentioned background, REMCO made the following decisions regarding the remuneration of the Executive Directors.
REMCO approved an annual bonus scorecard outcome of 1.11. This was the mathematical outcome and no discretion was applied by REMCO.
We believe individual performance targets are very important. They reinforce and drive a company-wide culture of individual performance and behaviour. The Chair reviewed the CEO’s performance with REMCO, and the CEO discussed the Chief Financial Officer’s (CFO) performance with REMCO. Having considered this input, REMCO determined to award each of the CEO and CFO an on-target individual performance factor of 1.0.
We are constantly looking at whether our remuneration structure is delivering its intended outcome. Nevertheless, some of you made it clear last year that you felt the bonus was too high. As part of this process of ongoing review, we have examined the target-setting landscape. We looked at bonus payments made over the last decade and observed that two areas were consistently delivering high outcomes: project delivery and sustainability. We concluded that Shell would be better served by more stretching targets in those areas. We had a discussion with the Corporate and Social Responsibility Committee and worked with them to apply more ambitious aims. We also consulted with the project delivery team and tightened the “on schedule” performance target for 2016 and beyond.
The 2014 LTIP award vested below target at 84% (or 42% of maximum). I am confident that our strategy provides the clarity and focus needed to help reshape Shell into a world-class investment case. We need to continue to focus on delivering higher returns on capital employed, higher free cash flow and, of course, reducing debt. Shell has improved its competitive position against the other oil majors, with strong relative three-year performance in cash flow from operating activities and return on average capital employed (ROACE), along with median EPS performance, but lagging three-year total shareholder return (TSR).
There were no significant changes made to the remuneration structure during 2016 and all awards were made in line with the policy approved by shareholders at the 2014 AGM.
CFO TRANSITION
As previously announced, Simon Henry stands down as CFO on March 9, 2017, and details of his termination payments are summarised on page 87.
REMCO determined the remuneration arrangements for Jessica Uhl who is appointed an Executive Director and CFO with effect from March 9, 2017. These arrangements are set out on page 88.
LOOKING AHEAD
We were grateful for all your constructive feedback in 2016 and glad to have taken it on board in our final proposals. We were also pleased that the vast majority of you indicated your support of Shell’s philosophy and policy on remuneration. With your continued input, we will review Shell’s remuneration policy regularly to ensure it continues to reinforce Shell’s long-term strategy and remains closely aligned with your interests.
83 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
The start of 2017 has been characterised by finalising the proposed Directors’ Remuneration Policy which is subject to shareholder approval at the 2017 AGM and implementing certain elements within the boundaries of the existing Directors’ Remuneration Policy. We will then move into a phase of monitoring its performance. We want to see evidence that, through the measures I have outlined, we have a pay structure that rewards performance in line with delivery of the strategy.
THIS REPORT
This Directors’ Remuneration Report for 2016 has been prepared in accordance with relevant UK corporate governance and legal requirements, in particular Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The Board has approved this report.
This report consists of two further sections:
■ the Annual Report on Remuneration (describing 2016 remuneration as well as implementation of the proposed Directors’ Remuneration Policy in 2017) which will be subject to an advisory vote at the 2017 AGM; and
■ the proposed Directors’ Remuneration Policy which will be subject to a binding vote at the 2017 AGM.
Gerard Kleisterlee
Chair of REMCO
March 8, 2017
84 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
ANNUAL REPORT ON REMUNERATION
The Annual Report on Remuneration sets out:
■ | REMCO and its responsibilities and activities; |
■ | a summary of our policy (as approved by shareholders at the 2014 AGM) in place in 2016, alongside a summary of the planned implementation of the proposed policy in 2017 which, subject to shareholder approval at the 2017 AGM, will take effect from May 23, 2017, and will be effective until the 2020 AGM, unless a further policy is proposed by the Company and approved by shareholders in the meantime; |
■ | the statement of implementation of the planned policy in 2017; and |
■ | Directors’ remuneration for 2016. |
The base currency in this Annual Report on Remuneration is the euro, as this is the currency of the base salary of the Executive Directors. Where amounts are shown in other currencies, an average exchange rate for the relevant year is used, unless a specific date is stated, in which case the average exchange rate for the specific date is used.
REMUNERATION COMMITTEE
The following Directors were members of REMCO during 2016:
■ | Gerard Kleisterlee (Chair of REMCO); |
Their biographies are given on pages 61-62; REMCO meeting attendance is given on page 69.
REMCO’s key responsibilities in respect of Executive Directors include:
■ | setting the remuneration policy; |
■ | agreeing performance frameworks, setting targets and reviewing performance; |
■ | determining actual remuneration and benefits; and |
■ | determining contractual terms. |
In addition, REMCO has the responsibility for the Chair of the Board’s remuneration and for recommending and monitoring the level and structure of remuneration for Senior Management.
REMCO operates within its terms of reference, which are regularly reviewed. They were last updated on January 28, 2015, and are available at www.shell.com.
Advice from within Shell on various subjects, including the Executive Directors’ annual bonus scorecard architecture and the remuneration of Senior Management, was provided by:
■ | Ronan Cassidy, Chief Human Resources & Corporate Officer and Secretary to REMCO; and |
■ | Stephanie Boyde, Executive Vice President Remuneration, Benefits & Services. |
The Chair of the Board and the CEO were consulted on remuneration proposals affecting the CFO.
REMCO requested TSR data against a number of indices and comparator groups from Kepler. The fees were £14,800 and Kepler did not provide any other advice.
During 2016, REMCO met seven times and its activities included:
■ | approving the 2015 Directors’ Remuneration Report; |
■ | reviewing the Directors’ Remuneration Policy and alignment with strategy; |
■ | consulting with major shareholders; |
■ | setting annual bonus performance measures and targets; |
■ | deciding on base salaries for the CEO and the CFO; |
■ | determining the 2015 annual bonus outcomes; |
■ | determining vesting of the 2013 LTIP award for the CEO and LTIP and Deferred Bonus Plan (DBP) awards for the CFO; and |
■ | tracking external developments and assessing their impact on Shell’s remuneration policy. |
85 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
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REMUNERATION POLICY AND PRACTICE AT A GLANCE | | |
Summary of the policy approved by shareholders at the 2014 AGM (effective January 1, 2015). This policy is set out in full on pages 98-105 of the 2015 Royal Dutch Shell plc Annual Report and Form 20-F. | Implementation of the policy approved by shareholders at the 2014 AGM in 2016. | Planned implementation of the proposed policy (which is subject to shareholder approval at the 2017 AGM) in 2017 [A]. This policy is set out on pages 96-103. |
Base salary and pensionable salary | | |
■ Reviewed annually after considering a range of factors including market positioning, tenure and experience, planned increases for other employees, Shell’s performance and individual performance. Maximum: €2,000,000. | ■ CEO base salary and pensionable salary: €1,460,000 (+2.1%). ■ CFO base salary: €1,040,000 (+1.0%); pensionable salary: £780,000 (+2.0%). | ■ CEO base salary and pensionable salary: €1,490,000 (+2.1%). ■ CFO (Simon Henry) base salary: €1,040,000 (unchanged); pensionable salary: £780,000 (unchanged). ■ CFO (Jessica Uhl) base salary: €980,000. |
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Benefits | | |
■ Typically include car allowance, transport between home and office, medical insurance. Mobility policies and tax equalisation related to expatriate employment before Board appointment or to offset double taxation may also apply. | ■ CEO and CFO received standard benefits. | ■ No change in standard benefits. |
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Annual bonus | | |
■ Target bonus as a % of base salary: CEO 150%; CFO 120%. ■ Maximum: CEO 250%; CFO 240%. ■ Calculated as base salary x target bonus % x scorecard result (0–2) against short-term strategic targets, adjusted for individual performance with a 0–1.2 multiplier. ■ 50% delivered in cash, 50% deferred into shares and released after three years, together with dividend shares accrued over the deferral period. ■ Subject to malus and clawback provisions. ■ Scorecard measures: cash flow from operating activities (30%); operational excellence (50%); and sustainable development (20%). | ■ Scorecard mathematical outcome: 1.11. Individual performance multiplier: 1.0. ■ Bonus paid in respect of 2016: CEO 164% of base salary, CFO 130% of base salary. This represents around 109% of their respective target bonuses. | ■ Same bonus opportunities as in 2016. ■ In order to align with the refreshed strategy, measures under operational excellence have been rebalanced and are equally weighted. Sustainable development now includes GHG metrics. ■ 50% is delivered in cash and 50% is delivered in shares. Shares are subject to a three-year holding period which applies beyond an Executive Director’s tenure. |
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LTIP | | |
■ Maximum award: 400% of base salary. Between 0% and 200% of the initial award may vest, depending on relative performance over a three-year period. ■ Vesting capped at 50% of the maximum payout if there is no vesting on the TSR element. ■ Additional shares are released representing the value of dividends payable on vested shares. ■ Vested shares must be held for a further two years. ■ Subject to malus and clawback provisions. ■ Performance measures: TSR (30%), EPS (30%), ROACE (20%) and cash flow from operating activities (20%). | ■ Award as a % of base salary: CEO 340%; CFO 270%. ■ Vesting of 2014 award: 84% of target (42% of maximum). The performance measures of the 2014 award were the same as those applying to the 2016 award. | ■ Same award opportunities as in 2016. ■ FCF replaces EPS, and the weighting of the four measures has been set at 25% each. ■ Vested LTIP shares are subject to a three-year holding period post-vesting which applies beyond an Executive Director’s tenure. |
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Pension | | |
■ Retirement benefits maintained in base country pension arrangements. ■ CEO: Dutch defined benefit and net pay defined contribution pension plans. ■ CFO: UK defined benefit pension plans. | ■ CEO: maximum pensionable salary for future defined benefit accruals of €91,269. Net pay defined contribution pension plan: employer contribution: 24% of salary in excess of €91,269. ■ CFO: no change to the pension plans. | ■ No changes to the pension plans in which the CEO and CFO (Simon Henry) participate. ■ CFO (Jessica Uhl): continued membership of the Shell US retirement benefit arrangements. |
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Shareholding | | |
■ Requirement as a % of base salary: CEO: 700%; CFO: 400%. | ■ Actual holding at year end: CEO: 213% of base salary; CFO: 1,090% of base salary. | ■ No change in shareholding requirements. |
■ Expected to be reached through retention of vested shares within five years of appointment and maintained for the full period of appointment. | | |
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[A] See CFO transition arrangements on page 88 for further details of the remuneration terms for Jessica Uhl, who is appointed an Executive Director and CFO with effect from March 9, 2017.
86 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
STATEMENT OF 2017 PLANNED POLICY IMPLEMENTATION
The proposed Directors’ Remuneration Policy as outlined on pages 96-103 will, subject to shareholder approval at the 2017 AGM, take effect from May 23, 2017, and will be effective until the 2020 AGM, unless a further policy is proposed by the Company and approved by shareholders in the meantime. The existing Directors’ Remuneration Policy is similar and this section generally describes elements that apply for 2017 and/or have changed within the boundaries of the current policy.
COMPARATOR GROUP
The 2017 benchmarking comparator group consists of the other oil majors as well as a selection of major Europe-based companies. The European comparator group has been updated to ensure the companies included remain comparable to Shell in size and complexity, and to exclude industries where the pay structure is driven by regulatory requirements, such as banking. Daimler and Nestle have been added, while Anglo American, BG Group, Philips, SABMiller, and banks (Barclays, Deutsche Bank and HSBC), have been removed.
|
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2017 EUROPEAN COMPARATOR GROUP |
Allianz | Daimler | Rio Tinto |
AstraZeneca | Diageo | Roche |
BAT | GlaxoSmithKline | Siemens |
Bayer | Nestle | Unilever |
BHP Billiton | Novartis | Vodafone |
EXECUTIVE DIRECTORS
Salaries
Effective from January 1, 2017, the base salary and pensionable base salary were set at €1,490,000 (+2.1%) for Ben van Beurden, CEO. The base salary set for Simon Henry, CFO, was unchanged at €1,040,000 and his pensionable base salary remains at £780,000.
When determining base salaries, REMCO considered: the external market positioning of the Executive Directors’ compensation packages; Senior Management salaries; the planned average increases for 2017 for other employees across three major countries (the Netherlands, the UK and the USA); the impact of the increase on other elements of the package; the current economic conditions and Shell’s own performance; and the conservative positioning of the CEO’s base salary on appointment (his 2017 salary remains below that of his predecessor on appointment in 2009).
Annual bonus
The 2017 performance measures will remain aligned with a number of our performance indicators set out on pages 20-21 and comprise cash flow from operating activities, operational excellence and sustainable development measures. In order to align with the refreshed strategy, measures under operational excellence have been rebalanced and are equally weighted and sustainable development now includes GHG metrics. Synergies were included as a one-off measure in 2016 and will not be included in the 2017 scorecard.
Annual bonus scorecard targets are not disclosed prospectively because to do so in a meaningful manner would require the disclosure of commercially sensitive information. As in previous years, scorecard targets will be disclosed in a subsequent Directors’ Remuneration Report when they are no longer deemed to be commercially sensitive. Disclosure of detailed personal targets is inappropriate as these are deemed commercially sensitive. However, the basis for the determination of the individual multiplier will be disclosed.
50% of the annual bonus awarded for the 2017 performance year will, subject to shareholder approval of the proposed Directors’ Remuneration Policy at the 2017 AGM, be delivered in shares and subject to a three-year holding period which remains in force beyond an Executive Director’s tenure.
Long-term Incentive Plan
On February 3, 2017, a conditional award of performance shares under the LTIP was made to the CEO. The award had a face value of 340% of the base salary, resulting in 198,900 Royal Dutch Shell plc A shares (A shares) being awarded conditionally to Ben van Beurden.
For LTIP awards made in 2017, performance is assessed over a three-year period based on four financial measures. FCF (25%) is based on absolute performance and relative performance is compared with the other oil majors on the following measures:
■ | TSR, calculated in dollars using a 90-day averaging period around the start and end of the performance period (25%); |
■ | ROACE growth (25%). For this purpose, in order to facilitate the comparison, the calculation of ROACE differs from that described in “Performance indicators” on page 21 as there is no adjustment for after-tax interest expense; and |
■ | Cash flow from operating activities growth (25%). |
The vesting schedule for the relative measures is unchanged from 2016. The target for FCF, along with the ranges for threshold and outstanding performance, will be set by reference to Shell’s operating plan, being the aggregate of our plan FCF targets over the three-year performance period. As a result, targets will only be disclosed retrospectively after the three-year period. Updates will be provided in each Annual Report on Remuneration. 20% of the maximum available under this measure will be payable for threshold performance rising to full vesting of that measure for outstanding performance. A straight-line vesting schedule will apply for performance between threshold and outstanding.
Vested LTIP shares are subject to a three-year holding period which remains in force beyond an Executive Director’s tenure.
CFO transition arrangements
Simon Henry stands down from the Board and his role as CFO with effect from March 9, 2017. In accordance with Shell’s policy for employees who work outside their base country, he will repatriate to his base country, which is the UK, and will become an employee of Shell International Limited with effect from April 1, 2017. He remains available to the incoming CFO and to the Board to assist with the transition and will leave employment with Shell on June 30, 2017. The end of employment arrangements set out below are in accordance with the policy approved by shareholders at the 2014 AGM:
■ | Payment for loss of office: a gross payment of €2,288,000, equivalent to one times annual pay (base salary plus target bonus). The payment will be phased in six equal monthly instalments, and outstanding payments will be reduced by 50% if Simon Henry resumes an equivalent full-time executive role in that period. |
■ | Annual bonus: an annual bonus in relation to performance year 2016 is disclosed on page 90. 50% of this bonus was deferred into the Deferred Bonus Plan (DBP). The annual bonus in relation to performance year 2017 will be determined by REMCO and will be prorated for all service in 2017. In accordance with the proposed policy (which is subject to shareholder approval at the 2017 AGM), 50% of the bonus will be delivered in cash and 50% will be delivered in shares; and the shares will be subject to a three-year holding period which remains in force after Simon Henry leaves the employment of Shell International Limited. |
| ■ | No 2017 LTIP award will be made. |
| ■ | Outstanding LTIP awards will not vest early and will be prorated for service. |
| ■ | Outstanding DBP awards will not vest early and are not prorated. The applicable holding periods remain in force post-leaving employment. |
| ■ | The conditional LTIP awards and outstanding DBP awards described above are subject to adjustment events (malus and clawback) and these provisions remain in force. |
■ | Pension: accrued pension benefits for 2017 will be reported in the 2017 Director’s Remuneration Report. |
■ | Benefits: standard Shell provisions apply in respect of tax return assistance and relocation support (such as movement of household goods, transportation and temporary accommodation). |
87 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
Jessica Uhl is appointed an Executive Director and CFO with effect from March 9, 2017. Her remuneration for 2017 will be reported in the 2017 Directors’ Remuneration Report, as appropriate. The remuneration policies for the CFO role remain unchanged and key elements are summarised below:
■ | Annual base salary: €980,000. |
■ | 2017 target bonus: 120% of base salary. For performance year 2017, the bonus will be prorated for service as CFO. |
■ | Conditional LTIP award: 270% of base salary. |
■ | Shareholding guideline: 400% of base salary. |
■ | Pension: continued membership of the Shell US retirement benefit arrangements, which include the Shell Pension Plan, a defined benefit plan, and the Shell Provident Fund, a defined contribution plan. REMCO has determined that, exceptionally under US arrangements, no element of bonus will be included in determining pensionable compensation. As for all other pre-2013 members of the Shell Pension Plan, Jessica Uhl has an annual choice of two accrual options with different forms of benefits, one in the form of a lifetime pension annuity and the other normally in the form of a lump sum. |
Prior to her appointment as CFO, Jessica Uhl was on expatriate terms and conditions in the Netherlands and her employment arrangements were governed by Shell’s mobility policies, which include tax equalisation. These terms and conditions cease upon her appointment as CFO with effect from March 9, 2017. However, as a consequence of her expatriate assignment, any tax liability arising in respect of prior assignment income, pension benefits or future vesting of past share plan awards will be settled by Shell in accordance with Shell’s mobility policies and appropriate disclosures will be made in future Directors’ Remuneration Reports.
Adjustment (malus) and recovery (clawback)
Bonus, DBP and LTIP are subject to adjustment (malus) and recovery (clawback) provisions, which may apply in case of direct responsibility or supervisory accountability.
REMCO may adjust an award, for example by lapsing part or all of it, reducing the number of shares which would otherwise vest, by imposing additional conditions on it, or imposing a new holding period. Award adjustments may be made as a result of: Shell restating the relevant year(s)’ financial statements due to material non-compliance with any financial reporting requirement; an individual’s misconduct or misconduct through the individual’s direction or non-direction, which influenced the metrics and outcomes used in determining the individual’s annual bonus or LTIP outcome; any material breach of health and safety or environment regulations; serious reputational damage to Shell; material failure of risk management; and other exceptional events at the discretion of REMCO.
Adjustment may also apply after employment ends if the individual: (a) breaches any provision of his/her employment contract which applies after cessation of employment or any provision of an agreement entered into on termination of employment; (b) is found to have committed fraud or dishonesty with respect to Shell; (c) wilfully damaged the assets of or engaged in misconduct which, in any material respect, is or was injurious to Shell; (d) wrongfully disclosed or used any proprietary or confidential information which is related to the business, properties or affairs of Shell and the release of which is detrimental, in any material respect, to the competitive position or goodwill of Shell; (e) engaged in any activity which, in any material respect, reasonably constituted a conflict with the interests of Shell; or (f) breached any business principle or a term of any code of conduct applicable to employees or former employees of Shell.
Clawback applies in case of restatement of financial statements due to material non-compliance with any financial reporting requirement or as a result of the individual’s misconduct or misconduct through the individual’s direction or non-direction, which influenced the metrics and outcomes used in determining his/her annual bonus or LTIP outcome.
Pension
There are no changes to the pension plans in which the CEO and CFO participate.
NON-EXECUTIVE DIRECTORS’ FEES
The Chair’s fee is determined by REMCO and the annual fee for Charles O. Holliday was set at €850,000 upon appointment in 2015. REMCO reviewed the Chair’s fee in 2016 and determined that it would remain unchanged for 2017.
A Non-executive Director receives a basic fee, and there are additional fees for the Senior Independent Director, a Board committee chair or a Board committee membership for each committee. Non-executive Directors receive an additional fee of €5,000 for any Board meeting involving intercontinental travel, except for one meeting a year held in a location other than The Hague. Business expenses (including transport between home and office and occasional business-required spouse travel) and associated tax are paid or reimbursed by Shell. The Chair has use of Shell-provided accommodation in The Hague.
The Board reviews Non-executive Directors’ fees periodically to ensure that they are aligned with those of other major listed companies. A review was carried out in 2016, which resulted in an increase in the basic fee from €130,000 to €135,000, an increase in the Audit Committee Chair fee from €55,000 to €60,000, and an increase in the Remuneration Committee Chair fee from €35,000 to €40,000, effective January 1, 2017.
Annual fees for 2017 are indicated in the “Non-executive Directors’ fees 2017” table.
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Non-executive Directors’ fees 2017 |
| | € | | | Other fees |
Chair of the Board | | | 850,000 | | | Non-executive |
Non-executive Director | | | 135,000 | | | Directors receive |
Senior Independent Director | | | 55,000 | | | an additional fee |
Audit Committee | | | | | | of €5,000 for any |
Chair [A] | | | 60,000 | | | Board meeting |
Member | | | 25,000 | | | involving |
Corporate and Social Responsibility Committee | | | | | | intercontinental |
Chair [A] | | | 35,000 | | | travel – except |
Member | | | 17,250 | | | for one meeting |
Nomination and Succession Committee | | | | | | a year held in a |
Chair [A] | | | 25,000 | | | location other than |
Member | | | 12,000 | | | The Hague |
Remuneration Committee | | | | | | |
Chair [A] | | | 40,000 | | | |
Member | | | 17,250 | | | |
[A] The chair of a committee does not receive an additional fee for membership of that committee.
88 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
DIRECTORS’ REMUNERATION FOR 2016
NON-EXECUTIVE DIRECTORS’ REMUNERATION FOR 2016
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Single total figure of remuneration for Non-executive Directors (audited) | | € thousand | |
| | Fees | | | Taxable benefits[A] | | | Total | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Guy Elliott | | | 167 | | | | 197 | | | | — | | | | — | | | | 167 | | | | 197 | |
Euleen Goh | | | 225 | | | | 190 | | | | — | | | | — | | | | 225 | | | | 190 | |
Charles O. Holliday [B] | | | 850 | | | | 616 | | | | 77 | | | | 121 | | | | 927 | | | | 737 | |
Gerard Kleisterlee | | | 190 | | | | 190 | | | | — | | | | — | | | | 190 | | | | 190 | |
Sir Nigel Sheinwald | | | 147 | | | | 147 | | | | — | | | | 1 | | | | 147 | | | | 148 | |
Linda G. Stuntz | | | 197 | | | | 190 | | | | — | | | | — | | | | 197 | | | | 190 | |
Hans Wijers | | | 232 | | | | 219 | | | | — | | | | — | | | | 232 | | | | 219 | |
Patricia A. Woertz | | | 195 | | | | 183 | | | | — | | | | 19 | | | | 195 | | | | 202 | |
Gerrit Zalm | | | 147 | | | | 165 | | | | — | | | | — | | | | 147 | | | | 165 | |
[A] UK regulations require the inclusion of benefits where these would be taxable in the UK, on the assumption that Directors are tax residents in the UK. On this premise, the taxable benefits include the cost of Non-executive Director’s occasional business-required spouse travel. Shell also pays for travel between home and the head office in The Hague, where Board and committee meetings are typically held, as well as related hotel and subsistence costs. For consistency, these business expenses are not reported as taxable benefits as for most Non-executive Directors this is international travel and hence would not be taxable in the UK.
[B] Including the use of an apartment (2016: €70,157; 2015: €93,467).
EXECUTIVE DIRECTORS’ REMUNERATION FOR 2016
| | | | | | | | | | | | | | | | |
Single total figure of remuneration for Executive Directors (audited) | | € thousand | |
| | Ben van Beurden | | | Simon Henry | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Salaries | | | 1,460 | | | | 1,430 | | | | 1,040 | | | | 1,030 | |
Taxable benefits | | | 22 | | | | 42 | | | | 24 | | | | 24 | |
Total fixed remuneration | | | 1,482 | | | | 1,472 | | | | 1,064 | | | | 1,054 | |
Annual bonus [A] | | | 2,400 | | | | 3,500 | | | | 1,350 | | | | 2,050 | |
LTIP and DBP [B] | | | 4,381 | | | | 163 | | | | 2,644 | | | | 427 | |
Total variable remuneration | | | 6,781 | | | | 3,663 | | | | 3,994 | | | | 2,477 | |
Total direct remuneration | | | 8,263 | | | | 5,135 | | | | 5,058 | | | | 3,531 | |
Pension [C] | | | 330 | | | | 441 | | | | 524 | | | | 428 | |
Tax equalisation [D] | | | — | | | | — | | | | 374 | | | | 408 | |
Total remuneration including pension and tax equalisation | | | 8,593 | | | | 5,576 | | | | 5,956 | | | | 4,367 | |
in dollars | | | 9,515 | | | | 6,190 | | | | 6,595 | | | | 4,848 | |
in sterling | | | 7,046 | | | | 4,049 | | | | 4,884 | | | | 3,171 | |
[A] The full value of the bonus, comprising both the non-deferred and deferred value. For 2016, 50% is deferred into the DBP. For 2016, the market price of A and B shares on February 3, 2017 (€25.47 and £22.85 respectively), was used to determine the number of deferred bonus shares, resulting in 47,114 A shares for Ben van Beurden and 25,339 B shares for Simon Henry.
[B] Remuneration for performance periods of more than one year, comprising the value of released LTIP awards and DBP performance matching shares. The amounts reported for 2016 relate to the 2014 awards, which vested on March 1, 2017, at the market price of €24.78 and £22.28 for A and B shares respectively. The value in respect of the LTIP and DBP is calculated as the product of: the number of shares of the original award in the case of the LTIP plus accrued dividend shares; the vesting percentage; and the closing market price of A or B shares at the vesting date. The market price of B shares is converted into euros using the exchange rate on the respective date. The original deferred bonus share awards, which are those represented by the deferred bonus and dividend shares accrued on these shares, are not considered as long-term remuneration, as they relate to the short-term annual bonus value.
[C] The accrual for the period (net of inflation) multiplied by 20 in accordance with UK reporting regulations.
[D] As Simon Henry spent over 10 years in the Netherlands, tax relief on employee and employer contributions to the Shell Overseas Contributory Pension Fund under the terms of the UK/Netherlands double tax agreement ceased on May 1, 2014. Tax equalisation of the pension contributions for Simon Henry has applied since then.
NOTES TO THE SINGLE TOTAL FIGURE OF REMUNERATION FOR EXECUTIVE DIRECTORS TABLE (AUDITED)
Salaries
As disclosed in the 2015 Directors’ Remuneration Report, REMCO set Ben van Beurden’s base salary and pensionable salary for 2016 at €1,460,000 (+2.1%) and Simon Henry’s base salary at €1,040,000 (+1.0%) and pensionable salary at £780,000 (+2.0%), effective from January 1, 2016.
Taxable benefits
Executive Directors received car allowances or lease cars, transport between home and office, occasional business-required spouse travel, as well as employer contributions to life and medical insurance plans.
Annual bonus
The scorecard contains independent business measures grouped in three sections: financial, operational excellence and sustainable development. At the beginning of the year, REMCO sets a target range and weighting for each scorecard measure. The actual outcome for each measure results in a score of between zero and two, with a score of one representing “on target”. These scores are multiplied by the respective weighting of each measure and aggregated, resulting in a mathematical scorecard outcome of between zero and two. REMCO may then make an adjustment to the overall scorecard outcome in view of the wider business performance for the year.
An Executive Director’s individual performance is also taken into account in determining their annual bonus through the application of a multiplier between zero and 1.2. Individual performance is assessed against personal targets. Retrospective disclosure of detailed personal targets is inappropriate as these are deemed to be commercially sensitive.
50% of the annual bonus is deferred into shares, which are to be retained for three years.
89 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
Determination of the 2016 annual bonus
The mathematical scorecard outcome for 2016 was 1.11 and REMCO approved this outcome without exercising discretion. REMCO noted that the outcome was positively impacted by strong performance on operational excellence measures, with the exception of refinery and chemical plant availability due to increased planned and unplanned maintenance, as well as the accelerated delivery of synergies. Sustainable development was on target with our process safety performance in particular making a step-change improvement. However, these scores were offset by the impact of low oil and gas prices and weaker refining margins on cash flow from operating activities, which was below threshold.
The CEO delivered strongly on a range of fronts. He provided hands-on leadership in the delivery and integration of BG and led the reshaping of Shell, during a transformative year, towards the goal of being world-class investment. A clear strategy was put in place which will help Shell to move to a more focused and resilient company. This strategy included the creation of a New Energies business in order to position Shell as a key player in the world’s energy future.
The CFO made a strong personal contribution to closing the BG deal and led the exceptionally successful integration. The synergy opportunities and deal value drivers from BG were well identified and are delivering. Good progress was also made in reducing capital investment and operating expenses, which required some tough decisions. Some successful divestments against a tough industry backdrop were also delivered.
REMCO was satisfied with the delivery of individual performance targets and determined no discretionary performance adjustment for the CEO and CFO. The CEO and CFO received an on-target individual performance factor of 1.0.
The final, rounded, 2016 bonus outcomes for the Executive Directors were: €2,400,000 or 164% of base salary for the CEO and €1,350,000 or 130% of base salary for the CFO. Half of the bonus is deferred into shares under the DBP. The table below summarises the 2016 annual bonus scorecard measures including their weightings, targets and outcomes. Charts illustrating the calculation of the final 2016 bonus payable to the CEO and CFO are also provided.
| | | | | | | | | | | | | | | | | | | | | | | | |
2016 annual bonus outcome (audited) | | | | | | | | | | | | | | | | | | | | | | | | |
Measures | | Weight (% of scorecard) | | | Threshold | | | Target set | | | Outstanding | | | Result achieved | | | Score (0-2) | |
Cash flow from operating activities ($ billion) [A] | | | 20 | % | | | 23.0 | | | | 29.0 | | | | 35.0 | | | | 21.3 | | | | 0.00 | |
Synergies ($ billion) | | | 10 | % | | | 1.2 | | | | 1.4 | | | | 1.6 | | | | 2.8 | | | | 2.00 | |
Operational excellence | | | 50 | % | | | | | | | | | | | | | | | | | | | 1.44 | |
Project delivery: identified projects on time and budget (%) | | | 20 | % | | | 60 | % | | | 80 | % | | | 100 | % | | | 94 | % | | | 1.70 | |
Production (kboe/d) | | | 12 | % | | | 3,437 | | | | 3,543 | | | | 3,649 | | | | 3,668 | | | | 2.00 | |
LNG liquefaction volumes (mtpa) | | | 6 | % | | | 29.6 | | | | 30.5 | | | | 31.4 | | | | 30.9 | | | | 1.42 | |
Refinery and chemical plant availability (%) | | | 12 | % | | | 89.4 | | | | 91.4 | | | | 93.4 | | | | 90.3 | | | | 0.44 | |
Sustainable development | | | 20 | % | | | | | | | | | | | | | | | | | | | 0.98 | |
Total recordable case frequency (injuries/million hours) | | | 5 | % | | | 1.20 | | | | 0.96 | | | | 0.72 | | | | 1.00 | | | | 0.83 | |
Operational Tier 1 process safety events (number) | | | 5 | % | | | 68 | | | | 54 | | | | 40 | | | | 39 | | | | 2.00 | |
Volume of operational spills (thousand tonnes) | | | 4 | % | | | 0.9 | | | | 0.7 | | | | 0.5 | | | | 0.7 | | | | 1.00 | |
Refining Energy Intensity Index (EII™) (indexed to 2002) | | | 4 | % | | | 96.8 | | | | 92.2 | | | | 87.6 | | | | 95.4 | | | | 0.31 | |
Fresh water intensity (cubic metres per tonne of production) oil sands | | | 2 | % | | | 2.80 | | | | 2.25 | | | | 1.70 | | | | 2.74 | | | | 0.11 | |
| | | 100 | % | | | | | | | | | | | | | | | | | | | | |
Mathematical scorecard outcome | | | | | | | | | | | | | | | | | | | | | | | 1.11 | |
[A] Excluding tax on divestments.
90 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
Long-term Incentive Plan vesting
In 2014, Ben van Beurden and Simon Henry were each granted a conditional award of performance shares under the LTIP. For Ben van Beurden, this award was based on 300% of his base salary, with a maximum vesting of 600%. For Simon Henry, this award was based on 240% of his base salary, with a maximum vesting of 480%.
The LTIP vesting outcome at the end of the performance period (January 1, 2014, to December 31, 2016) is illustrated in the following LTIP vesting outcome table. REMCO also considered the underlying financial performance of Shell and decided to vest 84% of shares under the LTIP, using no discretion, resulting in 170,321 A shares for Ben van Beurden and 92,523 B shares for Simon Henry. At vesting, these shares (including accrued dividend shares) had a value of €4,220,554 and €2,419,143 respectively. These vested shares from the LTIP are subject to a further two-year holding period.
Deferred Bonus Plan vesting
In 2014, Ben van Beurden and Simon Henry were each granted performance matching shares under the DBP. The performance period was January 1, 2014, to December 31, 2016. Given that the performance condition of the DBP is the same as for the 2014 LTIP, REMCO decided to vest 84% of the performance matching shares under the DBP, resulting in 6,469 A shares for Ben van Beurden and 8,588 B shares for Simon Henry. At vesting, these shares (including accrued dividend shares) had a value of €160,302 and €224,545 respectively. DBP awards no longer attract matching shares with effect from 2015.
Pension
The CEO’s pension arrangements comprise a defined benefit plan with a maximum pensionable salary of €91,269, and a net pay defined contribution pension plan with an employer contribution of 24% of salary in excess of €91,269, with the option to take cash as an alternative to pension contributions (in either case subject to income tax). The CEO has elected to take his benefit in the form of contributions throughout 2016.
The CFO’s pension is in the form of defined benefit plans. See further details on pension arrangements on page 94.
91 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | |
Scheme interests awarded to Executive Directors in 2016 (audited) | | € |
| | Potential amount vesting |
Scheme interest type | | Type of interest awarded | | End of performance period | | Target award[A] | | Minimum
performance
(% of shares
awarded)[B] | | Maximum performance (% of shares of the target award [A][C]) |
LTIP | | Performance shares | | December 31, 2018 | | Ben van Beurden: 236,302 A shares, equivalent to 3.4 x base salary or €4,964,000. Simon Henry: 141,465 B shares, equivalent to 2.7 x base salary or €2,808,000. | | 0% | | Maximum number of shares vesting is 200% of the number of shares awarded, equivalent to €9,928,000 for Ben van Beurden and €5,616,000 for Simon Henry. |
[A] Having considered the volatility of the A and B share prices during 2015, REMCO determined to use averages of the closing market prices over the three months leading up to the award date to determine the number of shares. This method was used instead of the standard approach of using the closing prices on the award date. Therefore, 2016 LTIP awards were based on three-month average market closing prices from November 5, 2015, to February 5, 2016, for A and B shares of €21.01 and £15.29 respectively.
[B] Minimum performance relates to the lowest level of achievement, for which no reward is given.
[C] The equivalent values exclude share price movements and accrued dividend shares.
The measures and weightings applying to LTIP awards made in 2016 were: TSR (30%); diluted EPS growth on a current cost of supplies basis (30%); ROACE growth (20%) and cash flow from operating activities growth (20%).
The LTIP will vest on the basis of the relative performance rankings as indicated in the table below.
| |
Relative performance rankings |
Shell’s rank against peers on each of the four performance measures | Number of conditional performance shares
ultimately awarded, taking into account the
weightings of the four performance measures |
1st | 200% of initial LTIP award |
2nd | 150% of initial LTIP award |
3rd | 80% of initial LTIP award |
4th or 5th | Nil |
If the TSR ranking is fourth or fifth, the level of the award that can vest on the basis of the three other measures will be capped at 50% of the maximum.
To deliver the shares under the LTIP, market-purchased shares are used rather than the issuing of new shares.
STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS (AUDITED)
SHAREHOLDING GUIDELINES
REMCO believes that Executive Directors should align their interests with those of shareholders by holding shares in the Company. The CEO is expected to build a shareholding with a value of 700% of base salary, and other Executive Directors 400% of base salary. Only unfettered shares count. The bonus deferred into shares under the DBP (net of tax) and the vested LTIP shares (subject to holding requirements) count towards the guidelines. Ben van Beurden has not yet met the required shareholding level. Simon Henry has done so. Non-executive Directors (NEDs) are encouraged to hold shares with a value equivalent to 100% of their fixed annual fee and maintain that holding during their tenure.
| | | | | | | | |
Executive Directors’ shareholding (audited) | |
| | Shareholding guideline (% of base salary) | | | Value of shares counting towards guideline (% of base salary at December 31, 2016)[A] | |
Ben van Beurden | | | 700 | % | | | 213 | % |
Simon Henry | | | 400 | % | | 1,090 | % |
[A] Representing the value of share interests and the estimated after-tax value of DBP shares (not subject to performance conditions).
DIRECTORS’ SHARE INTERESTS
The interests (in shares of the Company or calculated equivalents) of the Directors in office during 2016, including any interests of their connected persons, are set out in the table below.
| | | | | | | | | |
Directors’ share interests [A] (audited) | |
| | January 1, 2016 | | December 31, 2016 | |
| | A shares | | B shares | | A shares | | B shares | |
Ben van Beurden | | 28,062 | | — | | 33,703 | | — | |
Guy Elliott | | — | | 5,777 | | — | | 5,825 | |
Euleen Goh | | — | | 5,000 | | — | | 12,895 | |
Simon Henry | | 54,368 | | 306,844 | | 54,368 | | 305,959 | |
Charles O. Holliday | | — | | 50,000 | [B] | — | | 50,000 | [B] |
Gerard Kleisterlee | | 5,254 | | — | | 5,254 | | — | |
Sir Nigel Sheinwald | | — | | 1,000 | | — | | 1,124 | |
Linda G. Stuntz | | — | | 12,400 | [C] | — | | 12,400 | [C] |
Hans Wijers | | 5,251 | | — | | 5,251 | | — | |
Patricia A. Woertz | | — | | 6,000 | [D] | — | | 6,000 | [D] |
Gerrit Zalm | | 2,026 | | — | | 2,026 | | — | |
[A] Includes vested LTIP awards subject to holding conditions. Excludes unvested interests in shares awarded under the LTIP and DBP.
[B] Held as 25,000 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares.
[C] Held as 6,200 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares.
[D] Held as 3,000 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares.
The only changes in Directors’ share interests during the period from December 31, 2016, to March 8, 2017, were that Simon Henry sold 50,000 B shares on February 15, 2017, and Ben van Beurden’s interests increased by 96,735 A shares and Simon Henry’s by 58,148 B shares resulting from the release of the 2014 LTIP and DBP awards, which vested on March 1, 2017.
At March 8, 2017, the Directors and Senior Management (pages 61-63) of the Company beneficially owned, individually and in aggregate (including shares under option), less than 1% of the total shares of each class of the Company shares outstanding.
92 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
DIRECTORS’ SCHEME INTERESTS
The table below shows the aggregate position for Directors’ interests under share schemes at December 31. These are A shares for Ben van Beurden and B shares for Simon Henry. During the period from December 31, 2016, to March 8, 2017, scheme interests have changed as a result of the vesting of the 2014 LTIP and DBP awards on March 1, 2017, and the 2017 LTIP and DBP awards made on February 3, 2017, as described on pages 91, 87 and 89 respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Directors’ scheme interests (audited) | |
| | Share plan interests[A] | |
| | LTIP subject to performance conditions [B] | | | DBP not subject to performance conditions [C] | | | DBP subject to performance conditions [D] | | | Total | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Ben van Beurden | | | 662,359 | | | | 425,817 | | | | 179,621 | | | | 79,839 | | | | 7,564 | | | | 7,025 | | | | 849,544 | | | | 512,681 | |
Simon Henry | | | 374,671 | | | | 315,122 | | | | 114,390 | | | | 89,291 | | | | 10,052 | | | | 26,420 | | | | 499,113 | | | | 430,833 | |
[A] Includes unvested long-term incentive awards and notional dividend shares accrued at December 31. Interests are shown on the basis of the original awards. The shares subject to performance conditions can vest at between 0% and 200%. Dividend shares accumulate each year on an assumed notional LTIP/DBP award. Such dividend shares are disclosed and recorded on the basis of the number of shares conditionally awarded but, when an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. Shares released during the year are included in the “Directors’ share interests” table.
[B] Total number of unvested LTIP shares at December 31, including dividend shares accrued on the original LTIP award.
[C] The number of shares deferred from the bonus (original DBP award) and the dividend shares accrued on these at December 31. Delivery of the original DBP award and the related accrued dividend shares is not subject to performance conditions.
[D] The target number of performance matching shares, which corresponds to the original DBP award. In accordance with the operation of the DBP until 2014, half of the shares from the bonus deferral are matchable with performance matching shares. The actual number of performance matching shares will be determined at vesting on the same basis as the LTIP vesting. DBP no longer attract matching shares with effect from 2015 awards.
DILUTION
In any 10-year period, no more than 5% of the issued ordinary share capital of the Company may be issued or issuable under executive (discretionary) share plans adopted by the Company. To date, no shareholder dilution has resulted from these plans, although it is permitted under the rules of the plans subject to these limits.
PAYMENTS TO PAST DIRECTORS (AUDITED)
On March 1, 2017, Peter Voser’s 2014 DBP award vested at 84%. The value at vesting of the performance matching DBP shares was €452,210.
Payments below €5,000 are not reported as they are considered de minimis.
TSR PERFORMANCE AND CEO PAY
PERFORMANCE GRAPHS
The graphs below compare the TSR performance of the Company over the past eight financial years with that of the companies comprising the Euronext 100 and the FTSE 100 share indices. The Board regards these indices as appropriate broad market equity indices for comparison, as they are the leading market indices in the Company’s home markets.
93 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
CEO PAY OUTCOMES
The following table sets out the single total figure of remuneration, and the annual bonus payout and long-term incentive (LTI) vesting rates compared with the respective maximum opportunity, for the CEO for the last eight years.
| | | | | | | | | | | | | | |
CEO pay outcomes | | | | | | | | | | | | |
Year | | CEO | | Single total figure of remuneration (€000) | | | Annual bonus payout against maximum opportunity | | | LTI vesting rates against maximum opportunity | |
2016 | | Ben van Beurden | | | 8,593 | | | | 66 | % | | | 42 | % |
2015 | | Ben van Beurden | | | 5,576 | | | | 98 | % | | | 8 | % |
2014 | | Ben van Beurden | | | 24,198 | | | | 94 | % | | | 49 | % |
2013 | | Peter Voser | | | 8,456 | | | | 44 | % | | | 30 | % |
2012 | | Peter Voser | | | 18,246 | | | | 83 | % | | | 88 | % |
2011 | | Peter Voser | | | 9,941 | | | | 90 | % | | | 30 | % |
2010 | | Peter Voser | | | 10,611 | | | | 100 | % | | | 75 | % |
2009 | | Peter Voser | | | 6,228 | | | | 50 | % | | | 0 | % |
2009 | | Jeroen van der Veer | | | 3,748 | | | | 66 | % | | | 0 | % |
Peter Voser stood down on December 31, 2013, and was succeeded by Ben van Beurden. Ben van Beurden’s single figure for 2014 was impacted by the increase in pension accrual calculated under the UK reporting regulations and tax equalisation as a result of his promotion and prior assignment to the UK. Jeroen van der Veer stood down on July 1, 2009, and Peter Voser took over from that date. Only remuneration relating to their position as CEO is included.
CHANGE IN REMUNERATION OF CEO AND EMPLOYEES FROM 2015 TO 2016
The CEO data compares the remuneration of Ben van Beurden for 2016 with 2015. The comparator group consists of local employees in the Netherlands, the UK and the USA. This is considered to be a suitable employee comparator group, because: these are countries with a significant Shell employee base; a large proportion of senior managers come from these countries; and REMCO considers remuneration levels in these countries when setting base salaries for Executive Directors.
Taxable benefits are those that align with the definition of taxable benefits applying in the respective country. In line with the “Single total figure of remuneration for Executive Directors” table, the annual bonus is included in the year in which it was earned.
| | | | | | | | |
Change in remuneration of CEO and employees | |
| | CEO | | | Employees | |
Salaries | | | 2.1 | % | | | 1.8 | % |
Taxable benefits | | | -46.4 | % | | | 3.2 | % |
Annual bonus | | | -31.4 | % | | | -7.1 | % |
RELATIVE IMPORTANCE OF SPEND ON PAY
Distributions to shareholders by way of dividends and share buybacks and remuneration paid to or receivable by employees for the last five years are set out below, together with annual percentage changes.
| | | | | | | | | | | | | | | | |
Relative importance of spend on pay | | | | | | | | | |
| | Dividends and share buybacks[A] | | | Spend on pay (all employees)[B] | |
Year | | $ billion | | | Annual change | | | $ billion | | | Annual change | |
2016 | | | 15.0 | | | | 25 | % | | | 15.7 | | | | -8 | % |
2015 | | | 12.0 | | | | -18 | % | | | 17.1 | | | | 5 | % |
2014 | | | 14.6 | | | | -14 | % | | | 16.4 | | | | 0 | % |
2013 | | | 17.1 | | | | 35 | % | | | 16.4 | | | | 9 | % |
2012 | | | 12.7 | | | | 9 | % | | | 15.1 | | | | 3 | % |
[A] Dividends paid, which includes the dividends settled in shares via our Scrip Dividend Programme, and repurchases of shares as reported in the “Consolidated Statement of Changes in Equity”.
[B] Employee costs, excluding redundancy costs, as reported in Note 27 to the “Consolidated Financial Statements”.
Spend on pay can be compared with the major costs associated with generating income by referring to the “Consolidated Statement of Income”. Over the last five years, the average spend on pay was 5% of the major costs of generating income. These costs are considered to be the sum of: purchases; production and manufacturing expenses; selling, distribution and administrative expenses; research and development; exploration; and depreciation, depletion and amortisation.
TOTAL PENSION ENTITLEMENTS (AUDITED)
During 2016, Ben van Beurden and Simon Henry accrued retirement benefits under defined benefit plans. The pension accrued under these plans at December 31, 2016, is set out below. The exchange rates used for conversion into euros and dollars are at December 31, 2016.
| | | | | | | | | | | | |
Accrued pension (audited) | | Thousand | |
| | Local | | | € | | | $ | |
Ben van Beurden | | | €1,174 | | | | €1,174 | | | | $1,235 | |
Simon Henry | | £ | 496 | | | | €579 | | | | $609 | |
The ages at which Ben van Beurden and Simon Henry can receive any pension benefit without actuarial reduction are 67 and 60 respectively. Any pension benefits on early retirement are reduced using actuarial factors to reflect early payment. No payments were made in 2016 regarding early retirement or in lieu of retirement benefits.
BEN VAN BEURDEN
Ben van Beurden is a member of the “Stichting Shell Pensioenfonds”, the pension plan for Shell employees in the Netherlands who joined before July 2013 that provides benefits in defined benefit form. Ben van Beurden is also a member of the Shell net pay defined contribution pension plan in the Netherlands with effect from January 1, 2015.
SIMON HENRY
Simon Henry is a member of the Shell Overseas Contributory Pension Fund (SOCPF) and the Shell Contributory Pension Fund (SCPF), with both these funded pension plans providing benefits in defined benefit form. The SOCPF provides benefits in respect of his periods of employment outside the UK, while the SCPF provides benefits in respect of his periods of employment in the UK. Simon Henry has elected to have his benefits from the SCPF restricted to the UK lifetime allowance with any excess provided from an unfunded arrangement, the Shell Supplementary Pension Plan.
94 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
EXTERNAL APPOINTMENTS
The Board considers external appointments to be valuable in broadening Executive Directors’ knowledge and experience. The number of outside directorships is generally limited to one. Exceptions to this are considered in the final year of employment. The Board must explicitly approve such appointments. Executive Directors are allowed to retain any cash or share-based compensation they receive from such external board directorships.
Simon Henry was appointed a Non-executive Director of (i) Lloyds Banking Group plc with effect from June 2014 and his fee in 2016 was £135,000; and (ii) Rio Tinto plc with effect from July 1, 2017, as announced in February 2017.
STATEMENT OF VOTING AT 2016 AGM
The Company’s 2016 AGM was held on May 24, 2016, in the Netherlands. The results of the polls in respect of Directors’ remuneration were as follows:
| | | | | |
Approval of Directors’ Remuneration Report |
Votes | | Number | | | Percentage |
For | | 3,469,740,309 | | | 85.83% |
Against | | 573,049,761 | | | 14.17% |
Total cast | | 4,042,790,070 | [A] | | 100.00% |
Withheld [B] | | 191,483,188 | | | |
[A] Representing 50.40% of issued share capital.
[B] A vote “withheld” is not a vote under English law and is not counted in the calculation of the proportion of the votes “for” and “against” a resolution.
The results of the polls in respect of the Directors’ Remuneration Policy approved at the 2014 AGM were as follows:
| | | | | |
Approval of Directors’ Remuneration Policy |
Votes | | Number | | | Percentage |
For | | 3,167,299,751 | | | 92.90% |
Against | | 242,225,203 | | | 7.10% |
Total cast | | 3,409,524,954 | [A] | | 100.00% |
Withheld [B] | | 63,756,314 | | | |
[A] Representing 53.47% of issued share capital.
[B] A vote “withheld” is not a vote under English law and is not counted in the calculation of the proportion of the votes “for” and “against” a resolution.
DIRECTORS’ EMPLOYMENT ARRANGEMENTS AND LETTERS OF APPOINTMENT
Executive Directors are employed for an indefinite period. Non-executive Directors, including the Chair, have letters of appointment. Details of Executive Directors’ employment arrangements can be found in the Directors’ Remuneration Policy on pages 102-103. Further details of Non-executive Director terms of appointment can be found in the “Directors’ Report” on page 65 and the “Corporate governance” report on page 68.
COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
During the year ended December 31, 2016, Shell paid and/or accrued compensation totalling $43 million (2015: $44 million) to Directors and Senior Management for services in all capacities while serving as a Director or member of Senior Management, including $3 million (2015: $4 million) accrued to provide pension, retirement and similar benefits. The amounts stated are those recognised in Shell’s income on an IFRS basis. Personal loans or guarantees were not provided to Directors or Senior Management. See Note 28 to the “Consolidated Financial Statements”.
95 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
DIRECTORS’ REMUNERATION POLICY
This section describes the Directors’ Remuneration Policy (Policy) which, subject to shareholder approval at the 2017 Annual General Meeting (AGM), will take effect from May 23, 2017, and will be effective until the 2020 AGM, unless a further policy is proposed by the Company and approved by shareholders in the meantime.
The Policy has evolved over time, to align with: Shell’s strategy, market practice and shareholders’ views. A consistent and competitive structure, which applies across the workforce, is also a core principle. This consistency allows for a culture of shared purpose and performance.
The Executive Directors’ remuneration structure is made up of a fixed element of basic pay and the majority of the package is tied to two variable elements: the annual bonus (50% delivered in shares) and the Long-term Incentive Plan (LTIP). Variable pay outcomes are conditional on the successful execution of the operating plan in the short term and financial out-performance over the longer term. Furthermore, the award of shares under the bonus and LTIP, along with significant shareholding requirements, is intended to ensure executives build up a sizeable shareholding stake in Royal Dutch Shell plc (the Company) and experience the same outcomes as shareholders.
The main aspects of the Policy, as approved by shareholders at the 2014 AGM, have been maintained. There are no changes to maximum opportunity levels for base salary, annual bonus and LTIP. Certain key updates made within the boundaries of the existing policy approved by shareholders at the 2014 AGM have been implemented with effect from January 1, 2017, including:
■ | Alignment with new strategy – updated performance measures for the bonus and LTIP. |
■ | Long-term horizons – the holding period for LTIP vested shares has been extended to three years and continues to apply after Executive Directors leave employment. |
■ | Strengthened governance – bonus removed from termination payment policy for Executive Directors appointed on or after January 1, 2017. |
Subject to shareholder approval of the Policy at the 2017 AGM, the Deferred Bonus Plan (DBP) will be removed and instead 50% of the annual bonus will be delivered in cash and 50% will be delivered in shares. Shares are subject to a three-year holding period, which continues to apply after Executive Directors leave employment.
Executive Directors
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EXECUTIVE DIRECTORS’ REMUNERATION POLICY TABLE |
Element | Purpose and link to strategy | Maximum opportunity | Operation and performance measurement |
Base salary and pensionable base salary | Provides a fixed level of earnings to attract and retain Executive Directors. | We have retained a maximum of €2,000,000, for both base salary and pensionable base salary, in the context of current peer group base salary levels. | Base salary and pensionable base salary (where different) are reviewed annually with salary adjustments effective from January 1 each year. In making salary determinations, the Remuneration Committee (REMCO) will consider: ■ the market positioning of the Executive Directors’ compensation packages; ■ comparison with Senior Management salaries; ■ the employee context, and planned average salary increase for other employees across three major countries – the Netherlands, the UK and the USA; ■ the experience, skills and performance of the Executive Director, or any change in the scope and responsibility of their role; ■ general economic conditions, Shell’s financial performance, and governance trends; and ■ the impact of salary increases on pension benefits and other elements of the package. For Executive Directors employed outside their base country, euro base salaries are translated into their home currencies for pension plan purposes. Pensionable base salaries are maintained in line with euro base salaries taking into account exchange rate fluctuations and other factors as determined by REMCO. |
Benefits | Provides benefits, in line with those applicable to the wider workforce, in order to attract and retain Executive Directors. | The maximum opportunity is the cost to the Company of providing the relevant benefit as specified in Shell’s standard policies. These costs can vary. | Benefits that Executive Directors typically receive include car allowances and transport to and from home and office, risk benefits (for example ill-health, disability or death-in-service), as well as employer contributions to insurance plans (such as medical). Precise benefits will depend on the Executive Director’s specific circumstances such as nationality, country of residence, length of service, and family status. Post-retirement benefits such as healthcare may be applicable under their country-specific policies. Shell’s mobility policies may apply, such as for relocation and tax return preparation support, as may tax equalisation related to expatriate employment prior to Board appointment, or in other limited circumstances to offset double taxation. REMCO may adjust the range and scope of the benefits offered in the context of developments for other employees in relevant countries. Personal loans or guarantees are not provided to Executive Directors. In relation to the maximum opportunity, and by way of example, maximum relocation and tax equalisation settlement benefits will be the grossed-up cost of meeting the specific Executive Director’s costs incurred as a result of appointment and any associated relocation (in line with Shell’s policy), and will depend on a variety of factors such as length of service, salary increase on appointment and the tax regime in place at the time. |
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EXECUTIVE DIRECTORS’ REMUNERATION POLICY TABLE (CONTINUED) |
Element | Purpose and link to strategy | Maximum opportunity | Operation and performance measurement |
Annual bonus | Rewards the delivery of short-term operational targets as derived from Shell’s operating plan as well as individual contribution to Shell. To reinforce alignment with shareholder interests, 50% is delivered in cash and 50% is delivered in shares. Shares are subject to a three-year holding period, which applies beyond an Executive Director’s tenure. | Maximum bonus (as a percentage of base salary): ■ Chief Executive Officer (CEO): 250% ■ Other Executive Directors: 240% Target levels (as a percentage of base salary): ■ CEO: 150% ■ Other Executive Directors: 120% | ■ The bonus is determined by reference to performance from January 1 to December 31 each year. ■ Annual bonus = base salary x target bonus % x scorecard result (0–2); adjusted for individual performance with a 0–1.2 multiplier. ■ Taking the Shell operating plan into consideration, REMCO sets stretching scorecard targets and weightings which support the delivery of the strategy. Measures are related to financial performance, operational excellence and sustainable development. Indicative weightings are 30%, 50% and 20% respectively. This balance ensures that the achievement of short-term financial performance does not undermine future shareholder value creation. Stretching individual targets are also set. ■ Scorecard targets will be disclosed in a subsequent Directors’ Remuneration Report when they are no longer deemed to be commercially sensitive. ■ Individual performance is reflected by adjusting the bonus outcome. Upward adjustment is capped at 20% and subject to the overall maximum bonus cap. The CEO’s maximum bonus is asymmetrically capped at 250%. There is no limit to downward adjustment. ■ There are no prescribed thresholds or minimum levels of performance that equate to a prescribed payment under the Policy and this structure can result in no bonus being awarded. ■ The annual bonus is subject to malus provisions before it is delivered and to clawback provisions thereafter. ■ REMCO retains the ability to adjust performance measure targets and weightings year by year within the overall target and maximum payouts approved in the Policy. |
LTIP | Rewards longer-term value creation linked to Shell’s strategy. The measures predominantly focus on financial growth and increases in value compared with the other oil majors. To reinforce alignment with shareholder interests, shares delivered from vested LTIP awards are subject to a three-year holding period, which applies beyond an Executive Director’s tenure. | Awards may be made up to a value of 400% of base salary. 2017 Award levels: •CEO: 340% •Other Executive Directors: 270% Awards may vest at up to 200% of the shares originally awarded, plus dividends. | ■ Award levels are determined annually by REMCO and are set within the maximum approved in the Policy. ■ Awards may vest between 0% and 200% of the initial award level depending on Shell’s performance on either an absolute basis, or on a relative basis against the other oil majors. ■ For 2017, performance is assessed over a three-year period based on absolute free cash flow (FCF), which is the sum of cash flow from operating activities and cash flow from investing activities (25%) and the following relative performance measures: total shareholder return (TSR) (25%), return on average capital employed (ROACE) growth (25%) and cash flow from operating activities growth (25%). Each measure can vest independently, but if the TSR measure does not result in vesting, then the total vesting level will be capped at 50% of the maximum payout. ■ Although it is possible for no LTIP shares to vest, on current measures and weightings, 5% of the maximum LTIP award would vest if there was a threshold vesting outcome in respect of FCF and no vesting on the other measures. ■ Additional shares are released representing the value of dividends payable on the vested shares, as if these had been owned from the award date. ■ Following payment of taxes, delivered shares from LTIP awards must be held for a further three years to align with Shell’s longer-term time horizon and strategy. ■ The LTIP award is subject to malus provisions before it is delivered and to clawback provisions thereafter. ■ REMCO may adjust or change the LTIP measures, targets and weightings to ensure continued alignment with Shell’s strategy. |
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EXECUTIVE DIRECTORS’ REMUNERATION POLICY TABLE (CONTINUED) |
Element | Purpose and link to strategy | Maximum opportunity | Operation and performance measurement |
Pension | Provides a competitive retirement provision in line with the individual’s base country benefits policy, to attract and retain Executive Directors. | By reference to pensionable base salary, pension accrual and contribution rates and other pensionable elements, as determined by the rules of the base country pension plan of which the Executive Director is a member. | Executive Directors’ retirement benefits are maintained in line with those of the wider workforce in their base country. Only base salary is pensionable, unless country plan regulations specify otherwise. The rules of the relevant plans detail the pension benefits which members can receive on retirement (including on ill-health), death or leaving service. REMCO retains the right to amend the form of any Executive Director’s pension arrangements where appropriate, for example in response to changes in legislation to ensure the original objective of this element of remuneration is preserved. |
Shareholding | Aligns interests of Executive Directors with those of shareholders by creating a connection between individual wealth and Shell’s long-term performance. | Shareholding (% of base salary): ■ CEO: 700% ■ Other Executive Directors: 400% | Executive Directors are expected to build up their shareholding to the required level over a period of five years from appointment and, once reached, to maintain this level for the full period of their appointment. The intention is for the shareholding guideline to be reached through retention of vested shares from share plans. REMCO will monitor individual progress and retains the ability to adjust the guideline in special circumstances on an individual basis. |
NOTES TO THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY TABLE
Benefits
Benefits for Executive Directors deemed taxable in the UK are included as taxable benefits in the single total figure of remuneration table. These elements may include transport to and from home and office, the provision of home security, and occasional business-required spouse travel, which are generally considered legitimate business expenses rather than components of remuneration.
Annual bonus
For the 2017 performance year, the scorecard framework will consist of cash flow from operating activities (30% weight), operational excellence (50% weight) and sustainable development (20% weight). REMCO believes it is important for annual variable pay to remain balanced, with operational and environmental components, complementing the LTIP’s focus on longer-term financial outcomes. The same annual bonus scorecard approach applies to Senior Management and other senior executives, supporting consistency of remuneration and alignment of objectives.
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For future years, the specific measures and weightings for the annual bonus scorecard will be reviewed annually by REMCO and adjusted accordingly to evolve with Shell’s strategy and circumstances. The annual review will also consider the scorecard target and outcome history over a decade to ensure that the targets set remain stretching but realistic. REMCO retains the right to exercise its judgement to adjust the mathematical bonus scorecard outcome to ensure that the bonus scorecard outcome for Executive Directors reflects other aspects of Shell’s performance which REMCO deems appropriate for the reported year. REMCO is aware that the simple application of arithmetic performance targets may lead to anomalies between business performance and shareholder experience and therefore careful consideration is given to formulaic outcomes. REMCO has a track record of using its discretion to make downward adjustments where appropriate.
REMCO strengthens the Executive Directors’ individual accountability by increasing or decreasing their annual bonuses to take account of how well they have delivered against their individual performance targets. Shell operates this approach for most of its employees. These individual targets typically relate to qualitative differentiators not already covered by the scorecard. Examples for the Executive Directors have included management of transformative portfolio changes, portfolio development, and organisational and financial leadership. This individual performance element preserves consistency with the wider workforce and reinforces and drives a company-wide culture of performance and behaviour.
At the end of the one-year performance period, 50% of the annual bonus is delivered in cash and 50% is delivered in shares. Shares are subject to a three-year holding period, which remains in force beyond an Executive Director’s tenure.
Long-term Incentive Plan
The LTIP rewards longer-term performance linked to Shell’s strategy, which includes cash generation and capital discipline, as well as value created for shareholders.
The LTIP measures are predominantly based on relative outperformance compared with the other oil majors, in line with our strategic intent to be a leader in the oil and gas industry. For 2017, the measures will consist of absolute FCF and relative growth compared with our peers based on the following: TSR, ROACE and cash flow from operating activities. REMCO will regularly review the measures, weightings and comparator group, and retains the right to adjust these to ensure that the LTIP continues to serve its intended purpose and level of challenge.
FCF performance is measured by aggregating annual absolute FCF performance over the three-year performance period and then comparing the outcome to the aggregate of our plan FCF targets over three years. The outstanding (maximum), target and threshold (minimum) levels are declared at the end of the performance period and will be the aggregate respective annual outstanding, target and threshold levels for each year of the performance period. A straight-line vesting schedule will apply for performance between threshold and outstanding. The target, along with the ranges for threshold and outstanding performance, is set by reference to our operating plan and is in line with our cash flow priorities, namely: to service and reduce debt, pay dividends, buy back shares and make future capital investments.
For relative measures, we measure and rank growth based on the data points at the end of the performance period compared with those at the beginning of the period, using publicly reported data. When comparing performance against the other oil majors, the relative performance ranking is as indicated in the table below.
TSR underpin
If the TSR ranking is fourth or fifth, the level of the award that can vest on the basis of the three other measures will be capped at 50% of the maximum payout for the LTIP.
Performance outcomes
REMCO retains discretion to adjust the mathematical outcome if it believes that this is distorted by circumstances which are unrelated to performance, for example, reporting changes, ranking clustering, or corporate events in the comparator group. Upward adjustment would only be considered after consultation with major shareholders. An explanation of any such adjustment would be set out in the relevant Directors’ Remuneration Report.
LTIP performance is assessed over a three-year period. Vested shares from the LTIP are subject to a further three-year holding period post vesting, which remains in force beyond an Executive Director’s tenure. This time horizon has been extended and is deemed to be suitable for incentive purposes, but is recognised as short relative to some of Shell’s operations. However REMCO believes that it provides for broad alignment with shareholder interests when coupled with significant shareholding requirements.
99 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
Treatment of outstanding awards
Awards granted prior to the approval and implementation of this Policy and/or prior to an individual becoming an Executive Director will continue to vest and be delivered in accordance with the terms of the original award even if this is not consistent with the terms of this Policy.
As at March 8, 2017, this applies to Executive Directors Ben van Beurden and Simon Henry who each have outstanding awards under the LTIP and DBP. Jessica Uhl, who is appointed an Executive Director with effect from March 9, 2017, has outstanding awards under the LTIP.
Shareholding
REMCO believes significant shareholding by Executive Directors is an important way of ensuring that shareholders and Executive Directors share the same priorities. Shareholding is one of Shell’s core remuneration principles as it creates a balanced connection between individual wealth and Shell’s long-term performance. This will support effective governance and an ownership mindset. Significant shareholding requirements reflect the performance timescales of Shell and are aligned with absolute shareholder return.
The CEO is expected to build up a shareholding of seven times their base salary over five years from appointment. Other Executive Directors are expected to build up a shareholding of four times their base salary over the same period. In the event of an increase to the guideline multiple of salary, for every additional multiple of salary required, the director will have one extra year to reach the increased guideline, subject to a maximum of five years from the date of the change.
The holding periods for LTIP vested shares and shares delivered as part of the annual bonus continue to apply after Executive Directors leave employment. This is to ensure departing executives continue to have their interests aligned with those of shareholders.
DIFFERENCES FOR EXECUTIVE DIRECTORS FROM OTHER EMPLOYEES
The remuneration structure and approach to setting remuneration levels is consistent across Shell, with consideration given to location, seniority and responsibilities. However, a higher proportion of total remuneration is tied to variable pay for Executive Directors and members of Senior Management.
The salary for each Executive Director is determined based on the indicators in the “Executive Directors’ remuneration policy table”, which reflect the international nature of the Executive Directors’ labour market. The salary for other employees is normally set on a country basis.
Executive Directors are eligible to receive the standard benefits and allowances provided to other staff. The provisions which are not generally available for other employees are described in “Benefits”.
The methodology used for determining the annual bonus for Executive Directors is broadly consistent with the approach for Shell employees generally. However, the individual performance factor for Executive Directors is capped at 1.2 and the scorecard used for the majority of Shell staff may differ in the make-up and weighting of the metrics used. Like Executive Directors, members of Senior Management receive 50% of their annual bonus in shares.
Executive Directors are not eligible to receive new awards under employee share plans other than the LTIP, although awards previously granted will continue to vest in accordance with the terms of the original award. Selected employees participate in the Performance Share Plan (PSP). The operation of the PSP is similar to the LTIP, but currently differs, for example, in some performance measures and their relative weightings. As at March 2017, around 55,000 employees participate in one or more of Shell’s global share plans and/or incentive plans, further supporting alignment with shareholder interests.
Executive Directors’ retirement benefits are maintained in line with those of the wider workforce in their base country. There are no special pension arrangements exclusive to Executive Directors.
ILLUSTRATION OF POTENTIAL REMUNERATION OUTCOMES
The charts [below] represent estimates under three performance scenarios (“Minimum”, “On-target”, and “Maximum”) of the potential remuneration outcomes for each Executive Director resulting from the application of 2017 base salaries to awards, expected to be made in 2017 in accordance with the Policy.
The majority of Executive Directors’ remuneration is delivered through variable pay elements, which are conditional on the achievement of stretching targets.
The scenario charts are based on future Policy award levels and are combined with projected single total figures of remuneration. The pay scenarios are forward-looking and only serve to illustrate the future Policy. For simplicity, the scenarios assume no share price movement and exclude dividend accrual, for the portion of the bonus paid in shares and the LTIP, although dividend accrual during the performance and holding period applies.
The scenarios are based on the current CEO (Ben van Beurden) and incoming CFO (Jessica Uhl) roles.
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Non-executive Directors
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NON-EXECUTIVE DIRECTORS’ REMUNERATION POLICY TABLE |
Fee structure | Approach to setting fees | Other remuneration |
Non-executive Directors (NEDs) receive a fixed annual fee for their directorship. The size of the fee will differ based on the position on the Board: Chair of the Board fee or standard Non-executive Director fee. Additional annual fee(s) are payable to any director who serves as Senior Independent Director, a Board committee chair, or a Board committee member. A NED receives either a chair or member fee for each committee. This means that a chair of a committee does not receive both fees. NEDs receive an additional fee for any Board meeting involving intercontinental travel – except for one meeting a year held in a location other than The Hague. | The Chair’s fee is determined by REMCO. The Board determines the fees payable to NEDs. The maximum aggregate annual fees will be within the limit specified by the Articles of Association and in accordance with the NEDs’ responsibilities and time commitments. The Board reviews NED fees periodically to ensure that they are aligned with those of other major listed companies. | Business expenses incurred in respect of the performance of their duties as a NED will be paid or reimbursed by Shell. Such expenses could include transport between home and office and occasional business-required spouse travel. Where required, the Chair is offered Shell-provided accommodation in The Hague. REMCO has the discretion to offer other benefits to the Chair as appropriate to their circumstances. Where business expenses or benefits create a personal tax liability to the director, Shell may cover the associated tax. The Chair and the other NEDs cannot receive awards under any incentive or performance-based remuneration plans, and personal loans or guarantees are not granted to them. NEDs do not accrue any retirement benefits as a result of their non-executive directorships with Shell. NEDs are encouraged to hold shares with a value equivalent to 100% of their fixed annual fee and maintain that holding during their tenure. |
Malus and clawback
Variable pay awards may be made subject to adjustment events. At the discretion of REMCO, such an award may be adjusted before delivery (malus) or reclaimed after delivery (clawback) if an adjustment event occurs. Adjustment events will be specified in award documentation and it is intended that they will, for example, relate to restatement of financial results due to: non-compliance with a financial reporting requirement; or misconduct by an Executive Director or misconduct through their direction or non-direction. REMCO retains the right to alter the list of adjustment events in respect of future awards.
In addition, REMCO will retain discretion in assuring itself that there is satisfactory underlying performance before releasing any variable pay to Executive Directors and may withhold all or some of the bonus or shares awarded if it considers that the underlying performance (financial, environmental, safety or other) of Shell is inadequate.
Recruitment
EXECUTIVE DIRECTORS
REMCO determines the remuneration package for new Executive Director appointments. These appointments may involve external or internal recruitment or reflect a change in role of a current Executive Director.
When determining remuneration packages for new Executive Directors, REMCO will seek a balanced outcome which allows Shell to:
■ | attract and motivate candidates of the right quality; |
■ | take into account the individual’s current remuneration package and other contractual entitlements; |
■ | seek a competitive pay position relative to our comparator group, without overpaying; |
■ | encourage relocation if required; and |
■ | honour entitlements (for example, variable remuneration) of internal candidates before their promotion to the Board. |
101 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
REMCO will follow the approach set out in the table below when determining the remuneration package for a new Executive Director.
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REMUNERATION PACKAGE |
Component | Approach | Maximum |
Ongoing remuneration | The salary, benefits, annual bonus, long-term incentives and pension benefits will be positioned and delivered within the framework of the Executive Directors’ remuneration policy. | As stated in the “Executive Directors’ remuneration policy table”. |
Compensation for the forfeiture of any awards under variable remuneration arrangements | To facilitate external recruitment, one-off compensation in consideration for forfeited awards under variable remuneration arrangements entered into with a previous employer may be required. REMCO will use its judgement to determine the appropriate level of compensation by matching the value of any lost awards under variable remuneration arrangements with the candidate’s previous employer. This compensation may take the form of a one-off cash payment or an additional award under the LTIP. The compensation can alternatively be based on a newly created long-term incentive plan arrangement where the only participant is the new director. | An amount equal to the value of the forfeited variable remuneration awards, as assessed by REMCO. Consideration will be given to appropriate performance conditions, performance periods and clawback arrangements. |
Replacement of forfeited entitlements other than any awards under variable remuneration arrangements | There may also be a need to compensate a new Executive Director in respect of forfeited entitlements other than any awards under variable remuneration arrangements. This could include, for example, pension or contractual entitlements, or other benefits. On recruitment, these entitlements may be replicated within the Executive Directors’ remuneration policy or valued by REMCO and compensated in cash. In cases of internal promotion to the Board, any commitments made which cannot be effectively replaced within the Executive Directors’ remuneration policy may, at REMCO’s discretion, continue to be honoured. | An amount equal to the value of the forfeited entitlements, as assessed by REMCO. |
Exceptional recruitment incentive | Apart from the ongoing annual remuneration package and any compensation in respect of the replacement of forfeited entitlements, there may be circumstances in which REMCO needs to offer a one-off recruitment incentive in the form of cash or shares to ensure the right external candidate is attracted. REMCO recognises the importance of internal succession planning but it must also have the ability to compete for talent with other global companies. The necessity and level of this incentive will depend on the individual’s circumstances. | One times the LTIP award level, subject to the limits set out in the “Executive Directors’ remuneration policy table”. |
NON-EXECUTIVE DIRECTORS
REMCO’s approach to setting the remuneration package for NEDs is to offer fee levels and specific benefits (where appropriate) in line with the “Non-executive Directors’ remuneration policy table” and subject to the Articles of Association. NEDs are not offered variable remuneration or retention awards.
When determining the benefits for a new Chair, the individual circumstances of the future Chair will be taken into account.
DIRECTORS’ EMPLOYMENT ARRANGEMENTS AND LETTERS OF APPOINTMENT
Executive Directors are employed for an indefinite period. Executive Directors with the Netherlands as their base country will be employed on the basis of a contract of employment governed by Dutch employment law. For Executive Directors with a base country other than the Netherlands, REMCO will determine their employment arrangements based on a number of considerations, including Dutch immigration requirements and base country retirement benefits. NEDs, including the Chair, have letters of appointment. Executive Directors’ employment arrangements and NEDs’ letters of appointment are available for inspection at the AGM or on request. For further details on appointment and re-appointment of Directors, see the “Directors’ Report” on page 65.
End of employment
EXECUTIVE DIRECTORS
Notice period
Employment arrangements of Executive Directors can generally end by either the employee or the employer providing one month’s notice, or the applicable statutory notice period. For example, under Dutch law, the statutory notice period
for the employer will vary in line with the length of service, with the maximum being four months’ notice. Under Dutch law, termination payments are not linked to the contract’s notice period.
The Netherlands statutory end-of-employment compensation
With effect from July 1, 2015, new employment legislation in the Netherlands introduced statutory end-of-employment compensation. Under this legislation, every termination (other than following retirement or for cause) of a Dutch employment contract that has continued for a minimum of two years will give rise to an obligation to pay the departing employee transition compensation (“transitievergoeding”). The statutory compensation is capped at one times the annual salary, which is deemed to include variable pay such as the annual bonus. Executive Directors are expected not to claim transition compensation or any other applicable statutory compensation over and above the agreed compensation for loss of office as set out in the “End of employment” table on page 103.
Outstanding entitlements
In cases of resignation or dismissal for cause, fixed remuneration (base salary, benefits, and employer pension contributions) will cease on the last day of employment, variable remuneration elements will generally lapse and the Executive Director is not eligible for compensation for loss of office.
The information, on page 103, generally applies to termination of employment by Shell giving notice, by mutual agreement, or in situations where the employment terminates because of retirement with Shell consent at a date other than the normal retirement date, redundancy or in other similar circumstances at REMCO’s discretion.
102 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
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End of employment |
Provision | Policy |
Compensation for loss of office | For Executive Directors appointed prior to 2011, REMCO may offer a termination payment of up to one times annual pay (base salary plus target bonus). For Executive Directors appointed between January 1, 2011 and December 31, 2016, employment contracts include a cap on termination payments of one times annual pay (base salary plus target bonus). Delivery of compensation is mitigated by a contractual obligation for the Executive Director to seek alternative employment and the Company’s ability to implement phased payment terms. For Executive Directors appointed on or after January 1, 2017, REMCO may offer a termination payment of up to one times base salary (target bonus will not be included). However, REMCO may be obligated to pay statutory compensation over and above the compensation for loss of office to a departing Executive Director who asserts a statutory claim thereto. Delivery of compensation is mitigated by a contractual obligation for the Executive Director to seek alternative employment and the Company’s ability to implement phased payment terms. The reimbursement of standard end-of-employment benefits such as repatriation costs and outplacement support may also be included, as deemed reasonable by REMCO. REMCO may adjust the termination payment for any situation where a full payment is inappropriate, taking into consideration applicable law, corporate governance provisions and the best interests of the Company and shareholders as a whole. |
Annual bonus | Any annual bonus in the year of departure is prorated based on service. Depending on the timing of the departure, REMCO may consider the latest scorecard position or defer payment until the full-year scorecard result is known. DBP shares and bonus delivered in shares represent the bonus which a participant has already earned and carry no further performance conditions; therefore these shares will be unrestricted at the conclusion of the normal deferral or holding period respectively and no proration will apply. |
LTIP | Outstanding awards are prorated on a monthly basis, by reference to the Executive Director’s service within the performance period. They will generally survive the end of employment and will remain subject to the same vesting performance conditions, and malus and clawback provisions, as if the Executive Director had remained in employment. The three-year holding period will also remain in force for any awards made on or after January 1, 2017. If the participant dies before the end of the performance period, the award will vest at the target level on the date of death. In case of death after the end of the performance period, the award will vest as described in this Policy. |
NON-EXECUTIVE DIRECTORS
No payments for loss of office will be made to NEDs.
Consideration of overall pay and employment conditions
When setting the Policy, no specific employee groups were consulted. However, Shell seeks to promote and maintain good relations with employee representative bodies as part of its employee engagement strategy, and consults on matters affecting employees and business performance as required.
When determining Executive Directors’ remuneration structure and outcomes, REMCO reviews a set of information, including relevant reference points and trends, which includes internal data on employee remuneration (for example, employee relations matters in respect of remuneration and average salary increases applying in the Netherlands, UK and the USA). During the Policy review, pay and employment conditions of the wider Shell employee population were taken into account by adhering to the same performance, rewards and benefits philosophy for the Executive Directors, as well as overall benchmarking principles. Furthermore, any potential differences from other employees (see “Differences for Executive Directors from other employees”) were taken into account when providing REMCO with advice in the formation of this Policy.
Dialogue between management and staff is important, with the annual Shell People Survey being one of the principal means of gathering employee views on a range of matters. The Shell People Survey includes questions inviting employees’ views on their pay and benefit arrangements. The Company also encourages share ownership among employees, and many are shareholders who are able to participate in the vote on the Policy at the AGM.
REMCO is kept informed by the CEO, the Chief Human Resources & Corporate Officer and the Executive Vice President Remuneration, Benefits & Services on the bonus scorecard and any relevant remuneration matters affecting Senior Management and other senior executives, extending to multiple levels below the Board.
Consideration of shareholder views
REMCO engages with major shareholders on a regular basis throughout the year and this allows it to hear views on Shell’s remuneration approach and test proposals when developing or evolving the Policy. Recent examples of REMCO responding to shareholder views include introducing greenhouse gas
management to variable pay and setting FCF as an absolute measure in the LTIP performance conditions.
REMCO will review the Policy regularly to ensure it continues to reinforce Shell’s long-term strategy and remains closely aligned with shareholders’ interests.
Additional policy statement
REMCO reserves the right to make payments outside the Policy in limited exceptional circumstances, such as for regulatory, tax or administrative purposes or to take account of a change in legislation or exchange controls, and only where REMCO considers such payments are necessary to give effect to the intent of the Policy.
Signed on behalf of the Board /s/ Linda M. Szymanski |
Linda M. Szymanski |
Company Secretary |
March 8, 2017 |
103 GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2016
FINANCIAL STATEMENTS AND SUPPLEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ROYAL DUTCH SHELL PLC
REPORT ON THE FINANCIAL STATEMENTS
1. | OUR OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT |
1.1 | Our opinion on the financial statements |
In our opinion, the financial statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively, Shell):
| ■ | give a true and fair view of Shell’s and of the Company’s affairs as at December 31, 2016, and of Shell’s and the Company’s income for the year then ended; |
| ■ | have been properly prepared both in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and IFRS as issued by the International Accounting Standards Board (IASB); and |
| ■ | have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards Shell’s financial statements, Article 4 of the IAS Regulation. |
1.2 | Our opinion on other matters prescribed by the Companies Act |
We report that, in our opinion:
| ■ | the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and |
| ■ | based on the work undertaken in the course of our audit: |
| o | the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and |
| o | the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. |
1.3 | Matters on which we are required to report by exception |
Our confirmations that we have nothing to report by exception, in relation to those matters where we are required so to report, are set out in section 9 below.
Royal Dutch Shell plc’s financial statements for the year ended December 31, 2016, included in the Annual Report and Form 20-F (the Annual Report) comprise:
Shell | The Company |
Consolidated Balance Sheet as at December 31, 2016 | Balance Sheet as at December 31, 2016 |
Consolidated Statement of Income for the year then ended | Statement of Income for the year then ended |
Consolidated Statement of Comprehensive Income for the year then ended | Statement of Comprehensive Income for the year then ended |
Consolidated Statement of Changes in Equity for the year then ended | Statement of Changes in Equity for the year then ended |
Consolidated Statement of Cash Flows for the year then ended | Statement of Cash Flows for the year then ended |
Notes to the Consolidated Financial Statements on pages 122 - 152, which include a summary of significant accounting policies and other explanatory information | Notes to the Parent Company Financial Statements on pages 174 - 179. |
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and both IFRS as adopted by the EU and IFRS as issued by the IASB.
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3. | OVERVIEW OF OUR AUDIT APPROACH |
| | We developed a detailed audit transition plan, designed to deliver an effective audit transition from Shell’s predecessor audit firm, PricewaterhouseCoopers LLP (PwC). Our audit planning and transition commenced on October 1, 2015, after we confirmed our independence of Shell to the Shell Audit Committee. Also, during 2015, we established and adhered to a conflict of interest and independence protocol with Shell in order to address any actual or perceived threats to our independence and objectivity arising out of our pre-existing external audit relationship with BG Group plc (BG). Our transition activities were performed at all of Shell’s key locations. The activities included meeting relevant partners and senior staff from PwC, workshadowing PwC at key meetings with Shell management, including meetings of the Audit Committee, and reviewing PwC’s 2015 and certain 2014 audit work papers. In December 2015, we held an audit planning meeting in The Hague with the senior members of our key location teams in order to develop our first year audit approach. Members of Shell management directly relevant to our audit also participated in parts of the meeting. |
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| | Our global audit team has deep industry experience through working on the audits of several large international oil companies. Building on this knowledge, we obtained a specific understanding of Shell’s strategy, business model and the environment in which it operates. This was achieved through review, enquiry, analytical procedures, observation and visiting a number of Shell’s operating units. We performed risk assessment procedures, including data analytics, to identify risks of material misstatement. We specifically considered the financial statement risks associated with sustained low oil and gas prices and the impact of the acquisition of BG. |
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| When we established our audit strategy, we determined overall materiality for the financial statements as a whole. In so doing, we made judgements about the size of misstatements that would be considered material. We also considered which earnings, activity or capital-based measure aligns best with the expectations of those charged with governance at Shell and users of Shell’s financial statements. Our assessment of overall materiality for Shell is $800 million, which is derived from an average of Shell’s earnings on a current cost of supplies basis (CCS earnings), excluding identified items reported by Shell in its quarterly earnings releases and adjusted for an effective tax rate. This average includes a forward-looking element. CCS earnings by segment are disclosed in Note 5 to the “Consolidated Financial Statements”. Prior year comparison: In 2015, the overall materiality for Shell was set at $1,200 million – which was 5% of the historical three-year average income before tax, adjusted for certain exceptional non-recurring items – and at $1,415 million for 2014. |
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| Our scope is tailored to the particular circumstances of our audit of Shell and is influenced by our assessed risks of material misstatement and our determination of materiality. We performed audits of the complete financial information of 33 operating units and specific audit procedures on an additional 52 operating units. In selecting the operating units to be brought into audit scope, we assessed the risks of material misstatement of the financial statements based on size, complexity and risk, including the risk of fraud, and designed and implemented appropriate responses to the assessed risks. In addition, other group audit procedures were carried out at the consolidated level. These procedures included: analytical review; testing of consolidation journals and inter-company eliminations; tests of financial systems; tests of processes and controls at business service centres (BSCs); and foreign currency translation testing. Prior year comparison: The main differences in scoping are as a result of the impact in 2016 of the BG acquisition and a lower level of overall materiality. |
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| We have identified the following key audit matters that, in our professional judgement, had the greatest effect on our overall audit strategy, the allocation of resources in the audit and in directing the global engagement team’s efforts: ■ first year audit transition; ■ the acquisition of BG, specifically the judgements around the purchase price allocation; ■ the estimation of oil and gas reserves, including reserves used in the calculation of depreciation, depletion and amortisation; ■ the recoverable amounts of exploration and production assets, goodwill, and Upstream and Integrated Gas joint ventures; ■ estimation of decommissioning and restoration provisions; ■ the recognition and valuation of deferred tax assets; ■ revenue recognition relating to unrealised trading gains and losses; and ■ accounting for the assets under Shell’s disposal programme. Prior year comparison: As would be expected in the case of any audit, key audit matters will inevitably differ from year to year as significant events, transactions and judgements differ. |
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4. | OUR APPLICATION OF MATERIALITY |
The scope of our work is influenced by our view of materiality. As we develop our audit strategy, we determine materiality at the overall level and at the individual account level (referred to as our ‘performance materiality’).
Overall materiality |
What we mean | We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements on our audit and on Shell’s financial statements. For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would be changed or influenced. Our overall materiality provides a basis for identifying and assessing the risk of material misstatement and determining the nature, timing and extent of audit procedures. Our evaluation of materiality requires professional judgement and necessarily takes into account qualitative as well as quantitative considerations. It also takes into account our assessment of the expectations of those charged with governance at Shell and users of Shell’s financial statements. As required by auditing standards, we reassess materiality throughout the audit. |
Level set | We set our preliminary overall materiality for Shell at $900 million. We kept this under review throughout the year and reassessed the appropriateness of our original assessment in the light of Shell’s results and the external market conditions. In the third quarter 2016 we reduced our overall materiality to $800 million and amended our audit scope and extent of testing accordingly. In the case of prior years, materiality was set at $1,200 million for 2015 and $1,415 million for 2014. |
Our basis for determining materiality for 2016 | Our revised assessment of overall materiality is $800 million. This is derived from an average of Shell’s CCS earnings, excluding identified items reported by Shell in its quarterly earnings releases and adjusted for an effective tax rate. This average included a forward-looking element. The $800 million is determined by applying a percentage to the calculated average CCS earnings. When using an earnings-related measure to determine overall materiality, the norm is to apply a benchmark percentage of 5%. In the case of Shell, because our earnings estimate includes a forward-looking element, we have applied a more prudent rate that is below the 5% benchmark. In determining materiality, auditing standards require us to use benchmarks, such as pre-tax income, gross profit and total revenue. Nevertheless, we have to exercise considerable judgement, including the need to take account of the volatility of the benchmarks applied and to consider which earnings, activity or capital based measure aligns best with the expectations of users of Shell’s financial statements and the Audit Committee. We considered Shell’s business updates, the levels of activity in the business and the associated financial performance of 2016 relative to historic performance and expected future performance. We also considered current and forecast commodity prices for oil and natural gas, the impact of Shell’s acquisition of BG as well as the basis on which overall materiality was determined in previous years, which was 5% of the historical three-year average income before tax, adjusted for certain exceptional non-recurring items. In our view, including a forward-looking element in the calculation of average earnings is more appropriate at this time, due to the sustained low oil price environment. It is also common for auditors to use the most prominent earnings measure discussed in quarterly results announcements, rather than income before tax, as the benchmark. Shell’s results announcements feature CCS earnings as the primary measure for earnings, Shell’s earnings forecasts are based on CCS earnings, and it is the earnings measure used by Shell’s Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. Furthermore, analyst reports on forecasts predominately feature CCS earnings as the basis for earnings. �� CCS earnings excluding identified items both removes the effects of changes in oil price on inventory carrying amounts and items disclosed as identified items that can significantly distort Shell’s results in any one particular year. The identified items, reported by Shell in its quarterly earnings releases, that we excluded from the 2016 CCS earnings used in our determination of overall materiality were: net divestment gains ($1.6 billion), impairments ($2.0 billion charge), fair value accounting of commodity derivatives and certain gas contracts ($0.6 billion loss), redundancy and restructuring ($1.4 billion charge); differences in exchange on deferred tax ($0.3 billion gain); and the aggregate of other individually small items ($1.5 billion charge). On the basis of our analysis of these factors, we concluded that we should focus on Shell’s CCS earnings, excluding identified items reported by Shell in its quarterly earnings releases and adjusted for an effective tax rate. |
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Performance materiality |
What we mean | Having established overall materiality, we determined performance materiality, which represents our tolerance for misstatement in an individual account or balance. It is calculated as a fraction of overall materiality in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality of $800 million for Shell’s financial statements as a whole. Once we determined our audit scope, we then assigned performance materiality to our various in-scope operating units. They used this assigned performance materiality in performing their group audit procedures. The performance materiality allocation is dependent on the size of the operating unit, measured by its contribution of earnings to Shell, or other appropriate metric, and risk associated with the operating unit. In 2016, the range of performance materiality allocated to operating units was $40 million to $220 million. This is set out in more detail in section 5 below. |
Level set | $400 million, which is 50% of overall materiality. Our determination that performance materiality should be 50% of overall materiality reflects our normal practice in the case of a first year audit. |
Audit difference reporting threshold |
What we mean | This is the level above which we collate and report audit differences to the Audit Committee. We also report differences below that threshold that, in our view, warrant reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of other relevant qualitative considerations in forming our opinion. |
Level set | We agreed with the Audit Committee that we would report to the Committee all differences in excess of $40 million. The reporting threshold for both 2015 and 2014 was set at $75 million. |
5. | OUR SCOPE OF THE AUDIT OF SHELL’S FINANCIAL STATEMENTS |
What we mean | We are required to establish an overall audit strategy that sets the scope, timing and direction of our audit, and that guides the development of our audit plan. Audit scope comprises the physical locations, operating units, activities and processes to be audited that, in aggregate, are expected to provide sufficient coverage of the financial statements in order for us to express an audit opinion. |
Criteria for determining our audit scope | Our assessment of audit risk and our evaluation of materiality determined our audit scope for each entity within Shell which, when taken together, enabled us to form an opinion on the financial statements under International Standards on Auditing (UK and Ireland). Our audit effort was focused towards higher risk areas, such as management judgements and on operating units that are considered significant based upon size, complexity or risk. The factors that we considered when assessing the scope of the Shell audit, and the level of work to be performed at the operating units that are in scope for group reporting purposes, included the following: ■ the financial significance of an operating unit to Shell’s consolidated earnings, total assets or total liabilities, including consideration of the financial significance of specific account balances or transactions; ■ the significance of specific risks relating to an operating unit: history of unusual or complex transactions, identification of significant audit issues or the potential for, or a history of, material misstatements; ■ findings and observations from the work that we performed to confirm opening balances; ■ the effectiveness of the control environment and monitoring activities, including entity-level controls; ■ our assessment of locations that carry a higher than normal audit risk in relation to fraud, bribery or corruption. Where this was determined to be the case, we deployed appropriate forensic data interrogation techniques; and ■ the results of prior year audits that we were able to determine from our review of PwC’s 2015 and certain 2014 work papers. |
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Selection of in-scope operating units | We selected 85 operating units across 13 countries and performed an audit of the complete financial information of 33 operating units (full scope), which were selected based on their size or risk characteristics. For the remaining 52 selected operating units (specific scope) we performed audit procedures on specific selected accounts within the operating unit based on the size of these accounts or their risk profile. These 85 operating units accounted for 63% of Shell’s CCS earnings* and 69% of Shell’s total assets. In addition to the 85 operating units discussed above, we selected a further 32 operating units where we performed procedures at the operating unit level that were specified by the primary team in response to specific risk factors. Also, we performed review procedures at an additional 12 operating units. The remaining 601 operating units together represented 24% of CCS earnings* and 19% of total assets. None of these was individually greater than 1.0% of CCS earnings* or 0.3% of total assets. For these operating units, we performed other group procedures, including analytical review, testing of consolidation journals and inter-company eliminations, tests of financial systems, process and controls at BSCs and foreign currency translation recalculations to respond to any potential significant risks of material misstatement to Shell’s Consolidated Financial Statements. We revised our audit scope throughout the year in order to reflect changes in Shell’s underlying business and risks and our reassessment of materiality. Our final coverage is summarised below: 
*CCS earnings, excluding identified items reported by Shell in its quarterly earnings releases and adjusted for an effective tax rate. |
Allocation of performance materiality to the
in-scope operating units | Audit work at the operating unit level is undertaken using a percentage of our performance materiality. This percentage is based on the size of the operating unit relative to Shell as a whole and our assessment of the risk of material misstatement at that operating unit. In 2016 the range of performance materiality allocated to operating units was $40 million to $220 million. The operating units selected, together with the ranges of allocated performance materiality, were: |
| Countries | No. of operating units | Allocation $ million |
Full scope Segments |
Integrated Gas | Australia, Qatar | 4 | 60-100 |
Upstream | Brazil, Canada, Nigeria, UK, USA | 10 | 40-100 |
Downstream | Canada, Germany, Singapore, USA | 5 | 60-120 |
Corporate | UK | 1 | 80 |
Full scope Function |
Trading and supply | UK, USA | 13 | 40-220 |
Total full scope | | 33 | |
Specific scope Segments |
Upstream | Kazakhstan, Malaysia, Netherlands, Norway, UK | 6 | 60-80 |
Downstream | Germany, Netherlands, Singapore, USA | 15 | 60-80 |
Corporate | Germany, UK, USA | 23 | 60-80 |
Specific scope Function |
Trading and supply | UK, USA | 8 | 40-80 |
Total specific scope | | 52 | |
Total full and specific scope | 85 | |
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Integrated group team structure | The overall audit strategy is determined by the Senior Statutory Auditor, Allister Wilson. During 2016 he personally visited nine countries to meet with local EY teams and Shell local management (in some cases more than once). The Senior Statutory Auditor is supported by 24 segment and function partners and directors, who are based in the Netherlands and the UK. They are responsible for directing, supervising and reviewing the work of local EY audit teams to evaluate whether: ■ the work was performed and documented to a sufficiently high standard; ■ the local EY audit team demonstrated that they had challenged management sufficiently and had executed their audit procedures with a sufficient level of scepticism; and ■ there is sufficient appropriate audit evidence to support the conclusions reached. |
Involvement with local EY teams | Shell has centralised processes and controls over key areas within a number of BSCs. We have a central team who provide direct oversight, review, and coordination of our BSC audit teams. Our teams performed centralised testing in the BSCs for certain accounts, including revenue, cash and payroll. In establishing our overall approach to the group audit we determined the type of work that needed to be undertaken at each of the operating units or BSCs by the group audit team or by auditors from other EY global network firms operating under our instruction. The group audit team performed procedures directly on 57 of the in-scope operating units. For the operating units where the work was performed by local EY auditors, we determined the appropriate level of involvement to enable us to determine that sufficient appropriate audit evidence had been obtained as a basis for our opinion on Shell as a whole. The group audit team interacted regularly with the local EY teams during each stage of the audit, were responsible for the scope and direction of the audit process and reviewed key working papers. This, together with the additional procedures performed at the group level, gave us sufficient appropriate audit evidence for our opinion on the Consolidated Financial Statements. We maintained continuous and open dialogue with our local EY teams in addition to holding formal meetings quarterly to ensure that we were fully aware of their progress and results of their procedures. We met with all of our local EY teams at our global team meetings in December 2015 and November 2016. Also during 2016, the Senior Statutory Auditor and other group audit partners and directors visited operating units across 10 countries and each of Shell’s BSCs. This allowed us to gain a greater understanding of the business and issues faced in each location. The visits also promote deeper engagement with our local EY audit teams, ensuring that a consistent and cohesive audit approach is adopted, and that a high quality audit is executed. The countries and the BSC locations visited were as follows: |
| | Countries visited | | BSCs | |
| | Australia | Nigeria | UK | | Chennai, India | Kuala Lumpur, Malaysia | |
| | Brazil | Qatar | USA | | Glasgow, UK | Manila, Philippines | |
| | Germany | Singapore | | | Krakow, Poland | | |
| | Netherlands | Malaysia | | | | | |
6. | OUR ASSESSMENT OF KEY AUDIT MATTERS |
As Shell’s auditors, we are required to determine – from the matters communicated by us to the Audit Committee during the year – those matters that required significant attention from us in performing our audit of Shell’s 2016 Consolidated Financial Statements. In making this determination we took the following into account:
| ■ | the risks that we believed were significant to our audit and therefore required special audit consideration; |
| ■ | areas of higher assessed risk of material misstatement that influenced our audit focus; |
| ■ | significant audit judgements relating to areas in Shell’s financial statements that involved significant management judgement, including accounting estimates that we identified as having high estimation uncertainty; |
| ■ | the effect on our audit of significant events or transactions that occurred during the period; and |
| ■ | those assessed risks of material misstatement that had the greatest effect on the allocation of resources in the audit and directing the efforts of the engagement team. |
On this basis, we have identified the following key audit matters that, in our professional judgement, were of most significance in our audit of Shell’s 2016 Consolidated Financial Statements. The key audit matters had the greatest effect on our overall audit strategy, the allocation of resources in the audit and in directing the global engagement team’s efforts.
The key audit matters have been addressed in the context of the audit of Shell’s Consolidated Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The table below describes the key audit matters, a summary of our procedures carried out and our key observations that we communicated to the Shell Audit Committee. We presented to the May 2016 meeting of the Audit Committee the procedures that we planned to undertake in response to the risks that we identified.
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Our key audit matters |
Description of the key audit matters | Summary of our response to the key audit matters | Key observations communicated to the Shell Audit Committee |
First year audit transition |
In our first year as auditors we have to: ■ build on our knowledge of Shell by understanding Shell’s specific risks, controls, policies and processes. This enables us to identify the risks of material misstatement within Shell’s financial statements and to determine the scope of our audit. For a company the size of Shell, with the global spread of operations and its use of BSCs, understanding the organisational structure and how this impacts on processes has been critical; ■ establish the appropriateness of corresponding amounts and the account balances at the beginning of the period being audited; and ■ understand accounting policies applied by Shell to ensure that these are consistently applied between periods. | The principal procedures performed included: ■ shadowing PwC during the third quarter of 2015 and the 2015 year-end at group and key locations during closing and technical meetings with management. This provided us with insights on key issues and PwC’s audit approach; ■ holding a global audit planning meeting in December 2015 at which members of Shell management briefed senior members of our group audit and key location teams on Shell’s organisation and processes; ■ engaging with management at a group and local level in order to obtain a detailed understanding of Shell, including its processes and internal controls. This exercise covered over 300 processes across 67 operating units before the first quarter 2016 results announcement; ■ understanding accounting policies and historic accounting judgements by reviewing accounting policy manuals and technical documentation on specific accounting topics; ■ reviewing key elements of PwC’s 2014 audit files at the group level, and their 2015 audit files both at the group level and for key operating units in scope for the group audit. This built on our knowledge gained through shadowing PwC; and ■ site visits by the group audit team (see section 5). We built upon the knowledge gained through these procedures as we undertook our audit work and refined our views on risks and scope accordingly. We considered the results of our 2016 audit, as it progressed, to provide further evidence in respect of opening balances. | In our audit planning report presented to the Audit Committee in May 2016, we communicated the procedures that we had carried out in order to establish our audit base. We also presented our initial views of risks of material misstatement, the procedures we planned to undertake in response thereto and our proposed audit scope. We presented our updated views on risks and scoping to the December 2016 meeting of the Audit Committee. We formally confirmed to the Audit Committee in March 2017 that nothing had come to our attention that materially impacted on the opening balances and corresponding amounts. |
Cross-reference: See the Audit Committee Report on page 79 for further details. |
The acquisition of BG, specifically the judgements around the purchase price allocation (PPA) |
The consideration for the BG acquisition was $54 billion. Net assets acquired were valued at $43 billion and goodwill of $11 billion was recognised. Shell was required to recognise BG’s assets acquired and liabilities assumed at the acquisition-date fair values. The valuation of oil and gas assets is highly judgemental and complex, requiring significant judgement in applying forecasts and assumptions to complex valuation models. Given the extent of the judgement in valuing some of the assets – in particular deep-water and LNG assets – we believed that the fair value calculation exercise carried with it significant risk of material misstatement. | Shell management engaged third-party experts to provide valuation, tax and business modelling support with respect to the determination of the fair values of BG’s assets and liabilities under IFRS 3. We deployed a specialist team to audit the PPA. Our team included valuation and business modelling specialists who have extensive experience in the valuation of oil and gas assets and liabilities. Our procedures – which were performed by our group team, local teams and specialists as appropriate – focused primarily on the risks relating to the valuation model, assumptions and judgements associated with the estimation of the fair value measurements. These included: ■ gaining an understanding through enquiry and review of the valuation methodology adopted by Shell, and comparing the approach with accepted industry practice; ■ assessing the appropriateness of key assumptions, including oil and gas prices and discount rates, by comparing them with external benchmarks; ■ confirming consistency of assumptions with other areas of the financial statements; ■ using our modelling team to audit the integrity of the models used in the valuations; ■ understanding the value attributed to the cash flow benefits of integrating BG’s assets and operations with those of Shell and validating that these benefits had been attributed appropriately to the asset valuations; ■ recalculating the consideration and goodwill; and ■ testing the internal controls over accounting and reporting for the business combination. These procedures were carried out primarily by the group team, including valuation and business modelling specialists, with input from local EY teams in Australia, Brazil and the USA. | We presented a separate report to the Audit Committee in May 2016 that addressed the audit work we carried out on the provisional PPA exercise. Subsequently, each quarter we reported to the Audit Committee on our progress in auditing the PPA. At the January 2017 meeting of the Audit Committee, we confirmed that we had audited the final adjustments to the PPA and were satisfied that management had followed a robust process in completing the PPA exercise and that it reflected appropriately the facts and circumstances that existed at the acquisition date. |
Cross-reference: See the Audit Committee report on page 80 for details on how the Audit Committee considered the acquisition of BG. Also see Notes 4, 8 and 9 to the “Consolidated Financial Statements”. |
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Our key audit matters |
Description of the key audit matters | Summary of our response to the key audit matters | Key observations communicated to the Shell Audit Committee |
The estimation of oil and gas reserves, including reserves used in the calculation of depreciation, depletion and amortisation (DD&A) |
At December 31, 2016, Shell reported 13,248 million barrels of oil equivalent of proved developed and undeveloped reserves. The estimation and measurement of oil and gas reserves impacts a number of material elements of the financial statements including DD&A, impairments, decommissioning and restoration provisions and acquisition accounting. There is technical uncertainty in assessing reserve quantities and complex contractual arrangements that determine Shell’s share of reserves. Proved reserves estimates, calculated pursuant to SEC rules, have declined in recent years due to continued low prices. Their usage in determining DD&A for certain fields with phased development or where volumes are not reflective of expected future production would accelerate depreciation charges in a way not reflective of their useful life. In these cases, Shell has used an alternative reserves base for DD&A purposes so as to reflect better their expected useful life. | Our reserves team comprises auditors with substantial oil and gas reserves expertise, valuation experience and relevant qualifications in energy economics. We carried out the following procedures: ■ confirmed our understanding of Shell’s oil and gas reserves estimation process; ■ tested significant controls in Shell’s reserves framework; ■ confirmed significant additions or reductions in proved reserves have been made in the period in which the new information became available; ■ tested Shell’s internal certification process and controls for technical and commercial experts responsible for reserves estimation; ■ assessed the reasonableness of proved undeveloped reserves recognised. Where volumes recognised remain undeveloped for more than five years from the date they were booked, or where development is not expected for at least five years, we ensured that Shell was still working towards development by corroborating with future development plans, including capital expenditure plans as appropriate; and ■ where SEC proved developed reserves were not used for DD&A purposes, we challenged management to provide evidence to ensure that the reserves base used better reflected the expected useful life of the field or facilities and was applied consistently. Our procedures were led by the group team, with input from our teams in Australia, Brazil, Canada, Kazakhstan, Netherlands, Nigeria, Norway, Qatar, the UK and USA. | In January 2017 we communicated to the Audit Committee that, based on our testing performed, we had not identified any significant errors in the oil and gas reserves and concluded that the inputs and assumptions used to estimate proved reserves were reasonable. We also confirmed our conclusion that the changes in estimate of reserves used in the DD&A calculation to reflect better the expected useful life of the field or facilities are appropriately and consistently applied. We noted that the approaches used are also in line with other international oil companies. |
Cross-reference: See the Audit Committee Report on page 80 for details on how the Audit Committee considered DD&A. Also, see Note 2 to the “Consolidated Financial Statements”, and Supplementary information – oil and gas (unaudited) – on page 153. |
The recoverable amounts of exploration and production assets, goodwill, and Upstream and Integrated Gas joint ventures and associates
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At December 31, 2016, Shell recognised $13 billion of goodwill, primarily relating to the BG acquisition, $188 billion of property, plant and equipment and $33 billion of investments in joint ventures and associates. A sustained low oil and gas price environment could have a significant impact on the recoverable amounts of Shell’s Upstream and Integrated Gas assets and goodwill. In view of the generally long-lived nature of Shell’s assets, the most critical assumption in forecasting future cash flows is management’s view on the long-term oil and gas price outlook beyond the next three to four years. Other key inputs used in assessing recoverable amounts are the discount rate used, future expected production volumes and capital and operating expenditures. Shell uses a discount rate that reflects the fact that risks are adjusted in the cash flows. | We carried out procedures in all full and certain specific scope locations, including testing for indicators of impairment and validating the appropriateness of the level at which the testing took place. We confirmed that Shell’s asset impairment methodology was appropriate. Our modelling experts tested the integrity of the models used, where applicable. For price assumptions, we corroborated future short and long-term commodity prices to consensus analysts’ forecasts and those adopted by other international oil companies, confirmed prices were used consistently across Shell and that pricing differentials were reasonable. For discount rates used, we engaged our oil and gas valuations team to calculate independently what an acceptable discount rate would be. For cash flow inputs where impairment tests were undertaken, we: ■ confirmed that operating expenditure profiles and capital costs to complete construction could be supported by approved operator budgets and management forecasts; ■ reconciled reserves volumes and confirmed that life-of-field assumptions were consistent with those applied in decommissioning and restoration provisions’ models; and ■ performed sensitivity analyses on certain key variables in the base case cash flow models to understand the impact of changes in certain assumptions (including oil and gas prices, production and operating expenditure levels). We assessed the reasonableness of the probability-weighting applied to the scenario risk factors used in the models and the basis for the risking of the cash flows applied to each individual asset. In doing so, we considered the stage of the life of the asset, country risk and consistency across similar developments and fields. Where impairment tests were undertaken, we stress tested the models using risked discount rates that we considered reasonable when taking account of the nature of the asset, its location, its stage of development and associated risks. In assessing the recoverable amount of goodwill, we tested a sample of Shell’s largest assets in order to establish whether or not any reasonably possible change in a key assumption would result in an impairment of the goodwill. | ■ We reported to the October 2016 meeting of the Audit Committee that, on the basis of our analysis of future commodity prices used in the impairment models versus other international oil companies and consensus analysts’ forecasts, there is sufficient external evidence to support the reasonableness of Shell’s price assumptions – both in the short and long term. ■ We concluded that the impairments recorded are reasonable. Where potential indicators of impairment reversals were present, we were satisfied that the decisions not to reverse previously recorded impairments were appropriate. ■ We concluded that the goodwill balance, which primarily relates to the BG acquisition, is not impaired. We reported to the Audit Committee that, in our view, no reasonably possible change in a key assumption would result in an impairment of the goodwill. |
Cross-reference: See the Audit Committee Report on page 80 for details on how the Audit Committee considered impairments. Also, see Notes 2 and 9 to the “Consolidated Financial Statements”. |
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Our key audit matters |
Description of the key audit matters | Summary of our response to the key audit matters | Key observations communicated to the Shell Audit Committee |
Estimation of decommissioning and restoration provisions (D&R) |
At December 31, 2016, Shell had recognised D&R provisions of $25 billion. D&R provisions are highly judgemental, as they are calculated using cost models based on assumptions that are impacted by future activities and the legislative environment in which Shell operates. D&R provisions are also affected by changes in the estimated date on which production will cease. The cost models are managed at a country level with certain key assumptions derived centrally. Shell discounts future estimated D&R costs at a discount rate that is consistent with the rate applied in 2015. | In auditing the D&R provisions we: ■ identified the cost assumptions that have the most significant impact on the provisions and tested the appropriateness of these assumptions using third-party evidence, including rig and vessel rates; ■ used our valuations experts to evaluate the reasonableness of the discount rate applied to the provisions by comparing it with the US Treasury Bond rate for a similar period; ■ audited the integrity of the underlying models, engaging our modelling team where appropriate; ■ verified the completeness of the cost estimate data by comparing it with work performed on oil and gas reserves and testing of property, plant and equipment; ■ tested the consistency of, and rationale for, the contingent factors applied in the cost estimate model, which are derived from location specific analysis; ■ performed a detailed review at the field level to ensure that all key movements were understood, corroborated and recorded correctly; ■ agreed cost estimates for non-Shell-operated ventures to information provided by third parties. We investigated any significant differences between this information and the amount provided by Shell; and ■ assessed whether D&R movements should be expensed or capitalised by understanding the reason for the change and by comparing the movement with the carrying amount of the related asset. | We reported to the Audit Committee in December 2016 that we had challenged the discount rate applied by management, and that we were satisfied that the rate was appropriate. In January 2017, we communicated to the Audit Committee that, on the basis of the audit work performed, we had concluded that the D&R provisions recorded are appropriate. We also reported that the movements over the year had been expensed appropriately in the Statement of Income or capitalised as part of property, plant and equipment. |
Cross-reference: See Note 19 to the “Consolidated Financial Statements”. |
The recognition and valuation of deferred tax assets (DTA) |
At December 31, 2016, Shell recognised gross DTAs totalling $34 billion, which are recognised within two balance sheet line items, deferred tax assets and as an offset against deferred tax liabilities, depending on the overall tax position in a particular jurisdiction. A significant proportion of DTA balances are supported by forecast future taxable profits, which are underpinned by Shell’s commodity price assumptions and business plans. Estimating DTAs therefore requires significant judgement, including the timing of reversals and the availability of future profits against which tax deductions represented by the DTAs can be offset. In some cases the DTA will be utilised in a period substantially beyond the period of the operating plan. Sustained low commodity prices increase the risk to the recoverability of the DTA due to the fact that sufficient future taxable profits may not be achieved. | We determined the expected timing of reversal of the DTA and the relevant country tax laws that apply to the utilisation of tax losses. This included the ability to carry tax losses forward or back and any restrictions arising from ring fencing tax losses to particular projects. We established whether the DTA was expected to be used against deferred tax liabilities unwinding, future taxable profits or was reliant on tax planning opportunities. For DTAs that are reliant on future taxable profits or tax planning opportunities being available we: ■ stress tested the commodity price and/or other key assumptions that underpin Shell’s assessment of forecast probable taxable profits; ■ ensured that the length of time over which the DTA would be recovered was appropriately supported by probable future taxable profits; and ■ determined the extent to which sufficient profits would arise in the period and within the assets where the losses would be available for utilisation, considering, for example, limits on the length of time that losses can be carried forward (applicable to the USA, the Netherlands and China) or are ring-fenced for tax purposes (including the UK and Nigeria). We evaluated whether the tax planning strategies proposed to recover any remaining DTAs are in line with current tax law and so available to Shell having considered their impact on other entities within Shell in light of their respective tax positions. | We reported to the January 2017 meeting of the Audit Committee that we had challenged the robustness of the following judgements: ■ DTAs recognised on the basis of profits forecast to arise beyond the period of the operating plan; ■ the expected utilisation of DTAs for assets that are ring-fenced for tax purposes; and ■ the impact of projected business improvements including whether it is probable a loss-making business will become profitable in the future or an existing business will experience a significant increase in levels of profit. We concluded to the Audit Committee that DTAs are appropriately recognised and valued in the year-end Balance Sheet. |
Cross-reference: See the Audit Committee Report on page 81 for details on how the Audit Committee reviewed certain tax matters, in particular the recoverability of deferred tax assets. Also see Notes 2 and 17 to the “Consolidated Financial Statements”. |
112
Our key audit matters |
Description of the key audit matters | Summary of our response to the key audit matters | Key observations communicated to the Shell Audit Committee |
Revenue recognition relating to unrealised trading gains and losses |
Shell’s trading and supply function is integrated within the Integrated Gas, Downstream and Upstream segments and is spread across multiple regions. It is inherently complex and exposes Shell to risks that are not normally associated with core oil and gas activities. Whilst trading is not uncommon amongst international oil and gas companies, it does require a robust internal control environment that is commensurate with that of a financial institution. In our audit we have considered the risk of unrealised trading gains and losses recognised as a result of unauthorised trading activity or deliberate misstatement of Shell’s trading positions and the inappropriate valuation of open trading positions. The deliberate misstatement of Shell’s trading positions or mis-marking of positions could result in understated trading losses, overstated trading profits and/or individual bonuses being manipulated through inappropriate inter-period profit/loss allocations. | In order to address the specific risks associated with a trading and supply function, our trading audit teams comprised individuals who have significant experience of auditing both large commodity trading organisations and financial institutions. Our audit procedures focused on: ■ discussions with management on whether there were any breakdowns of trading controls or instances of rogue trading reported or known or suspected frauds; ■ testing controls across the trading and supply function, including IT general and IT application controls; ■ independently obtaining confirmation of a sample of open trading positions with brokers and counterparties, or performing alternative procedures as necessary; ■ performing valuation testing of derivative positions, including confirming the appropriateness of price curves used; ■ performing independent testing of valuation models, focusing on validating, contract terms and key assumptions; and ■ testing the completeness of the amounts recorded in the financial statements through procedures to detect unrecorded liabilities as well as detailed cut-off procedures around sales, purchases, trade receivables and trade payables. | We confirmed that we tested the valuation of derivative contracts as at December 31, 2016, and that our testing –through a combination of controls testing and expanded substantive audit procedures - confirmed the models used to value contracts were appropriate for the purposes of the valuations included in the Consolidated Financial Statements. |
Cross-reference: See Note 20 to the “Consolidated Financial Statements”. |
Accounting for the assets under Shell’s disposal programme |
Shell’s disposal programme continues and there are a number of assets where negotiations with potential buyers are progressing. It is important that Shell actively monitors the progress of each material asset to assess whether or not the criteria for the asset to be classified as an asset held for sale are met. This re-classification may have impairment and/or disclosure implications. Assessing whether or not an asset should be classified as held for sale is a highly judgemental area. For an asset to be classified as held for sale the following two criteria must be met: ■ it must be available for immediate sale in its present condition; and ■ the sale must be “highly probable”. | The most significant judgements for 2016 of whether or not a sale is “highly probable” relate to potential material disposals within Upstream and Downstream. Management have concluded that the criteria have not been met in respect of these transactions and therefore have not classified the assets as held for sale. Our audit procedures for these potential disposals included: ■ monitoring the progress of these transactions and obtaining regular status updates; ■ assessing how committed Shell is to a plan with respect to the sale of each asset; ■ assessing the likelihood of any sales being completed within one year; ■ considering whether or not actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn; ■ understanding what substantive matters were still under discussion with regard to potential disposals; and ■ corroborating, where possible, the factors influencing management’s conclusion. | We communicated to the January 2017 meeting of the Audit Committee that we agreed with management’s assessment that, as at the year end, the criteria to classify the assets as assets held for sale had not been met. In reaching our conclusion, in the case of each asset we took account of the substantive matters that were still under discussion and the number of commercial factors that remained unresolved at the year-end. |
Cross-reference: See Note 2 to the “Consolidated Financial Statements”. |
7. | SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS |
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to Shell’s and the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
113
| 8. | RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR |
As explained more fully in the statement of Directors’ responsibilities set out on page 64, the Directors are responsible for the preparation of the Consolidated Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Consolidated Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
9. | MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION |
ISAs (UK and Ireland) reporting |
We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report is: ■ materially inconsistent with the information in the audited financial statements; or ■ apparently materially incorrect based on, or materially inconsistent with, our knowledge of Shell acquired in the course of performing our audit; or ■ otherwise misleading. In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the Directors’ statement that they consider the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s position and performance, business model and strategy; and whether the Annual Report appropriately addresses those matters that we communicated to the Audit Committee that we consider should have been disclosed. We have no exceptions to report. |
Companies Act 2006 reporting |
We are required to report to you if, in our opinion: ■ adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or ■ the Parent Company Financial Statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or ■ certain disclosures of Directors’ remuneration specified by law are not made; or ■ we have not received all the information and explanations we require for our audit. We have no exceptions to report. |
Listing Rules review requirements |
We are required to review: ■ the Directors’ statement in relation to going concern, set out on page 65, and longer-term viability, set out on page 65; and ■ the part of the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. We have no exceptions to report. |
ISAs (UK and Ireland) reporting, Statement on the directors’ assessment of the principal risks that would threaten the solvency
or liquidity of the entity |
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: ■ the Directors’ confirmation in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; ■ the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; ■ the Directors’ statement in the Directors’ Report (page 65) about whether they considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements; and ■ the Directors’ explanation in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. |
/s/ Allister Wilson (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
March 8, 2017
1. | The maintenance and integrity of the Shell website are the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. |
2. | Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. |
The report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report and Accounts for 2016 only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016.
114
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
We have audited the accompanying consolidated balance sheet of Royal Dutch Shell plc as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Dutch Shell plc at December 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union.
As discussed in Note 5 to the Consolidated Financial Statements, in 2016 Royal Dutch Shell plc elected to change the composition of its reportable segments. We also audited the adjustments to the 2015 and 2014 Consolidated Financial Statements to retrospectively reflect the change in composition of reportable segments. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2015 and 2014 Consolidated Financial Statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2015 and 2014 Consolidated Financial Statements taken as a whole.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Royal Dutch Shell plc's internal control over financial reporting as of December 31, 2016, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 8, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
London, United Kingdom
March 8, 2017
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
We have audited Royal Dutch Shell plc’s internal control over financial reporting as of December 31, 2016, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Royal Dutch Shell plc’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting as set out on page 72. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Royal Dutch Shell plc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Royal Dutch Shell plc as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended and our report dated March 8, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
London, United Kingdom
March 8, 2017
1. | The maintenance and integrity of the Shell website are the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. |
2. | Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. |
The reports set out above are included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016 only and do not form part of Royal Dutch Shell plc’s Annual Report on Accounts for 2016.
115 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND ROYAL DUTCH SHELL PLC SHAREHOLDERS
In our opinion, the accompanying Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes to the Consolidated Financial Statements before the effects of the adjustments to retrospectively reflect the change in the composition of reportable segments described in Note 5 present fairly, in all material respects, the financial position of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively Shell) at December 31, 2015 and the results of their operations and cash flows for each of the two years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits, before the effects of the adjustments described above, of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the change in the composition of reportable segments described in Note 5 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
/s/ PricewaterhouseCoopers LLP
London, United Kingdom
March 9, 2016
Note that the report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2016.
116 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
CONSOLIDATED FINANCIAL STATEMENTS
117 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
Consolidated Statement of Income | | $ million | |
| | Notes | | | 2016 | | | 2015 | | | 2014 | |
Revenue | | | 5 | | | | 233,591 | | | | 264,960 | | | | 421,105 | |
Share of profit of joint ventures and associates | | | 10 | | | | 3,545 | | | | 3,527 | | | | 6,116 | |
Interest and other income | | | 6 | | | | 2,897 | | | | 3,669 | | | | 4,123 | |
Total revenue and other income | | | | | | | 240,033 | | | | 272,156 | | | | 431,344 | |
Purchases | | | | | | | 162,574 | | | | 194,644 | | | | 327,278 | |
Production and manufacturing expenses | | | | | | | 28,434 | | | | 28,095 | | | | 30,038 | |
Selling, distribution and administrative expenses | | | | | | | 12,101 | | | | 11,956 | | | | 13,965 | |
Research and development | | | | | | | 1,014 | | | | 1,093 | | | | 1,222 | |
Exploration | | | | | | | 2,108 | | | | 5,719 | | | | 4,224 | |
Depreciation, depletion and amortisation | | | 5 | | | | 24,993 | | | | 26,714 | | | | 24,499 | |
Interest expense | | | 7 | | | | 3,203 | | | | 1,888 | | | | 1,804 | |
Total expenditure | | | | | | | 234,427 | | | | 270,109 | | | | 403,030 | |
Income before taxation | | | | | | | 5,606 | | | | 2,047 | | | | 28,314 | |
Taxation charge/(credit) | | | 17 | | | | 829 | | | | (153 | ) | | | 13,584 | |
Income for the period | | | 5 | | | | 4,777 | | | | 2,200 | | | | 14,730 | |
Income/(loss) attributable to non-controlling interest | | | | | | | 202 | | | | 261 | | | | (144 | ) |
Income attributable to Royal Dutch Shell plc shareholders | | | | | | | 4,575 | | | | 1,939 | | | | 14,874 | |
Basic earnings per share ($) | | | 25 | | | | 0.58 | | | | 0.31 | | | | 2.36 | |
Diluted earnings per share ($) | | | 25 | | | | 0.58 | | | | 0.30 | | | | 2.36 | |
| | | | | | | | | | | | | | | | |
Consolidated Statement of Comprehensive Income | | $ million | |
| | Notes | | | 2016 | | | 2015 | | | 2014 | |
Income for the period | | | | | | | 4,777 | | | | 2,200 | | | | 14,730 | |
Other comprehensive income/(loss), net of tax | | | 23 | | | | | | | | | | | | | |
Items that may be reclassified to income in later periods: | | | | | | | | | | | | | | | | |
Currency translation differences | | | | | | | 703 | | | | (7,121 | ) | | | (5,321 | ) |
Unrealised losses on securities | | | | | | | (214 | ) | | | (707 | ) | | | (797 | ) |
Cash flow hedging (losses)/gains | | | | | | | (617 | ) | | | 61 | | | | 528 | |
Net investment hedging losses | | | | | | | (2,024 | ) | | | — | | | | — | |
Share of other comprehensive loss of joint ventures and associates | | | 10 | | | | (28 | ) | | | (40 | ) | | | (156 | ) |
Total | | | | | | | (2,180 | ) | | | (7,807 | ) | | | (5,746 | ) |
Items that are not reclassified to income in later periods: | | | | | | | | | | | | | | | | |
Retirement benefits remeasurements | | | | | | | (3,817 | ) | | | 4,951 | | | | (6,482 | ) |
Other comprehensive loss for the period | | | | | | | (5,997 | ) | | | (2,856 | ) | | | (12,228 | ) |
Comprehensive (loss)/income for the period | | | | | | | (1,220 | ) | | | (656 | ) | | | 2,502 | |
Comprehensive income/(loss) attributable to non-controlling interest | | | | | | | 154 | | | | 155 | | | | (190 | ) |
Comprehensive (loss)/income attributable to Royal Dutch Shell plc shareholders | | | | | | | (1,374 | ) | | | (811 | ) | | | 2,692 | |
118 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | |
Consolidated Balance Sheet | | $ million | |
| | Notes | | | Dec 31, 2016 | | | Dec 31, 2015 | |
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Intangible assets | | | 8 | | | | 23,967 | | | | 6,283 | |
Property, plant and equipment | | | 9 | | | | 236,098 | | | | 182,838 | |
Joint ventures and associates | | | 10 | | | | 33,255 | | | | 30,150 | |
Investments in securities | | | 11 | | | | 5,952 | | | | 3,416 | |
Deferred tax | | | 17 | | | | 14,425 | | | | 11,033 | |
Retirement benefits | | | 18 | | | | 1,456 | | | | 4,362 | |
Trade and other receivables | | | 12 | | | | 9,553 | | | | 8,717 | |
| | | | | | | 324,706 | | | | 246,799 | |
Current assets | | | | | | | | | | | | |
Inventories | | | 13 | | | | 21,775 | | | | 15,822 | |
Trade and other receivables | | | 12 | | | | 45,664 | | | | 45,784 | |
Cash and cash equivalents | | | 14 | | | | 19,130 | | | | 31,752 | |
| | | | | | | 86,569 | | | | 93,358 | |
Total assets | | | | | | | 411,275 | | | | 340,157 | |
Liabilities | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Debt | | | 15 | | | | 82,992 | | | | 52,849 | |
Trade and other payables | | | 16 | | | | 6,925 | | | | 4,528 | |
Deferred tax | | | 17 | | | | 15,274 | | | | 8,976 | |
Retirement benefits | | | 18 | | | | 14,130 | | | | 12,587 | |
Decommissioning and other provisions | | | 19 | | | | 29,618 | | | | 26,148 | |
| | | | | | | 148,939 | | | | 105,088 | |
Current liabilities | | | | | | | | | | | | |
Debt | | | 15 | | | | 9,484 | | | | 5,530 | |
Trade and other payables | | | 16 | | | | 53,417 | | | | 52,770 | |
Taxes payable | | | 17 | | | | 6,685 | | | | 8,233 | |
Retirement benefits | | | 18 | | | | 455 | | | | 350 | |
Decommissioning and other provisions | | | 19 | | | | 3,784 | | | | 4,065 | |
| | | | | | | 73,825 | | | | 70,948 | |
Total liabilities | | | | | | | 222,764 | | | | 176,036 | |
Equity | | | | | | | | | | | | |
Share capital | | | 21 | | | | 683 | | | | 546 | |
Shares held in trust | | | 22 | | | | (901 | ) | | | (584 | ) |
Other reserves | | | 23 | | | | 11,298 | | | | (17,186 | ) |
Retained earnings | | | | | | | 175,566 | | | | 180,100 | |
Equity attributable to Royal Dutch Shell plc shareholders | | | | | | | 186,646 | | | | 162,876 | |
Non-controlling interest | | | | | | | 1,865 | | | | 1,245 | |
Total equity | | | | | | | 188,511 | | | | 164,121 | |
Total liabilities and equity | | | | | | | 411,275 | | | | 340,157 | |
Signed on behalf of the Board /s/ Simon Henry |
Simon Henry |
Chief Financial Officer |
March 8, 2017 |
119 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statement of Changes in Equity | | $ million | |
| | Equity attributable to Royal Dutch Shell plc shareholders | | | | | | | | | |
| | Share capital (see Note 21) | | | Shares held in trust (see Note 22) | | | Other reserves (see Note 23) | | | Retained earnings | | | Total | | | Non- controlling interest | | | Total equity | |
At January 1, 2016 | | | 546 | | | | (584 | ) | | | (17,186 | ) | | | 180,100 | | | | 162,876 | | | | 1,245 | | | | 164,121 | |
Comprehensive loss for the period | | | — | | | | — | | | | (5,949 | ) | | | 4,575 | | | | (1,374 | ) | | | 154 | | | | (1,220 | ) |
Dividends paid (see Note 24) | | | — | | | | — | | | | — | | | | (14,959 | ) | | | (14,959 | ) | | | (180 | ) | | | (15,139 | ) |
Scrip dividends (see Note 24) | | | 17 | | | | — | | | | (17 | ) | | | 5,282 | | | | 5,282 | | | | — | | | | 5,282 | |
Shares issued (see Note 4) | | | 120 | | | | — | | | | 33,930 | | | | — | | | | 34,050 | | | | — | | | | 34,050 | |
Share-based compensation [A] | | | — | | | | (317 | ) | | | 520 | | | | 141 | | | | 344 | | | | — | | | | 344 | |
Other changes in non-controlling interest [B] | | | — | | | | — | | | | — | | | | 427 | | | | 427 | | | | 646 | | | | 1,073 | |
At December 31, 2016 | | | 683 | | | | (901 | ) | | | 11,298 | | | | 175,566 | | | | 186,646 | | | | 1,865 | | | | 188,511 | |
At January 1, 2015 | | | 540 | | | | (1,190 | ) | | | (14,365 | ) | | | 186,981 | | | | 171,966 | | | | 820 | | | | 172,786 | |
Comprehensive loss for the period | | | — | | | | — | | | | (2,750 | ) | | | 1,939 | | | | (811 | ) | | | 155 | | | | (656 | ) |
Dividends paid (see Note 24) | | | — | | | | — | | | | — | | | | (11,972 | ) | | | (11,972 | ) | | | (117 | ) | | | (12,089 | ) |
Scrip dividends (see Note 24) | | | 7 | | | | — | | | | (7 | ) | | | 2,602 | | | | 2,602 | | | | — | | | | 2,602 | |
Repurchases of shares | | | (1 | ) | | | — | | | | 1 | | | | 1 | | | | 1 | | | | — | | | | 1 | |
Share-based compensation | | | — | | | | 606 | | | | (65 | ) | | | 48 | | | | 589 | | | | — | | | | 589 | |
Other changes in non-controlling interest [B] | | | — | | | | — | | | | — | | | | 501 | | | | 501 | | | | 387 | | | | 888 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2015 | | | 546 | | | | (584 | ) | | | (17,186 | ) | | | 180,100 | | | | 162,876 | | | | 1,245 | | | | 164,121 | |
At January 1, 2014 | | | 542 | | | | (1,932 | ) | | | (2,037 | ) | | | 183,474 | | | | 180,047 | | | | 1,101 | | | | 181,148 | |
Comprehensive income for the period | | | — | | | | — | | | | (12,182 | ) | | | 14,874 | | | | 2,692 | | | | (190 | ) | | | 2,502 | |
Dividends paid (see Note 24) | | | — | | | | — | | | | — | | | | (11,843 | ) | | | (11,843 | ) | | | (116 | ) | | | (11,959 | ) |
Scrip dividends (see Note 24) | | | 6 | | | | — | | | | (6 | ) | | | 2,399 | | | | 2,399 | | | | — | | | | 2,399 | |
Repurchases of shares | | | (8 | ) | | | — | | | | 8 | | | | (2,787 | ) | | | (2,787 | ) | | | — | | | | (2,787 | ) |
Share-based compensation | | | — | | | | 742 | | | | (148 | ) | | | 137 | | | | 731 | | | | — | | | | 731 | |
Other changes in non-controlling interest [B] | | | — | | | | — | | | | — | | | | 727 | | | | 727 | | | | 25 | | | | 752 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2014 | | | 540 | | | | (1,190 | ) | | | (14,365 | ) | | | 186,981 | | | | 171,966 | | | | 820 | | | | 172,786 | |
[A] Includes a reclassification of $534 million between shares held in trust and other reserves, with no impact on total equity, in order to appropriately reflect the carrying amount of shares held in trust at cost.
[B] Mainly relates to public offerings of limited partner units in Shell Midstream Partners, L.P. The difference between the proceeds after tax and the increase in non-controlling interest, measured by reference to the carrying amount of the entity’s net assets at the date of each transaction, was recognised in retained earnings.
120 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
Consolidated Statement of Cash Flows | | $ million | |
| | Notes | | | 2016 | | | 2015 | | | 2014 | |
Income for the period | | | | | | | 4,777 | | | | 2,200 | | | | 14,730 | |
Adjustment for: | | | | | | | | | | | | | | | | |
Current tax | | | | | | | 2,731 | | | | 7,058 | | | | 13,757 | |
Interest expense (net) | | | | | | | 2,752 | | | | 1,529 | | | | 1,598 | |
Depreciation, depletion and amortisation | | | | | | | 24,993 | | | | 26,714 | | | | 24,499 | |
Net gains on sale and revaluation of non-current assets and businesses | | | | | | | (2,141 | ) | | | (3,460 | ) | | | (3,212 | ) |
(Increase)/decrease in inventories | | | | | | | (5,658 | ) | | | 2,827 | | | | 7,958 | |
Decrease/(increase) in current receivables | | | | | | | 2,038 | | | | 9,852 | | | | (1,541 | ) |
Decrease in current payables | | | | | | | (2,669 | ) | | | (7,158 | ) | | | (12 | ) |
Share of profit of joint ventures and associates | | | | | | | (3,545 | ) | | | (3,527 | ) | | | (6,116 | ) |
Dividends received from joint ventures and associates | | | | | | | 3,820 | | | | 4,627 | | | | 6,902 | |
Deferred tax, retirement benefits, decommissioning and other provisions | | | | | | | (823 | ) | | | (5,827 | ) | | | (1,720 | ) |
Other | | | | | | | (1,226 | ) | | | 2,648 | | | | 2,500 | |
Tax paid | | | | | | | (4,434 | ) | | | (7,673 | ) | | | (14,299 | ) |
Cash flow from operating activities | | | | | | | 20,615 | | | | 29,810 | | | | 45,044 | |
Capital expenditure | | | | | | | (22,116 | ) | | | (26,131 | ) | | | (31,676 | ) |
Acquisition of BG Group plc, net of cash and cash equivalents acquired | | | 4 | | | | (11,421 | ) | | | — | | | | — | |
Investments in joint ventures and associates | | | | | | | (1,330 | ) | | | (896 | ) | | | (1,426 | ) |
Proceeds from sale of property, plant and equipment and businesses | | | | | | | 2,072 | | | | 4,720 | | | | 9,873 | |
Proceeds from sale of joint ventures and associates | | | | | | | 1,565 | | | | 276 | | | | 4,163 | |
Interest received | | | | | | | 470 | | | | 288 | | | | 174 | |
Other | | | | | | | (203 | ) | | | (664 | ) | | | (765 | ) |
Cash flow from investing activities | | | | | | | (30,963 | ) | | | (22,407 | ) | | | (19,657 | ) |
Net decrease in debt with maturity period within three months | | | | | | | (360 | ) | | | (586 | ) | | | (3,332 | ) |
Other debt: | | | | | | | | | | | | | | | | |
New borrowings | | | | | | | 18,144 | | | | 21,500 | | | | 7,778 | |
Repayments | | | | | | | (6,710 | ) | | | (6,023 | ) | | | (4,089 | ) |
Interest paid | | | | | | | (2,938 | ) | | | (1,742 | ) | | | (1,480 | ) |
Change in non-controlling interest | | | | | | | 1,110 | | | | 598 | | | | 989 | |
Cash dividends paid to: | | | | | | | | | | | | | | | | |
Royal Dutch Shell plc shareholders | | | 24 | | | | (9,677 | ) | | | (9,370 | ) | | | (9,444 | ) |
Non-controlling interest | | | | | | | (180 | ) | | | (117 | ) | | | (116 | ) |
Repurchases of shares | | | | | | | — | | | | (409 | ) | | | (3,328 | ) |
Shares held in trust: net (purchases)/sales and dividends received | | | | | | | (160 | ) | | | (39 | ) | | | 232 | |
Cash flow from financing activities | | | | | | | (771 | ) | | | 3,812 | | | | (12,790 | ) |
Currency translation differences relating to cash and cash equivalents | | | | | | | (1,503 | ) | | | (1,070 | ) | | | (686 | ) |
(Decrease)/increase in cash and cash equivalents | | | | | | | (12,622 | ) | | | 10,145 | | | | 11,911 | |
Cash and cash equivalents at January 1 | | | | | | | 31,752 | | | | 21,607 | | | | 9,696 | |
Cash and cash equivalents at December 31 | | | 14 | | | | 19,130 | | | | 31,752 | | | | 21,607 | |
121 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
The Consolidated Financial Statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively referred to as Shell) have been prepared in accordance with the provisions of the Companies Act 2006 (the Act) and Article 4 of the IAS Regulation, and therefore in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to Shell, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
As described in the accounting policies in Note 2, the Consolidated Financial Statements have been prepared under the historical cost convention except for certain items measured at fair value. Those accounting policies have been applied consistently in all periods.
The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on March 8, 2017.
2 KEY ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
NATURE OF THE CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are presented in US dollars (dollars) and comprise the financial statements of the Company and its subsidiaries, being those entities over which the Company has control, either directly or indirectly, through exposure or rights to their variable returns and the ability to affect those returns through its power over the entities. Information about subsidiaries at December 31, 2016, can be found in Exhibit 8.
Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from such transactions, are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Non-controlling interest represents the proportion of income, other comprehensive income and net assets in subsidiaries that is not attributable to the Company’s shareholders.
CURRENCY TRANSLATION
Foreign currency transactions are translated using the exchange rate at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at quarter-end exchange rates of monetary assets and liabilities denominated in foreign currencies (including those in respect of inter-company balances unless related to loans of a long-term investment nature) are recognised in income, except when recognised in other comprehensive income in respect of cash flow or net investment hedges, and presented within interest and other income or within purchases where not related to financing. Share capital issued in currencies other than the dollar is translated at the exchange rate at the date of issue.
On consolidation, assets and liabilities of non-dollar entities are translated to dollars at year-end rates of exchange, while their statements of income, other comprehensive income and cash flows are translated at quarterly average rates. The resulting translation differences are recognised as currency translation differences within other comprehensive income. Upon sale of all or part of an interest in, or upon liquidation of, an entity, the appropriate portion of cumulative currency translation differences related to that entity are generally recognised in income.
REVENUE RECOGNITION
Revenue from sales of oil, natural gas, chemicals and other products is recognised at the fair value of consideration received or receivable, after deducting sales taxes, excise duties and similar levies, when the significant risks and rewards of ownership have been transferred, which is when title passes to the customer. For sales by Integrated Gas and Upstream operations, this generally occurs when product is physically transferred into a vessel, pipe or other delivery mechanism; for sales by refining operations it is either when product is placed onboard a vessel or offloaded from the vessel, depending on the contractually agreed terms; and for sales of oil products and chemicals it is either at the point of delivery or the point of receipt, depending on contractual conditions.
Revenue resulting from hydrocarbon production from properties in which Shell has an interest with partners in joint arrangements is recognised on the basis of Shell’s working interest (entitlement method). Revenue resulting from the production of oil and natural gas under production-sharing contracts (PSCs) is recognised for those amounts relating to Shell’s cost recoveries and Shell’s share of the remaining production. Gains and losses on derivative contracts and the revenue and costs associated with other contracts that are classified as held for trading purposes are reported on a net basis in the Consolidated Statement of Income. Purchases and sales of hydrocarbons under exchange contracts that are necessary to obtain or reposition feedstocks for refinery operations are presented net in the Consolidated Statement of Income.
RESEARCH AND DEVELOPMENT
Development costs that are expected to generate probable future economic benefits are capitalised as intangible assets. All other research and development expenditure is recognised in income as incurred.
EXPLORATION COSTS
Hydrocarbon exploration costs are accounted for under the successful efforts method: exploration costs are recognised in income when incurred, except that exploratory drilling costs, including in respect of operating leases, are included in property, plant and equipment pending determination of proved reserves. Exploration costs capitalised in respect of exploration wells that are more than 12 months old are written off unless: (a) proved reserves are booked; or (b) (i) they have found commercially producible quantities of reserves and (ii) they are subject to further exploration or appraisal activity in that either drilling of additional exploratory wells is underway or firmly planned for the near future or other activities are being undertaken to sufficiently progress the assessing of reserves and the economic and operating viability of the project.
122 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS
Recognition
Property, plant and equipment comprise assets owned by Shell, assets held by Shell under finance leases and assets operated by Shell as contractor in PSCs. They include rights and concessions in respect of properties with proved reserves (proved properties) and with no proved reserves (unproved properties). Property, plant and equipment, including expenditure on major inspections, and intangible assets are initially recognised in the Consolidated Balance Sheet at cost where it is probable that they will generate future economic benefits. This includes capitalisation of decommissioning and restoration costs associated with provisions for asset retirement (see “Provisions”), certain development costs (see “Research and development”) and the effects of associated cash flow hedges (see “Financial instruments and other derivative contracts”) as applicable. The accounting for exploration costs is described separately (see “Exploration costs”). Intangible assets include goodwill, LNG off-take and sales contracts obtained through acquisition, software costs and trademarks. Interest is capitalised, as an increase in property, plant and equipment, on major capital projects during construction.
Property, plant and equipment and intangible assets are subsequently carried at cost less accumulated depreciation, depletion and amortisation (including any impairment). Gains and losses on sale are determined by comparing the proceeds with the carrying amounts of assets sold and are recognised in income, within interest and other income.
An asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, which is when the sale is highly probable and it is available for immediate sale. Assets classified as held for sale are measured at the lower of the carrying amount upon classification and the fair value less costs to sell.
Depreciation, depletion and amortisation
Property, plant and equipment related to hydrocarbon production activities are in principle depreciated on a unit-of-production basis over the proved developed reserves of the field concerned, other than assets whose useful lives differ from the lifetime of the field which are depreciated applying the straight-line method. However, for certain Upstream assets, other approaches are applied to determine the reserves base for the purpose of calculating depreciation, such as using management’s expectations of future oil and gas prices rather than yearly average prices, to provide a phasing of periodic depreciation charges that more appropriately reflects the expected utilisation of the assets concerned.
Rights and concessions in respect of proved properties are depleted on the unit-of-production basis over the total proved reserves of the relevant area. Where individually insignificant, unproved properties may be grouped and depreciated based on factors such as the average concession term and past experience of recognising proved reserves.
Property, plant and equipment held under finance leases and capitalised LNG off-take and sales contracts are depreciated or amortised over the term of the respective contract. Other property, plant and equipment and intangible assets are depreciated or amortised on a straight-line basis over their estimated useful lives, except for goodwill, which is not amortised. They include refineries and chemical plants (for which the useful life is generally 20 years), retail service stations (15 years), upgraders (30 years) and major inspection costs, which are depreciated over the estimated period before the next planned major inspection (three to five years).
On classification held for sale, depreciation on the asset ceases.
Estimates of the useful lives and residual values of property, plant and equipment and intangible assets are reviewed annually and adjusted if appropriate.
Impairment
The carrying amount of goodwill is tested for impairment annually; in addition, assets other than unproved properties (see “Exploration costs”) are tested for impairment whenever events or changes in circumstances indicate that the carrying amounts for those assets may not be recoverable. On classification as held for sale, the carrying amounts of property, plant and equipment and intangible assets are also reviewed. If assets are determined to be impaired, the carrying amounts of those assets are written down to their recoverable amount, which is the higher of fair value less costs to sell (see “Fair value measurements”) and value in use.
Value in use is determined as the amount of estimated risk-adjusted discounted future cash flows. For this purpose, assets are grouped into cash-generating units based on separately identifiable and largely independent cash inflows. Estimates of future cash flows used in the evaluation of impairment of assets are made using management’s forecasts of commodity prices, market supply and demand, product margins and, in the case of exploration and production assets, expected production volumes. The latter takes into account assessments of field and reservoir performance and includes expectations about both proved reserves and volumes that are expected to constitute proved reserves in the future (unproved volumes), which are risk-weighted utilising geological, production, recovery and economic projections. Cash flow estimates are risk-adjusted to reflect local conditions as appropriate and discounted at a rate based on Shell’s marginal cost of debt.
Impairments, except those related to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed.
Impairment losses and reversals are reported within depreciation, depletion and amortisation.
123 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Key accounting judgements and estimates
Proved oil and gas reserves
Unit-of-production depreciation, depletion and amortisation charges are principally measured based on management’s estimates of proved developed oil and gas reserves. Also, exploration drilling costs are capitalised pending the results of further exploration or appraisal activity, which may take several years to complete and before any related proved reserves can be booked.
Proved reserves are estimated by reference to available geological and engineering data and only include volumes for which access to market is assured with reasonable certainty. Yearly average oil and gas prices are applied in the determination of proved reserves. Estimates of proved reserves are inherently imprecise, require the application of judgement and are subject to regular revision, either upward or downward, based on new information such as from the drilling of additional wells, observation of long-term reservoir performance under producing conditions and changes in economic factors, including product prices, contract terms or development plans.
Changes to estimates of proved developed reserves affect prospectively the amounts of depreciation, depletion and amortisation charged and, consequently, the carrying amounts of exploration and production assets. It is expected, however, that in the normal course of business the diversity of the asset portfolio will limit the effect of such revisions. The outcome of, or assessment of plans for, exploration or appraisal activity may result in the related capitalised exploration drilling costs being recognised in income in that period.
Judgement is involved in determining when to use an alternative reserves base in order to appropriately reflect the expected utilisation of the assets concerned (see "Depreciation, depletion and amortisation").
Information about the carrying amounts of exploration and production assets and the amounts charged to income, including depreciation, depletion and amortisation, is presented in Note 9.
Impairment
For the purposes of determining whether impairment of assets has occurred, and the extent of any impairment loss or its reversal, the key assumptions management uses in estimating risk-adjusted future cash flows for value-in-use measures are future oil and gas prices, expected production volumes and refining margins appropriate to the local circumstances and environment. These assumptions and the judgements of management that are based on them are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates.
Future price assumptions tend to be stable because management does not consider short-term increases or decreases in prices as being indicative of long-term levels, but they are nonetheless subject to change. Expected production volumes, which comprise proved reserves and unproved volumes, are used for impairment testing because management believes this to be the most appropriate indicator of expected future cash flows. As discussed in “Proved oil and gas reserves” above, reserves estimates are inherently imprecise. Furthermore, projections about unproved volumes are based on information that is necessarily less robust than that available for mature reservoirs. Due to the nature and geographical spread of the business activity in which those assets are used, it is typically not practicable to estimate the likelihood or extent of impairments under different sets of assumptions for Shell overall.
Changes in assumptions could affect the carrying amounts of assets, and any impairment losses and reversals will affect income.
Judgement, which is subject to change as new information becomes available, can be required in determining when an asset is classified as held for sale. A change in that judgement could result in impairment charges affecting income, depending on whether classification requires a write down of the asset to its fair value less costs to sell.
Information about the carrying amounts of assets and impairments is presented in Notes 8 and 9.
LEASES
Agreements under which payments are made to owners in return for the right to use an asset for a period are accounted for as leases. Leases that transfer substantially all the risks and rewards of ownership are recognised at the commencement of the lease term as finance leases within property, plant and equipment and debt at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Finance lease payments are apportioned between interest expense and repayments of debt. All other leases are classified as operating leases and the cost is recognised in income on a straight-line basis, except where capitalised as exploration drilling costs (see "Exploration costs").
JOINT ARRANGEMENTS AND ASSOCIATES
Arrangements under which Shell has contractually agreed to share control (see “Nature of the Consolidated Financial Statements”) with another party or parties are joint ventures where the parties have rights to the net assets of the arrangement, or joint operations where the parties have rights to the assets and obligations for the liabilities relating to the arrangement. Investments in entities over which Shell has the right to exercise significant influence but neither control nor joint control are classified as associates. Information about incorporated joint arrangements and associates at December 31, 2016, can be found in Exhibit 8.
Investments in joint ventures and associates are accounted for using the equity method, under which the investment is initially recognised at cost and subsequently adjusted for the Shell share of post-acquisition income less dividends received and the Shell share of other comprehensive income and other movements in equity, together with any loans of a long-term investment nature. Where necessary, adjustments are made to the financial statements of joint ventures and associates to bring the accounting policies used into line with those of Shell. In an exchange of assets and liabilities for an interest in a joint venture, the non-Shell share of any excess of the fair value of the assets and liabilities transferred over the pre-exchange carrying amounts is recognised in income. Unrealised gains on other transactions between Shell and its joint ventures and associates are eliminated to the extent of Shell’s interest in them; unrealised losses are treated similarly but may also result in an assessment of whether the asset transferred is impaired.
Shell recognises its assets and liabilities relating to its interests in joint operations, including its share of assets held jointly and liabilities incurred jointly with other partners.
124 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
INVENTORIES
Inventories are stated at cost or net realisable value, whichever is lower. Cost comprises direct purchase costs (including transportation), and associated costs incurred in bringing inventories to their present condition and location, and is determined using the first-in, first-out (FIFO) method for oil, gas and chemicals and by the weighted average cost method for materials.
TAXATION
The charge for current tax is calculated based on the income reported by the Company and its subsidiaries, as adjusted for items that are non-taxable or disallowed and using rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is determined, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Balance Sheet and on unused tax losses and credits carried forward.
Deferred tax assets and liabilities are calculated using the enacted or substantively enacted rates that are expected to apply when an asset is realised or a liability is settled. They are not recognised where they arise on the initial recognition of goodwill or of an asset or liability in a transaction (other than in a business combination) that, at the time of the transaction, affects neither accounting nor taxable profit, or in respect of taxable temporary differences associated with subsidiaries, joint ventures and associates where the reversal of the respective temporary difference can be controlled by Shell and it is probable that it will not reverse in the foreseeable future.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences, unused tax losses and credits carried forward can be utilised.
Income taxes are recognised in income except when they relate to items recognised in other comprehensive income, in which case the tax is recognised in other comprehensive income. Income tax assets and liabilities are presented separately in the Consolidated Balance Sheet except where there is a right of offset within fiscal jurisdictions and an intention to settle such balances on a net basis.
Key accounting judgements and estimates
Tax liabilities are recognised when it is considered probable that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/or in the expected amount to be settled would be recognised in income in the period in which the change occurs.
Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognised in respect of deferred tax assets as well as in the amounts recognised in income in the period in which the change occurs.
Taxation information, including charges and deferred tax assets and liabilities, is presented in Note 17. Income taxes include taxes at higher rates levied on income from certain Integrated Gas and Upstream activities.
RETIREMENT BENEFITS
Benefits in the form of retirement pensions and healthcare and life insurance are provided to certain employees and retirees under defined benefit and defined contribution plans.
Obligations under defined benefit plans are calculated annually by independent actuaries using the projected unit credit method, which takes into account employees’ years of service and, for pensions, average or final pensionable remuneration, and are discounted to their present value using interest rates of high-quality corporate bonds denominated in the currency in which the benefits will be paid and of a duration consistent with the plan obligations. Where plans are funded, payments are made to independently managed trusts; assets held by those trusts are measured at fair value.
The amounts recognised in income in respect of defined benefit plans mainly comprise service cost and net interest. Service cost comprises principally the increase in the present value of the obligation for benefits resulting from employee service during the period (current service cost) and also amounts relating to past service and settlements or amendments of plans. Plan amendments are changes to benefits and are generally recognised when all legal and regulatory approvals have been received and the effects have been communicated to members. Net interest is calculated using the net defined benefit liability or asset matched against the discount rate yield curve at the beginning of each year for each plan. Remeasurements of the net defined benefit liability or asset resulting from actuarial gains and losses and the return on plan assets excluding the amount recognised in income are recognised in other comprehensive income.
For defined contribution plans, pension expense represents the amount of employer contributions payable for the period.
Key accounting judgements and estimates
Defined benefit obligations and plan assets, and the resulting liabilities and assets that are recognised, are subject to significant volatility as actuarial assumptions regarding future outcomes and market values change. Substantial judgement is required in determining the actuarial assumptions, which vary for the different plans to reflect local conditions but are determined under a common process in consultation with independent actuaries. The assumptions applied in respect of each plan are reviewed annually and adjusted where necessary to reflect changes in experience and actuarial recommendations.
Information about the amounts reported in respect of defined benefit pension plans, assumptions applicable to the principal plans and their sensitivity to changes are presented in Note 18.
125 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
PROVISIONS
Provisions are recognised at the balance sheet date at management’s best estimate of the expenditure required to settle the present obligation. Non-current amounts are discounted at a rate intended to reflect the time value of money. Specific details for decommissioning and restoration costs are described below. The carrying amounts of provisions are regularly reviewed and adjusted for new facts or changes in law or technology.
Provisions for decommissioning and restoration costs, which arise principally in connection with hydrocarbon production facilities and pipelines, are measured on the basis of current requirements, technology and price levels; the present value is calculated using amounts discounted over the useful economic life of the assets. The liability is recognised (together with a corresponding amount as part of the related property, plant and equipment) once an obligation crystallises in the period when a reasonable estimate can be made. The effects of changes resulting from revisions to the timing or the amount of the original estimate of the provision are reflected on a prospective basis, generally by adjustment to the carrying amount of the related property, plant and equipment. However, where there is no related asset, or the change reduces the carrying amount to nil, the effect, or the amount in excess of the reduction in the related asset to nil, is recognised in income.
Redundancy provisions are recognised when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs and an appropriate timeline, and the employees affected have been notified of the plan's main features.
Other provisions are recognised in income in the period in which an obligation arises and the amount can be reasonably estimated. Provisions are measured based on current legal requirements and existing technology where applicable. Recognition of any joint and several liability is based on management’s best estimate of the final pro rata share of the liability. Provisions are determined independently of expected insurance recoveries. Recoveries are recognised when virtually certain of realisation.
Key accounting judgements and estimates
Provisions are recognised for the future decommissioning and restoration of hydrocarbon production facilities and pipelines at the end of their economic lives. The estimated cost is recognised in income over the life of the proved developed reserves on a unit-of-production basis or on a straight-line basis, as applicable. Changes in the estimates of costs to be incurred, proved developed reserves or the rate of production will therefore impact income, generally over the remaining economic life of the related assets.
Estimates of the amounts of provisions recognised are based on current legal and constructive requirements, technology and price levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take account of such changes. The discount rate applied is reviewed annually.
Information about decommissioning and restoration provisions is presented in Note 19.
FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial assets and liabilities are presented separately in the Consolidated Balance Sheet except where there is a legally enforceable right of offset and net settlement is regularly applied.
Financial assets
Investments in securities
Investments in securities (also referred to as “securities”) comprise equity and debt securities classified on initial recognition as available-for-sale and are carried at fair value, except where their fair value cannot be measured reliably, in which case they are carried at cost, less any impairment. Unrealised holding gains and losses other than impairments are recognised in other comprehensive income, except for translation differences arising on foreign currency debt securities, which are recognised in income. On maturity or sale, net gains and losses previously deferred in accumulated other comprehensive income are recognised in income.
Interest income on debt securities is recognised in income using the effective interest method. Dividends on equity securities are recognised in income when receivable.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand, including offsetting bank overdrafts, short-term bank deposits, money market funds, reverse repos and similar instruments that have a maturity of three months or less at the date of purchase.
Trade receivables
Trade receivables are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost less any impairment.
Financial liabilities
Debt and trade payables are recognised initially at fair value based on amounts exchanged, net of transaction costs, and subsequently at amortised cost except for fixed rate debt subject to fair value hedging which is remeasured for the hedged risk (see below). Interest expense on debt is accounted for using the effective interest method and, other than interest capitalised, is recognised in income.
Derivative contracts and hedges
Derivative contracts are used in the management of interest rate risk, foreign exchange risk and commodity price risk, and in the management of foreign currency cash balances. These contracts are recognised at fair value.
Certain derivative contracts qualify and are designated either as a “fair value” hedge of the change in fair value of a recognised asset or liability or an unrecognised firm commitment or as a “cash flow” hedge of the change in cash flows to be received or paid relating to a recognised asset or liability or a highly probable forecast transaction.
A change in the fair value of a hedging instrument designated as a fair value hedge is recognised in income, together with the consequential adjustment to the carrying amount of the hedged item. The effective portion of a change in fair value of a derivative contract designated as a cash flow hedge is recognised in other comprehensive income until the hedged transaction occurs; any ineffective portion is recognised in income. Where the hedged item is a non-financial asset or liability, the amount in accumulated other comprehensive income is transferred to the initial carrying amount of the asset or liability (reclassified to the balanced sheet); for other hedged items, the amount in accumulated other comprehensive income is reclassified to income when the hedged transaction affects income.
126 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
The effective portion of a change due to retranslation at quarter-end exchange rates in the carrying amount of debt and the principal amount of derivative contracts used to hedge net investments in foreign operations is recognised in other comprehensive income until the related investment is sold or liquidated; any ineffective portion is recognised in income.
All relationships between hedging instruments and hedged items are documented, as well as risk management objectives and strategies for undertaking hedge transactions. The effectiveness of hedges is also continually assessed and hedge accounting is discontinued when a hedge ceases to be highly effective.
Gains and losses on derivative contracts not qualifying and designated as hedges, including forward sale and purchase contracts for commodities in trading operations that may be settled by the physical delivery or receipt of the commodity, are recognised in income.
Unless designated as hedging instruments, contracts to sell or purchase non-financial items that can be settled net as if the contracts were financial instruments and that do not meet expected own use requirements (typically, forward sale and purchase contracts for commodities in trading operations), and contracts that are or contain written options, are recognised at fair value; associated gains and losses are recognised in income.
Derivatives embedded within contracts that are not already required to be recognised at fair value, and that are not closely related to the host contract in terms of economic characteristics and risks, are separated from their host contract and recognised at fair value; associated gains and losses are recognised in income.
FAIR VALUE MEASUREMENTS
Fair value measurements are estimates of the amounts for which assets or liabilities could be transferred at the measurement date, based on the assumption that such transfers take place between participants in principal markets and, where applicable, taking highest and best use into account. Where available, fair value measurements are derived from prices quoted in active markets for identical assets or liabilities. In the absence of such information, other observable inputs are used to estimate fair value. Inputs derived from external sources are corroborated or otherwise verified, as appropriate. In the absence of publicly available information, fair value is determined using estimation techniques that take into account market perspectives relevant to the asset or liability, in as far as they can reasonably be ascertained, based on predominantly unobservable inputs. For derivative contracts where publicly available information is not available, fair value estimations are generally determined using models and other valuation methods, the key inputs for which include future prices, volatility, price correlation, counterparty credit risk and market liquidity, as appropriate; for other assets and liabilities, fair value estimations are generally based on the net present value of expected future cash flows.
Key accounting judgements and estimates
The acquisition of BG Group plc required management to estimate the fair value of the assets acquired and liabilities assumed; further information is given in Note 4.
SHARE-BASED COMPENSATION PLANS
The fair value of share-based compensation expense arising from the Performance Share Plan (PSP) and the Long-term Incentive Plan (LTIP) – Shell’s main equity-settled plans – is estimated using a Monte Carlo option pricing model and is recognised in income from the date of grant over the vesting period with a corresponding increase directly in equity. The model projects and averages the results for a range of potential outcomes for the vesting conditions, the principal assumptions for which are the share price volatility and dividend yields for Shell and four of its main competitors over the last three years and the last 10 years. Changes in the fair value of share-based compensation for cash-settled plans are recognised in income with a corresponding change in liabilities.
SHARES HELD IN TRUST
Shares in the Company, which are held by employee share ownership trusts and trust-like entities, are not included in assets but are reflected at cost as a deduction from equity as shares held in trust.
ACQUISITIONS AND SALES OF INTERESTS IN A BUSINESS
Assets acquired and liabilities assumed when control is obtained over a business, and, with effect from January 1, 2016, when an interest or an additional interest is acquired in a joint operation which is a business, are recognised at their fair value at the date of the acquisition; the amount of the purchase consideration above this value is recognised as goodwill. When control is obtained, any non-controlling interest is recognised as the proportionate share of the identifiable net assets. The acquisition of a non-controlling interest in a subsidiary and the sale of an interest while retaining control are accounted for as transactions within equity. The difference between the purchase consideration or sale proceeds after tax and the relevant proportion of the non-controlling interest, measured by reference to the carrying amount of the interest’s net assets at the date of acquisition or sale, is recognised in retained earnings as a movement in equity attributable to Royal Dutch Shell plc shareholders.
CONSOLIDATED STATEMENT OF INCOME PRESENTATION
Purchases reflect all costs related to the acquisition of inventories and the effects of the changes therein, and include associated costs incurred in conversion into finished or intermediate products. Production and manufacturing expenses are the costs of operating, maintaining and managing production and manufacturing assets. Selling, distribution and administrative expenses include direct and indirect costs of marketing and selling products.
3 CHANGES TO IFRS NOT YET ADOPTED
The final version of IFRS 9 Financial Instruments was issued in 2014 and sets out the requirements for recognising and measuring financial assets, financial liabilities and certain contracts to buy or sell non-financial items. It replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is required to be adopted by 2018. The impact for Shell is under review and IFRS 9 may facilitate further use of hedge accounting and also could result in different income recognition, or timing of recognition, in respect of certain investments in securities.
IFRS 15 Revenue from Contracts with Customers was issued in 2014 and replaces IAS 18 Revenue. It is required to be adopted by 2018 and is not expected to have a significant effect on Shell’s accounting or disclosures.
IFRS 16 Leases was issued in 2016 to replace IAS 17 Leases and is required to be adopted by 2019. Under the new standard all lease contracts, with limited exceptions, are recognised in financial statements by way of right of use assets and corresponding lease liabilities. Compared with the existing accounting for operating leases, it will also impact the classification and timing of expenses and consequently the classification between cash flow from operating activities and cash flow from financing activities. A key aspect being considered in Shell’s review of the new standard is whether to apply any transitional options such as the modified retrospective approach, which would mean that the cumulative effect of initially applying the standard is recognised at the date of initial application and there is no restatement of comparative information.
It is not intended that Shell will early adopt IFRS 9, IFRS 15 or IFRS 16.
127 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
4 ACQUISITION OF BG GROUP PLC
On February 15, 2016, the Company acquired all the voting rights in BG Group plc (BG) by means of a Scheme of Arrangement under Part 26 of the Act for a purchase consideration of $54,034 million. This included cash of $19,036 million and the fair value ($34,050 million) of 218.7 million A shares and 1,305.1 million B shares issued in exchange for all BG shares. The fair value of the shares issued was calculated using the market price of the Company’s A and B shares of 1,545.0 and 1,538.5 pence respectively on the London Stock Exchange at its opening of business on February 15, 2016.
BG’s activities mainly comprised exploration, development, production, liquefaction and marketing of hydrocarbons, the development and use of liquefied natural gas (LNG) import facilities, and the purchase, shipping and sale of LNG and regasified natural gas. The acquisition was to accelerate Shell’s growth strategy in global LNG and deep water, with material additions to proved oil and gas reserves and production volumes, and to provide Shell with enhanced positions in competitive new oil and gas projects, particularly in Australia LNG and Brazil deep water.
Goodwill of $10,997 million was recognised on the acquisition, being the excess of the purchase consideration over the fair value of net assets acquired as set out below. The net asset fair values, in line with accounting standards, were determined, where applicable, and particularly in respect of property, plant and equipment and intangible assets, by reference to oil and gas prices as reflected in the prevailing market view on the day of completion, as well as using estimates of proved oil and gas reserves and unproved volumes including timing of production, discount rates and exchange rates. Oil and gas prices were based on the forward price curve for the first two years, and for subsequent years based on the market consensus price view.
| | | | | | | | |
Fair value of net assets acquired | | $ million | |
| | | | | | | | |
Assets | | | | | | | | |
Non-current assets | | | | | | | | |
Intangible assets | | | | | | | 7,765 | |
Property, plant and equipment | | | | | | | 56,067 | |
Joint ventures and associates | | | | | | | 4,551 | |
Investments in securities | | | | | | | 182 | |
Deferred tax | | | | | | | 3,278 | |
Retirement benefits | | | | | | | 236 | |
Trade and other receivables | | | | | | | 1,550 | |
| | | | | | | 73,629 | |
Current assets | | | | | | | | |
Inventories | | | | | | | 712 | |
Trade and other receivables | | | | | | | 4,085 | |
Cash and cash equivalents | | | | | | | 6,803 | |
| | | | | | | 11,600 | |
Total assets | | | | | | | 85,229 | |
Liabilities | | | | | | | | |
Non-current liabilities | | | | | | | | |
Debt | | | | | | | 19,690 | |
Trade and other payables | | | | | | | 1,876 | |
Deferred tax | | | | | | | 8,441 | |
Decommissioning and other provisions | | | | | | | 5,542 | |
| | | | | | | 35,549 | |
Current liabilities | | | | | | | | |
Debt | | | | | | | 1,544 | |
Trade and other payables | | | | | | | 4,373 | |
Taxes payable | | | | | | | 726 | |
| | | | | | | 6,643 | |
Total liabilities | | | | | | | 42,192 | |
Total | | | | | | | 43,037 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisition costs of $391 million ($47 million in 2015 and $344 million in 2016) were recognised in the Consolidated Statement of Income in production and manufacturing and selling, distribution and administrative expenses.
The acquired activities of BG were integrated with those of other Shell entities and therefore it is impracticable to identify separately either the amounts of revenue and income since the date of acquisition that BG has contributed to the Consolidated Statement of Income, or the revenue and income of Shell for 2016 had the acquisition date been January 1, 2016.
128 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
5 SEGMENT INFORMATION
Shell is engaged in the principal aspects of the oil and gas industry in more than 70 countries. Segmental reporting has been changed with effect from 2016, in line with a change in the way Shell’s businesses are managed. Shell now reports its business through the segments Integrated Gas (previously part of Upstream), Upstream, Downstream and Corporate. Comparative information has been reclassified.
Integrated Gas is engaged in the liquefaction and transportation of gas, and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity - from producing to commercialising gas. Upstream combines the operating segments Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. These operating segments have similar economic characteristics because their earnings are significantly dependent on crude oil and natural gas prices and production volumes, and because their projects generally require significant investment, are complex and generate revenues for many years. Downstream is engaged in oil products and chemicals manufacturing and marketing activities. Corporate represents the key support functions, comprising Shell’s holdings and treasury organisation, its self-insurance activities and its headquarters and central functions. Integrated within the Integrated Gas, Upstream and Downstream segments are Shell’s trading activities, technical services and technology capability, and functions such as safety and environment, and carbon dioxide management. Sales between segments are based on prices generally equivalent to commercially available prices.
Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer (CEO) for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts.
Information by segment on a current cost of supplies basis is as follows:
| | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 2,529 | | | | (3,674 | ) | | | 6,588 | | | | (1,751 | ) | | | 3,692 | |
Revenue and other income | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | |
Third party | | | 25,282 | | | | 6,412 | | | | 201,823 | | | | 74 | | | | 233,591 | |
Inter-segment | | | 3,908 | | | | 26,524 | | | | 1,727 | | | | — | | | | | |
Share of profit/(loss) of joint ventures and associates | | | 1,116 | | | | 222 | | | | 2,244 | | | | (182 | ) | | | 3,400 | |
Interest and other income | | | 765 | | | | 839 | | | | 851 | | | | 442 | | | | 2,897 | |
Total | | | | | | | | | | | | | | | | | | | 239,888 | |
Depreciation, depletion and amortisation charge, of which: | | | 4,509 | | | | 16,779 | | | | 3,681 | | | | 24 | | | | 24,993 | |
Impairment losses | | | 72 | | | | 1,274 | | | | 588 | | | | 6 | | | | 1,940 | |
Impairment reversals | | | — | | | | — | | | | 38 | | | | — | | | | 38 | |
Interest expense | | | 247 | | | | 852 | | | | 91 | | | | 2,013 | | | | 3,203 | |
Taxation charge/(credit) | | | 1,254 | | | | (938 | ) | | | 1,008 | | | | (839 | ) | | | 485 | |
| | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 3,170 | | | | (8,833 | ) | | | 10,243 | | | | (425 | ) | | | 4,155 | |
Revenue and other income | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | |
Third party | | | 21,741 | | | | 6,739 | | | | 236,384 | | | | 96 | | | | 264,960 | |
Inter-segment | | | 4,248 | | | | 26,824 | | | | 1,362 | | | | — | | | | | |
Share of profit/(loss) of joint ventures and associates | | | 1,471 | | | | 491 | | | | 2,215 | | | | (327 | ) | | | 3,850 | |
Interest and other income | | | 537 | | | | 1,819 | | | | 1,156 | | | | 157 | | | | 3,669 | |
Total | | | | | | | | | | | | | | | | | | | 272,479 | |
Depreciation, depletion and amortisation charge, of which: | | | 2,597 | | | | 20,404 | | | | 3,667 | | | | 46 | | | | 26,714 | |
Impairment losses | | | 210 | | | | 8,536 | | | | 556 | | | | 27 | | | | 9,329 | |
Impairment reversals | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
Interest expense | | | 106 | | | | 775 | | | | 51 | | | | 956 | | | | 1,888 | |
Taxation charge/(credit) | | | 937 | | | | (927 | ) | | | 1,639 | | | | (1,156 | ) | | | 493 | |
129 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | |
2014 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 10,610 | | | | 5,231 | | | | 3,411 | | | | (156 | ) | | | 19,096 | |
Revenue and other income | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | |
Third party | | | 33,148 | | | | 12,092 | | | | 375,752 | | | | 113 | | | | 421,105 | |
Inter-segment | | | 6,861 | | | | 47,838 | | | | 2,294 | | | | — | | | | | |
Share of profit/(loss) of joint ventures and associates | | | 4,324 | | | | 1,178 | | | | 1,693 | | | | (346 | ) | | | 6,849 | |
Interest and other income | | | 3,156 | | | | 873 | | | | 41 | | | | 53 | | | | 4,123 | |
Total | | | | | | | | | | | | | | | | | | | 432,077 | |
Depreciation, depletion and amortisation charge, of which: | | | 2,662 | | | | 15,206 | | | | 6,619 | | | | 12 | | | | 24,499 | |
Impairment losses | | | 92 | | | | 3,495 | | | | 3,396 | | | | — | | | | 6,983 | |
Impairment reversals | | | — | | | | 100 | | | | 251 | | | | — | | | | 351 | |
Interest expense | | | 106 | | | | 847 | | | | 86 | | | | 765 | | | | 1,804 | |
Taxation charge/(credit) | | | 4,008 | | | | 11,269 | | | | 1,085 | | | | (1,324 | ) | | | 15,038 | |
| | | | | | | | | | | | |
Reconciliation of CCS earnings to income for the period | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
CCS earnings | | | 3,692 | | | | 4,155 | | | | 19,096 | |
Current cost of supplies adjustment: | | | | | | | | | | | | |
Purchases | | | 1,284 | | | | (2,278 | ) | | | (5,087 | ) |
Taxation | | | (344 | ) | | | 646 | | | | 1,454 | |
Share of profit/(loss) of joint ventures and associates | | | 145 | | | | (323 | ) | | | (733 | ) |
Income for the period | | | 4,777 | | | | 2,200 | | | | 14,730 | |
Information by geographical area is as follows:
| | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Europe | | | Asia, Oceania, Africa | | | USA | | | Other Americas | | | Total | |
Third-party revenue, by origin | | | 81,573 | | | | 83,103 | | | | 49,147 | | | | 19,768 | | | | 233,591 | |
Intangible assets, property, plant and equipment, joint ventures and associates at December 31 | | | 43,901 | | | | 121,618 | | | | 60,430 | | | | 67,371 | | | | 293,320 | |
| | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Europe | | | Asia, Oceania, Africa | | | USA | | | Other Americas | | | Total | |
Third-party revenue, by origin | | | 95,223 | | | | 95,892 | | | | 50,666 | | | | 23,179 | | | | 264,960 | |
Intangible assets, property, plant and equipment, joint ventures and associates at December 31 | | | 33,439 | | | | 104,949 | | | | 51,269 | | | | 29,614 | | | | 219,271 | |
| | | | | | | | | | | | | | | | | | | | |
2014 | | $ million | |
| | Europe | | | Asia, Oceania, Africa | | | USA | | | Other Americas | | | Total | |
Third-party revenue, by origin | | | 154,709 | | | | 149,869 | | | | 80,133 | | | | 36,394 | | | | 421,105 | |
Intangible assets, property, plant and equipment, joint ventures and associates at December 31 | | | 35,220 | | | | 105,226 | | | | 51,124 | | | | 39,536 | | | | 231,106 | |
130 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
6 INTEREST AND OTHER INCOME
| | | | | | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Interest income | | | 451 | | | | 359 | | | | 206 | |
Dividend income (from investments in securities) | | | 264 | | | | 456 | | | | 888 | |
Net gains on sale and revaluation of non-current assets and businesses | | | 2,141 | | | | 3,460 | | | | 3,212 | |
Net foreign exchange gains/(losses) on financing activities | | | 343 | | | | (649 | ) | | | (195 | ) |
Other | | | (302 | ) | | | 43 | | | | 12 | |
Total | | | 2,897 | | | | 3,669 | | | | 4,123 | |
Net gains on sale of non-current assets and businesses in 2016 arose mainly in respect of Upstream assets in North America and Downstream assets in Denmark and Japan. In addition, in respect of Shell’s interest in Woodside Petroleum Limited (Woodside) (see Notes 10 and 11) a revaluation gain of $293 million was recognised and a gain of $358 million on the related release of cumulative currency translation differences was recognised in net foreign exchange gains on financing activities. Other mainly relates to the write down of an investment in securities.
Net gains on sale of non-current assets and businesses in 2015 arose mainly in respect of interests in Nigeria (Upstream), interests in France and Norway (Downstream) and an office building in the UK (Corporate). In 2014, they arose mainly in respect of Integrated Gas interests in Australia and Upstream interests in Nigeria and the USA.
Other net foreign exchange losses of $49 million in 2016 (2015: $197 million; 2014: $122 million) were included in purchases.
7 INTEREST EXPENSE
| | | | | | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Interest incurred and similar charges | | | 2,732 | | | | 1,832 | | | | 1,517 | |
Less: interest capitalised | | | (725 | ) | | | (839 | ) | | | (757 | ) |
Other net losses/(gains) on fair value hedges of debt | | | 4 | | | | (37 | ) | | | 5 | |
Accretion expense | | | 1,192 | | | | 932 | | | | 1,039 | |
Total | | | 3,203 | | | | 1,888 | | | | 1,804 | |
The rate applied in determining the amount of interest capitalised in 2016 was 3% (2015: 3%; 2014: 3%).
8 INTANGIBLE ASSETS
| | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Goodwill | | | LNG off-take and sales contracts | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | |
At January 1 | | | 2,604 | | | | 3,271 | | | | 4,473 | | | | 10,348 | |
Additions on acquisition of BG (see Note 4) | | | 10,997 | | | | 7,158 | | | | 607 | | | | 18,762 | |
Other additions | | | — | | | | — | | | | 130 | | | | 130 | |
Sales, retirements and other movements | | | (3 | ) | | | — | | | | — | | | | (3 | ) |
Currency translation differences | | | (6 | ) | | | — | | | | (125 | ) | | | (131 | ) |
At December 31 | | | 13,592 | | | | 10,429 | | | | 5,085 | | | | 29,106 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | |
At January 1 | | | 594 | | | | 556 | | | | 2,915 | | | | 4,065 | |
Charge for the year | | | — | | | | 919 | | | | 306 | | | | 1,225 | |
Sales, retirements and other movements | | | — | | | | — | | | | (63 | ) | | | (63 | ) |
Currency translation differences | | | 11 | | | | — | | | | (99 | ) | | | (88 | ) |
At December 31 | | | 605 | | | | 1,475 | | | | 3,059 | | | | 5,139 | |
Carrying amount at December 31 | | | 12,987 | | | | 8,954 | | | | 2,026 | | | | 23,967 | |
131 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Goodwill | | | LNG off-take and sales contracts | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | |
At January 1 | | | 2,712 | | | | 3,271 | | | | 4,562 | | | | 10,545 | |
Additions | | | — | | | | — | | | | 277 | | | | 277 | |
Sales, retirements and other movements | | | — | | | | — | | | | (174 | ) | | | (174 | ) |
Currency translation differences | | | (108 | ) | | | — | | | | (192 | ) | | | (300 | ) |
At December 31 | | | 2,604 | | | | 3,271 | | | | 4,473 | | | | 10,348 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | |
At January 1 | | | 316 | | | | 278 | | | | 2,875 | | | | 3,469 | |
Charge for the year | | | 315 | | | | 278 | | | | 335 | | | | 928 | |
Sales, retirements and other movements | | | — | | | | — | | | | (156 | ) | | | (156 | ) |
Currency translation differences | | | (37 | ) | | | — | | | | (139 | ) | | | (176 | ) |
At December 31 | | | 594 | | | | 556 | | | | 2,915 | | | | 4,065 | |
Carrying amount at December 31 | | | 2,010 | | | | 2,715 | | | | 1,558 | | | | 6,283 | |
Goodwill at December 31, 2016, principally related to BG (see Note 4) which was allocated to Integrated Gas ($4,954 million) and Upstream ($6,043 million) at the operating segment level, and to Pennzoil-Quaker State Company (PQS), a lubricants business in the Downstream segment based largely in North America.
For impairment testing purposes, the respective carrying amount was compared with the value in use. The nominal pre-tax discount rate applied was 6% (2015: 6%). Cash flow projections for the Integrated Gas and Upstream segments were made using management’s forecasts of commodity prices, market supply and demand and expected production volumes, and were risk-adjusted (see Note 2). Cash flow projections for PQS reflected long-term growth rates that were assumed to be equal to the average expected inflation rate for the USA (2016: 2%; 2015: 2%) and were adjusted for a variety of risks, in particular volume and margin deterioration.
9 PROPERTY, PLANT AND EQUIPMENT
| | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Exploration and production | | | Manufacturing, | | | | | | | | | |
| | Exploration and evaluation | | | Production | | | supply and distribution | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 27,728 | | | | 239,559 | | | | 73,648 | | | | 20,988 | | | | 361,923 | |
Additions on acquisition of BG (see Note 4) | | | 916 | | | | 54,775 | | | | 314 | | | | 62 | | | | 56,067 | |
Other additions | | | 1,961 | | | | 17,304 | | | | 4,818 | | | | 1,250 | | | | 25,333 | |
Sales, retirements and other movements | | | (5,210 | ) | | | (3,557 | ) | | | (653 | ) | | | (1,545 | ) | | | (10,965 | ) |
Currency translation differences | | | (19 | ) | | | (5,549 | ) | | | (841 | ) | | | (692 | ) | | | (7,101 | ) |
At December 31 | | | 25,376 | | | | 302,532 | | | | 77,286 | | | | 20,063 | | | | 425,257 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 8,095 | | | | 122,586 | | | | 38,158 | | | | 10,246 | | | | 179,085 | |
Charge for the year | | | 828 | | | | 18,182 | | | | 3,842 | | | | 916 | | | | 23,768 | |
Sales, retirements and other movements | | | (2,602 | ) | | | (3,326 | ) | | | (1,696 | ) | | | (1,354 | ) | | | (8,978 | ) |
Currency translation differences | | | 42 | | | | (3,842 | ) | | | (631 | ) | | | (285 | ) | | | (4,716 | ) |
At December 31 | | | 6,363 | | | | 133,600 | | | | 39,673 | | | | 9,523 | | | | 189,159 | |
Carrying amount at December 31 | | | 19,013 | | | | 168,932 | | | | 37,613 | | | | 10,540 | | | | 236,098 | |
132 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Exploration and production | | | Manufacturing, | | | | | | | | | |
| | Exploration and evaluation | | | Production | | | supply and distribution | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 29,922 | | | | 234,725 | | | | 75,681 | | | | 23,871 | | | | 364,199 | |
Additions | | | 3,523 | | | | 17,425 | | | | 4,148 | | | | 1,458 | | | | 26,554 | |
Sales, retirements and other movements | | | (4,467 | ) | | | (442 | ) | | | (2,975 | ) | | | (2,357 | ) | | | (10,241 | ) |
Currency translation differences | | | (1,250 | ) | | | (12,149 | ) | | | (3,206 | ) | | | (1,984 | ) | | | (18,589 | ) |
At December 31 | | | 27,728 | | | | 239,559 | | | | 73,648 | | | | 20,988 | | | | 361,923 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,810 | | | | 116,476 | | | | 39,347 | | | | 12,094 | | | | 171,727 | |
Charge for the year | | | 4,968 | | | | 16,229 | | | | 3,654 | | | | 935 | | | | 25,786 | |
Sales, retirements and other movements | | | (427 | ) | | | (3,912 | ) | | | (2,792 | ) | | | (1,748 | ) | | | (8,879 | ) |
Currency translation differences | | | (256 | ) | | | (6,207 | ) | | | (2,051 | ) | | | (1,035 | ) | | | (9,549 | ) |
At December 31 | | | 8,095 | | | | 122,586 | | | | 38,158 | | | | 10,246 | | | | 179,085 | |
Carrying amount at December 31 | | | 19,633 | | | | 116,973 | | | | 35,490 | | | | 10,742 | | | | 182,838 | |
The carrying amount at December 31, 2016, included $45,396 million (2015: $45,701 million) of assets under construction. This amount excludes exploration and evaluation assets. The carrying amount at December 31, 2016, also included $385 million of assets classified as held for sale (2015: $1,161 million).
The carrying amount of exploration and production assets at December 31, 2016, included rights and concessions in respect of proved and unproved properties of $15,610 million (2015: $17,204 million). Exploration and evaluation assets principally comprise rights and concessions in respect of unproved properties and capitalised exploration drilling costs.
Contractual commitments for the purchase of property, plant and equipment at December 31, 2016, amounted to $4,825 million (2015: $3,062 million). In addition, Shell has other commitments for future expenditure that, when incurred, are also expected to be recognised as additions to property, plant and equipment, such as the majority of operating lease payments in respect of drilling and ancillary equipment (see Note 15).
| | | | | | | | |
Carrying amount of property, plant and equipment held under finance leases [A] | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Exploration and production | | | 7,930 | | | | 2,080 | |
Manufacturing, supply and distribution | | | 3,108 | | | | 1,856 | |
Other | | | 227 | | | | 324 | |
Total | | | 11,265 | | | | 4,260 | |
[A] See Note 15.
| | | | | | | | | | | | |
Impairments | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Impairment losses [A] | | | | | | | | | | | | |
Exploration and production | | | 1,324 | | | | 8,387 | | | | 3,585 | |
Manufacturing, supply and distribution | | | 567 | | | | 458 | | | | 3,099 | |
Other | | | 40 | | | | 165 | | | | 299 | |
Total | | | 1,931 | | | | 9,010 | | | | 6,983 | |
Impairment reversals [A] | | | | | | | | | | | | |
Exploration and production | | | — | | | | — | | | | 100 | |
Manufacturing, supply and distribution | | | 36 | | | | — | | | | — | |
Other | | | 2 | | | | 3 | | | | 244 | |
Total | | | 38 | | | | 3 | | | | 344 | |
[A] Presented by segment in Note 5, together with impairment losses and reversals in respect of intangible assets.
133 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Impairment losses in 2016 were mainly triggered by asset performance, disposals and project cancellations. They related primarily in Upstream to shale and deep-water properties in North and South America and in Downstream to disposals and assets held for sale in the refining portfolio. Impairment losses in 2015 were principally in Upstream related to North American shale properties, following revisions to Shell’s long-term oil and gas price outlook, and to cancelled projects in Alaska and Carmon Creek in Canada. Impairment losses in 2014 were mainly in Upstream in respect of US tight-gas properties, in response to changes to future capital expenditure plans, and in Downstream in the refining portfolio, in response to the continuation of weak industry margins.
| | | | | | | | | | | | |
Capitalised exploration drilling costs | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
At January 1 | | | 7,835 | | | | 8,465 | | | | 8,377 | |
Additions pending determination of proved reserves | | | 1,762 | | | | 3,276 | | | | 4,370 | |
Amounts charged to expense | | | (834 | ) | | | (2,771 | ) | | | (1,881 | ) |
Reclassifications to productive wells on determination of proved reserves | | | (1,187 | ) | | | (991 | ) | | | (2,116 | ) |
Other movements | | | 334 | | | | (144 | ) | | | (285 | ) |
At December 31 | | | 7,910 | | | | 7,835 | | | | 8,465 | |
Exploration drilling costs capitalised for periods greater than one year at December 31, 2016, analysed according to the most recent year of activity, are presented in the table below. They comprise $1,031 million relating to 14 projects where drilling activities were underway or firmly planned for the future and $5,063 million relating to 45 projects awaiting development concepts.
| | | | | | | | | | | | |
| | Projects | | | Wells | |
| | Number | | $ million | | | Number | | $ million | |
Between 1 and 5 years | | 44 | | | 5,306 | | | 211 | | | 4,355 | |
Between 6 and 10 years | | 14 | | | 763 | | | 100 | | | 1,552 | |
Between 11 and 15 years | | 1 | | | 25 | | | 13 | | | 187 | |
Total | | 59 | | | 6,094 | | | 324 | | | 6,094 | |
10 joint ventures and associates
| | | | | | | | | | | | | | | | | | | |
Shell share of comprehensive income of joint ventures and associates | | $ million |
| | 2016 | | 2015 | | 2014 |
| | Joint ventures | | Associates | | Total | | Joint ventures | | | Associates | | Total | | Joint ventures | | Associates | | Total |
Income for the period | | 2,332 | | 1,213 | | 3,545 | | 908 | [A] | | 2,619 | | 3,527 | | 1,813 | | 4,303 | | 6,116 |
Other comprehensive income/(loss) for the period | | 78 | | (106) | | (28) | | (73) | | | 33 | | (40) | | (90) | | (66) | | (156) |
Comprehensive income for the period | | 2,410 | | 1,107 | | 3,517 | | 835 | | | 2,652 | | 3,487 | | 1,723 | | 4,237 | | 5,960 |
[A] Includes an impairment loss of $837 million as a result of changes in the outlook in respect of a joint venture in the Oceania region.
| | | | | | | | | | | | | | | | | | | | | | | | |
Carrying amount of interests in joint ventures and associates | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
| | Joint ventures | | | Associates | | | Total | | | Joint ventures | | | Associates | | | Total | |
Net assets | | | 20,555 | | | | 12,700 | | | | 33,255 | | | | 19,065 | | | | 11,085 | | | | 30,150 | |
Shell has a 13% interest in Woodside, a publicly listed company on the Australian Securities Exchange. During 2016, management concluded that a change in Shell’s level of involvement over Woodside’s financial and operating policy decisions, due to reduced Board representation and joint-venture relationships, resulted in no longer having significant influence. Shell’s interest in Woodside was therefore reclassified from an associate to an investment in securities (see Note 11), resulting in a decrease of $2,144 million in interests in associates. The consequential revaluation and related release of cumulative currency translation differences were reported in interest and other income in the Consolidated Statement of Income (see Note 6).
| | | | | | | | | | | | |
Transactions with joint ventures and associates | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Sales and charges to joint ventures and associates | | | 24,214 | | | | 36,548 | | | | 48,379 | |
Purchases and charges from joint ventures and associates | | | 13,859 | | | | 26,440 | | | | 36,567 | |
These transactions principally comprise sales and purchases of goods and services in the ordinary course of business. Related balances outstanding at December 31, 2016 and 2015, are presented in Notes 12 and 16.
| | | | | | | | |
Other arrangements in respect of joint ventures and associates | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Commitments to make purchases from joint ventures and associates | | | 85,333 | | | | 86,442 | |
Commitments to provide debt or equity funding to joint ventures and associates | | | 2,703 | | | | 2,711 | |
134 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
11 INVESTMENTS IN SECURITIES
| | | | | | | | |
Investments in securities | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Equity securities | | | 4,784 | | | | 2,272 | |
Debt securities | | | 1,168 | | | | 1,144 | |
Total | | | 5,952 | | | | 3,416 | |
At fair value | | | | | | | | |
Measured by reference to prices in active markets for identical assets | | | 4,408 | | | | 1,427 | |
Measured using predominantly unobservable inputs | | | 1,233 | | | | 1,625 | |
Total | | | 5,641 | | | | 3,052 | |
At cost | | 311 | | | 364 | |
Total | | | 5,952 | | | | 3,416 | |
Equity securities at December 31, 2016, principally comprised a 13% interest in Woodside, as a result of its reclassification from an associate in 2016 (see Notes 6 and 10), and a 15% interest in Malaysia LNG Tiga Sendirian Berhad (Tiga). Debt securities principally comprised a portfolio required to be held by Shell’s insurance entities as security for their activities.
| | | | | | | | |
Investments in securities measured using predominantly unobservable inputs [A] | | $ million | |
| | 2016 | | | 2015 | |
At January 1 | | | 1,625 | | | | 2,393 | |
Losses recognised in other comprehensive loss | | | (333 | ) | | | (733 | ) |
Other movements | | | (59 | ) | | | (35 | ) |
At December 31 | | | 1,233 | | | | 1,625 | |
[A] Based on expected dividend flows, adjusted for country and other risks as appropriate and discounted to their present value. All are equity securities, mainly comprising Shell’s interest in Tiga. Were the oil price assumption used in its valuation to be decreased by $10 per barrel with no change in other measurement inputs, its carrying amount at December 31, 2016, would decrease by $110 million (2015: $149 million).
12 TRADE AND OTHER RECEIVABLES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Trade receivables | | | 25,766 | | | | — | | | | 20,607 | | | | — | |
Other receivables | | | 7,556 | | | | 5,231 | | | | 6,694 | | | | 4,018 | |
Amounts due from joint ventures and associates | | | 2,175 | | | | 2,510 | | | | 2,107 | | | | 2,260 | |
Derivative contracts (see Note 20) | | | 5,957 | | | | 405 | | | | 13,114 | | | | 744 | |
Prepayments and deferred charges | | | 4,210 | | | | 1,407 | | | | 3,262 | | | | 1,695 | |
Total | | | 45,664 | | | | 9,553 | | | | 45,784 | | | | 8,717 | |
The fair value of financial assets included above approximates the carrying amount and, other than the fair value of certain derivative contracts, was determined from predominantly unobservable inputs.
Other receivables include income tax recoverable (see Note 17), other taxes recoverable and amounts due from joint arrangement partners.
Provisions for impairments deducted from trade and other receivables amounted to $461 million at December 31, 2016 (2015: $456 million).
| | | | | | | | |
Overdue trade receivables | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Overdue 1–30 days | | | 747 | | | | 569 | |
Overdue 31–180 days | | | 649 | | | | 480 | |
Overdue more than 180 days | | | 545 | | | | 224 | |
Total | | | 1,941 | | | | 1,273 | |
Information about offsetting, collateral and credit risk is presented in Note 20.
135 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
13 INVENTORIES
| | | | | | | | |
| | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Oil, gas and chemicals | | | 19,653 | | | | 14,077 | |
Materials | | | 2,122 | | | | 1,745 | |
Total | | | 21,775 | | | | 15,822 | |
Inventories at December 31, 2016, include write-downs to net realisable value of $566 million (2015: $1,134 million).
14 CASH AND CASH EQUIVALENTS
| | | | | | | | |
| | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015[A] | |
Cash | | | 3,426 | | | | 3,237 | |
Short-term bank deposits | | | 4,084 | | | | 7,442 | |
Money market funds, reverse repos and other cash equivalents | | | 11,620 | | | | 21,073 | |
Total | | | 19,130 | | | | 31,752 | |
[A] See Note 20 in respect of cash flow hedges.
Included in cash and cash equivalents at December 31, 2016, were amounts totalling $349 million (2015: $524 million) subject to currency controls or other legal restrictions. Information about credit risk is presented in Note 20.
15 DEBT AND LEASE ARRANGEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | |
Debt | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
| | Debt (excluding finance lease liabilities) | | | Finance lease liabilities | | | Total | | | Debt (excluding finance lease liabilities) | | | Finance lease liabilities | | | Total | |
Short-term debt | | | 1,787 | | | | — | | | | 1,787 | | | | 899 | | | | — | | | | 899 | |
Long-term debt due within 1 year | | | 6,574 | | | | 1,123 | | | | 7,697 | | | | 4,100 | | | | 531 | | | | 4,631 | |
Current debt | | | 8,361 | | | | 1,123 | | | | 9,484 | | | | 4,999 | | | | 531 | | | | 5,530 | |
Non-current debt | | | 69,256 | | | | 13,736 | | | | 82,992 | | | | 47,195 | | | | 5,654 | | | | 52,849 | |
Total | | | 77,617 | | | | 14,859 | | | | 92,476 | | | | 52,194 | | | | 6,185 | | | | 58,379 | |
| | | | | | | | | | | | | | | | |
Net debt | | $ million | |
| | Current debt | | | Non-current debt | | | Cash and cash equivalents (see Note 14) | | | Net debt | |
At January 1, 2016 | | | (5,530 | ) | | | (52,849 | ) | | | 31,752 | | | | (26,627 | ) |
Additions on acquisition of BG (see Note 4) | | | (1,544 | ) | | | (19,690 | ) | | | 6,803 | | | | (14,431 | ) |
Cash flow | | | 5,092 | | | | (16,166 | ) | | | (17,922 | ) | | | (28,996 | ) |
Other movements | | | (7,554 | ) | | | 4,918 | | | | — | | | | (2,636 | ) |
Currency translation differences | | | 52 | | | | 795 | | | | (1,503 | ) | | | (656 | ) |
At December 31, 2016 | | | (9,484 | ) | | | (82,992 | ) | | | 19,130 | | | | (73,346 | ) |
At January 1, 2015 | | | (7,208 | ) | | | (38,332 | ) | | | 21,607 | | | | (23,933 | ) |
Cash flow | | | 5,327 | | | | (20,218 | ) | | | 11,215 | | | | (3,676 | ) |
Other movements | | | (3,849 | ) | | | 5,436 | | | | — | | | | 1,587 | |
Currency translation differences | | | 200 | | | | 265 | | | | (1,070 | ) | | | (605 | ) |
At December 31, 2015 | | | (5,530 | ) | | | (52,849 | ) | | | 31,752 | | | | (26,627 | ) |
Management’s financial strategy is to manage Shell’s assets and liabilities with the aim that, across the business cycle, “cash in” at least equals “cash out” while maintaining a strong balance sheet.
136 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Gearing, defined as net debt (total debt less cash and cash equivalents) as a percentage of total capital (net debt plus total equity), is a key measure of Shell’s capital structure. Across the business cycle, management aims to manage gearing within a range of 0-30%. At December 31, 2016, gearing was 28.0% (2015: 14.0%).
| | | | | | | | |
Gearing | | $ million, except where indicated | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Net debt | | | 73,346 | | | | 26,627 | |
Total equity | | | 188,511 | | | | 164,121 | |
Total capital | | | 261,857 | | | | 190,748 | |
Gearing | | | 28.0 | % | | | 14.0 | % |
Management’s priorities for applying Shell’s cash are the servicing and reduction of debt commitments, payment of dividends followed by a balance of capital investment and share buybacks. Management’s policy is to grow the dollar dividend through time, in line with its view of Shell’s underlying earnings and cash flow.
Shell has access to international debt capital markets via two commercial paper (CP) programmes, a Euro medium-term note (EMTN) programme and a US universal shelf (US shelf) registration. Issuances under the CP programmes are supported by a committed credit facility and cash.
| | | | | | | | | | | | | | | | |
Borrowing facilities and amounts undrawn | | $ million | |
| | Facility | | | Amount undrawn | |
| | Dec 31, 2016 | | | Dec 31, 2015 | | | Dec 31, 2016 | | | Dec 31, 2015 | |
CP programmes | | | 20,000 | | | | 20,000 | | | | 18,982 | | | | 20,000 | |
EMTN programme | | unlimited | | | unlimited | | | n/a | | | n/a | |
US shelf registration | | unlimited | | | unlimited | | | n/a | | | n/a | |
Committed credit facility | | | 7,480 | | | | 7,480 | | | | 7,480 | | | | 7,480 | |
Bridge credit facility | | | — | | | | 14,932 | | | | — | | | | 14,932 | |
Under the CP programmes, Shell can issue debt of up to $10 billion with maturities not exceeding 270 days and $10 billion with maturities not exceeding 397 days. The EMTN programme is updated each year, most recently in August 2016. $4,510 million was issued under this programme in 2016 (2015: $5,285 million). The US shelf registration provides Shell with the flexibility to issue debt securities, ordinary shares, preferred shares and warrants. The registration is updated every three years and was last updated in October 2014. Debt totalling $12,000 million was issued under this registration in 2016 (2015: $15,000 million). The committed credit facility is available at pre-agreed margins and expires in 2020. The terms and availability are not conditional on Shell’s financial ratios or its financial credit ratings. The bridge credit facility was entered into in 2015 in advance of the acquisition of BG and was cancelled unused on February 10, 2016.
In addition, other subsidiaries have access to short-term bank facilities totalling $3,835 million at December 31, 2016 (2015: $4,652 million).
Interest rate swaps were entered into against certain of the fixed rate debt affecting the effective interest rate on these balances (see Note 20).
The following tables compare contractual cash flows for debt excluding finance lease liabilities at December 31, with the carrying amount in the Consolidated Balance Sheet. Contractual amounts reflect the effects of changes in foreign exchange rates; differences from carrying amounts reflect the effects of discounting, premiums and, where hedge accounting is applied, fair value adjustments. Interest is estimated assuming interest rates applicable to variable rate debt remain constant and there is no change in aggregate principal amounts of debt other than repayment at scheduled maturity, as reflected in the table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | | |
| | Contractual payments | | | Difference | | | | | | |
| | | | | | Between | | | Between | | | Between | | | Between | | | | | | | | | | | from | | | | | | |
| | Less than | | | 1 and 2 | | | 2 and 3 | | | 3 and 4 | | | 4 and 5 | | | 5 years | | | | | | | carrying | | | Carrying | | |
| | 1 year | | | years | | | years | | | years | | | years | | | and later | | | Total | | | amount | | | amount | | |
Commercial paper | | | 1,018 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,018 | | | | (6 | ) | | | 1,012 | | |
Bonds | | | 5,943 | | | | 8,483 | | | | 7,964 | | | | 5,900 | | | | 4,902 | | | | 39,566 | | | | 72,758 | | | | 321 | | | | 73,079 | | [A] |
Bank and other borrowings | | | 1,363 | | | | 595 | | | | 358 | | | | 302 | | | | 213 | | | | 572 | | | | 3,403 | | | | 123 | | | | 3,526 | | |
Total (excluding interest) | | | 8,324 | | | | 9,078 | | | | 8,322 | | | | 6,202 | | | | 5,115 | | | | 40,138 | | | | 77,179 | | | | 438 | | | | 77,617 | | |
Interest | | | 2,236 | | | | 2,051 | | | | 1,790 | | | | 1,557 | | | | 1,423 | | | | 23,230 | | [B] | | 32,287 | | | | | | | | | | |
[A] Including amounts in respect of bonds issued by BG prior to its acquisition
[B] The increase in contractual payments due in 5 years and later compared with December 31, 2015, is mainly due to the maturity profile of debt assumed on acquisition of BG.
137 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Contractual payments | | | Difference | | | | | |
| | | | | | Between | | | Between | | | Between | | | Between | | | | | | | | | | | from | | | | | |
| | Less than | | | 1 and 2 | | | 2 and 3 | | | 3 and 4 | | | 4 and 5 | | | 5 years | | | | | | | carrying | | | Carrying | |
| | 1 year | | | years | | | years | | | years | | | years | | | and later | | | Total | | | amount | | | amount | |
Bonds | | | 3,365 | | | | 5,389 | | | | 7,231 | | | | 4,052 | | | | 5,250 | | | | 24,188 | | | | 49,475 | | | | 324 | | | | 49,799 | |
Bank and other borrowings | | | 1,634 | | | | 137 | | | | 475 | | | | 49 | | | | 27 | | | | 73 | | | | 2,395 | | | | — | | | | 2,395 | |
Total (excluding interest) | | | 4,999 | | | | 5,526 | | | | 7,706 | | | | 4,101 | | | | 5,277 | | | | 24,261 | | | | 51,870 | | | | 324 | | | | 52,194 | |
Interest | | | 1,500 | | | | 1,394 | | | | 1,264 | | | | 1,052 | | | | 883 | | | | 11,205 | | | | 17,298 | | | | | | | | | |
The fair value of debt excluding finance lease liabilities at December 31, 2016, was $80,408 million (2015: $53,480 million), mainly determined from the prices quoted for those securities.
Additional finance lease liabilities of $6,861 million mainly in respect of contracts entered into by BG for floating, production, storage and offloading units and subsea equipment, were assumed, and related property, plant and equipment recognised, on acquisition of BG. Operating lease contracts, mainly for LNG vessels, were also assumed on this acquisition. Shell also has lease arrangements as lessee, for: in Upstream and Integrated Gas, principally drilling and ancillary equipment, service vessels, obligations under certain power generation contracts, LNG vessels and land and buildings; in Downstream, principally tankers, storage capacity and retail sites; and in Corporate, principally land and buildings. Finance lease liabilities are secured on the leased assets.
The future minimum lease payments for finance and operating leases and the present value of future minimum finance lease payments at December 31, by payment date are as follows:
| | | | | | | | | | | | | | | | | |
2016 | | $ million | | |
| | Finance leases | | | Operating leases | | |
| | Future minimum lease payments | | | Interest | | | Present value of future minimum lease payments | | | Future minimum lease payments | | [A] |
Less than 1 year | | | 2,193 | | | | 1,070 | | | | 1,123 | | | | 4,805 | | |
Between 1 and 5 years | | | 7,727 | | | | 3,265 | | | | 4,462 | | | | 13,979 | | |
5 years and later | | | 14,305 | | | | 5,031 | | | | 9,274 | | | | 7,214 | | |
Total | | | 24,225 | | | | 9,366 | | | | 14,859 | | | | 25,998 | | |
[A] Including $6,926 million in respect of drilling and ancillary equipment (see Note 9).
| | | | | | | | | | | | | | | | | |
2015 | | $ million | | |
| | Finance leases | | | Operating leases | | |
| | Future minimum lease payments | | | Interest | | | Present value of future minimum lease payments | | | Future minimum lease payments | | [A] [B] |
Less than 1 year | | | 1,122 | | | | 591 | | | | 531 | | | | 4,687 | | |
Between 1 and 5 years | | | 3,462 | | | | 1,475 | | | | 1,987 | | | | 11,443 | | |
5 years and later | | | 5,466 | | | | 1,799 | | | | 3,667 | | | | 6,759 | | |
Total | | | 10,050 | | | | 3,865 | | | | 6,185 | | | | 22,889 | | |
[A] Including $8,449 million in respect of drilling and ancillary equipment (see Note 9).
[B] Revised following reassessment of contracts.
Future minimum lease payments at December 31, 2016, are stated before deduction of amounts expected to be received under non-cancellable sub-leases of $418 million (2015: $485 million) in respect of finance leases and $252 million (2015: $169 million) in respect of operating leases.
Operating lease expense in 2016 was $5,063 million (2015: $4,751 million; 2014: $4,572 million).
138 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
16 TRADE AND OTHER PAYABLES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Trade payables | | | 28,069 | | | | — | | | | 23,795 | | | | — | |
Other payables | | | 5,007 | | | | 3,035 | | | | 4,406 | | | | 2,062 | |
Amounts due to joint ventures and associates | | | 1,973 | | | | 26 | | | | 2,503 | | | | 24 | |
Derivative contracts (see Note 20) | | | 6,418 | | | | 3,315 | | | | 10,757 | | | | 1,687 | |
Accruals and deferred income | | | 11,950 | | | | 549 | | | | 11,309 | | | | 755 | |
Total | | | 53,417 | | | | 6,925 | | | | 52,770 | | | | 4,528 | |
The fair value of financial liabilities included above approximates the carrying amount and, other than the fair value of certain derivative contracts, was determined from predominantly unobservable inputs.
Other payables include amounts due to joint arrangement partners and in respect of other project-related items and cash-settled share-based compensation plans.
Information about offsetting, collateral and liquidity risk is presented in Note 20.
17 TAXATION
| | | | | | | | | | | | |
Taxation charge/(credit) | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Current tax | | | | | | | | | | | | |
Charge in respect of current period | | | 3,936 | | | | 6,886 | | | | 14,044 | |
Adjustments in respect of prior periods | | | (1,205 | ) | | | 172 | | | | (287 | ) |
Total | | | 2,731 | | | | 7,058 | | | | 13,757 | |
Deferred tax | | | | | | | | | | | | |
Relating to the origination and reversal of temporary differences, tax losses and credits | | | (2,688 | ) | | | (6,833 | ) | | | (318 | ) |
Relating to changes in tax rates | | | (200 | ) | | | (526 | ) | | | 19 | |
Adjustments in respect of prior periods | | | 986 | | | | 148 | | | | 126 | |
Total | | | (1,902 | ) | | | (7,211 | ) | | | (173 | ) |
Total taxation charge/(credit) | | | 829 | | | | (153 | ) | | | 13,584 | |
The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. The amounts in 2016 principally related to the release of a current tax liability and related deferred tax asset.
The deferred tax net credit relating to temporary differences, tax losses and credits in 2015 was mainly due to impairment charges, additional provisions, operating losses and sales of non-current assets and businesses.
| | | | | | | | | | | | |
Reconciliation of applicable tax (credit)/charge at statutory tax rates to taxation charge/(credit) | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Income before taxation | | | 5,606 | | | | 2,047 | | | | 28,314 | |
Less: share of profit of joint ventures and associates | | | (3,545 | ) | | | (3,527 | ) | | | (6,116 | ) |
Income/(loss) before taxation and share of profit of joint ventures and associates | | | 2,061 | | | | (1,480 | ) | | | 22,198 | |
Applicable tax (credit)/charge at statutory tax rates | | | (344 | ) | | | 930 | | | | 11,206 | |
Adjustments in respect of prior periods | | | (219 | ) | | | 320 | | | | (161 | ) |
Tax effects of: | | | | | | | | | | | | |
Expenses not deductible for tax purposes | | | 2,066 | | | | 1,452 | | | | 2,271 | |
Income not subject to tax at statutory rates | | | (1,740 | ) | | | (2,597 | ) | | | (1,864 | ) |
Derecognition of deferred tax assets | | | 1,575 | | | | 108 | | | | 1,015 | |
Deductible items not expensed | | | (516 | ) | | | (418 | ) | | | (401 | ) |
Taxable income not recognised | | | 509 | | | | 384 | | | | 526 | |
Other | | | (502 | ) | | | (332 | ) | | | 992 | |
Taxation charge/(credit) | | | 829 | | | | (153 | ) | | | 13,584 | |
The weighted average of statutory tax rates was (17)% in 2016 (2015: (63)%; 2014: 50%).The negative rate in 2016 (tax credit on pre-tax income) was mainly due to losses incurred in jurisdictions with a higher weighted average statutory rate than jurisdictions in which profits were made. The negative rate in 2015 (tax charge on a pre-tax loss) was mainly due to impairment charges, and other charges related to ceasing activities in Alaska and the Carmon Creek project.
139 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | |
Taxes payable | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Income taxes | | | 4,082 | | | | 5,653 | |
Sales taxes, excise duties and similar levies | | | 2,603 | | | | 2,580 | |
Total | | | 6,685 | | | | 8,233 | |
Included in other receivables at December 31, 2016 (see Note 12), was income tax receivable of $1,037 million (2015: $1,244 million).
| | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax | | $ million | | |
| | Decommissioning and other provisions | | | Losses carried forward | | | Property, plant and equipment | | | Retirement benefits | | | Other | | | Total | | |
At January 1, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 3,674 | | | | 7,688 | | | | (6,651 | ) | | | 3,461 | | | | 2,861 | | | | 11,033 | | |
Deferred tax liabilities | | | 5,307 | | | | 3,806 | | | | (17,664 | ) | | | 309 | | | | (734 | ) | | | (8,976 | ) | |
| | | 8,981 | | | | 11,494 | | | | (24,315 | ) | | | 3,770 | | | | 2,127 | | | | 2,057 | | |
Recognised in the year | | | | | | | | | | | | | | | | | | | | | | | | | |
Additions on acquisition of BG | | | 702 | | | | 1,624 | | | | (7,310 | ) | | | 39 | | | | (218 | ) | | | (5,163 | ) | [A] |
Recognised in income | | | (1,445 | ) | | | 3,566 | | | | 144 | | | | 33 | | | | (396 | ) | | | 1,902 | | |
Other movements | | | 94 | | | | (229 | ) | | | 199 | | | | 738 | | | | (192 | ) | | | 610 | | |
Currency translation differences | | | (599 | ) | | | (460 | ) | | | 829 | | | | (109 | ) | | | 84 | | | | (255 | ) | |
| | | (1,248 | ) | | | 4,501 | | | | (6,138 | ) | | | 701 | | | | (722 | ) | | | (2,906 | ) | |
At December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 2,944 | | | | 12,179 | | | | (6,607 | ) | | | 3,817 | | | | 2,092 | | | | 14,425 | | |
Deferred tax liabilities | | | 4,789 | | | | 3,816 | | | | (23,846 | ) | | | 654 | | | | (687 | ) | | | (15,274 | ) | |
| | | 7,733 | | | | 15,995 | | | | (30,453 | ) | | | 4,471 | | | | 1,405 | | | | (849 | ) | |
At January 1, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 3,721 | | | | 6,006 | | | | (7,194 | ) | | | 3,787 | | | | 1,811 | | | | 8,131 | | |
Deferred tax liabilities | | | 5,167 | | | | 3,310 | | | | (21,041 | ) | | | 973 | | | | (461 | ) | | | (12,052 | ) | |
| | | 8,888 | | | | 9,316 | | | | (28,235 | ) | | | 4,760 | | | | 1,350 | | | | (3,921 | ) | |
Recognised in the year | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognised in income | | | 430 | | | | 2,888 | | | | 2,860 | | | | 295 | | | | 738 | | | | 7,211 | | |
Other movements | | | 15 | | | | (270 | ) | | | (290 | ) | | | (967 | ) | | | 82 | | | | (1,430 | ) | |
Currency translation differences | | | (352 | ) | | | (440 | ) | | | 1,350 | | | | (318 | ) | | | (43 | ) | | | 197 | | |
| | | 93 | | | | 2,178 | | | | 3,920 | | | | (990 | ) | | | 777 | | | | 5,978 | | |
At December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 3,674 | | | | 7,688 | | | | (6,651 | ) | | | 3,461 | | | | 2,861 | | | | 11,033 | | |
Deferred tax liabilities | | | 5,307 | | | | 3,806 | | | | (17,664 | ) | | | 309 | | | | (734 | ) | | | (8,976 | ) | |
| | | 8,981 | | | | 11,494 | | | | (24,315 | ) | | | 3,770 | | | | 2,127 | | | | 2,057 | | |
[A] Comprising deferred tax assets and liabilities of $3,278 million and $8,441 million respectively (see Note 4).
The above deferred tax information takes into consideration offsetting balances within the same tax jurisdiction.
The increase in deferred tax assets and decrease in deferred tax liabilities in 2015 was mainly the result of impairment charges, additional provisions, operating losses and sales of non-current assets and businesses.
Other movements in deferred tax assets and liabilities principally relate to acquisitions (other than of BG), sales of non-current assets and businesses and amounts recognised in other comprehensive income (see Note 23).
Deferred tax assets of $11,896 million at December 31, 2016 (2015: $9,110 million) are dependent on future taxable profits not arising from the reversal of existing deferred tax liabilities, and relate to tax jurisdictions where Shell has suffered a loss in the current or preceding year. It is considered probable based on business forecasts that such profits will be available.
Unrecognised deductible temporary differences, unused tax losses and credits carried forward amounted to $39,589 million at December 31, 2016 (2015: $27,660 million) including amounts of $31,669 million (2015: $21,978 million) that are subject to time limits for utilisation of five years or later or are not time limited.
Retained earnings of subsidiaries, joint ventures and associates amounted to $211,075 million at December 31, 2016 (2015: $206,135 million). Provision has been made for withholding and other taxes that would become payable on the distribution of these earnings only to the extent that either Shell does not control the relevant entity or it is expected that these earnings will be remitted in the foreseeable future. For a significant majority of the retained earnings no provision has been made, because either distribution would not be subject to tax or is not expected in the foreseeable future.
140 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
18 RETIREMENT BENEFITS
Retirement benefits are provided through a number of funded and unfunded defined benefit plans and defined contribution plans, the most significant of which are in the Netherlands, UK and USA. Benefits comprise principally pensions; retirement healthcare and life insurance are also provided in certain countries.
| | | | | | | | | | | | |
Retirement benefit expense | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Defined benefit plans: | | | | | | | | | | | | |
Current service cost, net of plan participants’ contributions | | | 1,527 | | | | 1,855 | | | | 1,844 | |
Interest expense on obligations | | | 2,643 | | | | 2,944 | | | | 3,821 | |
Interest income on plan assets | | | (2,358 | ) | | | (2,495 | ) | | | (3,524 | ) |
Other | | | (116 | ) | | | 207 | | | | (1,073 | ) |
Total | | | 1,696 | | | | 2,511 | | | | 1,068 | |
Defined contribution plans | | | 485 | | | | 473 | | | | 448 | |
Total retirement benefit expense | | | 2,181 | | | | 2,984 | | | | 1,516 | |
Other in 2014 mainly comprises the impact of amendments to the Dutch pension plan following regulatory changes in the Netherlands.
Retirement benefit expense is presented principally within production and manufacturing expenses and selling, distribution and administrative expenses in the Consolidated Statement of Income. Interest income on plan assets is calculated using the rate applied to the related defined benefit obligations for each plan.
| | | | | | | | | | | | |
Remeasurements | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Actuarial gains/(losses) on obligations: | | | | | | | | | | | | |
Due to changes in demographic assumptions | | | 809 | | | | (517 | ) | | | (663 | ) |
Due to changes in financial assumptions [A] | | | (11,391 | ) | | | 6,381 | | | | (14,313 | ) |
Due to experience adjustments | | | 642 | | | | 121 | | | | 135 | |
Total | | | (9,940 | ) | | | 5,985 | | | | (14,841 | ) |
Return on plan assets in excess of interest income | | | 5,106 | | | | 298 | | | | 6,139 | |
Other movements | | | 18 | | | | 55 | | | | (18 | ) |
Total remeasurements | | | (4,816 | ) | | | 6,338 | | | | (8,720 | ) |
[A] Mainly in the discount rates applied.
Experience adjustments arise from differences between the actuarial assumptions made in respect of the year and actual outcomes.
| | | | | | | | |
Defined benefit plans | | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
Obligations | | | (94,405 | ) | | | (89,426 | ) |
Plan assets | | | 81,276 | | | | 80,851 | |
Net liability | | | (13,129 | ) | | | (8,575 | ) |
Retirement benefits in the Consolidated Balance Sheet: | | | | | | | | |
Non-current assets | | | 1,456 | | | | 4,362 | |
Non-current liabilities | | | (14,130 | ) | | | (12,587 | ) |
Current liabilities | | | (455 | ) | | | (350 | ) |
Total | | | (13,129 | ) | | | (8,575 | ) |
| | | | | | | | |
Defined benefit plan obligations | | $ million, except where indicated | |
| | 2016 | | | 2015 | |
At January 1 | | | 89,426 | | | | 101,331 | |
Current service cost | | | 1,585 | | | | 1,919 | |
Interest expense | | | 2,643 | | | | 2,944 | |
Actuarial losses/(gains) | | | 9,940 | | | | (5,985 | ) |
Benefit payments | | | (3,847 | ) | | | (3,508 | ) |
Other movements | | | 1,006 | | [A] | | (491 | ) |
Currency translation differences | | | (6,348 | ) | | | (6,784 | ) |
At December 31 | | | 94,405 | | | | 89,426 | |
Comprising: | | | | | | | | |
Funded pension plans | | | 85,357 | | | | 80,603 | |
Weighted average duration | | 18 years | | | 17 years | |
Unfunded pension plans | | | 4,463 | | | | 4,496 | |
Weighted average duration | | 11 years | | | 12 years | |
Other unfunded plans | | | 4,585 | | | | 4,327 | |
Weighted average duration | | 13 years | | | 14 years | |
[A] Includes additions to obligations on acquisition of BG of $1,958 million.
141 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | |
Defined benefit plan assets | | $ million, except where indicated | |
| | 2016 | | | 2015 | |
At January 1 | | | 80,851 | | | | 86,318 | |
Return on plan assets (in excess of interest income) | | | 5,106 | | | | 298 | |
Interest income | | | 2,358 | | | | 2,495 | |
Employer contributions | | | 1,341 | | | | 1,296 | |
Plan participants’ contributions | | | 58 | | | | 64 | |
Benefit payments | | | (3,560 | ) | | | (3,254 | ) |
Other movements | | | 1,211 | | [A] | | (515 | ) |
Currency translation differences | | | (6,089 | ) | | | (5,851 | ) |
At December 31 | | | 81,276 | | | | 80,851 | |
Comprising: | | | | | | | | |
Quoted in active markets: | | | | | | | | |
Equities | | | 29 | % | | | 34 | % |
Debt securities | | | 46 | % | | | 47 | % |
Real estate | | | 1 | % | | | — | |
Investment funds | | | 1 | % | | | 1 | % |
Other | | | 1 | % | | | 1 | % |
Other: | | | | | | | | |
Equities | | | 9 | % | | | 6 | % |
Debt securities | | | 3 | % | | | 2 | % |
Real estate | | | 6 | % | | | 5 | % |
Investment funds | | | 2 | % | | | 2 | % |
Other | | | 2 | % | | | 2 | % |
[A] Includes additions to plan assets on acquisition of BG of $2,194 million.
Long-term investment strategies of plans are generally determined by the relevant pension plan trustees using a structured asset liability modelling approach to define the asset mix that best meets the objectives of optimising returns within agreed risk levels while maintaining adequate funding levels.
Employer contributions to defined benefit pension plans are set by local trustees based on actuarial valuations in accordance with local regulations and are estimated to be $1.4 billion in 2017.
The principal assumptions applied in determining the present value of defined benefit obligations and their bases were as follows:
■ | rates of increase in pensionable remuneration, pensions in payment and healthcare costs: historical experience and management’s long-term expectation; |
■ | discount rates: prevailing long-term AA corporate bond yields, chosen to match the currency and duration of the relevant obligation; and |
■ | mortality rates: published standard mortality tables for the individual countries concerned adjusted for Shell experience where statistically significant. |
The weighted averages for those assumptions and related sensitivity information at December 31 are presented below. Sensitivity information indicates by how much the defined benefit obligations would increase or decrease if a given assumption were to increase or decrease with no change in other assumptions.
| | | | | | | | | | | | | | |
| | $ million, except where indicated |
| | | | | | | | | | Effect of using alternative assumptions |
| | Assumptions used | | | Increase/(decrease) in defined benefit obligations |
| | 2016 | | | 2015 | | | Range of assumptions | | 2016 | | 2015 |
Rate of increase in pensionable remuneration | | | 5 | % | | | 5 | % | | -1% to +1% | | (1,895) to 2,504 | | (2,015) to 2,557 |
Rate of increase in pensions in payment | | | 2 | % | | | 2 | % | | -1% to +1% | | (8,850) to 11,271 | | (7,666) to 9,639 |
Rate of increase in healthcare costs | | | 7 | % | | | 7 | % | | -1% to +1% | | (455) to 555 | | (451) to 552 |
Discount rate for pension plans | | | 3 | % | | | 4 | % | | -1% to +1% | | 16,904 to (12,912) | | 14,679 to (11,568) |
Discount rate for healthcare plans | | | 4 | % | | | 4 | % | | -1% to +1% | | 662 to (528) | | 651 to (518) |
Expected age at death for persons aged 60: | | | | | | | | | | | | | | |
Men | | 87 years | | | 87 years | | | -1 year to +1 year | | (1,743) to 1,797 | | (1,497) to 1,527 |
Women | | 89 years | | | 89 years | | | -1 year to +1 year | | (1,484) to 1,530 | | (1,207) to 1,228 |
142 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
19 DECOMMISSIONING AND OTHER PROVISIONS
| | | | | | | | | | | | |
| | $ million | |
| | Decommissioning and restoration | | | Other | | | Total | |
At January 1, 2016 | | | | | | | | | | | | |
Current | | | 1,239 | | | | 2,826 | | | | 4,065 | |
Non-current | | | 23,008 | | | | 3,140 | | | | 26,148 | |
| | | 24,247 | | | | 5,966 | | | | 30,213 | |
Additions on acquisition of BG (see Note 4) | | | 3,965 | | | | 1,577 | | [A] | | 5,542 | |
Other additions | | | 816 | | | | 3,997 | | [B] | | 4,813 | |
Amounts charged against provisions | | | (880 | ) | | | (2,562 | ) | | | (3,442 | ) |
Accretion expense | | | 1,013 | | | | 103 | | | | 1,116 | |
Remeasurements and other movements | | | (2,846 | ) | | | (694 | ) | | | (3,540 | ) |
Currency translation differences | | | (1,150 | ) | | | (150 | ) | | | (1,300 | ) |
| | | 918 | | | | 2,271 | | | | 3,189 | |
At December 31, 2016 | | | | | | | | | | | | |
Current | | | 797 | | | | 2,987 | | | | 3,784 | |
Non-current | | | 24,368 | | | | 5,250 | | | | 29,618 | |
| | | 25,165 | | | | 8,237 | | | | 33,402 | |
At January 1, 2015 | | | | | | | | | | | | |
Current | | | 1,275 | | | | 2,691 | | | | 3,966 | |
Non-current | | | 20,612 | | | | 3,222 | | | | 23,834 | |
| | | 21,887 | | | | 5,913 | | | | 27,800 | |
Additions | | | 522 | | | | 2,999 | | | | 3,521 | |
Amounts charged against provisions | | | (913 | ) | | | (2,410 | ) | | | (3,323 | ) |
Accretion expense | | | 881 | | | | 51 | | | | 932 | |
Remeasurements and other movements | | | 2,863 | | | | (305 | ) | | | 2,558 | |
Currency translation differences | | | (993 | ) | | | (282 | ) | | | (1,275 | ) |
| | | 2,360 | | | | 53 | | | | 2,413 | |
At December 31, 2015 | | | | | | | | | | | | |
Current | | | 1,239 | | | | 2,826 | | | | 4,065 | |
Non-current | | | 23,008 | | | | 3,140 | | | | 26,148 | |
| | | 24,247 | | | | 5,966 | | | | 30,213 | |
[A] Includes $950 million representing the fair value of contingent liabilities assumed, mainly in relation to litigation costs.
[B] Mainly relating to onerous contracts and redundancy costs (see Note 27)
.
The amount and timing of settlement in respect of these provisions are uncertain and dependent on various factors that are not always within management’s control. Additions to provisions are stated net of reversals of provisions recognised in prior periods.
Reviews of estimated decommissioning and restoration costs and the discount rate applied are carried out annually. In 2016, there was a decrease of $2,361 million in the provision resulting from changes in cost estimates reported within remeasurements and other movements (2015: an increase of $3,620 million resulting from changes in cost estimates and a decrease in the discount rate).
Of the decommissioning and restoration provision at December 31, 2016, an estimated $4,747 million is expected to be utilised within one to five years, $6,069 million within six to 10 years, and the remainder in later periods.
Other provisions principally comprise amounts recognised in respect of environmental costs ($1,482 million at December 31, 2016; 2015 $1,545 million), litigation costs, redundancy costs, employee benefits and onerous contracts.
20 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial instruments and other derivative contracts in the Consolidated Balance Sheet comprise investments in securities (see Note 11), cash and cash equivalents (see Note 14), debt (see Note 15) and certain amounts (including derivative contracts) reported within trade and other receivables (see Note 12) and trade and other payables (see Note 16).
RISKS
In the normal course of business, financial instruments of various kinds are used for the purposes of managing exposure to interest rate, foreign exchange and commodity price movements.
Treasury standards are applicable to all subsidiaries and each subsidiary is required to adopt a treasury policy consistent with these standards. These policies cover: financing structure; interest rate and foreign exchange risk management; insurance; counterparty risk management; and use of derivative contracts. Wherever possible, treasury operations are carried out through specialist regional organisations without removing from each subsidiary the responsibility to formulate and implement appropriate treasury policies.
Apart from forward foreign exchange contracts to meet known commitments, the use of derivative contracts by most subsidiaries is not permitted by their treasury policy.
Other than in exceptional cases, the use of external derivative contracts is confined to specialist trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems.
143 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Shell’s operations expose it to market, credit and liquidity risk, as described below.
Market risk
Market risk is the possibility that changes in interest rates, foreign exchange rates or the prices of crude oil, natural gas, LNG, refined products, chemical feedstocks, power and carbon-emission rights will adversely affect the value of assets, liabilities or expected future cash flows.
Interest rate risk
Most debt is raised from central borrowing programmes. Shell’s policy continues to be to have debt principally denominated in dollars and to maintain a largely floating interest rate exposure profile; however, Shell has issued a significant amount of fixed rate debt in recent years, taking advantage of historically low interest rates available in US debt markets. As a result, a substantial portion of the debt portfolio at December 31, 2016, is at fixed rates and this reduces Shell’s exposure to the dollar LIBOR interest rate.
The financing of most subsidiaries is structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged.
On the basis of the floating rate net debt position at December 31, 2016, (both issued and hedged), and assuming other factors (principally foreign exchange rates and commodity prices) remained constant and that no further interest rate management action was taken, an increase in interest rates of 1% would have decreased 2016 income before taxation by $210 million (2015: $36 million increase, based on the floating rate position at December 31, 2015).
The carrying amounts and maturities of debt and borrowing facilities are presented in Note 15. Interest expense is presented in Note 7.
Foreign exchange risk
Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most [Upstream] entities and those with significant cross-border business is the dollar. For Downstream entities, the functional currency is typically the local currency. Consequently, Shell is exposed to varying levels of foreign exchange risk when an entity enters into transactions that are not denominated in its functional currency, when foreign currency monetary assets and liabilities are translated at the balance sheet date and as a result of holding net investments in operations that are not dollar-functional. Each entity is required to adopt treasury policies that are designed to measure and manage its foreign exchange exposures by reference to its functional currency.
Foreign exchange gains and losses arise in the normal course of business from the recognition of receivables and payables and other monetary items in currencies other than an entity’s functional currency. Foreign exchange risk may also arise in connection with capital expenditure. For major projects, an assessment is made at the final investment decision stage whether to hedge any resulting exposure.
Assuming other factors (principally interest rates and commodity prices) remained constant and that no further foreign exchange risk management action were taken, a 10% appreciation against the dollar at December 31 of the main currencies to which Shell is exposed would have the following effects:
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Increase/(decrease) in income before taxation | | | Increase in net assets | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
10% appreciation against the dollar of: | | | | | | | | | | | | | | | | |
Canadian dollar | | | (53 | ) | | | (99 | ) | | | 1,666 | | | | 1,701 | |
Euro | | | (75 | ) | | | 63 | | | | 845 | | | | 1,185 | |
Australian dollar | | | 45 | | | | 31 | | | | 669 | | | | 6 | |
Sterling | | | (141 | ) | | | 35 | | | | 549 | | | | 2,951 | |
The above sensitivity information was calculated by reference to carrying amounts of assets and liabilities at December 31 only. The effect on income before taxation arises in connection with monetary balances denominated in currencies other than an entity’s functional currency; the effect on net assets arises principally from the translation of assets and liabilities of entities that are not dollar-functional.
Foreign exchange gains and losses included in income are presented in Note 6.
Commodity price risk
Certain subsidiaries have a mandate to trade crude oil, natural gas, LNG, refined products, chemical feedstocks, power and carbon-emission rights, and to use commodity derivative contracts (forwards, futures, swaps and options) as a means of managing price and timing risks arising from this trading activity. In effecting these transactions, the entities concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are managed within authorised limits.
Risk management systems are used for recording and valuing instruments. Commodity price risk exposure is monitored, and the acceptable level of exposure determined, by market risk committees. There is regular reviewing of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques, daily monitoring of trading positions against limits, marking-to-fair value of trading exposures with a department independent of traders reviewing the market values applied. Although trading losses can and do occur, the nature of the trading portfolio and its management are considered adequate mitigants against the risk of significant losses.
VAR techniques based on variance/covariance or Monte Carlo simulation models are used to make a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Models are regularly reviewed against actual fair value movements to ensure integrity is maintained. All VAR ranges and year-end positions in respect of commodities traded in active markets, which are presented in the table below, are calculated on a diversified basis in order to reflect the effect of offsetting risk within combined portfolios.
144 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | |
Value-at-risk (pre-tax) | | $ million | |
| | 2016 | | 2015 | |
| | High | | Low | | Average | | Year-end | | High | | | Low | | | Average | | | Year-end | |
Global oil | | 40 | | 13 | | 23 | | 29 | | | 39 | | | | 10 | | | | 18 | | | | 26 | |
North America gas and power | | 17 | | 4 | | 10 | | 12 | | | 18 | | | | 4 | | | | 7 | | | | 8 | |
Europe gas and power | | 8 | | 1 | | 2 | | 2 | | | 4 | | | | — | | | | 1 | | | | 1 | |
Carbon-emission rights | | 7 | | 1 | | 2 | | 3 | | | 2 | | | | — | | | | 1 | | | | 1 | |
Credit risk
Policies are in place to ensure that sales of products are made to customers with appropriate creditworthiness. These policies include detailed credit analysis and monitoring of trading partners against counterparty credit limits. Credit information is regularly shared between business and finance functions, with dedicated teams in place to quickly identify and respond to cases of credit deterioration. Mitigation measures are defined and implemented for high-risk business partners and customers, and include shortened payment terms, collateral or other security posting and vigorous collections. In addition, policies limit the amount of credit exposure to any individual financial institution. There are no material concentrations of credit risk, with individual customers or geographically, and there has been no significant level of counterparty default in recent years.
Surplus cash is invested in a range of short-dated, secure and liquid instruments including short-term bank deposits, money market funds, reverse repos and similar instruments. The portfolio of these investments is diversified to avoid concentrating risk in any one instrument, country or counterparty. Management monitors the investments regularly and adjusts the investment portfolio in light of new market information where necessary to ensure credit risk is effectively diversified.
In commodity trading, counterparty credit risk is managed within a framework of credit limits with utilisation being regularly reviewed. Credit risk exposure is monitored and the acceptable level is determined by a credit committee. Credit checks are performed by a department independent of traders, and are undertaken before contractual commitment. Where appropriate, netting arrangements, credit insurance, prepayments and collateral are used to manage specific risks.
Shell routinely enters into offsetting, master netting and similar arrangements with trading and other counterparties to manage credit risk. Where there is a legally enforceable right of offset under such arrangements and net settlement is regularly applied, the net asset or liability is recognised in the Consolidated Balance Sheet, otherwise assets and liabilities are presented gross. These amounts, as presented net and gross within trade and other receivables and trade and other payables in the Consolidated Balance Sheet at December 31, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Amounts offset | | | Amounts not offset | | | | | |
| | Gross amounts before offset | | | Amounts offset | | | Net amounts as presented | | | Cash collateral received/pledged | | | Other offsetting instruments | | | Net amounts | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Within trade receivables | | | 9,844 | | | | 6,539 | | | | 3,305 | | | | 1 | | | | 12 | | | | 3,292 | |
Within derivative contracts | | | 6,309 | | | | 2,197 | | | | 4,112 | | | | 107 | | | | 1,272 | | | | 2,733 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Within trade payables | | | 9,489 | | | | 6,535 | | | | 2,954 | | | | — | | | | 12 | | | | 2,942 | |
Within derivative contracts | | | 9,434 | | | | 2,197 | | | | 7,237 | | | | 86 | | | | 1,272 | | | | 5,879 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Amounts offset | | | Amounts not offset | | | | | |
| | Gross amounts before offset [A] | | | Amounts offset [A] | | | Net amounts as presented | | | Cash collateral received/pledged | | | Other offsetting instruments | | | Net amounts | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Within trade receivables | | | 9,629 | | | | 6,252 | | | | 3,377 | | | | 1 | | | | 209 | | | | 3,167 | |
Within derivative contracts | | | 13,234 | | | | 3,069 | | | | 10,165 | | | | 162 | | | | 7,562 | | | | 2,441 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Within trade payables | | | 8,861 | | | | 6,137 | | | | 2,724 | | | | — | | | | 210 | | | | 2,514 | |
Within derivative contracts | | | 12,777 | | | | 3,069 | | | | 9,708 | | | | 98 | | | | 7,538 | | | | 2,072 | |
[A] Revised to align with the netting methodology for the variation margin applied from 2016.
Amounts not offset principally relate to contracts where the intention to settle on a net basis was not clearly established at December 31.
The carrying amount of financial assets pledged as collateral for liabilities or contingent liabilities at December 31, 2016, presented within trade and other receivables, was $1,815 million (2015: $1,824 million). The carrying amount of collateral held at December 31, 2016, presented within trade and other payables, was $173 million (2015: $541 million). Collateral mainly relates to initial margins held with commodity exchanges and over-the-counter counterparty variation margins.
145 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Liquidity risk
Liquidity risk is the risk that suitable sources of funding for Shell’s business activities may not be available. Management believes that it has access to sufficient debt funding sources (capital markets), and to undrawn committed borrowing facilities to meet foreseeable requirements. Information about borrowing facilities is presented in Note 15.
DERIVATIVE CONTRACTS AND HEDGES
Derivative contracts are used principally as hedging instruments, however, because hedge accounting is not always applied, movements in the carrying amounts of derivative contracts that are recognised in income are not always matched in the same period by the recognition of the income effects of the related hedged items.
Carrying amounts, maturities and hedges
The carrying amounts of derivative contracts at December 31 (see Notes 12 and 16), designated and not designated as hedging instruments for hedge accounting purposes, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Assets | | | Liabilities | | | | | |
| | Designated | | | Not designated | | | Total | | | Designated | | | Not designated | | | Total | | | Net | |
Interest rate swaps | | | 38 | | | | 15 | | | | 53 | | | | 136 | | | | 38 | | | | 174 | | | | (121 | ) |
Forward foreign exchange contracts | | | — | | | | 469 | | | | 469 | | | | 10 | | | | 348 | | | | 358 | | | | 111 | |
Currency swaps and options | | | 3 | | | | 280 | | | | 283 | | | | 3,241 | | | | 545 | | | | 3,786 | | | | (3,503 | ) |
Commodity derivatives | | | — | | | | 5,480 | | | | 5,480 | | | | — | | | | 5,230 | | | | 5,230 | | | | 250 | |
Other contracts | | | — | | | | 77 | | | | 77 | | | | — | | | | 185 | | | | 185 | | | | (108 | ) |
Total | | | 41 | | | | 6,321 | | | | 6,362 | | | | 3,387 | | | | 6,346 | | | | 9,733 | | | | (3,371 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Assets | | | Liabilities | | | | | |
| | Designated | | | Not designated | | | Total | | | Designated | | | Not designated | | | Total | | | Net | |
Interest rate swaps | | | 51 | | | | — | | | | 51 | | | | 35 | | | | — | | | | 35 | | | | 16 | |
Forward foreign exchange contracts | | | — | | | | 508 | | | | 508 | | | | 136 | | | | 236 | | | | 372 | | | | 136 | |
Currency swaps and options | | | 16 | | | | 361 | | | | 377 | | | | 1,637 | | | | 51 | | | | 1,688 | | | | (1,311 | ) |
Commodity derivatives | | | — | | | | 12,611 | | | | 12,611 | | | | — | | | | 10,210 | | | | 10,210 | | | | 2,401 | |
Other contracts | | | — | | | | 311 | | | | 311 | | | | — | | | | 139 | | | | 139 | | | | 172 | |
Total | | | 67 | | | | 13,791 | | | | 13,858 | | | | 1,808 | | | | 10,636 | | | | 12,444 | | | | 1,414 | |
Net gains before tax on derivative contracts, excluding realised commodity contracts and those accounted for as hedges, were $414 million in 2016 (2015: $4,107 million; 2014: $6,053 million).
In 2015, certain cash and cash equivalents and forward foreign exchange contracts were designated as cash flow hedges of a significant portion of the forecast cash consideration for the acquisition of BG (see Note 4). The total of cash and cash equivalents and amounts receivable under the forward foreign exchange contracts at December 31, 2015, was $19,912 million. Related losses of $411 million were recognised in other comprehensive income in 2016 (2015: $537 million), and the accumulated losses were reclassified to the balance sheet in 2016 (see Note 23).
In addition, certain contracts, mainly to hedge price risk relating to forecast commodity transactions which mature in 2017-2019, were designated in cash flow hedging relationships. In 2016, no net gains or losses for ineffectiveness were recognised in income (2015: $1 million net gains; 2014: $13 million net gains). The net liability carrying amount of commodity derivative contracts designated as cash flow hedging instruments of $115 million at December 31, 2016 (2015: $1,050 million net asset), was presented after the offset of related margin balances maintained with exchanges.
Certain interest rate and currency swaps were designated in fair value hedges, principally in respect of debt for which the carrying amount of the related derivative contracts, net of accrued interest, at December 31, 2016, was a net liability of $3,472 million (2015: $1,847 million).
In 2016, certain debt and currency swaps were designated as hedges of net investments in foreign operations, relating to the foreign exchange risk arising between certain intermediate holding companies and their subsidiaries. The total carrying amount of the hedging instruments at December 31, 2016, was a net liability of $5,381 million.
In the course of trading operations, certain contracts are entered into for delivery of commodities that are accounted for as derivatives. The resulting price exposures are managed by entering into related derivative contracts. These contracts are managed on a fair value basis and the maximum exposure to liquidity risk is the undiscounted fair value of derivative liabilities.
For a minority of commodity derivative contracts, carrying amounts cannot be derived from quoted market prices or other observable inputs, in which case fair value is estimated using valuation techniques such as Black-Scholes, option spread models and extrapolation using quoted spreads with assumptions developed internally based on observable market activity.
146 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Other contracts include certain contracts that are held to sell or purchase commodities and others containing embedded derivatives, which are required to be recognised at fair value because of pricing or delivery conditions, even though they were entered into to meet operational requirements. These contracts are expected to mature in 2017-2025, with certain contracts having early termination rights (for either party). Valuations are derived from quoted market prices for the next six years and, thereafter, from forward gas price formulae used in similar contracts. Future gas price assumptions are the most significant input to this model, and a decrease at December 31, 2016, of 10% in the projected gas price would, assuming other inputs remained unchanged, increase income before taxation by $33 million (2015: $59 million).
The contractual maturities of derivative liabilities at December 31 compare with their carrying amounts in the Consolidated Balance Sheet as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Contractual maturities | | | | | | | | | |
| | Less than 1 year | | | Between 1 and 2 years | | | Between 2 and 3 years | | | Between 3 and 4 years | | | Between 4 and 5 years | | | 5 years and later | | | Total | | | Discounting | | | Carrying amount | |
Forward foreign exchange contracts | | | 341 | | | | 97 | | | | 56 | | | | — | | | | (27 | ) | | | — | | | | 467 | | | | (109 | ) | | | 358 | |
Currency swaps and options | | | 1,062 | | | | 1,269 | | | | 831 | | | | 372 | | | | 701 | | | | 3,762 | | | | 7,997 | | | | (4,211 | ) | | | 3,786 | |
Commodity derivatives | | | 3,889 | | | | 706 | | | | 344 | | | | 111 | | | | 47 | | | | 204 | | | | 5,301 | | | | (71 | ) | | | 5,230 | |
Other contracts | | | 95 | | | | 130 | | | | 102 | | | | 53 | | | | 20 | | | | 3 | | | | 403 | | | | (44 | ) | | | 359 | |
Total | | | 5,387 | | | | 2,202 | | | | 1,333 | | | | 536 | | | | 741 | | | | 3,969 | | | | 14,168 | | | | (4,435 | ) | | | 9,733 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Contractual maturities | | | | | | | | | |
| | Less than 1 year | | | Between 1 and 2 years | | | Between 2 and 3 years | | | Between 3 and 4 years | | | Between 4 and 5 years | | | 5 years and later | | | Total | | | Discounting | | | Carrying amount | |
Forward foreign exchange contracts | | | 334 | | | | 75 | | | | 12 | | | | 8 | | | | — | | | | — | | | | 429 | | | | (57 | ) | | | 372 | |
Currency swaps | | | 162 | | | | 443 | | | | 713 | | | | 292 | | | | 188 | | | | 1,771 | | | | 3,569 | | | | (1,881 | ) | | | 1,688 | |
Commodity derivatives | | | 8,770 | | | | 1,215 | | | | 230 | | | | 150 | | | | 32 | | | | 102 | | | | 10,499 | | | | (289 | ) | | | 10,210 | |
Other contracts | | | 32 | | | | 58 | | | | 65 | | | | 35 | | | | 11 | | | | — | | | | 201 | | | | (27 | ) | | | 174 | |
Total | | | 9,298 | | | | 1,791 | | | | 1,020 | | | | 485 | | | | 231 | | | | 1,873 | | | | 14,698 | | | | (2,254 | ) | | | 12,444 | |
Fair value measurements
The net carrying amounts of derivative contracts held at December 31, categorised according to the predominant source and nature of inputs used in determining the fair value of each contract, were as follows:
| | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Prices in active markets for identical assets/liabilities | | | Other observable inputs | | | Unobservable inputs | | | Total | |
Interest rate swaps | | | — | | | | (121 | ) | | | — | | | | (121 | ) |
Forward foreign exchange contracts | | | — | | | | 111 | | | | — | | | | 111 | |
Currency swaps and options | | | — | | | | (3,503 | ) | | | — | | | | (3,503 | ) |
Commodity derivatives | | | 12 | | | | (153 | ) | | | 391 | | | | 250 | |
Other contracts | | | (2 | ) | | | (183 | ) | | | 77 | | | | (108 | ) |
Total | | | 10 | | | | (3,849 | ) | | | 468 | | | | (3,371 | ) |
| | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Prices in active markets for identical assets/liabilities | | | Other observable inputs | | | Unobservable inputs | | | Total | |
Interest rate swaps | | | — | | | | 16 | | | | — | | | | 16 | |
Forward foreign exchange contracts | | | — | | | | 136 | | | | — | | | | 136 | |
Currency swaps and options | | | — | | | | (1,311 | ) | | | — | | | | (1,311 | ) |
Commodity derivatives | | | 10 | | | | 2,070 | | | | 321 | | | | 2,401 | |
Other contracts | | | 5 | | | | (119 | ) | | | 286 | | | | 172 | |
Total | | | 15 | | | | 792 | | | | 607 | | | | 1,414 | |
147 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | |
Net carrying amounts of derivative contracts measured using predominantly unobservable inputs | | $ million | |
| | 2016 | | | 2015 | |
At January 1 | | | 607 | | | | 254 | |
Net (losses)/gains recognised in revenue | | | (361 | ) | | | 291 | |
Purchases | | | (227 | ) | | | (129 | ) |
Sales | | | 428 | | | | 142 | |
Recategorisations (net) | | | 56 | | | | 72 | |
Currency translation differences | | | (35 | ) | | | (23 | ) |
At December 31 | | | 468 | | | | 607 | |
Included in net losses recognised in revenue in 2016 were unrealised net gains totalling $333 million relating to assets and liabilities held at December 31, 2016 (2015: $490 million unrealised net losses included in recognised net gains).
21 SHARE CAPITAL
| | | | | | | | | | | | | | | | | | | | |
Issued and fully paid ordinary shares of €0.07 each [A] | | | | | | | | | | | | | | | | | | | | |
| | Number of shares | | | Nominal value ($ million) | |
| | A | | | B | | | A | | | B | | | Total | |
At January 1, 2016 | | | 3,990,921,569 | | | | 2,440,410,614 | | | | 340 | | | | 206 | | | | 546 | |
Scrip dividends | | | 219,253,936 | | | | — | | | | 17 | | | | — | | | | 17 | |
Shares issued (see Note 4) | | | 218,728,308 | | | | 1,305,076,117 | | | | 17 | | | | 103 | | | | 120 | |
At December 31, 2016 | | | 4,428,903,813 | | | | 3,745,486,731 | | | | 374 | | | | 309 | | | | 683 | |
At January 1, 2015 | | | 3,907,302,393 | | | 2,440,410,614 | | | 334 | | | | 206 | | | | 540 | |
Scrip dividends | | | 96,336,688 | | | | — | | | | 7 | | | | — | | | | 7 | |
Repurchases of shares | | | (12,717,512 | ) | | | — | | | (1) | | | | — | | | (1) | |
At December 31, 2015 | | | 3,990,921,569 | | | 2,440,410,614 | | | | 340 | | | | 206 | | | | 546 | |
[A] Share capital at December 31, 2016, and 2015 also included 50,000 issued and fully paid sterling deferred shares of £1 each.
At the Company’s Annual General Meeting (AGM) on May 24, 2016, the Board was authorised to allot ordinary shares in the Company, and to grant rights to subscribe for or to convert any security into ordinary shares in the Company, up to an aggregate nominal amount of €185 million (representing 2,643 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 24, 2017, and the end of the AGM to be held in 2017, unless previously renewed, revoked or varied by the Company in a general meeting.
22 SHARE-BASED COMPENSATION PLANS AND SHARES HELD IN TRUST
| | | | | | | | | | |
Share-based compensation expense | | $ million | |
| | 2016 | | 2015 | | | 2014 | |
Equity-settled plans | | 488 | | | 621 | | | | 517 | |
Cash-settled plans | | 205 | | | 129 | | | | 287 | |
Total | | 693 | | | 750 | | | | 804 | |
The principal share-based employee compensation plans are the PSP and LTIP. Awards of shares and American Depository Shares (ADSs) of the Company under the PSP and LTIP are granted upon certain conditions to eligible employees. The actual amount of shares that may vest ranges from 0% to 200% of the awards, depending on the outcomes of prescribed performance conditions over a three-year period beginning on January 1 of the award year. Shares and ADSs vest for nil consideration.
148 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
Share awards under the PSP and LTIP | | | | | | | | | | | | | | | | |
| | Number of A shares (million) | | | Number of B shares (million) | | | Number of A ADSs (million) | | | Weighted average remaining contractual life (years) | |
At January 1, 2016 | | | 36 | | | | 12 | | | | 10 | | | | 1.0 | |
Granted | | | 11 | | | | 4 | | | | 3 | | | | | |
Vested | | | (11 | ) | | | (4 | ) | | | (3 | ) | | | | |
At December 31, 2016 | | | 36 | | | | 12 | | | | 10 | | | | 1.0 | |
At January 1, 2015 | | | 33 | | | | 11 | | | | 9 | | | | 1.0 | |
Granted | | | 13 | | | | 5 | | | | 4 | | | | | |
Vested | | | (10 | ) | | | (4 | ) | | | (3 | ) | | | | |
At December 31, 2015 | | | 36 | | | | 12 | | | | 10 | | | | 1.0 | |
Other plans offer employees opportunities to acquire shares and ADSs of the Company or receive cash benefits measured by reference to the Company’s share price.
Shell employee share ownership trusts and trust-like entities purchase the Company’s shares in the open market to meet delivery commitments under employee share plans. At December 31, 2016, they held 13.1 million A shares (2015: 12.7 million), 6.2 million B shares (2015: 8.9 million) and 4.9 million A ADSs (2015: 6.1 million).
23 OTHER RESERVES
| | | | | | | | | | | | | | | | | | | | | | | | |
Other reserves attributable to Royal Dutch Shell plc shareholders | | $ million | |
| | Merger reserve | | | Share premium reserve | | | Capital redemption reserve | | | Share plan reserve | | | Accumulated other comprehensive income | | | Total | |
At January 1, 2016 | | | 3,398 | | | | 154 | | | | 84 | | | | 1,658 | | | | (22,480 | ) | | | (17,186 | ) |
Other comprehensive loss attributable to Royal Dutch Shell plc shareholders | | | — | | | | — | | | | — | | | | — | | | | (5,949 | ) | | | (5,949 | ) |
Scrip dividends | | | (17 | ) | | | — | | | | — | | | | — | | | | — | | | | (17 | ) |
Shares issued (see Note 4) | | | 33,930 | | | | — | | | | — | | | | — | | | | — | | | | 33,930 | |
Share-based compensation | | | — | | | | — | | | | — | | | | (14 | ) | | | 534 | | | | 520 | |
At December 31, 2016 | | | 37,311 | | | | 154 | | | | 84 | | | | 1,644 | | | | (27,895 | ) | | | 11,298 | |
At January 1, 2015 | | | 3,405 | | | | 154 | | | | 83 | | | | 1,723 | | | | (19,730 | ) | | | (14,365 | ) |
Other comprehensive loss attributable to Royal Dutch Shell plc shareholders | | | — | | | | — | | | | — | | | | — | | | | (2,750 | ) | | | (2,750 | ) |
Scrip dividends | | | (7 | ) | | | — | | | | — | | | | — | | | | — | | | | (7 | ) |
Repurchases of shares | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Share-based compensation | | | — | | | | — | | | | — | | | | (65 | ) | | | — | | | | (65 | ) |
At December 31, 2015 | | | 3,398 | | | | 154 | | | | 84 | | | | 1,658 | | | | (22,480 | ) | | | (17,186 | ) |
At January 1, 2014 | | | 3,411 | | | | 154 | | | | 75 | | | | 1,871 | | | | (7,548 | ) | | | (2,037 | ) |
Other comprehensive loss attributable to Royal Dutch Shell plc shareholders | | | — | | | | — | | | | — | | | | — | | | | (12,182 | ) | | | (12,182 | ) |
Scrip dividends | | | (6 | ) | | | — | | | | — | | | | — | | | | — | | | | (6 | ) |
Repurchases of shares | | | — | | | | — | | | | 8 | | | | — | | | | — | | | | 8 | |
Share-based compensation | | | — | | | | — | | | | — | | | | (148 | ) | | | — | | | | (148 | ) |
At December 31, 2014 | | | 3,405 | | | | 154 | | | | 83 | | | | 1,723 | | | | (19,730 | ) | | | (14,365 | ) |
The merger reserve and share premium reserve were established as a consequence of the Company becoming the single parent company of Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, in 2005. The increase in the merger reserve in 2016 in respect of the shares issued represents the difference between the fair value and the nominal value of the shares issued for the acquisition of BG. The capital redemption reserve was established in connection with repurchases of shares of the Company. The share plan reserve is in respect of equity-settled share-based compensation plans (see Note 22).
149 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
Accumulated other comprehensive income comprises the following:
| | | | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive income attributable to Royal Dutch Shell plc shareholders | | $ million | |
| | Currency translation differences | | | Unrealised gains/(losses) on securities | | | Cash flow hedging gains/(losses) | | | Retirement benefits remeasurements | | | Total | |
At January 1, 2016 | | | (12,940 | ) | | | 1,409 | | | | 473 | | | | (11,422 | ) | | | (22,480 | ) |
Recognised in other comprehensive income | | | (1,023 | ) | [A] | | (204 | ) | | | (727 | ) | | | (4,816 | ) | | | (6,770 | ) |
Reclassified to income | | | (277 | ) | | | 1 | | | | (939 | ) | | | — | | | | (1,215 | ) |
Reclassified to the balance sheet | | | — | | | | — | | | | 1,044 | | [B] | | — | | | | 1,044 | |
Tax on amounts recognised/reclassified | | | (21 | ) | | | (11 | ) | | | 5 | | | | 999 | | | | 972 | |
Total, net of tax | | | (1,321 | ) | | | (214 | ) | | | (617 | ) | | | (3,817 | ) | | | (5,969 | ) |
Share of joint ventures and associates | | | (154 | ) | | | 126 | | | | — | | | | — | | | | (28 | ) |
Other comprehensive loss for the period | | | (1,475 | ) | | | (88 | ) | | | (617 | ) | | | (3,817 | ) | | | (5,997 | ) |
Less: non-controlling interest | | | 50 | | | | — | | | | — | | | | (2 | ) | | | 48 | |
Attributable to Royal Dutch Shell plc shareholders | | | (1,425 | ) | | | (88 | ) | | | (617 | ) | | | (3,819 | ) | | | (5,949 | ) |
Reclassification in respect of shares held in trust | | | 534 | | | | — | | | | — | | | | — | | | | 534 | |
At December 31, 2016 | | | (13,831 | ) | | | 1,321 | | | | (144 | ) | | | (15,241 | ) | | | (27,895 | ) |
At January 1, 2015 | | | (5,931 | ) | | | 2,112 | | | | 458 | | | | (16,369 | ) | | | (19,730 | ) |
Recognised in other comprehensive income | | | (7,170 | ) | | | (650 | ) | | | 698 | | | | 6,338 | | | | (784 | ) |
Reclassified to income | | | 47 | | | | (61 | ) | | | (610 | ) | | | — | | | | (624 | ) |
Tax on amounts recognised/reclassified | | | 2 | | | | 4 | | | | (27 | ) | | | (1,387 | ) | | | (1,408 | ) |
Total, net of tax | | | (7,121 | ) | | | (707 | ) | | | 61 | | | | 4,951 | | | | (2,816 | ) |
Share of joint ventures and associates | | | 2 | | | | 4 | | | | (46 | ) | | | — | | | | (40 | ) |
Other comprehensive (loss)/income for the period | | | (7,119 | ) | | | (703 | ) | | | 15 | | | | 4,951 | | | | (2,856 | ) |
Less: non-controlling interest | | | 110 | | | | — | | | | — | | | | (4 | ) | | | 106 | |
Attributable to Royal Dutch Shell plc shareholders | | | (7,009 | ) | | | (703 | ) | | | 15 | | | | 4,947 | | | | (2,750 | ) |
At December 31, 2015 | | | (12,940 | ) | | | 1,409 | | | | 473 | | | | (11,422 | ) | | | (22,480 | ) |
At January 1, 2014 | | | (551 | ) | | | 2,929 | | | | (46 | ) | | | (9,880 | ) | | | (7,548 | ) |
Recognised in other comprehensive income | | | (4,832 | ) | | | (741 | ) | | | 606 | | | | (8,720 | ) | | | (13,687 | ) |
Reclassified to income | | | (484 | ) | | | (44 | ) | | | (56 | ) | | | — | | | | (584 | ) |
Tax on amounts recognised/reclassified | | | (5 | ) | | | (12 | ) | | | (22 | ) | | | 2,238 | | | | 2,199 | |
Total, net of tax | | | (5,321 | ) | | | (797 | ) | | | 528 | | | | (6,482 | ) | | | (12,072 | ) |
Share of joint ventures and associates | | | (112 | ) | | | (20 | ) | | | (24 | ) | | | — | | | | (156 | ) |
Other comprehensive (loss)/income for the period | | | (5,433 | ) | | | (817 | ) | | | 504 | | | | (6,482 | ) | | | (12,228 | ) |
Less: non-controlling interest | | | 53 | | | | — | | | | — | | | | (7 | ) | | | 46 | |
Attributable to Royal Dutch Shell plc shareholders | | | (5,380 | ) | | | (817 | ) | | | 504 | | | | (6,489 | ) | | | (12,182 | ) |
At December 31, 2014 | | | (5,931 | ) | | | 2,112 | | | | 458 | | | | (16,369 | ) | | | (19,730 | ) |
[A] Includes losses of $2,024 million arising on net investment hedges.
[B] Mainly relating to the acquisition of BG (see Note 20).
24 DIVIDENDS
| | | | | | | | | | | | |
Interim dividends | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
A shares | | | | | | | | | | | | |
Cash: $1.88 per share (2015: $1.88; 2014: $1.86) | | | 4,545 | | | | 5,203 | | | | 5,413 | |
Scrip: $1.88 per share (2015: $1.88; 2014: $1.86) | | | 3,491 | | | | 2,154 | | | | 1,866 | |
Total – A shares | | | 8,036 | | | | 7,357 | | | | 7,279 | |
B shares | | | | | | | | | | | | |
Cash: $1.88 per share (2015: $1.88; 2014: $1.86) | | | 5,132 | | | | 4,167 | | | | 4,031 | |
Scrip: $1.88 per share (2015: $1.88; 2014: $1.86) | | | 1,791 | | | | 448 | | | | 533 | |
Total – B shares | | | 6,923 | | | | 4,615 | | | | 4,564 | |
Total | | | 14,959 | | | | 11,972 | | | | 11,843 | |
In addition, on February 2, 2017, the Directors announced a further interim dividend in respect of 2016 of $0.47 per A share and $0.47 per B share. The total dividend is estimated to be $3,842 million and is payable on March 27, 2017, to shareholders on the register at February 17, 2017. Under the Scrip Dividend Programme, shareholders can elect to receive dividends in the form of A shares.
Dividends on A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends on B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends on ADSs are paid in dollars.
150 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
25 EARNINGS PER SHARE
| | | | | | | | | | | | |
| | 2016 | | | 2015 | | | 2014 | |
Income attributable to Royal Dutch Shell plc shareholders ($ million) | | | 4,575 | | | | 1,939 | | | | 14,874 | |
Weighted average number of A and B shares used as the basis for determining: | | | | | | | | | | | | |
Basic earnings per share (million) | | | 7,833.7 | | | | 6,320.3 | | | | 6,311.5 | |
Diluted earnings per share (million) | | | 7,891.7 | | | | 6,393.8 | | | | 6,311.6 | |
Basic earnings per share are calculated by dividing the income attributable to Royal Dutch Shell plc shareholders for the year by the weighted average number of A and B shares outstanding during the year. The weighted average number of shares outstanding excludes shares held in trust.
Diluted earnings per share are based on the same income figures. The weighted average number of shares outstanding during the year is increased by dilutive shares related to share-based compensation plans.
Earnings per share are identical for A and B shares.
26 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
GENERAL
In the ordinary course of business, Shell subsidiaries are subject to a number of loss contingencies arising from litigation and claims brought by private parties and governments, including tax authorities. The operations and earnings of Shell subsidiaries continue, from time to time, to be affected to varying degrees by political, legislative, fiscal and regulatory developments, including those relating to the protection of the environment and indigenous groups in the countries in which they operate. The industries in which Shell subsidiaries are engaged are also subject to physical risks of various types. The nature and frequency of these developments and events, as well as their effect on future operations and earnings, are unpredictable. While these matters are not expected to have a material impact on Shell, no assurance can be provided.
PESTICIDE LITIGATION
Shell Oil Company (SOC), along with other agricultural chemical pesticide manufacturers and distributors, has been sued by public and quasi-public water purveyors alleging responsibility for groundwater contamination caused by applications of chemical pesticides. Most of these law suits assert various theories of strict liability and seek to recover actual damages, including water well treatment and remediation costs. All of the suits assert claims for punitive damages. There are approximately 30 such cases pending. Based on the claims asserted and SOC’s track record with regard to amounts paid to resolve varying claims, management does not expect that the outcome of these suits pending at December 31, 2016, will have a material impact on Shell, although no assurance can be provided.
NIGERIAN LITIGATION
Shell subsidiaries and associates operating in Nigeria are parties to various environmental and contractual disputes brought in the courts of Nigeria, England and the Netherlands. These disputes are at different stages in litigation, including at the appellate stage, where judgements have been rendered against Shell entities. If taken at face value, the aggregate amount of these judgements could be seen as material. The management, however, believes that the outcomes of these matters will ultimately be resolved in a manner favourable to Shell. While these matters are not expected to have a material impact on Shell, no assurance can be provided.
Authorities in various countries are investigating Shell’s investment in Nigerian oil block OPL 245 and the 2011 settlement of litigation pertaining to that block. On January 27, 2017, the Nigeria Federal High Court issued an Interim Order of Attachment for oil block OPL 245, pending the conclusion of the investigation. Shell has applied to discharge this order on constitutional and procedural grounds. On February 14, 2017, Shell received notice of the request of indictment from the Italian prosecution office in Milan with respect to this matter.
27 EMPLOYEES
| | | | | | | | | | | | |
Employee costs | | $ million | |
| | 2016[A] | | | 2015 | | | 2014 | |
Remuneration | | | 11,985 | | | | 12,558 | | | | 13,092 | |
Social security contributions | | | 867 | | | | 830 | | | | 944 | |
Retirement benefits (see Note 18) | | | 2,181 | | | | 2,984 | | | | 1,516 | |
Share-based compensation (see Note 22) | | | 693 | | | | 750 | | | | 804 | |
Total | | | 15,726 | | | | 17,122 | | | | 16,356 | |
[A] In addition, there were redundancy costs of $1,441 million.
| | | | | | | | | | |
Average employee numbers | | Thousand | |
| | 2016 | | 2015 | | | 2014 | |
Integrated Gas [A] | | 13 | | | 13 | | | | 11 | |
Upstream [A] | | 22 | | | 22 | | | | 22 | |
Downstream | | 40 | | | 43 | | | | 47 | |
Corporate [B] | | 17 | | | 15 | | | | 14 | |
Total | | 92 | | | 93 | | | | 94 | |
[A] Segmental reporting has been changed with effect from 2016 (see Note 5). Comparative information has been reclassified.
[B] Includes all employees working in business services centres irrespective of the segment they support.
151 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
28 DIRECTORS AND SENIOR MANAGEMENT
. | | | | | | | | | | |
Remuneration of Directors of the Company | | $ million | |
| | 2016 | | 2015 | | | 2014 | |
Emoluments | | 10 | | | 12 | | | | 24 | |
Value of released awards under long-term incentive plans | | 8 | | | 1 | | | | 5 | |
Employer contributions to pension plans | | 1 | | | 1 | | | | 1 | |
Emoluments comprise salaries and fees, annual bonuses (for the period for which performance is assessed) and other benefits. Emoluments in 2014 included $11 million for tax equalisation which arose mainly as a result of the promotion of the CEO. The value of released awards under long-term incentive plans for the period is in respect of the performance period ending in that year. In 2016, retirement benefits were accrued in respect of qualifying services under defined benefit plans by two Directors.
Further information on the remuneration of the Directors can be found in the Directors’ Remuneration Report on pages 82-103.
| | | | | | | | | | |
Directors and Senior Management expense | | $ million | |
| | 2016 | | 2015 | | | 2014 | |
Short-term benefits | | 21 | | | 21 | | | | 43 | |
Retirement benefits | | 3 | | | 4 | | | | 4 | |
Share-based compensation | | 15 | | | 19 | | | | 18 | |
Termination and related amounts | | 4 | | | — | | | | 5 | |
Total | | 43 | | | 44 | | | | 70 | |
Directors and Senior Management comprise members of the Executive Committee and the Non-executive Directors of the Company.
Short-term benefits comprise salaries and fees, annual bonuses delivered in cash (for the period for which performance is assessed), other benefits and employer social security contributions. Short-term benefits in 2014 included tax equalisation as described above.
29 AUDITOR’s REMUNERATION
| | | | | | | | | | | | | |
| | $ million | | |
| | 2016 | | | 2015 | | | 2014 | | |
Fees in respect of the audit of the Consolidated and Parent Company Financial Statements, including audit of consolidation returns | | | 32 | | | | 5 | | | | 5 | | |
Other audit fees, principally in respect of audits of accounts of subsidiaries | | | 17 | | | | 46 | | | | 45 | | |
Total audit fees | | | 49 | | | | 51 | | | | 50 | | |
Audit-related fees (for other services provided pursuant to legislation) | | | 2 | | | | 2 | | | | 2 | | |
Fees in respect of non-audit services | | | 1 | | | | — | | | | 1 | | [A] |
Total | | | 52 | | | | 53 | | | | 53 | | |
[A] Principally for tax compliance.
In addition, the auditor provided audit services to retirement benefit plans for employees of subsidiaries. Remuneration amounted to $1 million in 2016 (2015: $1 million; 2014: $1 million).
With effect from 2016, Ernst & Young LLP (EY) was appointed as auditor of the Company, replacing PricewaterhouseCoopers LLP (PwC). Auditor’s remuneration for 2016 relates to EY and for 2015 and 2014 to PwC. From 2016, fees in respect of the audit of the Consolidated Financial Statements include audit of consolidation returns carried out locally that was previously included within other audit fees.
30 POST BALANCE SHEET EVENTS
In January 2017, we agreed to sell our interests in the UK North Sea assets Buzzard, Beryl, Bressay, Elgin-Franklin, J-Block, the Greater Armada cluster, Everest, Lomond and Erskine, as well as a 10% interest in Schiehallion, for a consideration of up to $3.8 billion, including an initial consideration of $3.0 billion, a payment of up to $0.6 billion between 2018 and 2021 subject to commodity price, and potential further payments of up to $0.2 billion for future discoveries. The transaction is subject to partner and regulatory approvals, with completion expected in 2017.
Subsequent to the release of the fourth quarter and full year 2016 unaudited results, Shell signed binding definitive agreements with Saudi Refining Inc., a wholly owned subsidiary of Saudi Arabian Oil Company, on the separation of assets, liabilities and businesses of Motiva Enterprises LLC, a 50:50 refining and marketing joint venture in the USA. The transaction is expected to be completed in 2017, subject to regulatory approvals. The estimated net assets to be acquired by Shell and a balancing receipt exceed the carrying amount of the investment in the joint venture.
In March 2017, Shell agreed to sell to Canadian Natural Resources Limited (Canadian Natural) its 60% interest in the Athabasca Oil Sands Project (AOSP), accounted for as a joint operation, its 100% interest in the Peace River Complex in-situ assets including Carmon Creek, and a number of undeveloped oil sands leases, all in Alberta, Canada. The consideration is approximately $8.5 billion, comprising $5.4 billion in cash and around 98 million Canadian Natural shares currently valued at $3.1 billion. The transaction is estimated to result in a post-tax impairment loss of $1.3 billion to $1.5 billion, subject to adjustments. In a related transaction, Shell and Canadian Natural have agreed to jointly (50:50) acquire Marathon Oil Canada Corporation (MOCC), which has a 20% interest in the AOSP, for $1.25 billion each. Following these transactions, Shell will continue as operator of the Scotford Upgrader and the Quest carbon capture and storage (CCS) project. Subject to regulatory approvals, the transactions are expected to close in mid 2017. Subject to closing of these transactions and additional further conditions, Shell may swap its purchased interest in MOCC for a 20% interest in the Scotford Upgrader and Quest CCS project. If the swap were to occur, Shell would fully exit AOSP mining operations and have a 20% interest in the Scotford Upgrader and Quest CCS project.
152 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
SUPPLEMENTARY INFORMATION – OIL AND GAS (UNAUDITED)
The information set out on pages 153-170 is referred to as “unaudited” as a means of clarifying that it is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the “Consolidated Financial Statements”.
Proved reserves
Proved reserves estimates are calculated pursuant to the US Securities and Exchange Commission (SEC) Rules and the Financial Accounting Standard Board’s Topic 932. Proved reserves can be either developed or undeveloped. The definitions used are in accordance with the SEC Rule 4-10 (a) of Regulation S-X. We include proved reserves associated with future production that will be consumed in operations.
Proved reserves shown are net of any quantities of crude oil or natural gas that are expected to be (or could be) taken as royalties in kind. Proved reserves outside North America include quantities that will be settled as royalties in cash. Proved reserves include certain quantities of crude oil or natural gas that will be produced under arrangements that involve Shell subsidiaries, joint ventures and associates in risks and rewards but do not transfer title of the product to those entities.
Subsidiaries’ proved reserves at December 31, 2016, were divided into 73% developed and 27% undeveloped on a barrel of oil equivalent basis. For the Shell share of joint ventures and associates, the proved reserves at December 31, 2016, were divided into 83% developed and 17% undeveloped on a barrel of oil equivalent basis.
Proved reserves are recognised under various forms of contractual agreements. Shell’s proved reserves volumes at December 31, 2016, present in agreements such as production-sharing contracts (PSC), tax/variable royalty contracts or other forms of economic entitlement contracts, where the Shell share of reserves can vary with commodity prices, were 3,397 million barrels of crude oil and natural gas liquids, and 14,423 thousand million standard cubic feet (scf) of natural gas.
Proved reserves cannot be measured exactly because estimation of reserves involves subjective judgement (see “Risk factors” on page 12 and our “Proved reserves assurance process” below). These estimates remain subject to revision and are unaudited supplementary information.
The impact of the acquisition of BG Group plc (BG) in February 2016 on proved reserves volumes is included in purchases of minerals in place.
Proved reserves in Oceania included Shell’s 14% share of Woodside Petroleum Limited (Woodside) from June 2014 to April 2016 (previously 23%, from April 2012 to June 2014). Woodside is a publicly listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are based on our best assessment. The accounting classification of Woodside was changed from an associate to an investment in securities in April 2016 and therefore no proved reserves are included with effect from that date.
In March 2017, we agreed to sell, in a series of transactions, all of our in-situ and undeveloped oil sands interests in Canada and reduce our share in the Athabasca Oil Sands Project (AOSP) from 60% to 10%. See Note 30 to the “Consolidated Financial Statements” on page 152. Proved reserves associated with these oil sands interests and our 60% interest in the AOSP were 2 billion barrels at December 31, 2016.
Proved reserves assurance process
A central group of reserves experts, who on average have around 29 years’ experience in the oil and gas industry, undertake the primary assurance of the proved reserves bookings. This group of experts is part of the Resources Assurance and Reporting (RAR) organisation within Shell. A Vice President with 31 years’ experience in the oil and gas industry currently heads the RAR organisation. He is a member of the Society of Petroleum Engineers and holds a BA in mathematics from Oxford University and a MEng in Petroleum Engineering from Heriot Watt University. The RAR organisation reports directly to an Executive Vice President of Finance, who is a member of the Upstream Reserves Committee (URC). The URC is a multidisciplinary committee consisting of senior representatives from the Finance, Legal, Projects & Technology and Upstream organisations. The URC reviews and endorses all major (larger than 20 million barrels of oil equivalent) proved reserves bookings and endorses the total aggregated proved reserves. Final approval of all proved reserves bookings remains with Shell’s Executive Committee. The Internal Audit function also provides secondary assurance through audits of the control framework.
153 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
CRUDE OIL, NATURAL GAS LIQUIDS, SYNTHETIC CRUDE OIL AND BITUMEN
Shell subsidiaries’ proved reserves of crude oil, natural gas liquids (NGLs), synthetic crude oil and bitumen at the end of the year; their share of the proved reserves of joint ventures and associates at the end of the year; and the changes in such reserves during the year are set out on pages 155-157. Significant changes in these proved reserves are discussed below.
PROVED RESERVES 2016-2015
Shell subsidiaries
Acquisition of BG
Purchases of minerals in place included 1,205 million barrels additions on acquisition of BG, notably 85 million barrels in Europe, 175 million barrels in Asia and 931 million barrels in South America.
Asia
The net increase of 100 million barrels in revisions and reclassifications mainly related to Malaysia and Russia.
Canada
The increase of 96 million barrels in synthetic crude oil extensions and discoveries was in the Muskeg River Mine.
South America
The net increase of 86 million barrels in revisions and reclassifications was mainly due to a transfer of contingent resource to proved reserves in Brazil.
PROVED RESERVES 2015-2014
Shell subsidiaries
Europe
The net decrease of 97 million barrels in revisions and reclassifications resulted from field performance studies and development activities in Italy and the UK.
Asia
The net increase of 149 million barrels in revisions and reclassifications resulted mainly from increased PSC entitlement share in Iraq and Qatar due to the lower yearly average price.
Africa
The net increase of 50 million barrels in revisions and reclassifications resulted from field performance updates, development activities and increased PSC entitlement share due to the lower yearly average price. The decrease of 76 million barrels from sales of minerals in place resulted from divestment of assets in Nigeria.
USA
The net decrease of 61 million barrels in revisions and reclassifications resulted from field performance updates, development activities, and the lower yearly average price (early economic truncation and de-booking of uneconomic prior year proved undeveloped reserves).
Canada
The net increase of 204 million barrels in synthetic crude oil revisions and reclassifications resulted from reductions in variable royalties due to the lower yearly average price. The net decrease of 420 million barrels in bitumen revisions and reclassifications resulted from the cessation of the Carmon Creek project.
154 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2016 | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 417 | | | | 1,286 | | | | 126 | | | | 579 | | | | 560 | | | | 22 | | | | 1,941 | | | | 3 | | | | 56 | | | | 3,046 | | | | 1,941 | | | | 3 | | | | 4,990 | |
Revisions and reclassifications | | | 24 | | | | 100 | | | | 9 | | | | 21 | | | | 17 | | | | 3 | | | | 33 | | | | 4 | | | | 86 | | | | 260 | | | | 33 | | | | 4 | | | | 297 | |
Improved recovery | | | — | | | | 22 | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | — | | | | 24 | |
Extensions and discoveries | | | — | | | | 4 | | | | — | | | | — | | | | 20 | | | | 6 | | | | 96 | | | | — | | | | — | | | | 30 | | | | 96 | | | | — | | | | 126 | |
Purchases of minerals in place | | | 85 | | | | 175 | | | | 2 | | | | 14 | | | | — | | | | — | | | | — | | | | — | | | | 931 | | | | 1,207 | | | | — | | | | — | | | | 1,207 | |
Sales of minerals in place | | | (5 | ) | | | — | | | | — | | | | — | | | | (5 | ) | | | (2 | ) | | | — | | | | — | | | | — | | | | (12 | ) | | | — | | | | — | | | | (12 | ) |
Production [A] | | | (86 | ) | | | (201 | ) | | | (9 | ) | | | (85 | ) | | | (103 | ) | | | (11 | ) | | | (56 | ) | | | (5 | ) | | | (81 | ) | | | (576 | ) | | | (56 | ) | | | (5 | ) | | | (637 | ) |
At December 31 | | | 435 | | | | 1,386 | | | | 128 | | | | 529 | | | | 491 | | | | 18 | | | | 2,014 | | | | 2 | | | | 992 | | | | 3,979 | | | | 2,014 | | | | 2 | | | | 5,995 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 11 | | | | 290 | | | | 12 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 313 | | | | — | | | | — | | | | 313 | |
Revisions and reclassifications | | | (3 | ) | | | 1 | | | | (11 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | | — | | | | — | | | | (13 | ) |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production | | | (1 | ) | | | (36 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (38 | ) | | | — | | | | — | | | | (38 | ) |
At December 31 | | | 7 | | | | 256 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 263 | | | | — | | | | — | | | | 263 | |
Total | | | 442 | | | | 1,642 | | | | 128 | | | | 529 | | | | 491 | | | | 18 | | | | 2,014 | | | | 2 | | | | 992 | | | | 4,242 | | | | 2,014 | | | | 2 | | | | 6,258 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | 4 | |
[A] Included 2 million barrels consumed in operations for synthetic crude oil.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2016 | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 220 | | | | 972 | | | | 36 | | | | 437 | | | | 455 | | | | 20 | | | | 1,405 | | | | 3 | | | | 44 | | | | 2,184 | | | | 1,405 | | | | 3 | | | | 3,592 | |
At December 31 | | | 257 | | | | 1,184 | | | | 36 | | | | 461 | | | | 437 | | | | 14 | | | | 1,387 | | | | 2 | | | | 543 | | | | 2,932 | | | | 1,387 | | | | 2 | | | | 4,321 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 5 | | | | 204 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 218 | | | | — | | | | — | | | | 218 | |
At December 31 | | | 4 | | | | 215 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 219 | | | | — | | | | — | | | | 219 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2016 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 197 | | | | 314 | | | | 90 | | | | 142 | | | | 105 | | | | 2 | | | | 536 | | | | — | | | | 12 | | | | 862 | | | | 536 | | | | — | | | | 1,398 | |
At December 31 | | | 178 | | | | 202 | | | | 92 | | | | 68 | | | | 54 | | | | 4 | | | | 627 | | | | — | | | | 449 | | | | 1,047 | | | | 627 | | | | — | | | | 1,674 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 6 | | | | 86 | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 95 | | | | — | | | | — | | | | 95 | |
At December 31 | | | 3 | | | | 41 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | — | | | | — | | | | 44 | |
155 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2015 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 579 | | | | 1,306 | | | | 128 | | | | 691 | | | | 711 | | | | 44 | | | | 1,763 | | | | 428 | | | | 63 | | | | 3,522 | | | | 1,763 | | | | 428 | | | | 5,713 | |
Revisions and reclassifications | | | (97 | ) | | | 149 | | | | 6 | | | | 50 | | | | (61 | ) | | | (25 | ) | | | 204 | | | | (420 | ) | | | 7 | | | | 29 | | | | 204 | | | | (420 | ) | | | (187 | ) |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | 4 | |
Extensions and discoveries | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | 12 | | | | 26 | | | | — | | | | — | | | | 22 | | | | 26 | | | | — | | | | 48 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | (76 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (76 | ) | | | — | | | | — | | | | (76 | ) |
Production [A] | | | (65 | ) | | | (169 | ) | | | (8 | ) | | | (86 | ) | | | (104 | ) | | | (9 | ) | | | (52 | ) | | | (5 | ) | | | (14 | ) | | | (455 | ) | | | (52 | ) | | | (5 | ) | | | (512 | ) |
At December 31 | | | 417 | | | | 1,286 | | | | 126 | | | | 579 | | | | 560 | | | | 22 | | | | 1,941 | | | | 3 | | | | 56 | | | | 3,046 | | | | 1,941 | | | | 3 | | | | 4,990 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 29 | | | | 376 | | | | 12 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 417 | | | | — | | | | — | | | | 417 | |
Revisions and reclassifications | | | (17 | ) | | | (49 | ) | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (65 | ) | | | — | | | | — | | | | (65 | ) |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Purchases of minerals in place | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | 2 | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production | | | (1 | ) | | | (37 | ) | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (41 | ) | | | — | | | | — | | | | (41 | ) |
At December 31 | | | 11 | | | | 290 | | | | 12 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 313 | | | | — | | | | — | | | | 313 | |
Total | | | 428 | | | | 1,576 | | | | 138 | | | | 579 | | | | 560 | | | | 22 | | | | 1,941 | | | | 3 | | | | 56 | | | | 3,359 | | | | 1,941 | | | | 3 | | | | 5,303 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | 7 | |
[A] Included 2 million barrels consumed in operations for synthetic crude oil.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2015 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 350 | | | | 947 | | | | 41 | | | | 534 | | | | 494 | | | | 26 | | | | 1,273 | | | | 9 | | | | 51 | | | | 2,443 | | | | 1,273 | | | | 9 | | | | 3,725 | |
At December 31 | | | 220 | | | | 972 | | | | 36 | | | | 437 | | | | 455 | | | | 20 | | | | 1,405 | | | | 3 | | | | 44 | | | | 2,184 | | | | 1,405 | | | | 3 | | | | 3,592 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 22 | | | | 222 | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 254 | | | | — | | | | — | | | | 254 | |
At December 31 | | | 5 | | | | 204 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 218 | | | | — | | | | — | | | | 218 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2015 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 229 | | | | 359 | | | | 87 | | | | 157 | | | | 217 | | | | 18 | | | | 490 | | | | 419 | | | | 12 | | | | 1,079 | | | | 490 | | | | 419 | | | | 1,988 | |
At December 31 | | | 197 | | | | 314 | | | | 90 | | | | 142 | | | | 105 | | | | 2 | | | | 536 | | | | — | | | | 12 | | | | 862 | | | | 536 | | | | — | | | | 1,398 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 7 | | | | 154 | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 163 | | | | — | | | | — | | | | 163 | |
At December 31 | | | 6 | | | | 86 | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 95 | | | | — | | | | — | | | | 95 | |
156 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2014 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 769 | | | | 1,343 | | | | 139 | | | | 651 | | | | 991 | | | | 29 | | | | 1,731 | | | | 422 | | | | 95 | | | | 4,017 | | | | 1,731 | | | | 422 | | | | 6,170 | |
Revisions and reclassifications | | | (129 | ) | | | 120 | | | | 2 | | | | 126 | | | | (169 | ) | | | 3 | | | | 81 | | | | 17 | | | | (7 | ) | | | (54 | ) | | | 81 | | | | 17 | | | | 44 | |
Improved recovery | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | 9 | |
Extensions and discoveries | | | — | | | | 5 | | | | 1 | | | | 8 | | | | 18 | | | | 21 | | | | — | | | | 1 | | | | 13 | | | | 66 | | | | — | | | | 1 | | | | 67 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | (5 | ) | | | (15 | ) | | | (30 | ) | | | (1 | ) | | | — | | | | (6 | ) | | | (21 | ) | | | (72 | ) | | | — | | | | (6 | ) | | | (78 | ) |
Production [A] | | | (61 | ) | | | (162 | ) | | | (9 | ) | | | (88 | ) | | | (99 | ) | | | (8 | ) | | | (49 | ) | | | (6 | ) | | | (17 | ) | | | (444 | ) | | | (49 | ) | | | (6 | ) | | | (499 | ) |
At December 31 | | | 579 | | | | 1,306 | | | | 128 | | | | 691 | | | | 711 | | | | 44 | | | | 1,763 | | | | 428 | | | | 63 | | | | 3,522 | | | | 1,763 | | | | 428 | | | | 5,713 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 29 | | | | 381 | | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 17 | | | | 451 | | | | — | | | | — | | | | 451 | |
Revisions and reclassifications | | | 2 | | | | 33 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17 | ) | | | 18 | | | | — | | | | — | | | | 18 | |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8 | ) | | | — | | | | — | | | | (8 | ) |
Production | | | (2 | ) | | | (39 | ) | | | (4 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (45 | ) | | | — | | | | — | | | | (45 | ) |
At December 31 | | | 29 | | | | 376 | | | | 12 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 417 | | | | — | | | | — | | | | 417 | |
Total | | | 608 | | | | 1,682 | | | | 140 | | | | 691 | | | | 711 | | | | 44 | | | | 1,763 | | | | 428 | | | | 63 | | | | 3,939 | | | | 1,763 | | | | 428 | | | | 6,130 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | 9 | |
[A] Included 2 million barrels consumed in operations for synthetic crude oil.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2014 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 396 | | | | 942 | | | | 48 | | | | 453 | | | | 440 | | | | 21 | | | | 1,299 | | | | 13 | | | | 59 | | | | 2,359 | | | | 1,299 | | | | 13 | | | | 3,671 | |
At December 31 | | | 350 | | | | 947 | | | | 41 | | | | 534 | | | | 494 | | | | 26 | | | | 1,273 | | | | 9 | | | | 51 | | | | 2,443 | | | | 1,273 | | | | 9 | | | | 3,725 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 22 | | | | 316 | | | | 23 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15 | | | | 376 | | | | — | | | | — | | | | 376 | |
At December 31 | | | 22 | | | | 222 | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 254 | | | | — | | | | — | | | | 254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2014 | | | | | | | | | | | | | | | | | | | | | | | Million barrels | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | | | | | | | | | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
| | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | Oil and NGL | | | Oil and NGL | | | Synthetic crude oil | | | Bitumen | | | All products | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 373 | | | | 401 | | | | 91 | | | | 198 | | | | 551 | | | | 8 | | | | 432 | | | | 409 | | | | 36 | | | | 1,658 | | | | 432 | | | | 409 | | | | 2,499 | |
At December 31 | | | 229 | | | | 359 | | | | 87 | | | | 157 | | | | 217 | | | | 18 | | | | 490 | | | | 419 | | | | 12 | | | | 1,079 | | | | 490 | | | | 419 | | | | 1,988 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 7 | | | | 65 | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | 75 | | | | — | | | | — | | | | 75 | |
At December 31 | | | 7 | | | | 154 | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 163 | | | | — | | | | — | | | | 163 | |
157 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
NATURAL GAS
Shell subsidiaries’ proved reserves of natural gas at the end of the year; their share of the proved reserves of joint ventures and associates at the end of the year; and the changes in such reserves during the year are set out on pages 159-161. Significant changes in these proved reserves are discussed below. Volumes are not adjusted to standard heat content. Apart from integrated projects, volumes of gas are reported on an “as-sold” basis. The price used to calculate future revenue and cash flows from proved gas reserves is the contract price or the 12-month average on “as-sold” volumes. Volumes associated with integrated projects are those measured at a designated transfer point between the upstream and downstream portions of the integrated project. Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel.
PROVED RESERVES 2016-2015
Shell subsidiaries
Acquisition of BG
Purchases of minerals in place included 7,111 thousand million scf additions on acquisition of BG, notably 419 thousand million scf in Europe, 576 thousand million scf in Asia, 3,904 thousand million scf in Oceania, 327 thousand million scf in Africa, 151 thousand million scf in the USA and 1,734 thousand million scf in South America.
Asia
The net increase of 554 thousand million scf in revisions and reclassifications was mainly due to technical revisions in Kazakhstan and Thailand, and an increased PSC entitlement share in Qatar.
Oceania
The purchase of minerals in place of 426 thousand million scf, excluding the increase on acquisition of BG (see above), was from the acquisition of a further interest in the Jansz-Io field in Australia.
USA
The increase of 200 thousand million scf in extensions and discoveries was in shale.
Shell share of joint ventures and associates
Europe
The net decrease of 636 thousand million scf in revisions and reclassifications was mainly due to a reassessment of Groningen compression in the Netherlands.
Oceania
The net decrease of 464 thousand million scf in revisions and reclassifications was due to the change of accounting classification for Woodside.
PROVED RESERVES 2015-2014
Shell subsidiaries
Asia
The net increase of 1,385 thousand million scf in revisions and reclassifications resulted mainly from increased PSC entitlement share in Qatar due to the lower yearly average price.
USA
The net decrease of 587 thousand million scf in revisions and reclassifications was mainly the result of early economic field cut-off and previously booked proved undeveloped reserves no longer meeting the economic limit test due to the lower yearly average price.
Canada
The net decrease of 581 thousand million scf in revisions and reclassifications was mainly the result of early economic field cut-off and previously booked proved undeveloped reserves no longer meeting the economic limit test due to the lower yearly average price.
Shell share of joint ventures and associates
Asia
The net decrease of 214 thousand million scf in revisions and reclassifications resulted mainly from field performance updates and development activities in Brunei.
158 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2016 | | | | | | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,848 | | | | 10,692 | | | | 5,411 | | | | 2,236 | | | | 754 | | | | 955 | | | | 43 | | | | 23,939 | |
Revisions and reclassifications | | | 92 | | | | 554 | | | | (177 | ) | | | 51 | | | | (95 | ) | | | 41 | | | | 66 | | | | 532 | |
Improved recovery | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10 | |
Extensions and discoveries | | | 4 | | | | 162 | | | | — | | | | 2 | | | | 200 | | | | 180 | | | | 3 | | | | 551 | |
Purchases of minerals in place | | | 419 | | | | 576 | | | | 4,330 | | | | 327 | | | | 151 | | | | — | | | | 1,734 | | | | 7,537 | |
Sales of minerals in place | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) | | | (63 | ) | | | — | | | | (77 | ) |
Production [A] | | | (615 | ) | | | (921 | ) | | | (513 | ) | | | (391 | ) | | | (328 | ) | | | (269 | ) | | | (196 | ) | | | (3,233 | ) |
At December 31 | | | 3,741 | | | | 11,073 | | | | 9,051 | | | | 2,225 | | | | 675 | | | | 844 | | | | 1,650 | | | | 29,259 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 7,538 | | | | 5,363 | | | | 535 | | | | — | | | | — | | | | — | | | | — | | | | 13,436 | |
Revisions and reclassifications | | | (636 | ) | | | (197 | ) | | | (464 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,297 | ) |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | — | | | | 35 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 35 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production [B] | | | (405 | ) | | | (447 | ) | | | (40 | ) | | | — | | | | — | | | | — | | | | — | | | | (892 | ) |
At December 31 | | | 6,497 | | | | 4,754 | | | | 31 | | | | — | | | | — | | | | — | | | | — | | | | 11,282 | |
Total | | | 10,238 | | | | 15,827 | | | | 9,082 | | | | 2,225 | | | | 675 | | | | 844 | | | | 1,650 | | | | 40,541 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | 3 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 5 | |
[A] Included 197 thousand million standard cubic feet consumed in operations.
[B] Included 44 thousand million standard cubic feet consumed in operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2016 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,471 | | | | 9,920 | | | | 1,234 | | | | 1,386 | | | | 572 | | | | 636 | | | | 37 | | | | 17,256 | |
At December 31 | | | 3,437 | | | | 10,569 | | | | 3,966 | | | | 1,618 | | | | 563 | | | | 458 | | | | 1,172 | | | | 21,783 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 5,933 | | | | 4,301 | | | | 420 | | | | — | | | | — | | | | — | | | | — | | | | 10,654 | |
At December 31 | | | 5,240 | | | | 4,110 | | | | 31 | | | | — | | | | — | | | | — | | | | — | | | | 9,381 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2016 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | North America | | | | | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 377 | | | | 772 | | | | 4,177 | | | | 850 | | | | 182 | | | | 319 | | | | 6 | | | | 6,683 | |
At December 31 | | | 304 | | | | 504 | | | | 5,085 | | | | 607 | | | | 112 | | | | 386 | | | | 478 | | | | 7,476 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 1,605 | | | | 1,062 | | | | 115 | | | | — | | | | — | | | | — | | | | — | | | | 2,782 | |
At December 31 | | | 1,257 | | | | 644 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,901 | |
159 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2015 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 4,430 | | | | 10,071 | | | | 5,575 | | | | 2,621 | | | | 1,561 | | | | 1,611 | | | | 48 | | | | 25,917 | |
Revisions and reclassifications | | | (61 | ) | | | 1,385 | | | | 41 | | | | 5 | | | | (587 | ) | | | (581 | ) | | | 11 | | | | 213 | |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Extensions and discoveries | | | — | | | | — | | | | — | | | | 4 | | | | 59 | | | | 175 | | | | — | | | | 238 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 2 | |
Sales of minerals in place | | | (19 | ) | | | — | | | | — | | | | (115 | ) | | | (5 | ) | | | — | | | | — | | | | (139 | ) |
Production [A] | | | (502 | ) | | | (764 | ) | | | (205 | ) | | | (279 | ) | | | (275 | ) | | | (252 | ) | | | (16 | ) | | | (2,293 | ) |
At December 31 | | | 3,848 | | | | 10,692 | | | | 5,411 | | | | 2,236 | | | | 754 | | | | 955 | | | | 43 | | | | 23,939 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 7,866 | | | | 6,030 | | | | 503 | | | | — | | | | — | | | | — | | | | — | | | | 14,399 | |
Revisions and reclassifications | | | 92 | | | | (214 | ) | | | 23 | | | | — | | | | — | | | | — | | | | — | | | | (99 | ) |
Improved recovery | | | 6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6 | |
Extensions and discoveries | | | 11 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | |
Purchases of minerals in place | | | — | | | | — | | | | 84 | | | | — | | | | — | | | | — | | | | — | | | | 84 | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production [B] | | | (437 | ) | | | (453 | ) | | | (75 | ) | | | — | | | | — | | | | — | | | | — | | | | (965 | ) |
At December 31 | | | 7,538 | | | | 5,363 | | | | 535 | | | | — | | | | — | | | | — | | | | — | | | | 13,436 | |
Total | | | 11,386 | | | | 16,055 | | | | 5,946 | | | | 2,236 | | | | 754 | | | | 955 | | | | 43 | | | | 37,375 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | 2 | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 5 | |
[A] Included 145 thousand million standard cubic feet consumed in operations.
[B] Included 55 thousand million standard cubic feet consumed in operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2015 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,774 | | | | 9,114 | | | | 1,398 | | | | 1,162 | | | | 1,275 | | | | 939 | | | | 42 | | | | 17,704 | |
At December 31 | | | 3,471 | | | | 9,920 | | | | 1,234 | | | | 1,386 | | | | 572 | | | | 636 | | | | 37 | | | | 17,256 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 6,386 | | | | 4,501 | | | | 433 | | | | — | | | | — | | | | — | | | | — | | | | 11,320 | |
At December 31 | | | 5,933 | | | | 4,301 | | | | 420 | | | | — | | | | — | | | | — | | | | — | | | | 10,654 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2015 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 656 | | | | 957 | | | | 4,177 | | | | 1,459 | | | | 286 | | | | 672 | | | | 6 | | | | 8,213 | |
At December 31 | | | 377 | | | | 772 | | | | 4,177 | | | | 850 | | | | 182 | | | | 319 | | | | 6 | | | | 6,683 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 1,480 | | | | 1,529 | | | | 70 | | | | — | | | | — | | | | — | | | | — | | | | 3,079 | |
At December 31 | | | 1,605 | | | | 1,062 | | | | 115 | | | | — | | | | — | | | | — | | | | — | | | | 2,782 | |
160 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2014 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 4,767 | | | | 10,170 | | | | 6,092 | | | | 2,257 | | | | 2,199 | | | | 1,500 | | | | 74 | | | | 27,059 | |
Revisions and reclassifications | | | 175 | | | | 630 | | | | (20 | ) | | | 621 | | | | (46 | ) | | | (5 | ) | | | (11 | ) | | | 1,344 | |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | — | | | | 82 | | | | 46 | | | | 61 | | | | 73 | | | | 449 | | | | 8 | | | | 719 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | 287 | | | | — | | | | — | | | | 287 | |
Sales of minerals in place | | | — | | | | — | | | | (325 | ) | | | (10 | ) | | | (578 | ) | | | (100 | ) | | | (8 | ) | | | (1,021 | ) |
Production [A] | | | (512 | ) | | | (811 | ) | | | (218 | ) | | | (308 | ) | | | (374 | ) | | | (233 | ) | | | (15 | ) | | | (2,471 | ) |
At December 31 | | | 4,430 | | | | 10,071 | | | | 5,575 | | | | 2,621 | | | | 1,561 | | | | 1,611 | | | | 48 | | | | 25,917 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 8,508 | | | | 5,991 | | | | 909 | | | | — | | | | — | | | | — | | | | 6 | | | | 15,414 | |
Revisions and reclassifications | | | (60 | ) | | | 455 | | | | 34 | | | | — | | | | — | | | | — | | | | (6 | ) | | | 423 | |
Improved recovery | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Extensions and discoveries | | | 6 | | | | 26 | | | | 11 | | | | — | | | | — | | | | — | | | | — | | | | 43 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | (354 | ) | | | — | | | | — | | | | — | | | | — | | | | (354 | ) |
Production [B] | | | (588 | ) | | | (442 | ) | | | (97 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,127 | ) |
At December 31 | | | 7,866 | | | | 6,030 | | | | 503 | | | | — | | | | — | | | | — | | | | — | | | | 14,399 | |
Total | | | 12,296 | | | | 16,101 | | | | 6,078 | | | | 2,621 | | | | 1,561 | | | | 1,611 | | | | 48 | | | | 40,316 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | 3 | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 9 | |
[A] Included 162 thousand million standard cubic feet consumed in operations.
[B] Included 58 thousand million standard cubic feet consumed in operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2014 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | North America | | | | | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,942 | | | | 9,132 | | | | 1,621 | | | | 946 | | | | 1,492 | | | | 908 | | | | 48 | | | | 18,089 | |
At December 31 | | | 3,774 | | | | 9,114 | | | | 1,398 | | | | 1,162 | | | | 1,275 | | | | 939 | | | | 42 | | | | 17,704 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 6,856 | | | | 4,894 | | | | 806 | | | | — | | | | — | | | | — | | | | 4 | | | | 12,560 | |
At December 31 | | | 6,386 | | | | 4,501 | | | | 433 | | | | — | | | | — | | | | — | | | | — | | | | 11,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2014 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 825 | | | | 1,038 | | | | 4,471 | | | | 1,311 | | | | 707 | | | | 592 | | | | 26 | | | | 8,970 | |
At December 31 | | | 656 | | | | 957 | | | | 4,177 | | | | 1,459 | | | | 286 | | | | 672 | | | | 6 | | | | 8,213 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 1,652 | | | | 1,097 | | | | 103 | | | | — | | | | — | | | | — | | | | 2 | | | | 2,854 | |
At December 31 | | | 1,480 | | | | 1,529 | | | | 70 | | | | — | | | | — | | | | — | | | | — | | | | 3,079 | |
161 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS
The SEC Form 20-F requires the disclosure of a standardised measure of discounted future net cash flows, relating to proved reserves quantities and based on a 12-month unweighted arithmetic average sales price, calculated on a first-day-of-the-month basis, with cost factors based on those at the end of each year, currently enacted tax rates and a 10% annual discount factor. In our view, the information so calculated does not provide a reliable measure of future cash flows from proved reserves, nor does it permit a realistic comparison to be made of one entity with another because the assumptions used cannot reflect the varying circumstances within each entity. In addition, a substantial but unknown proportion of future real cash flows from oil and gas production activities is expected to derive from reserves which have already been discovered, but which cannot yet be regarded as proved.
STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS RELATING TO PROVED RESERVES AT DECEMBER 31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 – Shell subsidiaries | | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 33,837 | | | | 71,019 | | | | 49,872 | | | | 26,422 | | | | 20,239 | | | | 71,652 | | | | 41,999 | | | | 315,040 | |
Future production costs | | | 17,276 | | | | 25,793 | | | | 22,842 | | | | 12,302 | | | | 17,114 | | | | 54,966 | | | | 21,780 | | | | 172,073 | |
Future development costs | | | 11,630 | | | | 12,481 | | | | 16,795 | | | | 5,533 | | | | 7,894 | | | | 11,948 | | | | 15,053 | | | | 81,334 | |
Future tax expenses | | | 824 | | | | 9,059 | | | | 1,734 | | | | 5,427 | | | | 561 | | | | 1,327 | | | | 3,700 | | | | 22,632 | |
Future net cash flows | | | 4,107 | | | | 23,686 | | | | 8,501 | | | | 3,160 | | | | (5,330 | ) | | | 3,411 | | | | 1,466 | | | | 39,001 | |
Effect of discounting cash flows at 10% | | | 351 | | | | 10,663 | | | | 2,889 | | | | (231 | ) | | | (3,423 | ) | | | 2,129 | | | | (1,095 | ) | | | 11,283 | |
Standardised measure of discounted future net cash flows | | | 3,756 | | | | 13,023 | | | | 5,612 | | | | 3,391 | | | | (1,907 | ) | [A] | | 1,282 | | | | 2,561 | | | | 27,718 | |
Non-controlling interest included | | | — | | | | — | | | | — | | | | (65 | ) | [A] | | — | | | | — | | | | — | | | | (65 | ) |
[A] While proved reserves are economically producible at the 2016 yearly average price, the standardised measure of discounted future net cash flows was negative for those proved reserves at December 31, 2016, due to addition of overhead, tax and abandonment costs and ongoing commitments post production of proved reserves.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 – Shell share of joint ventures and associates | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 26,224 | | | | 28,000 | | | | 88 | | | | — | | | | — | | | | — | | | | — | | | | 54,312 | |
Future production costs | | | 18,163 | | | | 14,060 | | | | 65 | | | | — | | | | — | | | | — | | | | — | | | | 32,288 | |
Future development costs | | | 1,367 | | | | 7,588 | | | | 41 | | | | — | | | | — | | | | — | | | | — | | | | 8,996 | |
Future tax expenses | | | 2,526 | | | | 3,280 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,806 | |
Future net cash flows | | | 4,168 | | | | 3,072 | | | | (18 | ) | | | — | | | | — | | | | — | | | | — | | | | 7,222 | |
Effect of discounting cash flows at 10% | | | 2,363 | | | | 692 | | | | (9 | ) | | | — | | | | — | | | | — | | | | — | | | | 3,046 | |
Standardised measure of discounted future net cash flows | | | 1,805 | | | | 2,380 | | | | (9 | ) | | | — | | | | — | | | | — | | | | — | | | | 4,176 | |
| | | | | | | | | | | | | | | | | | | |
2015 – Shell subsidiaries | | $ million |
| | | | | | | | | | | North America | | South | | | |
| | Europe | | Asia | | Oceania | | Africa | | | USA | | | Canada | | America | | | Total |
Future cash inflows | | 46,910 | | 83,549 | | 36,644 | | 35,856 | | | 28,755 | | | 81,957 | | 2,264 | | | 315,935 |
Future production costs | | 21,526 | | 25,494 | | 11,690 | | 17,470 | | | 21,480 | | | 60,449 | | 1,728 | | | 159,837 |
Future development costs | | 12,003 | | 12,730 | | 12,987 | | 6,344 | | | 10,930 | | | 17,983 | | 898 | | | 73,875 |
Future tax expenses | | 7,660 | | 15,926 | | 1,407 | | 6,357 | | | 864 | | | 1,099 | | 86 | | | 33,399 |
Future net cash flows | | 5,721 | | 29,399 | | 10,560 | | 5,685 | | | (4,519) | | | 2,426 | | (448) | | | 48,824 |
Effect of discounting cash flows at 10% | | 1,870 | | 14,181 | | 5,894 | | 1,372 | | | (2,394) | | | 2,241 | | (221) | | | 22,943 |
Standardised measure of discounted future net cash flows | | 3,851 | | 15,218 | | 4,666 | | 4,313 | | | (2,125) | [A] | | 185 | | (227) | [A] | | 25,881 |
Non-controlling interest included | | — | | (1) | | — | | (149) | [A] | | — | | | — | | — | | | (150) |
[A] While proved reserves are economically producible at the 2015 yearly average price, the standardised measure of discounted future net cash flows was negative for those proved reserves at December 31, 2015, due to addition of overhead, tax and abandonment costs.
162 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 – Shell share of joint ventures and associates | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 45,488 | | | | 43,271 | | | | 5,261 | | | | — | | | | — | | | | — | | | | — | | | | 94,020 | |
Future production costs | | | 27,279 | | | | 19,566 | | | | 1,055 | | | | — | | | | — | | | | — | | | | — | | | | 47,900 | |
Future development costs | | | 1,513 | | | | 7,449 | | | | 492 | | | | — | | | | — | | | | — | | | | — | | | | 9,454 | |
Future tax expenses | | | 4,121 | | | | 6,384 | | | | 1,121 | | | | — | | | | — | | | | — | | | | — | | | | 11,626 | |
Future net cash flows | | | 12,575 | | | | 9,872 | | | | 2,593 | | | | — | | | | — | | | | — | | | | — | | | | 25,040 | |
Effect of discounting cash flows at 10% | | | 9,597 | | | | 3,393 | | | | 1,087 | | | | — | | | | — | | | | — | | | | — | | | | 14,077 | |
Standardised measure of discounted future net cash flows | | | 2,978 | | | | 6,479 | | | | 1,506 | | | | — | | | | — | | | | — | | | | — | | | | 10,963 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 – Shell subsidiaries | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 94,201 | | | | 154,314 | | | | 59,407 | | | | 77,122 | | | | 72,537 | | | | 190,183 | | | | 5,573 | | | | 653,337 | |
Future production costs | | | 37,786 | | | | 36,742 | | | | 14,296 | | | | 29,978 | | | | 42,784 | | | | 100,074 | | | | 3,173 | | | | 264,833 | |
Future development costs | | | 14,154 | | | | 15,729 | | | | 12,629 | | | | 7,214 | | | | 15,584 | | | | 33,495 | | | | 1,450 | | | | 100,255 | |
Future tax expenses | | | 25,692 | | | | 43,303 | | | | 6,607 | | | | 25,207 | | | | 5,299 | | | | 14,730 | | | | 778 | | | | 121,616 | |
Future net cash flows | | | 16,569 | | | | 58,540 | | | | 25,875 | | | | 14,723 | | | | 8,870 | | | | 41,884 | | | | 172 | | | | 166,633 | |
Effect of discounting cash flows at 10% | | | 5,493 | | | | 27,974 | | | | 14,997 | | | | 4,825 | | | | 1,583 | | | | 33,365 | | | | (231 | ) | | | 88,006 | |
Standardised measure of discounted future net cash flows | | | 11,076 | | | | 30,566 | | | | 10,878 | | | | 9,898 | | | | 7,287 | | | | 8,519 | | | | 403 | | | | 78,627 | |
Non-controlling interest included | | | — | | | | (5 | ) | | | — | | | | 59 | | | | — | | | | — | | | | — | | | | 54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 – Shell share of joint ventures and associates | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 60,397 | | | | 92,756 | | | | 11,370 | | | | — | | | | — | | | | — | | | | — | | | | 164,523 | |
Future production costs | | | 42,656 | | | | 37,961 | | | | 3,021 | | | | — | | | | — | | | | — | | | | — | | | | 83,638 | |
Future development costs | | | 1,631 | | | | 10,089 | | | | 2,580 | | | | — | | | | — | | | | — | | | | — | | | | 14,300 | |
Future tax expenses | | | 6,005 | | | | 16,368 | | | | 1,708 | | | | — | | | | — | | | | — | | | | — | | | | 24,081 | |
Future net cash flows | | | 10,105 | | | | 28,338 | | | | 4,061 | | | | — | | | | — | | | | — | | | | — | | | | 42,504 | |
Effect of discounting cash flows at 10% | | | 4,953 | | | | 12,218 | | | | 1,989 | | | | — | | | | — | | | | — | | | | — | | | | 19,160 | |
Standardised measure of discounted future net cash flows | | | 5,152 | | | | 16,120 | | | | 2,072 | | | | — | | | | — | | | | — | | | | — | | | | 23,344 | |
CHANGE IN STANDARDISED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES
| | | | | | | | | | | | |
2016 | | $ million | |
| | Shell subsidiaries | | | Shell share of joint ventures and associates | | | Total | |
At January 1 | | | 25,881 | | | | 10,963 | | | | 36,844 | |
Net changes in prices and production costs | | | (21,506 | ) | | | (6,942 | ) | | | (28,448 | ) |
Revisions of previous reserves estimates | | | 6,175 | | | | (1,328 | ) | | | 4,847 | |
Extensions, discoveries and improved recovery | | | 1,268 | | | | (17 | ) | | | 1,251 | |
Purchases and sales of minerals in place | | | 24,279 | | | | — | | | | 24,279 | |
Development cost related to future production | | | (15,327 | ) | | | (150 | ) | | | (15,477 | ) |
Sales and transfers of oil and gas, net of production costs | | | (19,657 | ) | | | (3,087 | ) | | | (22,744 | ) |
Development cost incurred during the year | | | 15,403 | | | | 854 | | | | 16,257 | |
Accretion of discount | | | 4,376 | | | | 1,363 | | | | 5,739 | |
Net change in income tax | | | 6,826 | | | | 2,520 | | | | 9,346 | |
At December 31 | | | 27,718 | | | | 4,176 | | | | 31,894 | |
163 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | |
2015 | | $ million | |
| | Shell subsidiaries | | | Shell share of joint ventures and associates | | | Total | |
At January 1 | | | 78,627 | | | | 23,344 | | | | 101,971 | |
Net changes in prices and production costs | | | (123,966 | ) | | | (19,098 | ) | | | (143,064 | ) |
Revisions of previous reserves estimates | | | 7,672 | | | | (1,255 | ) | | | 6,417 | |
Extensions, discoveries and improved recovery | | | 297 | | | | 7 | | | | 304 | |
Purchases and sales of minerals in place | | | (1,706 | ) | | | 218 | | | | (1,488 | ) |
Development cost related to future production | | | 4,329 | | | | 927 | | | | 5,256 | |
Sales and transfers of oil and gas, net of production costs | | | (18,930 | ) | | | (4,383 | ) | | | (23,313 | ) |
Development cost incurred during the year | | | 17,818 | | | | 1,463 | | | | 19,281 | |
Accretion of discount | | | 13,837 | | | | 3,188 | | | | 17,025 | |
Net change in income tax | | | 47,903 | | | | 6,552 | | | | 54,455 | |
At December 31 | | | 25,881 | | | | 10,963 | | | | 36,844 | |
| | | | | | | | | | | | |
2014 | | $ million | |
| | Shell subsidiaries | | | Shell share of joint ventures and associates | | | Total | |
At January 1 | | | 91,299 | | | | 25,180 | | | | 116,479 | |
Net changes in prices and production costs | | | (22,475 | ) | | | 1,025 | | | | (21,450 | ) |
Revisions of previous reserves estimates | | | 6,451 | | | | (28 | ) | | | 6,423 | |
Extensions, discoveries and improved recovery | | | 2,837 | | | | 191 | | | | 3,028 | |
Purchases and sales of minerals in place | | | (2,551 | ) | | | (1,497 | ) | | | (4,048 | ) |
Development cost related to future production | | | (9,372 | ) | | | (1,362 | ) | | | (10,734 | ) |
Sales and transfers of oil and gas, net of production costs | | | (40,495 | ) | | | (7,401 | ) | | | (47,896 | ) |
Development cost incurred during the year | | | 22,619 | | | | 1,350 | | | | 23,969 | |
Accretion of discount | | | 16,367 | | | | 3,670 | | | | 20,037 | |
Net change in income tax | | | 13,947 | | | | 2,216 | | | | 16,163 | |
At December 31 | | | 78,627 | | | | 23,344 | | | | 101,971 | |
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES CAPITALISED COSTS
The aggregate amount of property, plant and equipment and intangible assets, excluding goodwill, relating to oil and gas exploration and production activities, and the aggregate amount of the related depreciation, depletion and amortisation at December 31, are shown in the tables below.
SHELL SUBSIDIARIES
| | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | |
Cost [A] | | | | | | | | |
Proved properties [B] | | | 286,509 | | | | 231,768 | |
Unproved properties | | | 25,582 | | | | 27,928 | |
Support equipment and facilities | | | 6,418 | | | | 5,717 | |
| | | 318,509 | | | | 265,413 | |
Depreciation, depletion and amortisation | | | | | | | | |
Proved properties [B] | | | 129,243 | | | | 118,575 | |
Unproved properties | | | 6,569 | | | | 8,295 | |
Support equipment and facilities | | | 3,245 | | | | 3,000 | |
| | | 139,057 | | | | 129,870 | |
Net capitalised costs | | | 179,452 | | | | 135,543 | |
[A] There were additions of $48,430 million on acquisition of BG.
[B] Includes capitalised asset decommissioning and restoration costs and related depreciation.
164 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
| | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | |
Cost | | | | | | | | |
Proved properties [A] | | | 40,773 | | | | 44,003 | |
Unproved properties | | | 2,992 | | | | 3,698 | |
Support equipment and facilities | | | 4,383 | | | | 3,724 | |
| | | 48,148 | | | | 51,425 | |
Depreciation, depletion and amortisation | | | | | | | | |
Proved properties [A] | | | 28,712 | | | | 25,014 | |
Unproved properties | | | 20 | | | | 156 | |
Support equipment and facilities | | | 3,054 | | | | 2,124 | |
| | | 31,786 | | | | 27,294 | |
Net capitalised costs | | | 16,362 | | | | 24,131 | |
[A] Includes capitalised asset decommissioning and restoration costs and related depreciation.
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES COSTS INCURRED
Costs incurred during the year in oil and gas property acquisition, exploration and development activities, whether capitalised or charged to income currently, are shown in the tables below. Finance leases are excluded. Development costs include capitalised asset decommissioning and restoration costs (including increases or decreases arising from changes to cost estimates or to the discount rate applied to the obligations) and exclude costs of acquiring support equipment and facilities, but include depreciation thereon. Europe includes Greenland.
SHELL SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016[A] | | $ million | |
| | | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | | Asia | | | Oceania | | | Africa | | | USA | | | Other[B] | | | America | | | Total | |
Acquisition of properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved | | | 25 | | | | | 59 | | | | — | | | | 4 | | | | — | | | | — | | | | 16 | | | | 104 | |
Unproved | | | 222 | | | | | — | | | | 2 | | | | 6 | | | | 87 | | | | 17 | | | | 167 | | | | 501 | |
Exploration | | | 396 | | | | | 400 | | | | 20 | | | | 598 | | | | 1,043 | | | | 418 | | | | 509 | | | | 3,384 | |
Development | | | 4,242 | | | | | 6,632 | | | | 10,283 | | | | 2,009 | | | | 3,629 | | | | 701 | | | | 30,575 | | | | 58,071 | |
[A] Including $44,127 million of related costs incurred on acquisition of BG.
[B] Comprises Canada, Honduras and Mexico.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | | Asia | | | Oceania | | | Africa | | | USA | | | Other[A] | | | America | | | Total | |
Acquisition of properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved | | | 2 | | | | | 3 | | | | — | | | | — | | | | 2 | | | | 86 | | | | — | | | | 93 | |
Unproved | | | 1 | | | | | 1 | | | | — | | | | — | | | | 135 | | | | 30 | | | | 10 | | | | 177 | |
Exploration | | | 360 | | | | | 822 | | | | 198 | | | | 376 | | | | 3,433 | | | | 554 | | | | 542 | | | | 6,285 | |
Development | | | 3,777 | | | | | 2,703 | | | | 3,760 | | | | 2,829 | | | | 5,720 | | | | 1,747 | | | | 80 | | | | 20,616 | |
[A] Comprises Canada and Mexico.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | $ million | |
| | | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Acquisition of properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved | | | 2 | | | | | 57 | | | | — | | | | 132 | | | | 36 | | | | — | | | | 10 | | | | 237 | |
Unproved | | | — | | | | | 97 | | | | — | | | | 221 | | | | 401 | | | | 37 | | | | 136 | | | | 892 | |
Exploration | | | 680 | | | | | 1,339 | | | | 415 | | | | 254 | | | | 2,546 | | | | 851 | | | | 717 | | | | 6,802 | |
Development | | | 5,139 | | | | | 3,189 | | | | 5,111 | | | | 2,717 | | | | 6,482 | | | | 2,437 | | | | 409 | | | | 25,484 | |
165 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
Joint ventures and associates did not incur costs in the acquisition of oil and gas properties in 2016, 2015 or 2014.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Exploration | | | 33 | | | | 57 | | | | 101 | | | | — | | | | — | | | | — | | | | — | | | | 191 | |
Development | | | 99 | | | | 2,173 | | | | 273 | | | | — | | | | — | | | | — | | | | — | | | | 2,545 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Exploration | | | 40 | | | | 132 | | | | 125 | | | | — | | | | — | | | | — | | | | — | | | | 297 | |
Development | | | 254 | | | | 2,434 | | | | 854 | | | | — | | | | — | | | | — | | | | — | | | | 3,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Exploration | | | 18 | | | | 181 | | | | 162 | | | | — | | | | — | | | | — | | | | — | | | | 361 | |
Development | | | 220 | | | | 3,430 | | | | 143 | | | | — | | | | — | | | | — | | | | — | | | | 3,793 | |
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES EARNINGS
The results of operations for oil and gas producing activities are shown in the tables below. Europe includes Greenland and taxes other than income tax include cash-paid royalties to governments outside North America.
SHELL SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Other | | [A] | | America | | | Total | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third parties | | | 969 | | | | 2,656 | | | | 1,069 | | | | 1,380 | | | | 643 | | | | 41 | | | | 476 | | | 7,234 | |
Sales between businesses | | | 5,816 | | | | 7,284 | | | | 1,438 | | | | 3,138 | | | | 3,960 | | | | 3,789 | | | | 2,980 | | | 28,405 | |
Total | | | 6,785 | | | | 9,940 | | | | 2,507 | | | | 4,518 | | | | 4,603 | | | | 3,830 | | | | 3,456 | | | 35,639 | |
Production costs excluding taxes | | | 2,565 | | | | 2,212 | | | | 805 | | | | 1,468 | | | | 3,348 | | | | 2,230 | | | | | 865 | | | | 13,493 | |
Taxes other than income tax | | | 66 | | | | 421 | | | 83 | | | 194 | | | 70 | | | | — | | | | 790 | | | 1,624 | |
Exploration | | | 250 | | | 408 | | | 70 | | | 356 | | | 438 | | | 291 | | | | 295 | | | 2,108 | |
Depreciation, depletion and amortisation | | | 3,270 | | | 3,304 | | | 1,130 | | | 2,018 | | | 4,372 | | | 1,953 | | | | 2,881 | | | 18,928 | |
Other costs/(income) | | | 1,925 | | | 1,606 | | | (700) | | | 356 | | | 40 | | | 680 | | | | (173) | | | 3,734 | |
Earnings before taxation | | | (1,291 | ) | | 1,989 | | | 1,119 | | | 126 | | | (3,665) | | | (1,324) | | | | (1,202) | | | (4,248) | |
Taxation charge/(credit) | | | (311 | ) | | | 1,918 | | | | 559 | | | | 431 | | | | (1,351 | ) | | | (377 | ) | | | | (1,032 | ) | | | (163 | ) |
Earnings after taxation | | | (980 | ) | | | 71 | | | | 560 | | | | (305 | ) | | | (2,314 | ) | | | (947 | ) | | | | (170 | ) | | | (4,085 | ) |
[A] Comprises Canada, Honduras and Mexico.
166 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Other | | [A] | | America | | | Total | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third parties | | | 1,866 | | | | 2,577 | | | | 1,202 | | | | 1,174 | | | | 567 | | | | 53 | | | | | 85 | | | | 7,524 | |
Sales between businesses | | | 5,707 | | | | 8,040 | | | | 418 | | | | 3,737 | | | | 4,941 | | | | 4,045 | | | | | 535 | | | | 27,423 | |
Total | | | 7,573 | | | | 10,617 | | | | 1,620 | | | | 4,911 | | | | 5,508 | | | | 4,098 | | | | | 620 | | | | 34,947 | |
Production costs excluding taxes | | | 2,490 | | | | 2,163 | | | | 541 | | | | 1,570 | | | | 3,039 | | | | 2,612 | | | | | 343 | | | | 12,758 | |
Taxes other than income tax | | | 128 | | | | 435 | | | | 115 | | | | 347 | | | | 79 | | | | — | | | | | 63 | | | | 1,167 | |
Exploration | | | 261 | | | | 1,255 | | | | 195 | | | | 161 | | | | 3,336 | | | | 164 | | | | | 347 | | | | 5,719 | |
Depreciation, depletion and amortisation | | | 2,769 | | | | 3,047 | | | | 478 | | | | 1,733 | | | | 6,259 | | | | 6,570 | | | | | 687 | | | | 21,543 | |
Other costs/(income) | | | 779 | | | | 1,465 | | | | 226 | | | | (1,441 | ) | | | 668 | | | | 2,172 | | | | | 232 | | | | 4,101 | |
Earnings before taxation | | | 1,146 | | | | 2,252 | | | | 65 | | | | 2,541 | | | | (7,873 | ) | | | (7,420 | ) | | | | (1,052 | ) | | | (10,341 | ) |
Taxation charge/(credit) | | | 418 | | | | 2,516 | | | | 429 | | | | 866 | | | | (2,907 | ) | | | (1,815 | ) | | | | 278 | | | | (215 | ) |
Earnings after taxation | | | 728 | | | | (264 | ) | | | (364 | ) | | | 1,675 | | | | (4,966 | ) | | | (5,605 | ) | | | | (1,330 | ) | | | (10,126 | ) |
[A] Comprises Canada and Mexico.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third parties | | | 2,808 | | | | 4,914 | | | | 1,867 | | | | 3,004 | | | | 1,078 | | | | 202 | | | | 126 | | | | 13,999 | |
Sales between businesses | | | 7,869 | | | | 13,973 | | | | 990 | | | | 6,516 | | | | 9,903 | | | | 7,399 | | | | 1,376 | | | | 48,026 | |
Total | | | 10,677 | | | | 18,887 | | | | 2,857 | | | | 9,520 | | | | 10,981 | | | | 7,601 | | | | 1,502 | | | | 62,025 | |
Production costs excluding taxes | | | 2,831 | | | | 2,282 | | | | 599 | | | | 2,032 | | | | 3,440 | | | | 3,367 | | | | 482 | | | | 15,033 | |
Taxes other than income tax | | | 264 | | | | 948 | | | | 216 | | | | 836 | | | | 198 | | | | — | | | | 165 | | | | 2,627 | |
Exploration | | | 457 | | | | 1,331 | | | | 232 | | | | 307 | | | | 1,549 | | | | 88 | | | | 260 | | | | 4,224 | |
Depreciation, depletion and amortisation | | | 1,772 | | | | 3,341 | | | | 427 | | | | 2,037 | | | | 6,576 | | | | 1,709 | | | | 475 | | | | 16,337 | |
Other costs/(income) | | | 766 | | | | 2,058 | | | | (2,123 | ) | | | 129 | | | | 845 | | | | 2,137 | | | | 78 | | | | 3,890 | |
Earnings before taxation | | | 4,587 | | | | 8,927 | | | | 3,506 | | | | 4,179 | | | | (1,627 | ) | | | 300 | | | | 42 | | | | 19,914 | |
Taxation charge/(credit) | | | 3,362 | | | | 6,800 | | | | 2,113 | | | | 2,404 | | | | (654 | ) | | | 60 | | | | 157 | | | | 14,242 | |
Earnings after taxation | | | 1,225 | | | | 2,127 | | | | 1,393 | | | | 1,775 | | | | (973 | ) | | | 240 | | | | (115 | ) | | | 5,672 | |
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
Oceania included Shell’s 14% share of Woodside from June 2014 to April 2016 (previously 23%). Woodside is a publicly listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are estimated. The accounting classification of Woodside was changed from an associate to an investment in securities in April 2016.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Third-party revenue | | | 1,705 | | | | 3,708 | | | | 197 | | | | | — | | | | — | | | | — | | | | — | | | | 5,610 | |
Total | | | 1,705 | | | | 3,708 | | | | 197 | | | | | — | | | | — | | | | — | | | | — | | | | 5,610 | |
Production costs excluding taxes | | | 293 | | | | 705 | | | | 123 | | | | | — | | | | — | | | | — | | | | — | | | | 1,121 | |
Taxes other than income tax | | | 706 | | | | 456 | | | | 7 | | | | | — | | | | — | | | | — | | | | — | | | | 1,169 | |
Exploration | | | 36 | | | | 25 | | | | 27 | | | | | — | | | | — | | | | — | | | | — | | | | 88 | |
Depreciation, depletion and amortisation | | | 208 | | | | 1,663 | | | | 237 | | | | | — | | | | — | | | | — | | | | — | | | | 2,108 | |
Other costs/(income) | | | 79 | | | | 401 | | | | (28 | ) | | | | — | | | | — | | | | — | | | | — | | | | 452 | |
Earnings before taxation | | | 383 | | | | 458 | | | | (169 | ) | | | | — | | | | — | | | | — | | | | — | | | | 672 | |
Taxation charge | | | 91 | | | | 23 | | | | 8 | | | | | — | | | | — | | | | — | | | | — | | | | 122 | |
Earnings after taxation | | | 292 | | | | 435 | | | | (177 | ) | | | | — | | | | — | | | | — | | | | — | | | | 550 | |
167 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | |
2015 | | $ million |
| | | | | | | | | | | North America | | South | | |
| | Europe | | Asia | | Oceania | | | Africa | | USA | | Canada | | America | | Total |
Third-party revenue | | 2,764 | | 5,177 | | 632 | | | — | | — | | — | | — | | 8,573 |
Total | | 2,764 | | 5,177 | | 632 | | | — | | — | | — | | — | | 8,573 |
Production costs excluding taxes | | 382 | | 745 | | 215 | | | — | | — | | — | | — | | 1,342 |
Taxes other than income tax | | 1,253 | | 877 | | 31 | | | — | | — | | — | | — | | 2,161 |
Exploration | | 21 | | 20 | | 42 | | | — | | — | | — | | — | | 83 |
Depreciation, depletion and amortisation | | 196 | | 1,463 | | 1,114 | | | — | | — | | — | | — | | 2,773 |
Other costs | | 221 | | 580 | | 11 | | | — | | — | | — | | — | | 812 |
Earnings before taxation | | 691 | | 1,492 | | (781) | | | — | | — | | — | | — | | 1,402 |
Taxation charge | | 237 | | 242 | | 19 | | | — | | — | | — | | — | | 498 |
Earnings after taxation | | 454 | | 1,250 | | (800) | | | — | | — | | — | | — | | 904 |
| | | | | | | | | | | | | | | | | |
2014 | | $ million |
| | | | | | | | | | | North America | | South | | |
| | Europe | | Asia | | Oceania | | | Africa | | USA | | Canada | | America | | Total |
Third-party revenue | | 4,966 | | 8,811 | | 1,292 | | | — | | — | | — | | — | | 15,069 |
Total | | 4,966 | | 8,811 | | 1,292 | | | — | | — | | — | | — | | 15,069 |
Production costs excluding taxes | | 434 | | 829 | | 272 | | | — | | — | | — | | — | | 1,535 |
Taxes other than income tax | | 2,634 | | 2,518 | | 24 | | | — | | — | | — | | — | | 5,176 |
Exploration | | 22 | | 83 | | 66 | | | — | | — | | — | | 18 | | 189 |
Depreciation, depletion and amortisation | | 198 | | 1,117 | | 373 | | | — | | — | | — | | — | | 1,688 |
Other costs/(income) | | (6) | | 643 | | 96 | | | — | | — | | — | | 258 | | 991 |
Earnings before taxation | | 1,684 | | 3,621 | | 461 | | | — | | — | | — | | (276) | | 5,490 |
Taxation charge | | 608 | | 1,256 | | 190 | | | — | | — | | — | | — | | 2,054 |
Earnings after taxation | | 1,076 | | 2,365 | | 271 | | | — | | — | | — | | (276) | | 3,436 |
acreage and wells
The tables below reflect acreage and wells of Shell subsidiaries, joint ventures and associates. The term “gross” refers to the total activity in which Shell subsidiaries, joint ventures and associates have an interest. The term “net” refers to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of joint ventures and associates’ fractional interests. Net data below are rounded to the nearest whole number.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil and gas acreage (at December 31) | | Thousand acres |
| | 2016 | | | 2015 | | | 2014 |
| | Developed | | | Undeveloped | | | Developed | | | Undeveloped | | | Developed | | | Undeveloped |
| | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | |
Europe [A] | | | 6,556 | | | | 2,197 | | | | 18,216 | | | | 10,241 | | | | 7,152 | | | | 2,194 | | | | 14,623 | | | | 7,732 | | | | 9,603 | | | | 2,693 | | | | 16,161 | | | | 8,563 | | |
Asia | | | 26,003 | | | | 9,199 | | | | 58,463 | | | | 36,298 | | | | 25,581 | | | | 9,181 | | | | 36,658 | | | | 22,995 | | | | 25,724 | | | | 9,252 | | | | 46,487 | | | | 25,155 | | |
Oceania | | | 1,939 | | | | 822 | | | | 37,876 | | | | 24,109 | | | | 2,041 | | [B] | | 530 | | [B] | | 51,740 | | [C] | | 16,975 | | [C] | | 1,657 | | | | 433 | | | | 57,939 | | [D] | | 18,991 | | [D] |
Africa | | | 5,083 | | | | 2,315 | | | | 41,517 | | | | 29,152 | | | | 4,650 | | | | 2,071 | | | | 40,435 | | | | 27,058 | | | | 5,174 | | | | 2,232 | | | | 39,297 | | | | 26,409 | | |
North America – USA | | | 2,002 | | | | 1,197 | | | | 4,151 | | | | 2,577 | | | | 1,659 | | | | 1,158 | | | | 5,033 | | | | 4,262 | | | | 1,635 | | | | 1,131 | | | | 6,133 | | | | 5,047 | | |
North America – Canada | | | 976 | | | | 670 | | | | 26,149 | | | | 19,402 | | | | 1,227 | | | | 745 | | | | 32,706 | | | | 25,716 | | | | 1,132 | | | | 748 | | | | 33,094 | | | | 27,223 | | |
South America | | | 1,315 | | | | 547 | | | | 17,759 | | | | 14,643 | | | | 100 | | | | 52 | | | | 7,851 | | | | 3,621 | | | | 100 | | | | 52 | | | | 8,637 | | | | 4,081 | | |
Total | | | 43,874 | | | | 16,947 | | | | 204,131 | | | | 136,422 | | | | 42,410 | | | | 15,931 | | | | 189,046 | | | | 108,359 | | | | 45,025 | | | | 16,541 | | | | 207,748 | | | | 115,469 | | |
[A] Includes Greenland.
[B] Corrected from 1,657 gross (434 net)
[C] Corrected from 70,509 gross (26,312 net).
[D] Corrected from 71,941 gross (25,992 net).
168 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of productive wells [A] (at December 31) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | | 2015 | | | 2014 | |
| | Oil | | | Gas | | | Oil | | | Gas | | | Oil | | | Gas | |
| | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | |
Europe | | | 1,215 | | | | 321 | | | | 1,232 | | | | 403 | | | | 1,272 | | | | 344 | | | | 1,229 | | | | 392 | | | | 1,256 | | | | 332 | | | | 1,209 | | | | 333 | |
Asia | | | 9,261 | | | | 3,141 | | | | 656 | | | | 263 | | | | 8,271 | | | | 2,853 | | | | 334 | | | | 190 | | | | 7,529 | | | | 2,643 | | | | 353 | | | | 198 | |
Oceania | | | — | | | | — | | | | 3,257 | | | | 1,734 | | | | — | | | | — | | | | 624 | | | | 234 | | | | 44 | | | | 3 | | | | 625 | | | | 235 | |
Africa | | | 662 | | | | 289 | | | | 191 | | | | 127 | | | | 821 | | [B] | | 334 | | [B] | | 129 | | | | 86 | | [C] | | 887 | | | | 349 | | | | 116 | | | | 79 | |
North America – USA | | | 15,532 | | | | 7,892 | | | | 3,046 | | | | 2,136 | | | | 15,331 | | | | 7,893 | | | | 2,522 | | | | 2,403 | | | | 15,313 | | | | 7,760 | | | | 2,555 | | | | 1,849 | |
North America – Canada | | | 283 | | | | 283 | | | | 941 | | | | 781 | | | | 286 | | | | 286 | | | | 1,209 | | | | 1,059 | | | | 325 | | | | 320 | | | | 1,125 | | | | 878 | |
South America | | | 73 | | | | 28 | | | | 50 | | | | 26 | | | | 25 | | | | 15 | | | | 7 | | | | 2 | | | | 25 | | | | 15 | | | | 7 | | | | 2 | |
Total | | | 27,026 | | | | 11,954 | | | | 9,373 | | | | 5,470 | | | | 26,006 | | | | 11,725 | | | | 6,054 | | | | 4,366 | | | | 25,379 | | | | 11,422 | | | | 5,990 | | | | 3,574 | |
[A] The number of productive wells with multiple completions (more than one formation producing into the same well bore) at December 31, 2016, was 1,754 gross (691 net); 2015: 1,811 gross, corrected from 1,733 gross (760 net, corrected from 727 net); 2014:1,802 gross (762 net).
[B] Corrected from 812 gross (362 net).
[C] Corrected from 87.
| | | | | | | | | | | | | |
Number of net productive wells and dry holes drilled | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 | |
| | Productive | | Dry | | Productive | | Dry | | Productive | | Dry | |
Exploratory [A] | | | | | | | | | | | | | |
Europe | | — | | — | | 1 | | 2 | | 1 | | 2 | |
Asia | | 2 | | 4 | | — | | 11 | | 2 | | 10 | |
Oceania | | — | | — | | — | | 3 | | — | | 1 | |
Africa | | 4 | | 2 | | 5 | | — | | 4 | | 4 | |
North America – USA | | 40 | | 2 | | 35 | | 8 | | 53 | | 89 | |
North America – Canada | | — | | — | | 73 | | 5 | | 39 | | 2 | |
South America | | — | | — | | — | | 1 | | — | | 1 | |
Total | | 46 | | 8 | | 114 | | 30 | | 99 | | 109 | [B] |
Development | | | | | | | | | | | | | |
Europe | | 10 | | 1 | | 10 | | — | | 8 | | 1 | |
Asia | | 265 | | — | | 252 | | 2 | | 243 | | 9 | |
Oceania | | 184 | | — | | 2 | | — | | 6 | | 1 | |
Africa | | 15 | | — | | 24 | [C] | — | | 23 | | 2 | |
North America – USA | | 137 | | — | | 433 | | — | | 392 | | 3 | |
North America – Canada | | 50 | | — | | 20 | | 2 | | 22 | | — | |
South America | | 3 | | — | | 3 | | 1 | | 3 | | — | |
Total | | 664 | | 1 | | 744 | | 5 | | 697 | | 16 | |
[A] Productive wells are wells with proved reserves allocated. Exploratory wells in the process of drilling are excluded and presented separately below.
[B] Includes 50 net exploratory wells sold in North and South America.
[C] Corrected from 27.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of wells in the process of exploratory drilling [A] | | | | | | | | | | | | | | | 2016 | |
| | At January 1 | | | Additions on BG acquisition | | | Wells in the process of drilling at January 1 and allocated proved reserves during the year | | | Wells in the process of drilling at January 1 and determined as dry during the year | | | New wells in the process of drilling at December 31 | | | At December 31 | |
| | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | |
Europe | | | 19 | | | | 7 | | | | 4 | | | | 3 | | | | — | | | | — | | | | (1 | ) | | | — | | | | 4 | | | | 2 | | | | 26 | | | | 12 | |
Asia | | | 107 | | [B] | | 43 | | | | — | | | | — | | | | (16 | ) | | | (8 | ) | | | (14 | ) | | | (5 | ) | | | 17 | | | | 7 | | | | 94 | | | | 37 | |
Oceania | | | 205 | | [C] | | 68 | | [C] | | — | | | | — | | | | (7 | ) | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | | 198 | | | | 65 | |
Africa | | | 27 | | | | 16 | | | | 20 | | | | 12 | | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | 3 | | | | 3 | | | | 46 | | | | 27 | |
North America – USA | | | 218 | | [D] | | 149 | | [D] | | — | | | | — | | | | (84 | ) | | | (52 | ) | | | (3 | ) | | | (2 | ) | | | 47 | | | | 31 | | | | 178 | | | | 126 | |
North America – Canada | | | 123 | | [E] | | 122 | | [E] | | — | | | | — | | | | (54 | ) | | | (54 | ) | | | (67 | ) | | | (66 | ) | | | 9 | | | | 9 | | | | 11 | | | | 11 | |
South America | | | 34 | | [F] | | 22 | | [F] | | 13 | | | | 4 | | | | (1 | ) | | | — | | | | — | | | | — | | | | 5 | | | | 1 | | | | 51 | | | | 27 | |
Total | �� | | 733 | | | | 427 | | | | 37 | | | | 19 | | | | (164 | ) | | | (119 | ) | | | (87 | ) | | | (75 | ) | | | 85 | | | | 53 | | | | 604 | | | | 305 | |
[A] Wells in the process of drilling includes exploratory wells temporarily suspended.
[B] Corrected from 106.
[C] Corrected from 463 (201 net).
[D] Corrected from 181 (129 net).
[E] Corrected from 117 (107 net).
[F] Corrected from 32 (19 net).
169 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
Number of wells in the process of development drilling | | 2016 | |
| | At January 1 | | | At December 31 | |
| | Gross | | | Net | | | Gross | | | Net | |
Europe | | | 13 | | | | 3 | | | | 17 | | | | 6 | |
Asia | | | 80 | | | | 24 | | | | 35 | | | | 11 | |
Oceania | | | 7 | | | | 3 | | | | 5 | | | | 1 | |
Africa | | | 12 | | | | 5 | | | | 8 | | | | 3 | |
North America – USA | | | 37 | | | | 26 | | | | 14 | | | | 11 | |
North America – Canada | | | 36 | | | | 33 | | | | 3 | | | | 2 | |
South America | | | — | | | | — | | | | 9 | | | | 2 | |
Total | | | 185 | | | | 94 | | | | 91 | | | | 36 | |
In addition to the present activities mentioned above, the following recovery methods are operational in the following countries: water flooding (Brazil, Brunei, Denmark, Malaysia, Nigeria, Norway, Oman, Russia, UK and USA); gas injection (Brunei, Kazakhstan, Malaysia, Nigeria and Oman); steam injection (Canada, Netherlands and Oman); and polymer flooding (Oman).
170 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
PARENT COMPANY FINANCIAL STATEMENTS
The Parent Company Financial Statements have not been audited in accordance with the standards of the Public Company Accounting Oversight Board (United States).
171 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | |
Statement of Income | | $ million | |
| | Notes | | | 2016 | | | 2015 | |
Dividend income | | | | | | | 14,132 | | | | 8,167 | |
Interest and other income | | | 3 | | | | 612 | | | | 5 | |
Administrative expenses [A] | | | | | | | (488 | ) | | | (113 | ) |
Interest and other expense | | | 3 | | | | (25 | ) | | | (2,029 | ) |
Income before taxation | | | | | | | 14,231 | | | | 6,030 | |
Taxation charge | | | 6 | | | | (26 | ) | | | (1 | ) |
Income for the period | | | | | | | 14,205 | | | | 6,029 | |
[A] Includes BG acquisition costs
| | | | | | | | | | |
Statement of Comprehensive Income | | $ million | |
| | | | 2016 | | | 2015 | |
Income for the period | | | | | 14,205 | | | | 6,029 | |
Comprehensive income for the period | | | | | 14,205 | | | | 6,029 | |
| | | | | | | | | | | | |
Balance Sheet | | $ million | |
| | Notes | | | Dec 31, 2016 | | | Dec 31, 2015 | |
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Investments in subsidiaries | | | 4 | | | | 256,583 | | | | 203,066 | |
Deferred tax | | | 6 | | | | 352 | | | | 438 | |
| | | | | | | 256,935 | | | | 203,504 | |
Current assets | | | | | | | | | | | | |
Amounts due from subsidiaries | | | 13 | | | | 4,680 | | | | 19,006 | |
Cash and cash equivalents | | | | | | | 2 | | | | 465 | |
| | | | | | | 4,682 | | | | 19,471 | |
Total assets | | | | | | | 261,617 | | | | 222,975 | |
Liabilities | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 5 | | | | 224 | | | | 245 | |
| | | | | | | 224 | | | | 245 | |
Current liabilities | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 5 | | | | 4,049 | | | | 4,465 | |
| | | | | | | 4,049 | | | | 4,465 | |
Total liabilities | | | | | | | 4,273 | | | | 4,710 | |
Equity | | | | | | | | | | | | |
Share capital | | | 8 | | | | 683 | | | | 546 | |
Other reserves | | | 9 | | | | 235,573 | | | | 201,674 | |
Retained earnings | | | | | | | 21,088 | | | | 16,045 | |
Total equity | | | | | | | 257,344 | | | | 218,265 | |
Total liabilities and equity | | | | | | | 261,617 | | | | 222,975 | |
|
Signed on behalf of the Board /s/ Simon Henry |
|
Simon Henry |
Chief Financial Officer |
March 8, 2017 |
172 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | | | | | |
Statement of Changes in Equity | | $ million | |
| | Notes | | | Share capital | | | Other reserves | | | Retained earnings | | | Total equity | |
At January 1, 2016 | | | | | | | 546 | | | | 201,674 | | | | 16,045 | | | | 218,265 | |
Comprehensive income for the period | | | | | | | — | | | | — | | | | 14,205 | | | | 14,205 | |
Dividends paid | | | 10 | | | | — | | | | — | | | | (14,959 | ) | | | (14,959 | ) |
Scrip dividends | | | 10 | | | | 17 | | | | (17 | ) | | | 5,282 | | | | 5,282 | |
Shares issued | | | 8 | | | | 120 | | | | 33,930 | | | | — | | | | 34,050 | |
Share-based compensation | | | 9 | | | | — | | | | (14 | ) | | | 515 | | | | 501 | |
At December 31, 2016 | | | | | | | 683 | | | | 235,573 | | | | 21,088 | | | | 257,344 | |
At January 1, 2015 | | | | | | | 540 | | | | 201,745 | | | | 18,703 | | | | 220,988 | |
Comprehensive income for the period | | | | | | | — | | | | — | | | | 6,029 | | | | 6,029 | |
Dividends paid | | | 10 | | | | — | | | | — | | | | (11,972 | ) | | | (11,972 | ) |
Scrip dividends | | | 10 | | | | 7 | | | | (7 | ) | | | 2,602 | | | | 2,602 | |
Repurchases of shares | | | 8 | | | | (1 | ) | | | 1 | | | | 1 | | | | 1 | |
Share-based compensation | | | 9 | | | | — | | | | (65 | ) | | | 682 | | | | 617 | |
At December 31, 2015 | | | | | | | 546 | | | | 201,674 | | | | 16,045 | | | | 218,265 | |
| | | | | | | | | | | | |
Statement of Cash Flows | | $ million | |
| | Notes | | | 2016 | | | 2015 | |
Income for the period | | | | | | | 14,205 | | | | 6,029 | |
Adjustment for: | | | | | | | | | | | | |
Dividend income | | | | | | | (14,132 | ) | | | (8,167 | ) |
Tax | | | | | | | 26 | | | | 1 | |
Interest and other income | | | | | | | (17 | ) | | | (5 | ) |
Interest and other expense | | | | | | | 25 | | | | 41 | |
Share-based compensation | | | | | | | 21 | | | | 32 | |
Decrease in working capital | | | | | | | 13,868 | | | | 3,607 | |
Cash flow from operating activities | | | | | | | 13,996 | | | | 1,538 | |
Acquisition of BG Group plc | | 15 | | | | (19,036 | ) | | | — | |
Dividends received | | | | | | | 14,132 | | | | 8,167 | |
Interest received | | | | | | | 17 | | | | 5 | |
Share-based compensation | | | | | | | 130 | | | | 407 | |
Cash flow from investing activities | | | | | | | (4,757 | ) | | | 8,579 | |
Cash dividends paid | | | 10 | | | | (9,677 | ) | | | (9,370 | ) |
Repurchases of shares | | | | | | | — | | | | (409 | ) |
Interest and other expense paid | | | | | | | (25 | ) | | | (41 | ) |
Cash flow from financing activities | | | | | | | (9,702 | ) | | | (9,820 | ) |
(Decrease)/increase in cash and cash equivalents | | | | | | | (463 | ) | | | 297 | |
Cash and cash equivalents at January 1 | | | | | | | 465 | | | | 168 | |
Cash and cash equivalents at December 31 | | | | | | | 2 | | | | 465 | |
173 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
The Financial Statements of Royal Dutch Shell plc (the Company) have been prepared in accordance with the provisions of the Companies Act 2006 (the Act) and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Company, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
As described in the accounting policies in Note 2, the Financial Statements have been prepared under the historical cost convention except for certain items measured at fair value. Those accounting policies have been applied consistently in all periods presented.
The Financial Statements were approved and authorised for issue by the Board of Directors on March 8, 2017.
The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. Actual results may differ from those estimates.
The financial results of the Company are included in the Consolidated Financial Statements on pages 117-152. The financial results of the Company incorporate the results of the Dividend Access Trust (the Trust), the financial statements of which are presented on pages 183-186.
The Company’s principal activity is being the parent company for Shell, as described in Note 1 to the Consolidated Financial Statements.
2 KEY ACCOUNTING POLICIES
The Company’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. The following are Company-specific policies.
PRESENTATION AND FUNCTIONAL CURRENCY
The Company’s presentation and functional currency is US dollars (dollars).
INVESTMENTS
Investments in subsidiaries are stated at cost, net of any impairment. For the purposes of determining whether impairment of investments in subsidiaries has occurred, and the extent of any impairment loss or its reversal, the key assumptions management uses in estimating risk-adjusted future cash flows for value-in-use measures include future oil and gas prices, expected production volumes and refining margins appropriate to the local circumstances and environment. These assumptions and the judgements of management that are based on them are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates.
The original cost of the Company’s investment in Royal Dutch Petroleum Company (Royal Dutch) was based on the fair value of the shares transferred to the Company by the former shareholders of Royal Dutch in exchange for A shares in the Company during the public exchange offer in 2005. The original cost of the Company’s investment in The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited (Shell Transport), was the fair value of the shares held by the former shareholders of The “Shell” Transport and Trading Company, p.l.c. transferred in consideration for the issuance of B shares as part of the Scheme of Arrangement in 2005. The Company’s investments in Royal Dutch and Shell Transport now represent an investment in Shell Petroleum N.V. (Shell Petroleum); this change had no impact on the cost of investments in subsidiaries.
DIVIDEND INCOME
Dividends are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Petroleum, in which case income is recognised on the date at which receipt is deemed virtually certain.
SHARE-BASED COMPENSATION PLANS
The fair value of share-based compensation for equity-settled plans granted to employees of subsidiaries under the Company’s plans is recognised as an investment in subsidiaries from the date of grant over the vesting period with a corresponding increase in equity. Changes in the fair value of share-based compensation for cash-settled plans relating to employees of subsidiaries are recognised as an investment in subsidiaries with a corresponding change in liabilities. In the year of vesting of a plan, the costs for the actual deliveries are charged to the relevant employing subsidiaries. This is recognised as a realisation of the investment originally booked. If the actual vesting costs are higher than the cumulatively recognised share-based compensation charge, the difference is recognised in income.
See Note 22 to the Consolidated Financial Statements for information on the Company’s principal plan.
TAXATION
The Company is tax-resident in the Netherlands. For the assessment of corporate income tax in the Netherlands, the Company and certain of its subsidiaries form a fiscal unit, in respect of which the Company recognises any current tax receivable or payable (and deferred tax asset or liability) for the fiscal unit as a whole to the extent such balances have been settled between the Company and other members of the fiscal unit at the balance sheet date.
The Company’s tax charge or credit recognised in income is calculated at the statutory tax rate prevailing in the Netherlands for current tax and statutory tax rate substantively enacted in the Netherlands for deferred tax.
174 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
3 INTEREST AND OTHER INCOME/EXPENSE
| | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | |
Interest and other income | | | | | | | | |
Interest income | | | 17 | | | | 5 | |
Foreign exchange gains | | | 595 | | | | — | |
Total | | | 612 | | | | 5 | |
Interest and other expense | | | | | | | | |
Interest expense | | | (19 | ) | | | (28 | ) |
Other expense | | | (6 | ) | | | (13 | ) |
Foreign exchange losses | | | - | | | | (1,988 | ) |
Total | | | (25 | ) | | | (2,029 | ) |
4 INVESTMENTS IN SUBSIDIARIES
| | | | | | | | |
| | $ million | |
| | 2016 | | | 2015 | |
At January 1 | | | 203,066 | | | | 202,791 | |
Additions (see Note 15) | | | 53,118 | | | | — | |
Share-based compensation | | | 645 | | | | 715 | |
Recovery of vested share-based compensation | | | (246 | ) | | | (440 | ) |
At December 31 | | | 256,583 | | | | 203,066 | |
5 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2016 | | | Dec 31, 2015 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Amounts due to subsidiaries (see Note 13) | | | 3,593 | | | | - | | | | 4,178 | | | | — | |
Accruals and other liabilities | | | 302 | | | | 224 | | | | 139 | | | | 245 | |
Withholding tax payable | | | 152 | | | | - | | | | 145 | | | | — | |
Unclaimed dividends | | | 2 | | | | - | | | | 3 | | | | — | |
Total | | | 4,049 | | | | 224 | | | | 4,465 | | | | 245 | |
Accruals and other liabilities are principally in respect of cash-settled share-based compensation.
6 TAXATION
| | | | | | | | |
Taxation charge | | $ million | |
| | 2016 | | | 2015 | |
Deferred tax | | | | | | | | |
Relating to the origination and reversal of temporary differences | | | 24 | | | | 1 | |
Adjustments in respect of prior periods | | | 2 | | | | — | |
Taxation charge | | | 26 | | | | 1 | |
| | | | | | | | |
Reconciliation of applicable tax charge at statutory tax rate to taxation charge | | $ million | |
| | 2016 | | | 2015 | |
Income before taxation | | | 14,231 | | | | 6,030 | |
Applicable tax charge at the statutory tax rate of 25.0% (2015: 25.0%) | | | 3,558 | | | | 1,508 | |
Adjustments in respect of prior periods | | | 2 | | | | — | |
Tax effects of: | | | | | | | | |
Income not subject to tax at statutory rates | | | (3,681 | ) | | | (1,538 | ) |
Expenses not deductible for tax purposes | | | 112 | | | | 8 | |
Other | | | 35 | | | | 23 | |
Taxation charge | | | 26 | | | | 1 | |
Taxes payable are reported within accounts payable and accrued liabilities (see Note 5).
175 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | |
Deferred tax assets | | $ million | |
| | 2016 | | | 2015 | |
At January 1 | | | 438 | | | | 493 | |
Recognised in income | | | (26 | ) | | | (1 | ) |
Other movements | | | (60 | ) | | | (54 | ) |
At December 31 | | | 352 | | | | 438 | |
Deferred tax assets are recognised principally in respect of tax losses, which are available for relief against future taxable profits for up to nine years from the year in which the losses were incurred.
7 FINANCIAL INSTRUMENTS
Financial assets and liabilities in the Company’s Balance Sheet comprise cash and cash equivalents, amounts due from subsidiaries (see Note 13) and certain amounts reported within accounts payable and accrued liabilities (see Note 5). The fair value of financial assets and liabilities at December 31, 2016 and 2015 approximates their carrying amount.
Information on financial risk management is presented in Note 20 to the Consolidated Financial Statements. Foreign currency derivatives are used by the Company to manage foreign exchange risk, which arises when certain transactions are denominated in a currency that is not the Company’s functional currency. There were no derivative financial instruments held at December 31, 2016 or 2015.
8 SHARE CAPITAL
| | | | | | | | | | | | | | | | | | | | |
Issued and fully paid ordinary shares of €0.07 each [A] | | | | | | |
| | Number of shares | | | Nominal value ($ million) | |
| | A | | | B | | | A | | | B | | | Total | |
At January 1, 2016 | | | 3,990,921,569 | | | | 2,440,410,614 | | | | 340 | | | | 206 | | | | 546 | |
Scrip dividends | | | 219,253,936 | | | | — | | | | 17 | | | | — | | | | 17 | |
Shares issued (see Note 15) | | | 218,728,308 | | | | 1,305,076,117 | | | | 17 | | | | 103 | | | | 120 | |
At December 31, 2016 | | | 4,428,903,813 | | | | 3,745,486,731 | | | | 374 | | | | 309 | | | | 683 | |
At January 1, 2015 | | | 3,907,302,393 | | | | 2,440,410,614 | | | | 334 | | | | 206 | | | | 540 | |
Scrip dividends | | | 96,336,688 | | | | — | | | | 7 | | | | — | | | | 7 | |
Repurchases of shares [B] | | | (12,717,512 | ) | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
At December 31, 2015 | | | 3,990,921,569 | | | | 2,440,410,614 | | | | 340 | | | | 206 | | | | 546 | |
[A] Share capital at December 31, 2016 and 2015 also included 50,000 issued and fully paid sterling deferred shares of £1 each.
[B] Repurchased under the Company’s share buyback programme and all cancelled.
At the Company’s Annual General Meeting (AGM) on May 24, 2016, the Board was authorised to allot ordinary shares in the Company, and to grant rights to subscribe for or to convert any security into ordinary shares in the Company, up to an aggregate nominal amount of €185 million (representing 2,643 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 24, 2017, and the end of the AGM to be held in 2017, unless previously renewed, revoked or varied by the Company in a general meeting.
B shares rank equally in all respects with A shares except for the dividend access mechanism described below. The Company, Shell Transport and BG can procure the termination of the dividend access mechanism at any time. Upon such termination, B shares will form one class with A shares ranking equally in all respects and A and B shares will be known as ordinary shares without further distinction.
The sterling deferred shares are redeemable only at the discretion of the Company for £1 each and carry no voting rights. There are no further rights to participate in profits or assets, including the right to receive dividends. Upon winding up or liquidation, the shares carry a right to repayment of paid-up nominal value, ranking ahead of A and B shares.
For information on the number of shares in the Company held by Shell employee share ownership trusts and trust-like entities to meet delivery commitments under employee share plans, see Note 22 to the Consolidated Financial Statements.
176 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
DIVIDEND ACCESS MECHANISM FOR B SHARES
General
Dividends paid on A shares have a Dutch source for tax purposes and are subject to Dutch withholding tax.
It is the expectation and the intention, although there can be no certainty, that holders of B shares will receive dividends through the dividend access mechanism. Any dividends paid on the dividend access shares will have a UK source for UK and Dutch tax purposes. There will be no Dutch withholding tax on such dividends. Until April 6, 2016, certain holders (not including US holders) of B shares or B American Depositary Shares (ADSs) will be entitled to a UK tax credit in respect of their proportional share of such dividends. From April 6, 2016, there were changes to the UK taxation of dividends. The dividend tax credit has been abolished, and a new tax-free dividend allowance of £5,000 introduced.
Description of dividend access mechanism
A dividend access share has been issued by Shell Transport and, with effect from the Company’s acquisition on February 15, 2016 of BG Group plc (the Acquisition), now BG Group Limited, (BG), a dividend access share has been issued by BG to Computershare Trustees (Jersey) Limited as Trustee. Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access shares on trust for the holders of B shares and will arrange for prompt disbursement of such dividends to holders of B shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and BG and any dividends which are unclaimed after 12 years will revert to Shell Transport and BG (as applicable). Holders of B shares will not have any interest in either dividend access share and will not have any rights against Shell Transport and BG as issuers of the dividend access shares. The only assets held on trust for the benefit of the holders of B shares will be dividends paid to the Trustee in respect of the dividend access shares.
The declaration and payment of dividends on the dividend access shares will require board action by Shell Transport and BG (as applicable) and will be subject to any applicable limitations in law or in the Shell Transport or BG (as appropriate) articles of association in effect. In no event will the aggregate amount of the dividend paid by Shell Transport and BG under the dividend access mechanism for a particular period exceed the aggregate of the dividend announced by the Board of the Company on B shares in respect of the same period (after giving effect to currency conversions).
In particular, under their respective articles of association, Shell Transport and BG are each only able to pay a dividend on their respective dividend access shares which represents a proportional amount of the aggregate of any dividend announced by the Company on the B shares in respect of the relevant period, where such proportions are calculated by reference to, in the case of Shell Transport, the number of B shares in existence prior to completion of the Acquisition and, in the case of BG, the number of B shares issued as part of the Acquisition, in each case as against the total number of B shares in issue immediately following completion of the Acquisition.
Operation of the dividend access mechanism
If, in connection with the announcement of a dividend by the Company on B shares, the Board of Shell Transport and/or the Board of BG elects to declare and pay a dividend on their respective dividend access shares to the Trustee, the holders of B shares will be beneficially entitled to receive their share of those dividends pursuant to the declaration of trust (and arrangements will be made to ensure that the dividend is paid in the same currency in which they would have received a dividend from the Company).
If any amount is paid by Shell Transport or BG by way of a dividend on the dividend access shares and paid by the Trustee to any holder of B shares, the dividend which the Company would otherwise pay on B shares will be reduced by an amount equal to the amount paid to such holders of B shares by the Trustee.
The Company will have a full and unconditional obligation, in the event that the Trustee does not pay an amount to holders of B shares on a cash dividend payment date (even if that amount has been paid to the Trustee), to pay immediately the dividend announced on B shares. The right of holders of B shares to receive distributions from the Trustee will be reduced by an amount equal to the amount of any payment actually made by the Company on account of any dividend on B shares.
If for any reason no dividend is paid on the dividend access shares, holders of B shares will only receive dividends from the Company directly. Any payment by the Company will be subject to Dutch withholding tax (unless an exemption is obtained under Dutch law or under the provisions of an applicable tax treaty).
The Dutch tax treatment of dividends paid under the dividend access mechanism has been confirmed by the Dutch Revenue Service in an agreement (“vaststellingsovereenkomst”) with the Company and N.V. Koninklijke Nederlandsche Petroleum Maatschappij (Royal Dutch Petroleum Company) dated October 26, 2004, as supplemented and amended by an agreement between the same parties dated April 25, 2005, and a final settlement agreement in connection with the Acquisition dated November 9, 2015. The agreements state, among other things, that dividend distributions on the dividend access shares by Shell Transport and/or BG will not be subject to Dutch withholding tax provided that the dividend access mechanism is structured and operated substantially as set out above.
The Company may not extend the dividend access mechanism to any future issuances of B shares without prior consultation with the Dutch Revenue Service.
Accordingly, the Company would not expect to issue additional B shares unless confirmation from the Dutch Revenue Service was obtained or the Company were to determine that the continued operation of the dividend access mechanism was unnecessary. Any further issue of B shares is subject to advance consultation with the Dutch Revenue Service.
The dividend access mechanism may be suspended or terminated at any time by the Company’s Directors or the Directors of Shell Transport or BG, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation.
177 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
9 OTHER RESERVES
| | | | | | | | | | | | | | | | | | | | |
| | $ million | |
| | Merger reserve | | | Share premium reserve | | | Capital redemption reserve | | | Share plan reserve | | | Total | |
At January 1, 2016 | | | 200,331 | | | | 154 | | | | 84 | | | | 1,105 | | | | 201,674 | |
Scrip dividends | | | (17 | ) | | | — | | | | — | | | | — | | | | (17 | ) |
Shares issued (see Note 15) | | | 33,930 | | | | — | | | | — | | | | — | | | | 33,930 | |
Share-based compensation | | | — | | | | — | | | | — | | | | (14 | ) | | | (14 | ) |
At December 31, 2016 | | | 234,244 | | | | 154 | | | | 84 | | | | 1,091 | | | | 235,573 | |
At January 1, 2015 | | | 200,338 | | | | 154 | | | | 83 | | | | 1,170 | | | | 201,745 | |
Scrip dividends | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) |
Repurchases of shares | | | — | | | | — | | | | 1 | | | | — | | | | 1 | |
Share-based compensation | | | — | | | | — | | | | — | | | | (65 | ) | | | (65 | ) |
At December 31, 2015 | | | 200,331 | | | | 154 | | | | 84 | | | | 1,105 | | | | 201,674 | |
The merger reserve was established as a consequence of the Company becoming the single parent company of Royal Dutch and Shell Transport and represented the difference between the cost of the investment in those companies and the nominal value of shares issued in exchange for those investments as required by the prevailing legislation at that time, section 131 of the Companies Act 1985. The increase in the merger reserve in 2016 in respect of the shares issued represents the difference between the fair value and the nominal value of the shares issued for the Acquisition.
On January 6, 2006, loan notes were converted into 4,827,974 A shares. The difference between the carrying value of the loan notes and the nominal value of the new shares issued was credited to the share premium reserve. The capital redemption reserve was established in connection with repurchases of shares of the Company. The share plan reserve is in respect of equity-settled share-based compensation plans (see Note 22 to the Consolidated Financial Statements).
10 DIVIDENDS
See Note 24 to the Consolidated Financial Statements.
11 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
See Note 26 to the Consolidated Financial Statements.
12 DIRECTORS AND SENIOR MANAGEMENT
See Note 28 to the Consolidated Financial Statements for the remuneration of Directors of the Company. In 2016, the Company recognised $22 million (2015: $25 million) in administrative expenses for the compensation of Directors and Senior Management.
13 RELATED PARTIES
Information about the Company’s subsidiaries, and whether these are held directly or indirectly, and other related undertakings (all of which are held indirectly) at December 31, 2016, is set out in Exhibit 8.
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Amounts due from subsidiaries | | | Amounts due to subsidiaries (See Note 5) | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Shell Petroleum | | | 4,201 | | | | 19,002 | | | | 409 | | | | 425 | |
Shell Treasury Luxembourg Sarl | | | - | | | | — | | | | 3,163 | | | | 3,738 | |
Shell Treasury Centre Limited | | | 476 | | | | — | | | | - | | | | — | |
Other | | | 3 | | | | 4 | | | | 21 | | | | 15 | |
Total | | | 4,680 | | | | 19,006 | | | | 3,593 | | | | 4,178 | |
The amount due from Shell Petroleum, which is denominated in dollars, is repayable on demand. Interest is calculated at US LIBOR less 0.103% and interest income in 2016 was $12 million (2015: $5 million).
The net amount due to Shell Treasury Luxembourg Sarl at December 31, 2016, comprises an interest-bearing receivable of €1,183 million (2015: €14,278 million) and an interest-bearing payable of $4,408 million (2015: $19,334 million). Interest on euro balances is calculated at Euro OverNight Index Average (EONIA) less 0.1% (2015: EONIA less 0.1%) and on dollar balances at US LIBOR (2015: US LIBOR). Net interest expense on these balances in 2016 was $19 million (2015: $28 million).
The amount due from Shell Treasury Centre Limited comprises call deposits in euros, sterling and dollars, which has been reclassified from cash and cash equivalents to amounts due from subsidiaries during the year.
178 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
OTHER TRANSACTIONS AND BALANCES
The Company enters into forward and spot foreign currency contracts with Treasury companies, which are subsidiaries. There were no open foreign currency contracts at December 31, 2016 or 2015.
The Company settles general and administrative expenses of the Trust, including the auditor’s remuneration.
The Company has guaranteed contractual payments totalling $61,684 million at December 31, 2016 (2015: $49,475 million), and related interest in respect of listed debt issued by Shell International Finance B.V.
14 AUDITOR’S REMUNERATION
See Note 29 to the Consolidated Financial Statements.
15 ACQUISITION OF BG GROUP PLC
On February 15, 2016, the Company acquired all the voting rights in BG Group plc by means of a Scheme of Arrangement under Part 26 of the Act, via the issuance of 218.7 million A shares and 1,305.1 million B shares with a fair value of $34,050 million and cash payments of $19,036 million in exchange for all BG Group plc shares. The fair value of the shares issued was calculated using the market price of the Company’s A and B shares of 1,545.0 and 1,538.5 pence respectively on the London Stock Exchange at its opening of business on February 15, 2016. The cash payments were funded by amounts previously held on deposit with Shell Petroleum. In September 2016, the Company’s shares in BG Group Limited (formerly BG Group plc) were exchanged for an increased investment in Shell Petroleum.
179 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
INDEPENDENT AUDITOR’S REPORT TO COMPUTERSHARE TRUSTEES (JERSEY) LIMITED AS TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST
We have audited the non-statutory financial statements of the Royal Dutch Shell Dividend Access Trust (the Financial Statements) for the year ended December 31, 2016, which comprise the Statement of Income, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the related Notes 1 to 8. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).
This report is made solely to the Trustee of the Royal Dutch Shell Dividend Access Trust (the Trust), as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the Trustee those matters we are required to state to the Trustee in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trustee as a body, for our audit work, for this report, or for the opinions we have formed.
RESPECTIVE RESPONSIBILITIES OF TRUSTEE AND AUDITOR
The Trustee is responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. In preparing the Financial Statements the Trustee is required to: present fairly the financial position, financial performance and cash flows of the Trust; select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; make judgements that are reasonable; provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the EU is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Trust’s financial position and financial performance; and state whether the Financial Statements have been prepared in accordance with IFRS as adopted by the EU.
Our responsibility is to audit and express an opinion on the Financial Statements in accordance with International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Trust’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Trustee; and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Financial Statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
OPINION ON THE FINANCIAL STATEMENTS
In our opinion the Financial Statements:
■ | give a true and fair view of the state of the Trust’s affairs as at December 31, 2016, and of its income for the year then ended; and |
■ | have been properly prepared in accordance with IFRS as adopted by the EU. |
SEPARATE OPINION IN RELATION TO IFRS AS ISSUED BY THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
As explained in Note 2 to the Financial Statements, the Trust, in addition to complying with its legal obligation to apply IFRS as adopted by the EU, has also applied IFRS as issued by the IASB.
In our opinion the Financial Statements comply with IFRS as issued by the IASB.
/s/ Ernst & Young LLP
London
March 8, 2017
1. The maintenance and integrity of the Shell website are the responsibility of the Directors of Royal Dutch Shell plc; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website.
2. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report and Accounts for 2016 only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016.
180 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO COMPUTERSHARE TRUSTEES (JERSEY) LIMITED AS TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST AND THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
We have audited the accompanying balance sheet of the Royal Dutch Shell Dividend Access Trust (the Trust) as at December 31, 2016, and the related statements of income, comprehensive income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Trustee of the Trust and the management of Royal Dutch Shell plc. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Trustee and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Financial Statements referred to above present fairly, in all material respects, the financial position of the Trust at December 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Trust's internal control over financial reporting as of December 31, 2016, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 8, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
London
March 8, 2017
TO COMPUTERSHARE TRUSTEES (JERSEY) LIMITED AS TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST AND THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
We have audited the Royal Dutch Shell Dividend Access Trust’s (the Trust) internal control over financial reporting as at December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Trustee of the Trust and the management of Royal Dutch Shell plc are responsible for maintaining effective internal control over financial reporting, and for their assessment of the effectiveness of internal control over financial reporting included in the accompanying Trustee’s and Management’s Report on Internal Control over Financial Reporting as set out on page 72. Our responsibility is to express an opinion on the Trust’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of the Trust as of December 31, 2016, and the related statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and our report dated March 8, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
London
March 8, 2017
1. The maintenance and integrity of the Shell website are the responsibility of the Directors of Royal Dutch Shell plc; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The reports set out above are included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016 only and do not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2016.
181 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO COMPUTERSHARE TRUSTEES (JERSEY) LIMITED AS TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST AND THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
In our opinion, the accompanying Statement of Income, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows, and the related Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements present fairly, in all material respects, the financial position of the Royal Dutch Shell Dividend Access Trust (the Trust) at December 31, 2015 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union.
These financial statements are the responsibility of the Trustee and the management of Royal Dutch Shell plc. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits on these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers CI LLP
Jersey, Channel Islands
March 9, 2016
Note that the report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2016 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2016.
`
182 FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2016
ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS
183 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | |
Statement of Income | | £ million | |
| | 2016 | | | 2015 | | | 2014 | |
Dividend income | | | 3,879 | | | | 2,726 | | | | 2,470 | |
Income before taxation and for the period | | | 3,879 | | | | 2,726 | | | | 2,470 | |
| | | | | | | | | | | | |
Statement of Comprehensive Income | | £ million | |
| | 2016 | | | 2015 | | | 2014 | |
Income for the period | | | 3,879 | | | | 2,726 | | | | 2,470 | |
Comprehensive income for the period | | | 3,879 | | | | 2,726 | | | | 2,470 | |
| | | | | | | | | | | | |
Balance Sheet | | £ million | |
| | Notes | | | Dec 31, 2016 | | | Dec 31, 2015 | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | 2 | | | | 2 | |
Total assets | | | | | | 2 | | | | 2 | |
Liabilities | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | |
Unclaimed dividends | | | 4 | | | 2 | | | | 2 | |
Total liabilities | | | | | | 2 | | | | 2 | |
Equity | | | | | | | | | | | | |
Capital account | | | 5 | | | | - | | | | — | |
Revenue account | | | | | | | - | | | | — | |
Total equity | | | | | | | - | | | | — | |
Total liabilities and equity | | | | | | 2 | | | | 2 | |
Signed on behalf of Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust | | |
| | |
/s/ Karen Kurys | | /s/ Martin Fish |
| | |
Karen Kurys | | Martin Fish |
March 8, 2017 | | |
184 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
| | | | | | | | | | | | | | | | |
Statement of Changes in Equity | | £ million | |
| | Notes | | | Capital account | | | Revenue account | | | Total equity | |
At January 1, 2016 | | | | | | | — | | | | — | | | | — | |
Comprehensive income for the period | | | | | | | — | | | | 3,879 | | | | 3,879 | |
Distributions made | | | 6 | | | | — | | | | (3,879 | ) | | | (3,879 | ) |
At December 31, 2016 | | | | | | | — | | | | — | | | | — | |
At January 1, 2015 | | | | | | | — | | | | — | | | | — | |
Comprehensive income for the period | | | | | | | — | | | | 2,726 | | | | 2,726 | |
Distributions made | | | 6 | | | | — | | | | (2,726 | ) | | | (2,726 | ) |
At December 31, 2015 | | | | | | | — | | | | — | | | | — | |
At January 1, 2014 | | | | | | | — | | | | — | | | | — | |
Comprehensive income for the period | | | | | | | — | | | | 2,470 | | | | 2,470 | |
Distributions made | | | 6 | | | | — | | | | (2,470 | ) | | | (2,470 | ) |
At December 31, 2014 | | | | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Statement of Cash Flows | | £ million | |
| | 2016 | | | 2015 | | | 2014 | |
Income for the period | | | 3,879 | | | | 2,726 | | | | 2,470 | |
Adjustment for: | | | | | | | | | | | | |
Dividends received | | | (3,879 | ) | | | (2,726 | ) | | | (2,470 | ) |
Cash flow from operating activities | | | — | | | | — | | | | — | |
Dividends received | | | 3,879 | | | | 2,726 | | | | 2,470 | |
Cash flow from investing activities | | | 3,879 | | | | 2,726 | | | | 2,470 | |
Cash distributions made | | | (3,879 | ) | | | (2,725 | ) | | | (2,470 | ) |
Cash flow used in financing activities | | | (3,879 | ) | | | (2,725 | ) | | | (2,470 | ) |
Change in cash and cash equivalents | | | — | | | | 1 | | | | — | |
Cash and cash equivalents at January 1 | | | 2 | | | | 1 | | | | 1 | |
Cash and cash equivalents at December 31 | | | 2 | | | | 2 | | | | 1 | |
185 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
NOTES TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS
1 THE TRUST
The Royal Dutch Shell Dividend Access Trust (the Trust) was established on May 19, 2005, by The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited (Shell Transport), and Royal Dutch Shell plc (the Company). The Trust is governed by the applicable laws of England and Wales and is resident and domiciled in Jersey. The Trust is not subject to taxation. The Trustee of the Trust is Computershare Trustees (Jersey) Limited, registration number 92182 (the Trustee), Queensway House, Hilgrove Street, St Helier, Jersey, JE1 1ES. The Trust was established as part of a dividend access mechanism.
A dividend access share has been issued by Shell Transport to the Trustee and on February 15, 2016, a dividend access share was issued by BG Group plc, now BG Group Limited, (BG) to the Trustee. Following the announcement of a dividend by the Company on the B shares, Shell Transport and BG may declare a dividend on their dividend access shares.
The primary purposes of the Trust are to receive, on behalf of the B shareholders of the Company and in accordance with their respective holdings of B shares in the Company, any amounts paid by way of dividend on the dividend access shares and to pay such amounts to the B shareholders on the same pro rata basis. The Trust is not subject to significant market risk, credit risk or liquidity risk.
The Trust shall not endure for a period in excess of 80 years from May 19, 2005, being the date on which the Trust Deed was executed.
2 BASIS OF PREPARATION
The Financial Statements of the Trust have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Trust, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
The Financial Statements have been prepared under the historical cost convention. The accounting policies described in Note 3 have been applied consistently in all periods presented.
The Financial Statements were approved and authorised for issue by the Trustee on March 8, 2017.
The financial results of the Trust are included in the Consolidated and Parent Company Financial Statements on pages 117-152 and pages 171-179 respectively.
3 ACCOUNTING POLICIES
The Trust’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. The following are Trust-specific policies.
PRESENTATION AND FUNCTIONAL CURRENCY
The Trust’s presentation and functional currency is sterling. The Trust’s dividend income and dividends paid are principally in sterling.
DIVIDEND INCOME
Dividends on the dividend access shares are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport or BG, in which case income is recognised on the date on which receipt is deemed virtually certain.
DISTRIBUTIONS MADE
Amounts are recorded as distributed once a wire transfer or cheque is issued. To the extent that cheques expire or are returned unpresented, the Trust records a liability for unclaimed dividends and a corresponding amount of cash.
4 UNCLAIMED DIVIDENDS
Unclaimed dividends of £1,972,676 (2015: £1,725,047) include any dividend cheque payments that have not been presented within 12 months, have expired or have been returned unpresented.
5 CAPITAL ACCOUNT
The capital account is represented by the dividend access share of 25 pence settled in the Trust by Shell Transport and the dividend access share of 10 pence settled in the Trust by BG.
6 DISTRIBUTIONS MADE
Distributions are made to the B shareholders of the Company in accordance with the Trust Deed. See Note 24 to the Consolidated Financial Statements for information about dividends per share. Any wire transfers that are not completed are replaced by cheques.
7 RELATED PARTIES
The Trust received dividend income of £2,533 million (2015: £2,726 million; 2014: £2,470 million) in respect of the dividend access share from Shell Transport and £1,346 million in respect of the dividend access share from BG. The Trust made distributions of £3,879 million (2015: £2,726 million; 2014: £2,470 million) to the B shareholders of the Company.
The Company pays the general and administrative expenses of the Trust, including the auditor’s remuneration.
8 AUDITOR’S REMUNERATION
Auditor’s remuneration for 2016 audit services was £33,750 (2015: £33,750; 2014: £33,750).
186 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
ADDITIONAL INFORMATION
SHAREHOLDER INFORMATION
Royal Dutch Shell plc (the Company) was incorporated in England and Wales on February 5, 2002, as a private company under the Companies Act 1985, as amended. On October 27, 2004, the Company was re-registered as a public company limited by shares and changed its name from Forthdeal Limited to Royal Dutch Shell plc. The Company is registered at Companies House, Cardiff, under company number 4366849, and at the Chamber of Commerce, The Hague, under company number 34179503. The Legal Entity Identifier (LEI) issued by the London Stock Exchange is 21380068P1DRHMJ8KU70. The business address for the Directors and Senior Management is: Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands.
The Company is resident in the Netherlands for Dutch and UK tax purposes and its primary objective is to carry on the business of a holding company. It is not directly or indirectly owned or controlled by another corporation or by any government and does not know of any arrangements that may result in a change of control of the Company.
Nature of trading market
The Company has two classes of ordinary shares: A and B shares. The principal trading market for A shares is Euronext Amsterdam and the principal trading market for B shares is the London Stock Exchange. Ordinary shares are traded in registered form.
A and B American Depositary Shares (ADSs) are listed on the New York Stock Exchange [A]. A depositary receipt is a certificate that evidences ADSs. Depositary receipts are issued, cancelled and exchanged at the office of The Bank of New York Mellon, 101 Barclay Street, New York, NY 10286, USA, as depositary (the Depositary) under a deposit agreement between the Company, the Depositary and the holders of ADSs. Each ADS represents two €0.07 shares of Royal Dutch Shell plc deposited under the agreement. More information relating to ADSs is given on page 191.
[A] At February 10, 2017, 469,921,197 A ADSs and 275,706,542 B ADSs were outstanding, representing 21% and 15% of the respective share capital class, held by 6,019 and 902 holders of record with an address in the USA, respectively. In addition to holders of ADSs, at February 10, 2017, 49,698 A shares and 1,083,827 B shares of €0.07 each were outstanding, representing 0.001% and 0.029% of the respective share capital class, held by 330 and 3,179 holders of record registered with an address in the USA, respectively.
| | | | | | | | |
Listing information | | | | | | | | |
| | A shares | | | B shares | |
Ticker symbol London | | RDSA | | | RDSB | |
Ticker symbol Amsterdam | | RDSA | | | RDSB | |
Ticker symbol New York (ADS [A]) | | RDS.A | | | RDS.B | |
ISIN Code | | GB00B03MLX29 | | | GB00B03MM408 | |
CUSIP | | G7690A100 | | | G7690A118 | |
SEDOL Number London | | B03MLX2 | | | B03MM40 | |
SEDOL Number Euronext | | B09CBL4 | | | B09CBN6 | |
Weighting on FTSE at 31/12/16 | | | 5.43 | % | | | 4.89 | % |
Weighting on AEX at 31/12/16 | | | 15.95 | % | | not included | |
Share capital
The issued and fully paid share capital of the Company at February 10, 2017, was as follows:
| | | | | | | | |
Share capital | | | | | | | | |
| | Issued and fully paid | |
| | Number | | | Nominal value | |
Ordinary shares of €0.07 each | | | | | | | | |
A shares | | | 4,428,903,813 | | | € | 310,023,267 | |
B shares | | | 3,745,486,731 | | | € | 262,184,071 | |
Sterling deferred shares of £1 each | | | 50,000 | | | | £50,000 | |
The Directors may only allot new ordinary shares if they have authority from shareholders to do so. The Company seeks to renew this authority annually at its Annual General Meeting (AGM). Under the resolution passed at the Company’s 2016 AGM, the Directors were granted authority to allot ordinary shares up to an aggregate nominal amount equivalent to approximately one-third of the issued ordinary share capital of the Company (in line with the guidelines issued by institutional investors).
The following is a summary of the material terms of the Company’s ordinary shares, including brief descriptions of the provisions contained in the Articles of Association (the Articles) and applicable laws of England and Wales in effect on the date of this document. This summary does not purport to include complete statements of these provisions:
■ | upon issuance, A and B shares are fully paid and free from all liens, equities, charges, encumbrances and other interest of the Company and not subject to calls of any kind; |
■ | all A and B shares rank equally for all dividends and distributions on ordinary share capital; and |
■ | A and B shares are admitted to the Official List of the UK Listing Authority and to trading on the market for listed securities of the London Stock Exchange. A and B shares are also admitted to trading on Euronext Amsterdam. A and B ADSs are listed on the New York Stock Exchange. |
At December 31, 2016, trusts and trust-like entities holding shares for the benefit of employee share plans of Shell held (directly and indirectly) 29 million shares of the Company with an aggregate market value of $801 million and an aggregate nominal value of €2 million.
[A] Each A ADS represents two A shares of €0.07 each and each B ADS represents two B shares of €0.07 each.
187 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
SIGNIFICANT SHAREHOLDINGS
The Company’s A and B shares have identical voting rights, and accordingly the Company’s major shareholders do not have different voting rights.
SIGNIFICANT DIRECT SHAREHOLDINGS
Direct holdings of 3% or more of A and B shares combined held by registered members representing the interests of underlying investors at December 31, 2016, are given below.
| | | | | | | | | | | | | | | | | | | | | | | | |
Direct shareholdings | | | | | | | | | | | | | | | | | | | | | | | | |
| | A shares | | | B shares | | | Total | |
| | Number | | | % | | | Number | | | % | | | Number | | | % | |
Euroclear Nederland | | | 1,973,493,109 | | | | 44.56 | | | | 14,873,962 | | | | 0.40 | | | | 1,988,367,071 | | | | 24.32 | |
BNY (Nominees) Limited | | | 767,914,512 | | | | 17.34 | | | | 534,603,272 | | | | 14.27 | | | | 1,302,517,784 | | | | 15.93 | |
Chase Nominees Limited | | | 87,963,932 | | | | 1.99 | | | | 240,805,556 | | | | 6.43 | | | | 328,769,488 | | | | 4.02 | |
State Street Nominees Limited (OM02) | | | 117,372,417 | | | | 2.65 | | | | 166,027,530 | | | | 4.43 | | | | 283,399,947 | | | | 3.47 | |
SIGNIFICANT INDIRECT SHAREHOLDINGS
Interests of investors with 3% or more of A and B shares combined at December 31, 2016, are given below.
| | | | | | | | | | | | | | | | | | | | | | | | |
Indirect shareholdings | | | | | | | | | | | | | | | | | | | | | | | | |
| | A shares | | | B shares | | | Total | |
| | Number | | | % | | | Number | | | % | | | Number | | | % | |
Blackrock, Inc. | | | 301,845,972 | | | | 6.82 | | | | 263,950,866 | | | | 7.05 | | | | 565,796,838 | | | | 6.92 | |
The Capital Group Companies, Inc. | | | 93,692,575 | | | | 2.12 | | | | 352,152,243 | | | | 9.40 | | | | 445,844,818 | | | | 5.45 | |
NOTIFICATION OF MAJOR SHAREHOLDINGS
As at December 31, 2016, the Company had been notified by the following investors of their interests in the Company’s shares pursuant to Disclosure Guidance and Transparency Rule 5.
| | | | | | | | | | | | | | | | | | | | |
Investor | | | | | | | | | | | | | | | | | | | | |
| | A shares | | B shares | | | Total |
| | Number | | | % | | Number | | | % | | | Number | | | % |
Blackrock, Inc. | | | 267,808,127 | | | 6.13 | | | 232,232,862 | | | | 6.20 | | | | 500,040,989 | | | 6.16 |
The Capital Group Companies, Inc. | | | 76,174,196 | | | 1.76 | | | 328,093,875 | | | 8.76 | | | | 404,268,071 | | | 5.01 |
[A] The percentages given are calculated at the time of the relevant notification.
The Company did not receive any further notifications pursuant to Disclosure Guidance and Transparency Rule 5 in the period from December 31, 2016, to February 10, 2017 (being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
188 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
Dividends
The following tables show the dividends on each class of share and each class of ADS for the years 2012-2016.
| | | | | | | | | | | | | | | | | | | | |
A and B shares | | $ | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Q1 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | | | | 0.43 | |
Q2 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | | | | 0.43 | |
Q3 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | | | | 0.43 | |
Q4 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | | | | 0.43 | |
Total announced in respect of the year | | | 1.88 | | | | 1.88 | | | | 1.88 | | | | 1.80 | | | | 1.72 | |
| | | | | | | | | | | | | | | | | | | | |
A shares | | € [A] | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Q1 | | | 0.42 | | | | 0.42 | | | | 0.35 | | | | 0.34 | | | | 0.35 | |
Q2 | | | 0.42 | | | | 0.42 | | | | 0.36 | | | | 0.34 | | | | 0.34 | |
Q3 | | | 0.44 | | | | 0.43 | | | | 0.38 | | | | 0.33 | | | | 0.33 | |
Q4 | | [B] | | | | 0.42 | | | | 0.43 | | | | 0.32 | | | | 0.33 | |
Total announced in respect of the year | | [B] | | | | 1.69 | | | | 1.53 | | | | 1.34 | | | | 1.35 | |
Amount paid during the year | | | 1.70 | | | | 1.71 | | | | 1.42 | | | | 1.34 | | | | 1.34 | |
[A] Euro equivalent, rounded to the nearest euro cent.
[B] The euro equivalent announcement date is March 10, 2017, which therefore is also the date when the total announced in respect of the year can be calculated.
| | | | | | | | | | | | | | | | | | | | |
B shares | | Pence [A] | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Q1 | | | 32.98 | | | | 30.75 | | | | 28.03 | | | | 28.99 | | | | 27.92 | |
Q2 | | | 35.27 | | | | 30.92 | | | | 29.09 | | | | 28.67 | | | | 27.08 | |
Q3 | | | 37.16 | | | | 31.07 | | | | 30.16 | | | | 27.51 | | | | 26.86 | |
Q4 | | [B] | | | | 32.78 | | | | 31.20 | | | | 26.88 | | | | 28.79 | |
Total announced in respect of the year | | [B] | | | | 125.52 | | | | 118.48 | | | | 112.05 | | | | 110.65 | |
Amount paid during the year | | | 138.19 | | | | 123.94 | | | | 114.16 | | | | 113.96 | | | | 108.60 | |
[A] Sterling equivalent.
[B] The sterling equivalent announcement date is March 10, 2017, which therefore is also the date when the total announced in respect of the year can be calculated.
| | | | | | | | | | | | | | | | | | | | |
A and B ADSs | | $ | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Q1 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | | | | 0.86 | |
Q2 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | | | | 0.86 | |
Q3 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | | | | 0.86 | |
Q4 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | | | | 0.86 | |
Total announced in respect of the year | | | 3.76 | | | | 3.76 | | | | 3.76 | | | | 3.60 | | | | 3.44 | |
Amount paid during the year | | | 3.76 | | | | 3.76 | | | | 3.72 | | | | 3.56 | | | | 3.42 | |
189 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
High, low and year-end share prices
The following tables show the high, low and year-end prices, taken directly from the respective securities exchange, of the Company’s registered ordinary shares:
■ | of €0.07 nominal value on the London Stock Exchange; |
■ | of €0.07 nominal value on Euronext Amsterdam; and |
■ | in the form of ADSs on the New York Stock Exchange (ADSs do not have a nominal value). |
| | | | | | | | | | | | | | | | | | | | | | | | |
Annual share prices | | | | | | | | | | | | | | | | | | | | | | | | |
| | Euronext Amsterdam A shares | | | New York Stock Exchange A ADSs | |
| | High € | | | Low € | | | Year - end € | | | High $ | | | Low $ | | | Year-end $ | |
2012 | | | 29.18 | | | | 24.30 | | | | 25.98 | | | | 74.51 | | | | 60.62 | | | | 68.95 | |
2013 | | | 27.06 | | | | 23.40 | | | | 25.91 | | | | 73.00 | | | | 62.65 | | | | 71.27 | |
2014 | | | 31.13 | | | | 24.30 | | | | 27.66 | | | | 83.42 | | | | 60.84 | | | | 66.95 | |
2015 | | | 29.59 | | | | 19.58 | | | | 21.10 | | | | 67.16 | | | | 43.26 | | | | 45.79 | |
2016 | | | 26.39 | | | | 16.53 | | | | 25.99 | | | | 56.29 | | | | 35.80 | | | | 54.38 | |
| | London Stock Exchange B shares | | | New York Stock Exchange B ADSs | |
| | High pence | | | Low pence | | | Year-end pence | | | High $ | | | Low $ | | | Year-end $ | |
2012 | | | 2,499 | | | | 2,020 | | | | 2,175 | | | | 77.52 | | | | 63.05 | | | | 70.89 | |
2013 | | | 2,375 | | | | 2,070 | | | | 2,280 | | | | 75.18 | | | | 65.02 | | | | 75.11 | |
2014 | | | 2,614 | | | | 1,985 | | | | 2,233 | | | | 88.13 | | | | 62.11 | | | | 69.56 | |
2015 | | | 2,315 | | | | 1,423 | | | | 1,543 | | | | 70.15 | | | | 43.51 | | | | 46.04 | |
2016 | | | 2,359 | | | | 1,261 | | | | 2,354 | | | | 58.49 | | | | 35.96 | | | | 57.97 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarterly share prices | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Euronext Amsterdam A shares | | | London Stock Exchange B shares | | | New York Stock Exchange A ADSs | | | New York Stock Exchange B ADSs | |
| | High € | | | Low € | | | High pence | | | Low pence | | | High $ | | | Low $ | | | High $ | | | Low $ | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Q1 | | | 29.59 | | | | 25.75 | | | | 2,315 | | | | 2,004 | | | | 67.16 | | | | 56.82 | | | | 70.15 | | | | 59.33 | |
Q2 | | | 29.50 | | | | 25.37 | | | | 2,210 | | | | 1,807 | | | | 64.46 | | | | 56.50 | | | | 65.98 | | | | 56.85 | |
Q3 | | | 27.14 | | | | 20.27 | | | | 1,920 | | | | 1,503 | | | | 59.16 | | | | 45.81 | | | | 59.52 | | | | 45.92 | |
Q4 | | | 25.51 | | | | 19.58 | | | | 1,864 | | | | 1,423 | | | | 56.41 | | | | 43.26 | | | | 57.28 | | | | 43.51 | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Q1 | | | 22.29 | | | | 16.53 | | | | 1,757 | | | | 1,261 | | | | 50.32 | | | | 35.80 | | | | 50.78 | | | | 35.96 | |
Q2 | | | 24.78 | | | | 20.33 | | | | 2,062 | | | | 1,634 | | | | 55.22 | | | | 46.42 | | | | 56.92 | | | | 47.08 | |
Q3 | | | 25.40 | | | | 20.81 | | | | 2,163 | | | | 1,869 | | | | 56.29 | | | | 46.57 | | | | 57.88 | | | | 49.56 | |
Q4 | | | 26.39 | | | | 22.17 | | | | 2,359 | | | | 2,006 | | | | 54.98 | | | | 48.07 | | | | 58.49 | | | | 50.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Monthly share prices | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Euronext Amsterdam A shares | | | London Stock Exchange B shares | | | New York Stock Exchange A ADSs | | | New York Stock Exchange B ADSs | |
| | High € | | | Low € | | | High pence | | | Low pence | | | High $ | | | Low $ | | | High $ | | | Low $ | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September | | | 22.92 | | | | 20.81 | | | | 2,022 | | | | 1,869 | | | | 51.32 | | | | 46.57 | | | | 54.17 | | | | 49.56 | |
October | | | 23.66 | | | | 22.17 | | | | 2,252 | | | | 2,010 | | | | 52.42 | | | | 49.34 | | | | 55.93 | | | | 52.15 | |
November | | | 24.26 | | | | 22.41 | | | | 2,218 | | | | 2,006 | | | | 52.20 | | | | 48.07 | | | | 55.09 | | | | 50.94 | |
December | | | 26.39 | | | | 24.11 | | | | 2,359 | | | | 2,127 | | | | 54.98 | | | | 51.44 | | | | 58.49 | | | | 54.77 | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January | | | 26.87 | | | | 25.04 | | | | 2,404 | | | | 2,232 | | | | 56.39 | | | | 53.55 | | | | 59.56 | | | | 56.73 | |
February | | | 25.86 | | | | 24.21 | | | | 2,298 | | | | 2,149 | | | | 55.22 | | | | 51.54 | | | | 58.30 | | | | 54.73 | |
190 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
Method of holding shares or an interest in shares
There are several ways in which Royal Dutch Shell plc registered shares or an interest in these shares can be held, including:
■ | directly as registered shares either in uncertificated form or in certificated form in a shareholder’s own name; |
■ | indirectly through Euroclear Nederland (in respect of which the Dutch Securities Giro Act (“Wet giraal effectenverkeer”) is applicable); |
■ | through the Royal Dutch Shell Corporate Nominee; and |
■ | as a direct or indirect holder of either an A or a B ADS with the Depositary. |
American Depositary Shares
The Depositary is the registered shareholder of the shares underlying the A or B ADSs and enjoys the rights of a shareholder under the Articles. Holders of ADSs will not have shareholder rights. The rights of the holder of an A or a B ADS are specified in the respective Depositary agreements with the Depositary and are summarised below.
The Depositary will receive all cash dividends and other cash distributions made on the deposited shares underlying the ADSs and, where possible and on a reasonable basis, will distribute such dividends and distributions to holders of ADSs. Rights to purchase additional shares will also be made available to the Depositary who may make such rights available to holders of ADSs. All other distributions made on the Company’s shares will be distributed by the Depositary in any means that the Depositary thinks is equitable and practical. The Depositary may deduct its fees and expenses and the amount of any taxes owed from any payments to holders and it may sell a holder’s deposited shares to pay any taxes owed. The Depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to holders of ADSs.
The Depositary will notify holders of ADSs of shareholders’ meetings of the Company and will arrange to deliver voting materials to such holders of ADSs if requested by the Company. Upon request by a holder, the Depositary will endeavour to appoint such holder as proxy in respect of such holder’s deposited shares entitling such holder to attend and vote at shareholders’ meetings. Holders of ADSs may also instruct the Depositary to vote their deposited securities and the Depositary will try, as far as practical and lawful, to vote deposited shares in accordance with such instructions. The Company cannot ensure that holders will receive voting materials or otherwise learn of an upcoming shareholders’ meeting in time to ensure that holders can instruct the Depositary to vote their shares.
Upon payment of appropriate fees, expenses and taxes: (i) shareholders may deposit their shares with the Depositary and receive the corresponding class and amount of ADSs; and (ii) holders of ADSs may surrender their ADSs to the Depositary and have the corresponding class and amount of shares credited to their account.
Further, subject to certain limitations, holders may, at any time, cancel ADSs and withdraw their underlying shares or have the corresponding class and amount of shares credited to their account. The Depositary may also deliver ADSs prior to deposit of the underlying securities subject to certain conditions, including, without limitation, that such pre-released ADSs are fully collateralised and that the underlying securities are assigned to and held for the account of the Depositary.
FEES PAID BY HOLDERS OF ADSs
The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. (See page 192.)
REIMBURSEMENTS TO THE COMPANY
The Bank of New York Mellon, as Depositary, has agreed to reimburse the Company for expenses it incurs that are related maintenance expenses of the ADS programme. The Depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The Depositary has also agreed to pay certain legal expenses and the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filing of US federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain costs associated with the AGM, investor relationship programmes and special investor relations promotional activities. There are limits on the amount of expenses for which the Depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the Depositary collects from investors. From January 1, 2016, to February 10, 2017, the Company received $8,017,634 from the Depositary.
Scrip Dividend Programme
The Company has a Scrip Dividend Programme which enables shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends (if approved by the Board). Only new A shares are issued under the programme, including to shareholders who hold B shares. More information can be found at www.shell.com/scrip.
191 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
Persons depositing or withdrawing shares must pay: | For: |
$5.00 or less per 100 ADSs (or portion of 100 ADSs) | Issuance of ADSs, including those resulting from a distribution of shares, rights or other property; |
| Cancellation of ADSs for the purpose of their withdrawal, including if the deposit agreement terminates; and |
| Distribution of securities to holders of deposited securities by the Depositary to ADS registered holders. |
Registration and transfer fees | Registration and transfer of shares on the share register to or from the name of the Depositary or its agent when they deposit or withdraw shares. |
Expenses of the Depositary | Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); and Converting foreign currency into dollars. |
Taxes and other governmental charges the Depositary or the custodian has to pay on any ADS or share underlying an ADS, for example, share transfer taxes, stamp duty or withholding taxes | As necessary. |
Exchange controls and other limitations affecting security holders
Other than those individuals, entities, government bodies, corporations or agencies that are subject to European Union (EU) sanctions, for example, regarding Syria, and the general EU prohibition to transfer funds to and from North Korea, we are not aware of any other legislative or other legal provision currently in force in the UK, the Netherlands or arising under the Articles restricting remittances to non-resident holders of the Company’s ordinary shares or affecting the import or export of capital for use by the Company.
Taxation
GENERAL
The Company is incorporated in England and Wales and tax-resident in the Netherlands. As a tax resident of the Netherlands, it is generally required by Dutch law to withhold tax at a rate of 15% on dividends on its ordinary shares and ADSs, subject to the provisions of any applicable tax convention or domestic law. Based on a policy statement issued by the Ministry of Finance of the Netherlands on April 29, 2016, (which has been formalised in law), and depending on their particular circumstances, non-Dutch tax-resident holders may be entitled to a full or partial refund of Dutch withholding tax. The following sets forth the operation of other provisions on dividends on the Company’s various ordinary shares and ADSs to UK and US holders, as well as certain other tax rules pertinent to holders. Holders should consult their own tax adviser if they are uncertain as to the tax treatment of any dividend.
DIVIDENDS PAID ON THE DIVIDEND ACCESS SHARE
There is no Dutch withholding tax on dividends on B shares or B ADSs, provided that such dividends are paid on the dividend access share pursuant to the dividend access mechanism (see “Dividend access mechanism for B shares” on pages 75-76). Dividends paid on the dividend access share are treated as UK-source for tax purposes and there is no UK withholding tax on them. Until April 5, 2016, individual shareholders resident in the UK were entitled to a UK tax credit on dividends paid on the dividend access share. The amount of the UK tax credit was 10/90ths of the cash dividend; it was not repayable when it exceeded the individual’s UK tax liability. From April 6, 2016, the dividend tax credit has been abolished and a tax-free dividend allowance of £5,000 has been introduced.
In 2016, all dividends with respect to B shares and B ADSs were paid on the dividend access share pursuant to the dividend access mechanism.
DUTCH WITHHOLDING TAX
When Dutch withholding tax applies on dividends paid to a US holder (that is, dividends on A shares or A ADSs, or on B shares or B ADSs that are not paid on the dividend access share pursuant to the dividend access mechanism), the US holder will be subject to Dutch withholding tax at the rate of 15%. A US holder who is entitled to the benefits of the 1992 Double Taxation Convention (the Convention) between the USA and the Netherlands as amended by the protocol signed on March 8, 2004, will be entitled to a reduction in the Dutch withholding tax, either by way of a full or a partial exemption at source or by way of a partial refund or a credit as follows:
■ | if the US holder is an exempt pension trust as described in article 35 of the Convention, or an exempt organisation as described in article 36 thereof, the US holder will be exempt from Dutch withholding tax; or |
■ | if the US holder is a company that holds directly at least 10% of the voting power in the Company, the US holder will be subject to Dutch withholding tax at a rate not exceeding 5%. |
In general, the entire dividend (including any amount withheld) will be dividend income to the US holder and the withholding tax will be treated as a foreign income tax that is eligible for credit against the US holder’s income tax liability or a deduction subject to certain limitations. A “US holder” includes, but is not limited to, a citizen or resident of the USA, or a corporation or other entity organised under the laws of the USA or any of its political subdivisions.
When Dutch withholding tax applies on dividends paid to UK tax-resident holders (that is, dividends on A shares or A ADSs, or on B shares or B ADSs that are not paid on the dividend access share pursuant to the dividend access mechanism), the dividend will typically be subject to withholding tax at a rate of 15%. Such UK tax-resident holder may be entitled to a credit (not repayable) for withholding tax against their UK tax liability. However, certain corporate shareholders are, subject to conditions, exempt from UK tax on dividends. Withholding tax suffered cannot be offset against such exempt dividends. UK tax-resident holders should also be entitled to claim a refund of one-third of the Dutch withholding tax from the Dutch tax authorities in reliance on the tax convention between the Netherlands and the UK. Pension plans meeting certain defined criteria can, however, be entitled to claim a full refund or exemption at source of the dividend tax withheld. Also, UK tax-resident corporate shareholders holding at least a 5% shareholding and meeting other defined criteria are exempted at source from dividend tax.
For holders who are tax-resident in any other country, the availability of a whole or partial exemption or refund of Dutch withholding tax is governed by Dutch tax law and/or the tax convention, if any, between the Netherlands and the country of the holder’s residence.
There may be other grounds on which holders who are tax-resident in the UK, the USA or any other country can obtain a full or partial refund of the Dutch withholding tax, depending on their particular circumstances; see “Taxation: General” above.
192 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
SCRIP DIVIDEND PROGRAMME
The Company’s Scrip Dividend Programme enables shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends (if approved by the Board). Only new A shares are issued under the programme, including to shareholders who hold B shares. The tax consequences of electing to receive new A shares in place of a cash dividend depend on individual circumstances. More information about the programme, including the taxation consequences, can be found at www.shell.com/scrip.
DUTCH CAPITAL GAINS TAXATION
Capital gains on the sale of shares of a Dutch tax-resident company by a US holder are generally not subject to taxation by the Netherlands unless the US holder has a permanent establishment therein and the capital gain is derived from the sale of shares that are part of the business property of the permanent establishment.
DUTCH SUCCESSION DUTY AND GIFT TAXES
Shares of a Dutch tax-resident company held by an individual who is not a resident or a deemed resident of the Netherlands will generally not be subject to succession duty in the Netherlands on the individual’s death.
A gift of shares of a Dutch tax-resident company by an individual who is not a resident or a deemed resident of the Netherlands is generally not subject to Dutch gift tax.
UK STAMP DUTY AND STAMP DUTY RESERVE TAX
Sales or transfers of the Company’s ordinary shares within a clearance service (such as Euroclear Nederland) or of the Company’s ADSs within the ADS depositary receipts system will not give rise to a stamp duty reserve tax (SDRT) liability and should not in practice require the payment of UK stamp duty.
The transfer of the Company’s ordinary shares to a clearance service (such as Euroclear Nederland) or to an issuer of depositary shares (such as ADSs) will generally give rise to a UK stamp duty or SDRT liability at the rate of 1.5% of consideration given or, if none, of the value of the shares. A sale of the Company’s ordinary shares that are not held within a clearance service (for example, settled through the UK’s CREST system of paperless transfers) will generally be subject to UK stamp duty or SDRT at the rate of 0.5% of the amount of the consideration, normally paid by the purchaser.
CAPITAL GAINS TAX
For the purposes of UK capital gains tax, the market values [A] of the shares of the former public parent companies of the Royal Dutch/Shell Group at the relevant dates were:
| | | | | | | | |
| | £ | |
| | March 31, 1982 | | | July 20, 2005 | |
Royal Dutch Petroleum Company | | | | | | | | |
(N.V. Koninklijke Nederlandsche | | | | | | | | |
Petroleum Maatschappij) which ceased to exist on December 21, 2005 | | | 1.1349 | | | | 17.6625 | |
The “Shell” Transport and Trading Company, p.l.c. which delisted on July 19, 2005 | | | 1.4502 | | | Not applicable | |
[A] Restated where applicable to reflect all capitalisation issues since the relevant date. This includes the change in the capital structure in 2005, when Royal Dutch Shell plc became the single parent company of Royal Dutch Petroleum Company and of The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, and one share in Royal Dutch Petroleum Company was exchanged for two Royal Dutch Shell plc A shares and one share in The “Shell” Transport and Trading Company, p.l.c. was exchanged for 0.287333066 Royal Dutch Shell plc B shares.
193 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
SECTION 13(r) OF THE US SECURITIES EXCHANGE ACT OF 1934 DISCLOSURE
In accordance with our General Business Principles and Code of Conduct, Shell seeks to comply with all applicable international trade laws including applicable sanctions and embargoes.
The activities listed below have been conducted outside the USA by non-US Shell subsidiaries. None of the payments disclosed below were made in US dollars, nor are any of the balances disclosed below held in US dollars; however, for disclosure purposes, all have been converted into US dollars at the appropriate exchange rate. We do not believe that any of the transactions or activities listed below violated US sanctions.
As a result of the suspension of US and European Union (EU) sanctions, we are considering potential opportunities in Iran and, in September 2016, we opened an office in Iran. We have made a payment of $101,566 through our bank account at Bank Karafarin for the rent of the office and incidental office support.
In October 2016, we signed a non-binding letter of intent with the National Iranian Petrochemical Company to cover a joint review of opportunities in the Iran petrochemicals sector. In November 2016, we signed a memorandum of understanding and confidentiality agreement with the National Iranian Oil Company (NIOC) to cover a joint review of a number of oil and gas opportunities. Also in November, we signed a confidentiality agreement with the National Iranian Gas Export Company, together with other international participants, with respect to a potential gas export opportunity. In December 2016, we entered into a technology licence agreement with Hamedan Ib Sina Petrochemical Company for a Shell ethylene process. The expected gross revenue from this agreement is $7.6 million and the net profit is unknown at this time.
We maintain accounts with Bank Karafarin where our cash deposits (balance of $2.8 million at December 31, 2016) generated non-taxable interest income of $0.5 million in 2016 and we paid $22 in bank charges in 2016.
After the suspension of US and EU sanctions, we made a series of payments in February and March 2016, totalling $1,942 million, to settle the payable amount for oil cargoes purchased from NIOC prior to EU sanctions.
At December 31, 2016, we have a receivable of $10.5 million outstanding with NIOC associated with our previous Upstream activities conducted prior to the EU sanctions.
On May 31, 2016, through our subsidiary Shell Eastern Trading (Pte) Ltd (SETL), we purchased a cargo of crude oil from NIOC for $45 million. The cargo was sold to a Shell refinery, with a net profit of $1.1 million resulting from this transaction. On December 22, 2016, SETL purchased another cargo of crude oil from NIOC for $103 million, which was paid for in February 2017. The cargo is in transit, no profits have yet been recognised and the freight for the cargo is still to be paid. On December 30, 2016, SETL entered into an agreement to purchase another cargo of crude oil from NIOC. SETL took ownership of this cargo in January 2017 for which $106 million was paid in February 2017. The cargo is in transit, no profit has yet been recognised and the freight for the cargo is still to be paid. Shell intends to continue to consider business opportunities with NIOC, including the purchase and trading of crude oil.
In 2016, we paid $32,922 for a 2012 value-added tax claim, $224 in stamp duties and a $92 penalty fee related to a 2011 income tax claim to the Iranian Ministry of Finance, through our Iranian accountant Bayat Rayan. We also paid $168 to the Consulate of Iran in the Netherlands to notarise documents, through travel visa agent CIBT Visumdienst BV. There was no gross revenue or net profit associated with these transactions.
In 2016, we paid $12,593 to the Iranian Civil Aviation Authority for the clearance of overflight permits for Shell aircraft over Iranian airspace. There was no gross revenue or net profit associated with these transactions. On occasion, our aircraft may be routed over Iran and therefore these payments may continue in the future.
During 2016, Shell employees met with Iranian officials in Iran. In relation to these travelling Shell employees, $11,954 was paid to Iranian authorities for visas, airport services and exit fees, $123 was paid to Bimeh Insurance Company for travel insurance and $592 was paid to Iranian airlines for flight tickets. There was no gross revenue or net profit associated with these transactions. We expect to continue discussions with Iranian officials and therefore similar payments may continue in the future.
In 2016, through our subsidiary Deheza S.A.I.C.F.el., we provided Downstream retail services to the Iranian Embassy in Argentina. This transaction generated gross revenue of $296 and an estimated net profit of $23. We have no contractual agreement with this embassy.
194 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
NON-GAAP MEASURES RECONCILIATION
EARNINGS ON A CURRENT COST OF SUPPLIES BASIS
Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. The current cost of supplies adjustment does not impact our cash flow from operating activities in the “Consolidated Statement of Cash Flows”.
| | | | | | | | | | | | |
Reconciliation of CCS earnings to income for the period | | | | | | | | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Earnings on a current cost of supplies basis (CCS earnings) | | | 3,692 | | | | 4,155 | | | | 19,096 | |
Attributable to non-controlling interest | | | (159 | ) | | | (313 | ) | | | (55 | ) |
Earnings on a current cost of supplies basis attributable to Royal Dutch Shell plc shareholders | | | 3,533 | | | | 3,842 | | | | 19,041 | |
Current cost of supplies adjustment | | | 1,085 | | | | (1,955 | ) | | | (4,366 | ) |
Non-controlling interest | | | (43 | ) | | | 52 | | | | 199 | |
Income attributable to Royal Dutch Shell plc shareholders | | | 4,575 | | | | 1,939 | | | | 14,874 | |
Non-controlling interest | | | 202 | | | | 261 | | | | (144 | ) |
Income for the period | | | 4,777 | | | | 2,200 | | | | 14,730 | |
CAPITAL INVESTMENT
Capital investment is a measure used to make decisions about allocating resources and assessing performance.
| | | | | | | | | | | | |
Reconciliation of capital investment to capital expenditure | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Capital investment | | | | | | | | | | | | |
Integrated Gas | | | 26,214 | | | | 5,178 | | | | 9,124 | |
Upstream | | | 47,507 | | | | 18,349 | | | | 22,169 | |
Downstream | | | 6,057 | | | | 5,119 | | | | 5,910 | |
Corporate | | | 99 | | | | 215 | | | | 136 | |
Total | | | 79,877 | | | | 28,861 | | | | 37,339 | |
Capital investment related to the acquisition of BG Group plc | | | (52,904 | ) | | | — | | | | — | |
Investments in joint ventures and associates | | | (1,330 | ) | | | (896 | ) | | | (1,426 | ) |
Exploration expense, excluding exploration wells written off | | | (1,274 | ) | | | (2,948 | ) | | | (2,244 | ) |
Finance leases | | | (2,343 | ) | | (91) | | | | (808 | ) |
Other | | | 90 | | | 1,205 | | | | (1,185 | ) |
Capital expenditure | | | 22,116 | | | | 26,131 | | | | 31,676 | |
Organic capital investment includes capital expenditure and new finance leases of existing subsidiaries, investments in existing joint ventures and associates, and exploration expense (excluding well write-offs). Inorganic capital investment includes investments related to the acquisition of businesses, investments in new joint ventures and associates, and new acreage.
| | | | | | | | | | | | |
Organic and inorganic capital investment | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Organic capital investment | | | 26,913 | | | | 28,403 | | | | 34,082 | |
Inorganic capital investment | | | 52,964 | | | | 458 | | | | 3,257 | |
Total capital investment | | | 79,877 | | | | 28,861 | | | | 37,339 | |
divestments
Divestments is a measure used to monitor the progress of our divestment programme. This measure comprises proceeds from sale of property, plant and equipment and businesses, joint ventures and associates, and other Integrated Gas, Upstream and Downstream investments, adjusted onto an accruals basis, and proceeds from sale of interests in entities while retaining control (for example, proceeds from sale of interests in Shell Midstream Partners, L.P.).
| | | | | | | | | | | | |
Divestments | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Proceeds from sale of property, plant and equipment and businesses [A] | | | 2,072 | | | | 4,720 | | | | 9,873 | |
Proceeds from sale of joint ventures and associates [A] | | | 1,565 | | | | 276 | | | | 4,163 | |
Other [A] | | | (203 | ) | | | (664 | ) | | | (765 | ) |
Proceeds from sale of interests in entities while retaining control [B] | | | 1,108 | | | | 595 | | | | 1,012 | |
Other [C] | | | 167 | | | | 613 | | | | 736 | |
Total | | | 4,709 | | | | 5,540 | | | | 15,019 | |
Of which | | | | | | | | | | | | |
Integrated Gas | | | 352 | | | | 269 | | | | 4,819 | |
Upstream | | | 1,451 | | | | 2,478 | | | | 5,770 | |
Downstream | | | 2,889 | | | | 2,282 | | | | 4,410 | |
Corporate | | | 17 | | | | 511 | | | | 20 | |
[A] Included within Cash flow from investing activities in the “Consolidated Statement of Cash Flows”.
[B] Included within “Change in non-controlling interest” in Cash flow from financing activities in the “Consolidated Statement of Cash Flows”.
[C] Mainly changes in non-current receivables included within Other (above), which are not considered to be divestments.
195 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
OPERATING EXPENSES
| | | | | | | | | | | | |
Operating expenses | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Production and manufacturing expenses | | | 28,434 | | | | 28,095 | | | | 30,038 | |
Selling, distribution and administrative expenses | | | 12,101 | | | | 11,956 | | | | 13,965 | |
Research and development | | | 1,014 | | | | 1,093 | | | | 1,222 | |
Total | | | 41,549 | | | | 41,144 | | | | 45,225 | |
Of which | | | | | | | | | | | | |
Integrated Gas | | | 6,479 | | | | 4,088 | | | | 4,609 | |
Upstream | | | 14,501 | | | | 15,740 | | | | 17,394 | |
Downstream | | | 19,681 | | | | 20,816 | | | | 22,701 | |
Corporate | | | 888 | | | | 500 | | | | 521 | |
RETURN ON AVERAGE CAPITAL EMPLOYED
Return on average capital employed (ROACE) measures the efficiency of our utilisation of the capital that we employ. In this calculation, ROACE is defined as income for the period, adjusted for after-tax interest expense, as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt.
| | | | | | | | | | | | |
Calculation of return on average capital employed | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Income for the period | | | 4,777 | | | | 2,200 | | | | 14,730 | |
Interest expense after tax | | | 2,730 | | | | 2,030 | | | | 938 | |
Income before interest expense | | | 7,507 | | | | 4,230 | | | | 15,668 | |
Capital employed – opening | | | 222,500 | | | | 218,326 | | | | 225,710 | |
Capital employed – closing | | | 280,988 | | | | 222,500 | | | | 218,326 | |
Capital employed – average | | | 251,744 | | | | 220,413 | | | | 222,018 | |
ROACE | | | 3.0 | % | | | 1.9 | % | | | 7.1 | % |
FREE CASH FLOW
Free cash flow is used to evaluate cash available for financing activities, including dividend payments, after investment in maintaining and growing our business. It is defined as follows.
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Free cash flow | | $ million | |
| | 2016 | | | 2015 | | | 2014 | |
Cash flow from operating activities | | | 20,615 | | | | 29,810 | | | | 45,044 | |
Cash flow from investing activities | | | (30,963 | ) | | | (22,407 | ) | | | (19,657 | ) |
Free cash flow | | | (10,348 | ) | | | 7,403 | | | | 25,387 | |
196 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
INDEX TO THE EXHIBITS
Exhibit No. | | Description | | Page |
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1.1 | | Memorandum of Association of Royal Dutch Shell plc, together with a special resolution of Royal Dutch Shell plc dated May 18, 2010, (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form F-3 (No. 333-177588) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on October 28, 2011). | | |
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1.2 | | Articles of Association of Royal Dutch Shell plc, together with a special resolution of Royal Dutch Shell plc dated May 18, 2010, (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form F-3 (No. 333-177588) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on October 28, 2011). | | |
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2 | | Amended and Restated Dividend Access Trust Deed. | | |
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4.1 | | Shell Provident Fund Regulations and Trust Agreement (incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment to Registration Statement on Form S-8 (No. 333-126715) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on June 18, 2007). | | |
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4.2 | | Form of Director Indemnity Agreement (incorporated by reference to Exhibit 4.3 to the Annual Report for the fiscal year ended December 31, 2005, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on March 13, 2006). | | |
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4.3 | | Senior Debt Securities Indenture dated June 27, 2006, among Shell International Finance B.V., as issuer, Royal Dutch Shell plc, as guarantor, and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form F-3 (No. 333-126726) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on July 20, 2005, amended from then to be dated as of June 27, 2006, and with the parties signatures). | | |
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4.4 | | Form of contract of employment for Executive Directors (incorporated by reference to Exhibit 4.5 to the Annual Report for fiscal year ended December 31, 2013, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on March 13, 2014). | | |
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4.5 | | Form of Letter of appointments for Non-executive Directors (incorporated by reference to Exhibit 4.11 to the Annual Report for fiscal year ended December 31, 2006, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on March 13, 2007). | | |
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7.1 | | Calculation of Ratio of Earnings to Fixed Charges. | | E1 |
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7.2 | | Calculation of Return on Average Capital Employed (ROACE) (incorporated by reference to page 196 herein). | | |
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7.3 | | Calculation of gearing (incorporated by reference to page 21 and Note 15 to the Consolidated Financial Statements on page 137 herein). | | |
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8 | | Significant Shell subsidiaries at December 31, 2016. | | E1 |
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12.1 | | Section 302 Certification of Royal Dutch Shell plc. | | E20 |
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12.2 | | Section 302 Certification of Royal Dutch Shell plc. | | E21 |
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13.1 | | Section 906 Certification of Royal Dutch Shell plc. | | E22 |
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99.1 | | Consent of Ernst & Young LLP, London, United Kingdom. | | E23 |
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99.2 | | Consent of PricewaterhouseCoopers LLP, London, United Kingdom. | | E24 |
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99.3 | | Consent of Ernst & Young LLP, London, United Kingdom, relating to the Royal Dutch Shell Dividend Access Trust. | | E25 |
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99.4 | | Consent of PricewaterhouseCoopers CI LLP, Jersey, Channel Islands, relating to the Royal Dutch Shell Dividend Access Trust. | | E26 |
197 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign the Annual Report on Form 20-F on its behalf.
Royal Dutch Shell plc
/s/ Ben van Beurden | |
| |
Ben van Beurden | |
Chief Executive Officer | |
March 8, 2017 | |
198 ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2016
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| | FINANCIAL CALENDAR IN 2017 | | | | | | | | |
| | The Annual General Meeting will be held on May 23, 2017. | | | | |
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| | | | | 2016 Fourth | | 2017 First | | 2017 Second | | 2017 Third | | |
| | | | | quarter [A] | | quarter [B] | | quarter [B] | | quarter [B] | | |
| | Results announcements | | February 2 | | May 4 | | July 27 | | November 2 | | |
| | Interim dividend timetable | | | | | | | | | | |
| | Announcement date | | February 2 [C] | | May 4 | | July 27 | | November 2 | | |
| | Ex-dividend date A and B ADSs [D] | | February 15 | | May 17 | | August 9 | | November 15 | | |
| | Ex-dividend date A and B shares [D] | | February 16 | | May 18 | | August 10 | | November 16 | | |
| | Record date | | February 17 | | May 19 | | August 11 | | November 17 | | |
| | Scrip reference share price announcement date | | February 23 | | May 25 | | August 17 | | November 23 | | |
| | Closing date for scrip election and currency | | | | | | | | | | |
| | election [E] | | March 3 | | June 5 | | August 25 | | December 1 | | |
| | Euro and sterling equivalents announcement date | | March 10 | | June 12 | | September 4 | | December 7 | | |
| | Payment date | | March 27 | | June 26 | | September 18 | | December 20 | | |
| | [A] In respect of the financial year ended December 31, 2016. [B] In respect of the financial year ended December 31, 2017. [C] The Directors do not propose to recommend any further distribution in respect of 2016. [D] The London Stock Exchange and Euronext Amsterdam, with effect from October 6, 2014, reduced the standard settlement cycle in accordance with the Regulation of the European Parliament and of the Council on improving securities settlement in the European Union (EU) and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC (the CSD Regulation). The CSD Regulation aims to harmonise EU securities settlement cycles towards a T + 2 cycle. As a result, the ex-dividend dates for A and B shares traded on these markets are one trading day later than A and B ADSs traded in the USA. Record dates are not affected. [E] Both a different scrip and dividend currency election date may apply to shareholders holding shares in a securities account with a bank or financial institution ultimately through Euroclear Nederland. This may also apply to other shareholders who do not hold their shares either directly on the Register of Members or in the corporate sponsored nominee arrangement. Shareholders can contact their broker, financial intermediary, bank or financial institution for the election deadline that applies. A different scrip election date may also apply to registered and non-registered ADS holders. Registered ADS holders can contact The Bank of New York Mellon for the election deadline that applies. Non-registered ADS holders can contact their broker, financial intermediary, bank or financial institution for the election deadline that applies. | | |
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| REGISTERED OFFICE | | SHAREHOLDER RELATIONS | | INVESTOR RELATIONS | | |
| Royal Dutch Shell plc | | Royal Dutch Shell plc | | Royal Dutch Shell plc | | |
| Shell Centre | | Carel van Bylandtlaan 30 | | PO Box 162 | | |
| London SE1 7NA | | 2596 HR The Hague | | 2501 AN The Hague | | |
| United Kingdom | | The Netherlands | | The Netherlands | | |
| | | +31 (0)70 377 1365 | | +31 (0)70 377 4540 | | |
| Registered in England and Wales | | +31 (0)70 377 4088 | | or | | |
| Company number 4366849 | | or | | Shell Oil Company | | |
| Registered with the Dutch Trade Register | | Royal Dutch Shell plc | | Investor Relations | | |
| under number 34179503 | | Shell Centre | | 150 N Dairy Ashford | | |
| | | London SE1 7NA | | Houston, TX 77079 | | |
| Headquarters | | United Kingdom | | USA | | |
| Royal Dutch Shell plc | | +44 (0)20 7934 3363 | | +1 832 337 2034 | | |
| Carel van Bylandtlaan 30 | | | | | | | | | | | |
| 2596 HR The Hague | | royaldutchshell.shareholders@shell.com | | ir-europe@shell.com | | |
| The Netherlands | | www.shell.com/shareholder | | ir-usa@shell.com | | |
| | | | | | www.shell.com/investor | | |
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| SHARE REGISTRATION | | AMERICAN DEPOSITARY | | REPORT ORDERING | | |
| Equiniti | | SHARES (ADSs) | | order@shell.com | | |
| Aspect House | | BNY Mellon Shareowner Services | | | | |
| Spencer Road | | PO Box 30170 | | Annual Report/20-F service for US residents | |
| Lancing | | College Station, TX 77842-3170 | | +1 888 301 0504 | | |
| West Sussex BN99 6DA | | USA | | | | |
| United Kingdom | | | | | | |
| 0800 169 1679 (UK) | | Overnight correspondence to: | | | | |
| +44 (0)121 415 7073 | | BNY Mellon Shareowner Services | | | | |
| | | | 211 Quality Circle, Suite 210 | | | | |
| For online information about your holding | | College Station, TX 77845 | | | | |
| and to change the way you receive your | | USA | | | | |
| company documents: | | +1 888 737 2377 (USA) | | | | |
| www.shareview.co.uk | | +1 201 680 6825 (international) | | | | |
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| | | | shrrelations@cpushareownerservices.com | | | | |
| | | | www.mybnymdr.com | | | | |
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