REMCO will follow the approach set out in the table below when determining the remuneration package for a new Executive Director.
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 14, 2018
GOVERNANCE SHELL ANNUAL REPORT AND FORM 20-F 2017 | 117 | |
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 Parent Company) and its subsidiaries (collectively, Shell):
■ | give a true and fair view of the state of Shell’s and of the Parent Company’s affairs as at December 31, 2017, and of Shell’s and the Parent 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 2006 |
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: |
| ■ | 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 |
| ■ | 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 sections 9 and 10 below.
We have audited Royal Dutch Shell plc’s financial statements for the year ended December 31, 2017, which are included in the Annual Report and Form 20-F (the Annual Report) and comprise:
| |
Shell | Parent Company |
Consolidated Balance Sheet as at December 31, 2017 | Balance Sheet as at December 31, 2017 |
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 |
Related Notes 1 to 29 to the Consolidated Financial Statements,
including a summary of significant accounting policies | Related Notes 1 to 15 to the Parent Company Financial Statements |
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 118 | |
We conducted our audit in accordance with International Standards on Auditing (UK) (ISA (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of Shell and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained during the planning, execution and conclusion of our audit is sufficient and appropriate to provide a suitable basis for our opinion.
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.
4. | OUR CONCLUSIONS RELATING TO PRINICIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT |
We have nothing to report in respect of the following information in the Annual Report, in relation to which ISA(UK) requires us to report to you whether we have anything material to add or draw attention to:
■ | the disclosures in the Annual Report set out on pages 12 to 16 that describe the principal risks and cross refer to where there are explanations of how the risks are being managed or mitigated; |
■ | the Directors’ confirmation set out on page 82 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 Directors’ statement set out on pages 73 to 75 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; |
■ | whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or |
■ | the Directors’ explanation set out on pages 73 to 75 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. |
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5. OVERVIEW OF OUR AUDIT APPROACH
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 120 | |
6. | 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 identified misstatements (including omissions) on our audit and in forming our audit opinion. For the purposes of determining whether Shell’s financial statements are free from material misstatement (whether due to fraud or error), we define materiality as the magnitude of misstatements that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of these financial statements. We are required to establish a materiality level for the financial statements as a whole that is appropriate in the light of Shell’s particular circumstances. Our overall materiality provides a basis for identifying and assessing the risk of material misstatement and determining the nature 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 duration of the audit. |
Level set | Group materiality We set our preliminary overall materiality for Shell’s Consolidated Financial Statements at $800 million (2016: $800 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 external market conditions. On the basis of this review, we did not find it necessary to revise our level of overall materiality. Parent Company materiality We determined materiality for the Parent Company to be $2.5 billion (2016: $800 million), which is 1% (2016: 0.3%) of equity. Equity is an appropriate basis to determine materiality for an investment holding company and 1% is a typical percentage of equity to use to determine materiality. In our 2016 audit of the Parent Company we applied the same materiality of $800 million as the group as we did not consider it appropriate to set our materiality at a higher level than the materiality applied to the Consolidated Financial Statements in our first year as Shell’s auditor. Any balances in the Parent Company financial statements that were relevant to our audit of the consolidated group were audited using an allocation of group performance materiality. |
Our basis for determining materiality for 2017 | Our 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 results announcements and adjusted for an effective tax rate. This average included both backward and forward-looking elements. The $800 million was 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% of the pre-tax measure. 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. Our overall materiality is also less than 5% of the 2017 income before taxation. In determining materiality, auditing standards require us to use benchmark measures, 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 (AC). We considered Shell’s business updates, the levels of activity in the business and the associated financial performance of 2017 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 disposal programme as well as the basis on which overall materiality was determined in the previous year. In our view, including a forward-looking element in the calculation of average earnings is more appropriate at this time, due to the low oil price environment, which commenced part way through 2015. In determining the most appropriate benchmark on which to base our materiality assessment, we have applied a ‘reasonable investor perspective’. This reflects our understanding of the common financial information needs of the users of Shell’s financial statements as a group, which we believe is CCS earnings, excluding identified items. Shell’s results announcements feature CCS |
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| earnings excluding identified items as the primary measure for earnings. CCS earnings excluding identified items removes both 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. In our view, the use of CCS earnings excluding identified items allows investors to understand how management has performed in spite of the commodity price environment, as opposed to because of it. Furthermore, analyst forecasts predominately feature CCS earnings, excluding identified items, as the basis for earnings. The analyst consensus data supports our judgement that CCS earnings, excluding identified items, is the key indicator of performance from an analyst’s perspective. The identified items, reported by Shell in its quarterly results announcements, were: net divestment gains ($1.6 billion), impairments ($3.0 billion charge), fair value accounting of commodity derivatives and certain gas contracts ($0.3 billion loss), redundancy and restructuring ($0.4 billion charge), impact of exchange rate movements on tax balances ($0.6 billion gain), impact arising from the US tax reform legislation ($2.0 billion charge) and the aggregate of other individually small items (net $0.2 billion charge). The identified items excluded in 2016 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); impact of exchange rate movements on tax balances ($0.3 billion gain) and the aggregate of other individually small items (net $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 results announcements, and adjusted for an effective tax rate. |
Performance materiality |
What we mean | Having established overall materiality, we determined ‘performance materiality’, which represents our tolerance for misstatement in an individual account. 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. |
Level set | On the basis of our risk assessment, our judgement was that performance materiality should be 50% (2016: 50%) of our overall materiality, namely $400 million (2016: $400 million). In 2017, the range of performance materiality allocated to operating units was $40 million to $260 million (2016: $40 million to $220 million). This is set out in more detail in section 7 below. |
Audit difference reporting threshold |
What we mean | This is the amount below which identified misstatements are considered to be clearly trivial. The threshold is the level above which we collate and report audit differences to the AC. 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 AC that we would report to the Committee all audit differences in excess of $40 million (2016: $40 million). |
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7. | 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 operating unit within Shell which, when taken together, enabled us to form an opinion on the financial statements under ISA (UK). 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 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; ■ 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; and ■ the findings, observations and audit differences that we noted as a result of our 2016 audit. |
Selection of in-scope operating units | We selected 67 operating units (2016: 85) across 12 countries (2016: 13) on the basis of their size or risk characteristics. We performed full scope audits of the complete financial information of 25 operating units (2016: 33). For the remaining 42 operating units (2016: 52) we performed specific scope audit procedures on selected account balances within the operating unit based on the size of these individual account balances or their risk profiles. These 67 operating units (2016: 85) accounted for 60% of Shell’s CCS earnings* (2016: 63%) and 72% of Shell’s total assets (2016: 69%). In addition to the 67 operating units (2016: 85) discussed above, we selected a further 47 operating units (2016: 32) where we performed procedures at the operating unit level that were specified by the group audit team in response to specific risk factors. Also, we performed review procedures at an additional four operating units (2016: 11). The remaining 688 operating units (2016: 601) together represented 27% of CCS earnings* (2016: 25%) and 16% of total assets (2016: 19%). None of these was individually greater than 1.3% (2016: 1.0%) of CCS earnings* or 0.5% (0.3%) of total assets. For these operating units, we performed supplementary audit procedures, including process and controls testing at the business service centres (BSCs); testing of IT systems auditing the accounting of specific one-off transactions, testing of consolidation journals and disaggregated analytical reviews. In addition to this testing, we utilised our Risk Scan analytics techniques, which consolidate internal and external data in order to identify potential risks of material misstatement. This allowed us to risk rate each of the 688 operating units. The internal and external data sources included transactional data, forensic risk metrics, historic control findings and results from our audit procedures and quarterly reviews. Through this analysis, our analytics tool identified 140 operating units (together representing 8% of CCS earnings* and 4% of total assets) where we believed that it was appropriate to carry out targeted testing, which included audit of manual journal entries and/or the testing of payments to third party vendors to ensure that these had been approved in line with Shell’s policies and had an appropriate business rationale. We kept our audit scope under review throughout the year in order to reflect changes in Shell’s underlying business and risks. Our final coverage is summarised below: 
|
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 123 | |
Allocation of performance materiality to the in-scope operating units | The level of materiality that we applied in undertaking our audit work at the operating unit level was determined by applying a percentage of our total performance materiality. This percentage is based on the significance of the operating unit relative to Shell as a whole and our assessment of the risk of material misstatement at that operating unit. In 2017, the range of materiality applied at the operating unit level was $40 million to $260 million (2016: $40 million to $220 million). The operating units selected, together with the ranges of materiality applied, were: |
| | | |
| Countries | No. of operating units | Range of materiality applied $ million |
Full scope Segments |
Integrated Gas | Australia, Qatar | 4 | 80-120 |
Upstream | Brazil, Nigeria, UK, USA | 7 | 80-120 |
Downstream | Germany, Singapore, USA | 4 | 80-120 |
Corporate | UK | 1 | 80 |
Full scope Function |
Trading and supply | UK, USA | 9 | 80-260 |
Total full scope | | 25 | |
Specific scope Segments |
Upstream | Canada, Kazakhstan, Malaysia, UK | 7 | 60-80 |
Downstream | Canada, the Netherlands, Singapore, USA | 10 | 80 |
Corporate | The Netherlands, UK, USA | 12 | 40-80 |
Specific scope Function |
Trading and supply | UK, USA | 13 | 60-260 |
Total specific scope | | 42 | |
Total full and specific scope | 67 | |
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Integrated group
team structure | The overall audit strategy is determined by the Senior Statutory Auditor, Allister Wilson. During 2017 he visited five countries (in year of audit transition, 2016: nine countries) to meet with local Ernst & Young (EY) teams and Shell local management (in some cases more than once). The Senior Statutory Auditor is supported by 26 segment and function partners and directors (2016: 24), who are based in the Netherlands and the UK. They are responsible for directing, supervising and reviewing the work of EY global network firms operating under our instruction (local EY 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 local EY teams. The group audit team performed procedures directly on 54 of the in-scope operating units (2016: 57). 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 Shell’s 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. Our local EY partners attended our global team meetings in November 2016 and 2017. Also during 2017, the Senior Statutory Auditor and other group audit partners and directors visited operating units across 10 countries and each of Shell’s BSCs. These visits included discussing the audit approach with the local EY teams and any issues arising from their work, meetings with local management, attending planning and closing meetings, and reviewing key audit working papers on risk areas. The visits also promote deeper engagement with our local EY audit teams, ensuring that a consistent and cohesive audit approach is adopted that drives a high-quality audit. The countries and the BSC locations visited were as follows: |
| Countries visited | | BSCs |
| Australia | Malaysia | UK | | Chennai, India | Kuala Lumpur, Malaysia |
| Brazil | The Netherlands | USA | | Glasgow, UK | Manila, Philippines |
| Germany | Nigeria | | | Krakow, Poland | |
| Kazakhstan | Qatar | | | | |
8. | OUR ASSESSMENT OF KEY AUDIT MATTERS |
As Shell’s auditor, we are required to determine – from the matters communicated by us to the AC during the year – those matters that required significant attention from us in performing our audit of Shell’s 2017 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 Consolidated 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 audit 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 2017 Consolidated Financial Statements. These matters included those that had the greatest effect on: the overall strategy; the allocation of resources in the audit; and directing the efforts of the audit team. 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.
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The table below describes the key audit matters, a summary of our procedures carried out and our key observations that we communicated to the AC. We presented to the May and December 2017 meetings of the AC the procedures that we planned to undertake in response to the risks that we identified.
Risk | Our response to the risk | 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, 2017, Shell reported 12,233 million barrels of oil equivalent of proved developed and undeveloped reserves. (2016: 13,248 million barrels of oil equivalent). The estimation and measurement of oil and gas reserves impacts a number of material elements of the financial statements including DD&A, impairments, and decommissioning and restoration provisions. 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 that would not be 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 that significant additions or reductions in SEC 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; ■ tested the reasonableness of SEC 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’s basis and obtained sufficient and appropriate evidence to ensure that the reserves base used was reasonable and better reflected the expected useful life of the field or facilities. Our procedures were led by the group audit team, with input from our teams in Australia, Brazil, Canada, Kazakhstan, the Netherlands, Nigeria, Norway, Qatar, the UK and USA. | In January 2018, we communicated to the AC that, based on our testing performed, we had not identified any significant errors in the oil and gas reserves estimates and concluded that the inputs and assumptions used to estimate proved reserves were reasonable. We also communicated our conclusion that the changes in the estimates of reserves used in the DD&A calculations reflect better the expected useful life of the field or facilities. |
Cross-reference: See the AC Report on page 92 for details on how the AC considered DD&A. Also, see Notes 2 and 8 to the “Consolidated Financial Statements”, and Supplementary information – oil and gas (unaudited) on page 179. |
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Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
The recoverable amounts of exploration and production assets, and investments in joint ventures and associates in Upstream and Integrated Gas segments |
At December 31, 2017, Shell recognised $172 billion of exploration and production assets within property, plant and equipment (PP&E) (2016: $188 billion). Shell also recognised investments in joint ventures and associates of $28 billion (2016: $33 billion), which includes joint ventures and associates relating to Upstream and Integrated Gas segments. 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. 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. 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 cash flows are adjusted for risk. | We carried out procedures in all full and specific scope locations as necessary, 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. For price assumptions, we corroborated future short and long-term commodity prices to external forecasts and those adopted by other international oil companies; we confirmed prices were used consistently across Shell and that pricing differentials were reasonable and appropriate. We engaged our oil and gas valuations team to test the reasonableness of the discount rate used for impairment testing. For those assets impaired previously, we evaluated the actual results versus the assumptions made and whether or not reversals are required. 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 in the impairment models and confirmed that the life-of-field assumptions were consistent with those applied in the decommissioning and restoration provision 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 so doing, we considered the stage of the life of the asset, country risk and ensured 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. The audit procedures over this risk area were performed by our group audit team as well as our local EY teams in Australia, Brazil, Canada, Kazakhstan, Malaysia, the Netherlands, Nigeria, Qatar, the UK and USA, which covered 79% of PP&E and investments in joint ventures and associates in Upstream and Integrated Gas segments. We also performed specified procedures over the recoverability of PP&E balances in Kazakhstan, the Netherlands, Norway and the USA which covered an additional 6% of PP&E in Upstream and Integrated Gas segments. | We reported to the October 2017 and January 2018 meetings of the AC 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 strong external evidence to support the reasonableness of Shell’s commodity price assumptions – both in the short and long term. We concluded that the impairments recorded are appropriately determined. Where impairment tests were undertaken and no impairment was recorded, we performed specific procedures including multi-dimensional sensitivity analysis on the key assumptions that drive the impairment analysis, and concluded that it is reasonable and supportable not to record an impairment charge. Where potential indicators of impairment reversals were present, we were satisfied that the decisions not to reverse previously recorded impairments were supported by appropriate evidence. |
Cross-reference: See the AC Report on page 92 for details on how the AC considered impairments. Also, see Notes 2 and 8 to the “Consolidated Financial Statements”. |
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Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
Estimation of decommissioning and restoration (D&R) provisions |
At December 31, 2017, Shell recognised D&R provisions of $21 billion (2016: $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 4% (2016: 4%). | 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; ■ engaged our valuations experts to evaluate the reasonableness of the discount rate applied to the provisions; ■ audited the integrity of the underlying models, engaging our modelling team or using a spreadsheet analyser tool where appropriate; ■ verified the completeness of the cost estimate data by comparing it with work performed on oil and gas reserves and testing of PP&E; ■ 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 review 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; ■ tested contingent liabilities for D&R liabilities arising from assets previously disposed of; and ■ assessed whether D&R movements should be recorded in the income statement or capitalised by understanding the reason for the change and by comparing the movement with the carrying amount of the related asset. Our full and specific scope audit procedures over D&R provision were performed by our local EY teams in Australia, Brazil, Canada, Kazakhstan, Malaysia, Nigeria, Qatar, the Netherlands, the UK and the USA. These covered 64% of the decommissioning and other provisions balance. We also performed specified procedures over these balances in the Netherlands, Norway, and the USA which covered 11% of the decommissioning and other provisions balance. | In January 2018, we communicated to the AC that: ■ on the basis of the audit work performed, we had concluded that the D&R provisions recorded are supported by appropriate audit evidence; ■ changes in D&R provisions during the year have been reflected appropriately in the financial statements; and ■ the discount rate applied by management is supportable and lies within an acceptable range. |
Cross-reference: See the AC Report on page 92 for details on how the AC considered D&R provisions. Also, see Note 18 to the “Consolidated Financial Statements”. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 128 | |
Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
Accounting for assets under Shell’s disposal programme |
At December 31, 2017, Shell disclosed $1.0 billion of assets as held for sale (2016: $0.3 billion). During 2017, Shell received cash proceeds of $8.8 billion (2016: $2.1 billion) from the sale of PP&E and businesses. Shell’s divestment programme continues and there are a number of assets for which sales and purchase agreements have been reached and others where negotiations continue to progress. Shell actively monitors the progress of each material asset disposal to assess whether or not the IFRS 5 criteria to be classified as an Asset Held for Sale (AHFS) are met. This re-classification may have impairment and/or disclosure implications. The risk relates to accounting for assets under Shell’s disposal programme given the rise in innovative deal structures, where the traditional approach of a clean break is no longer the norm. Examples include the retention of certain obligations, and the acquisition of new rights and interests. This introduces considerably more complexity in accounting for such deals, as is evident in the Canadian Oil Sands and Motiva transactions. | Our audit procedures for potential disposals focused on auditing management’s assessment of the likelihood of a sale occurring within 12 months from the year end. As at December 31, 2017, there were no material disposals involving significant judgements as to whether or not a sale was ‘highly probable’. The most significant complex disposals in 2017 related to the discontinuation of the Motiva joint venture and subsequent redistribution of the assets, and the disposal of the Canadian Oil Sands and concurrent joint acquisition of Marathon Oil Canada Corporation. Our audit procedures on these complex transactions included as appropriate to each disposal: ■ gaining an understanding of the transaction through enquiry and review of contractual arrangements; ■ testing the tax consequences of the transactions, including the impact on deferred tax assets recognised; ■ assessing whether the accounting treatment was appropriate, including consideration of alternative views; ■ testing the methodology and the integrity of models used in the fair value of acquired assets and businesses; ■ testing the appropriateness of the key assumptions, including price assumptions and discount rates, used for the valuation of the re-acquired assets; testing the measurement of consideration on disposal of the asset, including deferred and contingent consideration; and the release of cumulative currency translation differences that may be triggered by the disposal; and ■ assessing how any retained D&R liabilities should be accounted for. The audit procedures were carried out principally by the group audit team, as well as our US and Canadian audit teams covering the most significant and complex transactions that occurred during the year. | We communicated to the May and July 2017 meetings of the AC that the disposal and business combination elements of both Canadian Oil Sands and Motiva transactions were appropriately accounted for. At the January 2018 AC meeting, we confirmed that we had performed a review of all material transactions, whether or not complete, and we were satisfied that assets disposal transactions completed during the year were appropriately accounted for, and that there were no other material assets where a sale was highly probable as at December 31, 2017, that should be classified as held for sale and therefore tested for impairment. |
Cross-reference: See the AC Report on page 92 for details on how the AC reviewed matters in relation to disposals. Also see Notes 2 and 29 to the “Consolidated Financial Statements”. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 129 | |
Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
Recognition and measurement of deferred tax assets (DTAs) |
At December 31, 2017, Shell recognised gross DTAs totalling $29 billion (2016: $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 derived from Shell’s commodity price assumptions and business plans. Estimating DTAs therefore requires significant judgement, including the timing of reversals of deferred tax liabilities (DTL) 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 considered the expected timing of utilisation of the DTA including 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. Our procedures depended on whether or not the DTAs were supported by the unwinding of taxable temporary differences, forecast taxable profits or tax planning opportunities that would be necessary to utilise tax losses. We assessed whether the forecast timing of the unwinding of taxable temporary differences were appropriate after considering the nature of the temporary difference and the relevant tax law. For DTAs that are supported by forecast taxable profits or tax planning opportunities, we: ■ stress tested the commodity price and/or other key assumptions that underpin Shell’s assessment of forecast probable taxable profits; ■ determined the extent to which sufficient probable taxable profits would arise in the period within which the related 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 in particular) or if losses are ring fenced for tax purposes (including the UK and Nigeria); and ■ considered whether the tax balances were calculated using appropriate, and substantively enacted, tax laws and rates. For the tax planning strategies necessary to justify the recognition of the DTAs, we considered whether or not the planning was reasonable and in line with the current tax law, including satisfying ourselves that sufficient profits would be available in the appropriate periods. Our audit procedures over the recognition and valuation of DTAs were performed by our tax specialist teams in Australia, Brazil, Germany, Nigeria, Singapore, Qatar, the UK and USA, which covered 53% of the gross DTA balance. We also performed specified procedures over the recognition and valuation of DTAs in Canada, China, Denmark, France, Ireland, Kazakhstan, the Netherlands, New Zealand, Norway and the UK, which covered an additional 40% of the gross DTA balance. | We reported our conclusions to the January 2018 meeting of the AC that we had challenged the robustness of the key management judgements and confirmed that we were satisfied: ■ as to the existence of DTLs available for offset in the same jurisdiction as the DTAs; ■ that where DTAs recognised are based on income forecast to arise beyond Shell’s planning horizon, we consider that there was sufficient future taxable profit that is probable to support the DTAs; however, we noted that a greater degree of judgement is required in recognising DTAs beyond Shell’s planning horizon; and ■ that tax planning strategies necessary to justify the recognition of the DTAs are reasonable. We also reported to the AC that the DTAs were appropriately recognised and valued at the year end. |
Cross-reference: See the AC Report on page 92 for details on how the AC reviewed certain tax matters, in particular the recoverability of deferred tax assets. Also see Notes 2 and 16 to the “Consolidated Financial Statements”. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 130 | |
Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
Impact of US tax reform |
At December 31, 2017, the net impact of the US tax reform is as follows: $2.6 billion net reduction of DTA balance with a $2.0 billion charge to the 2017 income statement. The US tax reform was signed into law on December 22, 2017. Because the legislation was enacted prior to December 31, 2017, its impact was required to be reflected in Shell’s 2017 financial statements. The tax reform significantly changes US corporate income tax law by reducing the corporate income tax rate from 35% to 21%, creating a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings), broadening the tax base and allowing for immediate expensing of certain qualified property. A key area of judgement and estimation in the calculation related to the level of profits that are subject to the transition tax. | We audited the impact of the US tax reform and engaged our US tax specialists to assist in interpreting the impact of the new legislation on Shell. Our audit procedures relating to US tax reform included: ■ understanding the legislation and considering its application to Shell’s circumstances as well as the judgements made; ■ testing the completeness of Shell’s assessment of the tax accounting impact; ■ assessing the appropriateness of the key assumptions used for the calculation of the impact, in particular the one-time transition tax; ■ testing the methodology and integrity of the models used to determine the accounting impact; and ■ challenging the appropriateness of the split of the impact between the income statement and other comprehensive income. The audit procedures in relation to this risk were performed principally by the group audit team and the full scope component team in the USA. | We reported to the January 2018 meeting of the AC that, based on our audit procedures, we were satisfied with management’s calculations of the impact of the US tax reform and the key judgements related thereto. We further confirmed to the AC that we consider the tax accounting treatment adopted by management to be consistent with the legislation on the basis of all the information that management could reasonably have been expected to obtain. We also highlighted to the AC that, because the interpretation and application of the legislation is untested, it is possible that changes to Shell’s assessment of the appropriate tax accounting treatment could be made as further legislative guidance is issued. |
Cross-reference: See the AC Report on page 92 for details on how the AC reviewed impact of the US tax reform. Also see Notes 2 and 16 to the “Consolidated Financial Statements”. |
Revenue recognition relating to unrealised trading gains and losses |
Shell’s trading and supply function is integrated within the Downstream, Integrated Gas 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. 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 Shell’s 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: ■ investigations as to whether or not 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. The audit procedures to address this risk were performed principally by the group audit team and the full scope component team in the USA. | We confirmed that: ■ we tested the valuation of derivative contracts as at December 31, 2017; ■ our testing – through a combination of controls testing and expanded substantive audit procedures – satisfied us that the models used to value contracts were appropriate for the purposes of the valuations included in Shell’s Consolidated Financial Statements; and ■ the unrealised gains and losses had been recorded appropriately. |
Cross-reference: See Note 19 to the “Consolidated Financial Statements”. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 131 | |
Risk | Our response to the risk | Key observations communicated
to the Shell Audit Committee |
Enhancements to Shell’s system of IT general controls |
Shell management continued to devote significant effort in 2017 to enhancing Shell’s system of IT general controls (ITGCs) following further system integration and other changes to Shell’s finance systems and global IT processes. During any period of significant system change, there is an increased risk to the internal financial control environment. Consequently, in addition to the inherent risks associated with auditing the IT systems of a complex global organisation such as Shell, the audit team focused its procedures on the following identified risks: ■ the ongoing migration of legacy BG ERP systems and processes into Shell’s reporting structure and chart of accounts; ■ the migration of certain IT activities to an IT hub; and ■ further standardisation of Shell’s User Access Management process. | Our procedures focused on the key IT processes and controls over IT systems critical to our audit. These included: management of changes to systems and access to systems; and IT operations, such as problem and incident management, and back-up and restore. We updated our understanding of Shell’s key IT applications and IT transitions that impacted our financial statement audits by carrying out walk-through tests. We identified 130 applications that were critical to our audit and therefore included in our audit scope. We also assessed the risk associated with any key business or IT changes and identified and tested application and IT dependent manual controls that we considered key to the business processes related to financial reporting. Our audit approach involved central testing of ITGCs that we considered important to the financial statements, including: ■ management of changes to systems; ■ management of access to systems; and ■ management of IT operations. | Throughout 2017, we communicated to the AC the progress of our testing of internal controls, including the central testing of ITGCs. In January 2018, we confirmed that, through a combination of control testing and substantive audit procedures, we were satisfied that we had obtained sufficient and appropriate evidence over Shell’s management of changes to systems, access to systems and of IT operations for the purpose of our financial statement audit. |
Cross-reference: See the AC Report on page 92 for details on how the AC reviewed the enhancements to Shell’s system of IT general controls. |
The other information comprises the information included in the Annual Report set out on pages 1 to 117, 179 to 198 and 208 to 226 including the Strategic Report, Governance and Additional Information sections, other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
■ | Fair, balanced and understandable set out on page 74 – the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or |
■ | Audit Committee reporting set out on page 90 to 93 – the section describing the work of the AC does not appropriately address matters communicated by us to the AC; or |
■ | Directors’ statement of compliance with the UK Corporate Governance Code set out on page 76 – the parts of the Directors’ statement required under the Listing Rules relating to Shell’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 132 | |
10. | MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION |
In the light of the knowledge and understanding of Shell and the Parent Company, and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us 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. |
11. | RESPONSIBILTIES OF DIRECTORS |
As explained more fully in the statement of Directors’ responsibilities set out on page 73, the Directors are responsible for the preparation of the Consolidated Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing Shell and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate Shell or Parent Company or to cease operations, or have no realistic alternative but to do so.
12. | AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS |
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
13. | EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD |
The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
Our approach was as follows:
■ | We obtained an understanding of the legal and regulatory frameworks that are applicable to Shell and determined that the most significant are those that relate to the reporting framework (IFRS, Companies Act 2006, the UK Corporate Governance Code, the US Securities Exchange Act of 1934 and the Listing Rules of the UK Listing Authority) and the relevant tax compliance regulations in the jurisdictions in which Shell operates. In addition, we concluded that there are certain significant laws and regulations that may have an effect on the determination of the amounts and disclosures in the financial statements and those laws and regulations relating to health and safety, employee matters, environmental, and bribery and corruption practices. |
■ | We understood how Shell is complying with those frameworks by making enquiries of management, internal audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of Board minutes, papers provided to the AC and correspondence received from regulatory bodies and noted that there was no contradictory evidence. |
■ | We assessed the susceptibility of Shell’s Consolidated Financial Statements to material misstatement, including how fraud might occur, by embedding forensic specialists into our audit team. Our forensic specialists worked with the group audit team to identify the fraud risks across various parts of the business. In addition, we utilised internal and external information to perform a fraud risk assessment for each of the countries of operation. We considered the risk of fraud through management override and, in response, we incorporated data analytics across manual journal entries into our audit approach. We also considered the possibility of fraudulent or corrupt payments made through third parties and conducted detailed analytical testing on third party vendors in high-risk jurisdictions. Where instances of risk behaviour patterns were identified through our data analytics, we performed additional audit procedures to address each identified risk. These procedures included testing of transactions back to source information and were designed to provide reasonable assurance that the financial statements were free from fraud or error. We also conducted specific audit procedures in relation to the risk of bribery and corruption across various countries of operation determined by a risk based process. |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 133 | |
■ | Based on the results of our risk assessment we designed our audit procedures to identify non-compliance with such laws and regulations identified above. Our procedures involved journal entry testing, with a focus on journals meeting our defined risk criteria based on our understanding of the business; enquiries of legal counsel, group management, internal audit and all full and specific scope management; review of the volume and nature of complaints received by the whistleblowing hotline during the year and focused testing, as discussed in the key audit matters section 8 above. |
■ | If any instance of non-compliance with laws and regulations were identified, these were communicated to the relevant local EY teams who performed sufficient and appropriate audit procedures supplemented by audit procedures performed at the group level. Where appropriate we consulted our forensic specialists. |
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
14. | OTHER MATTERS WE ARE REQUIRED TO ADDRESS |
Following the recommendation of the AC we were re-appointed by the Company’s Annual General Meeting (AGM) on May 23, 2017, as auditor of the Company to hold office until the conclusion of the next AGM of the Company, and signed an engagement letter on July 25, 2017. Our total uninterrupted period of engagement is two years covering periods from our appointment through to the period ended December 31, 2017.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to Shell or the Parent Company and we remain independent of Shell and the Parent Company in conducting the audit.
Our audit opinion is consistent with our additional report to the AC explaining the results of our audit.
/s/ Allister Wilson (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
March 14, 2018
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 2017 Annual Report and Accounts only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2017.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 134 | |
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Royal Dutch Shell plc (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the Consolidated Financial Statements). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and in conformity with IFRS as adopted by the European Union.
As discussed in Note 4 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 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 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 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 14, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
London, United Kingdom
March 14, 2018
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ROYAL DUTCH SHELL PLC
Opinion on Internal Control over Financial Reporting
We have audited Royal Dutch Shell plc’s (the Company) internal control over financial reporting as of December 31, 2017, 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). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Financial Statements of the Company, and our report dated March 14, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The company’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 82. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Ernst & Young LLP
London, United Kingdom
March 14, 2018
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 2017 Annual Report on Form 20-F only and do not form part of Royal Dutch Shell plc’s Annual Report on Accounts for 2017.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 135 | |
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 Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes to the Consolidated Financial Statements for the year ended December 31, 2015 before the effects of the adjustments to retrospectively reflect the change in the composition of reportable segments described in Note 4 present fairly, in all material respects, the results of operations and cash flows of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively Shell), 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 (the 2015 financial statements before the effects of the adjustments discussed in Note 4 are not presented herein).
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 of these financial statements, before the effects of the adjustments described above, 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 audit provides 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 4 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 2017 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2017.
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Consolidated Financial Statements
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 137 | |
| | | | | | | | | | | | | | | | |
Consolidated Statement of Income | | $ million | |
| | Notes | | | 2017 | | | 2016 | | | 2015 | |
Revenue | | | 4 | | | | 305,179 | | | | 233,591 | | | | 264,960 | |
Share of profit of joint ventures and associates | | | 9 | | | | 4,225 | | | | 3,545 | | | | 3,527 | |
Interest and other income | | | 5 | | | | 2,466 | | | | 2,897 | | | | 3,669 | |
Total revenue and other income | | | | | | | 311,870 | | | | 240,033 | | | | 272,156 | |
Purchases | | | | | | | 223,447 | | | | 162,574 | | | | 194,644 | |
Production and manufacturing expenses | | | | | | | 26,652 | | | | 28,434 | | | | 28,095 | |
Selling, distribution and administrative expenses | | | | | | | 10,509 | | | | 12,101 | | | | 11,956 | |
Research and development | | | | | | | 922 | | | | 1,014 | | | | 1,093 | |
Exploration | | | | | | | 1,945 | | | | 2,108 | | | | 5,719 | |
Depreciation, depletion and amortisation | | | 4 | | | | 26,223 | | | | 24,993 | | | | 26,714 | |
Interest expense | | | 6 | | | | 4,042 | | | | 3,203 | | | | 1,888 | |
Total expenditure | | | | | | | 293,740 | | | | 234,427 | | | | 270,109 | |
Income before taxation | | | | | | | 18,130 | | | | 5,606 | | | | 2,047 | |
Taxation charge/(credit) | | | 16 | | | | 4,695 | | | | 829 | | | | (153 | ) |
Income for the period | | | 4 | | | | 13,435 | | | | 4,777 | | | | 2,200 | |
Income attributable to non-controlling interest | | | | | | | 458 | | | | 202 | | | | 261 | |
Income attributable to Royal Dutch Shell plc shareholders | | | | | | | 12,977 | | | | 4,575 | | | | 1,939 | |
Basic earnings per share ($) | | | 24 | | | | 1.58 | | | | 0.58 | | | | 0.31 | |
Diluted earnings per share ($) | | | 24 | | | | 1.56 | | | | 0.58 | | | | 0.30 | |
| | | | | | | | | | | | | | | | |
Consolidated Statement of Comprehensive Income | | $ million | |
| | Notes | | | 2017 | | | 2016 | | | 2015 | |
Income for the period | | | | | | | 13,435 | | | | 4,777 | | | | 2,200 | |
Other comprehensive income/(loss), net of tax | | | 22 | | | | | | | | | | | | | |
Items that may be reclassified to income in later periods: | | | | | | | | | | | | | | | | |
Currency translation differences | | | | | | | 5,156 | | | | 703 | | | | (7,121 | ) |
Unrealised gains/(losses) on securities | | | | | | | 593 | | | | (214 | ) | | | (707 | ) |
Cash flow hedging (losses)/gains | | | | | | | (552 | ) | | | (617 | ) | | | 61 | |
Net investment hedging losses | | | | | | | — | | | | (2,024 | ) | | | — | |
Share of other comprehensive income/(loss) of joint ventures and associates | | | 9 | | | | 170 | | | | (28 | ) | | | (40 | ) |
Total | | | | | | | 5,367 | | | | (2,180 | ) | | | (7,807 | ) |
Items that are not reclassified to income in later periods: | | | | | | | | | | | | | | | | |
Retirement benefits remeasurements | | | | | | | 604 | | | | (3,817 | ) | | | 4,951 | |
Other comprehensive income/(loss) for the period | | | | | | | 5,971 | | | | (5,997 | ) | | | (2,856 | ) |
Comprehensive income/(loss) for the period | | | | | | | 19,406 | | | | (1,220 | ) | | | (656 | ) |
Comprehensive income attributable to non-controlling interest | | | | | | | 578 | | | | 154 | | | | 155 | |
Comprehensive income/(loss) attributable to Royal Dutch Shell plc shareholders | | | | | | | 18,828 | | | | (1,374 | ) | | | (811 | ) |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 138 | |
| | | | | | | | | | | | |
Consolidated Balance Sheet | | $ million | |
| | Notes | | | Dec 31, 2017 | | | Dec 31, 2016 | |
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Intangible assets | | | 7 | | | | 24,180 | | | | 23,967 | |
Property, plant and equipment | | | 8 | | | | 226,380 | | | | 236,098 | |
Joint ventures and associates | | | 9 | | | | 27,927 | | | | 33,255 | |
Investments in securities | | | 10 | | | | 7,222 | | | | 5,952 | |
Deferred tax | | | 16 | | | | 13,791 | | | | 14,425 | |
Retirement benefits | | | 17 | | | | 2,799 | | | | 1,456 | |
Trade and other receivables | | | 11 | | | | 9,394 | | | | 9,553 | |
| | | | | | | 311,693 | | | | 324,706 | |
Current assets | | | | | | | | | | | | |
Inventories | | | 12 | | | | 25,223 | | | | 21,775 | |
Trade and other receivables | | | 11 | | | | 49,869 | | | | 45,664 | |
Cash and cash equivalents | | | 13 | | | | 20,312 | | | | 19,130 | |
| | | | | | | 95,404 | | | | 86,569 | |
Total assets | | | | | | | 407,097 | | | | 411,275 | |
Liabilities | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Debt | | | 14 | | | | 73,870 | | | | 82,992 | |
Trade and other payables | | | 15 | | | | 4,428 | | | | 6,925 | |
Deferred tax | | | 16 | | | | 13,007 | | | | 15,274 | |
Retirement benefits | | | 17 | | | | 13,247 | | | | 14,130 | |
Decommissioning and other provisions | | | 18 | | | | 24,966 | | | | 29,618 | |
| | | | | | | 129,518 | | | | 148,939 | |
Current liabilities | | | | | | | | | | | | |
Debt | | | 14 | | | | 11,795 | | | | 9,484 | |
Trade and other payables | | | 15 | | | | 56,663 | | | | 53,417 | |
Taxes payable | | | 16 | | | | 7,250 | | | | 6,685 | |
Retirement benefits | | | 17 | | | | 594 | | | | 455 | |
Decommissioning and other provisions | | | 18 | | | | 3,465 | | | | 3,784 | |
| | | | | | | 79,767 | | | | 73,825 | |
Total liabilities | | | | | | | 209,285 | | | | 222,764 | |
Equity | | | | | | | | | | | | |
Share capital | | | 20 | | | | 696 | | | | 683 | |
Shares held in trust | | | 21 | | | | (917 | ) | | | (901 | ) |
Other reserves | | | 22 | | | | 16,932 | | | | 11,298 | |
Retained earnings | | | | | | | 177,645 | | | | 175,566 | |
Equity attributable to Royal Dutch Shell plc shareholders | | | | | | | 194,356 | | | | 186,646 | |
Non-controlling interest | | | | | | | 3,456 | | | | 1,865 | |
Total equity | | | | | | | 197,812 | | | | 188,511 | |
Total liabilities and equity | | | | | | | 407,097 | | | | 411,275 | |
Signed on behalf of the Board /s/ Jessica Uhl |
Jessica Uhl |
Chief Financial Officer |
March 14, 2018 |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statement of Changes in Equity | | | $ million | |
| | Equity attributable to Royal Dutch Shell plc shareholders | | | | | | | | | |
| | Share capital (see Note 20) | | | Shares held in trust (see Note 21) | | | Other reserves (see Note 22) | | | Retained earnings | | | Total | | | Non- controlling interest | | | Total equity | |
At January 1, 2017 | | | 683 | | | | (901 | ) | | | 11,298 | | | | 175,566 | | | | 186,646 | | | | 1,865 | | | | 188,511 | |
Comprehensive income for the period | | | — | | | | — | | | | 5,851 | | | | 12,977 | | | | 18,828 | | | | 578 | | | | 19,406 | |
Dividends paid (see Note 23) | | | — | | | | — | | | | — | | | | (15,628 | ) | | | (15,628 | ) | | | (406 | ) | | | (16,034 | ) |
Scrip dividends (see Note 23) | | | 13 | | | | — | | | | (13 | ) | | | 4,751 | | | | 4,751 | | | | — | | | | 4,751 | |
Share-based compensation | | | — | | | | (16 | ) | | | (204 | ) | | | (74 | ) | | | (294 | ) | | | — | | | | (294 | ) |
Other changes in non-controlling interest [A] | | | — | | | | — | | | | — | | | | 53 | | | | 53 | | | | 1,419 | | | | 1,472 | |
At December 31, 2017 | | | 696 | | | | (917 | ) | | | 16,932 | | | | 177,645 | | | | 194,356 | | | | 3,456 | | | | 197,812 | |
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 23) | | | — | | | | — | | | | — | | | | (14,959 | ) | | | (14,959 | ) | | | (180 | ) | | | (15,139 | ) |
Scrip dividends (see Note 23) | | | 17 | | | | — | | | | (17 | ) | | | 5,282 | | | | 5,282 | | | | — | | | | 5,282 | |
Shares issued | | | 120 | | | | — | | | | 33,930 | | | | — | | | | 34,050 | | | | — | | | | 34,050 | |
Share-based compensation [B] | | | — | | | | (317 | ) | | | 520 | | | | 141 | | | | 344 | | | | — | | | | 344 | |
Other changes in non-controlling interest [A] | | | — | | | | — | | | | — | | | | 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 23) | | | — | | | | — | | | | — | | | | (11,972 | ) | | | (11,972 | ) | | | (117 | ) | | | (12,089 | ) |
Scrip dividends (see Note 23) | | | 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 [A] | | | — | | | | — | | | | — | | | | 501 | | | | 501 | | | | 387 | | | | 888 | |
At December 31, 2015 | | | 546 | | | | (584 | ) | | | (17,186 | ) | | | 180,100 | | | | 162,876 | | | | 1,245 | | | | 164,121 | |
[A] Includes in 2017 the non-controlling interest of $1,286 million arising on the acquisition of a 50% controlling interest in Marathon Oil Canada Corporation (see Note 8). The remainder in 2017, and the amounts in 2016 and 2015, mainly relate 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.
[B] 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 140 | |
| | | | | | | | | | | |
Consolidated Statement of Cash Flows | | $ million |
| | Notes | | | 2017 | | | 2016 | | | 2015 |
Income for the period | | | | | 13,435 | | | 4,777 | | | 2,200 |
Adjustment for: | | | | | | | | | | | |
Current tax | | | | | 6,591 | | | 2,731 | | | 7,058 |
Interest expense (net) | | | | | 3,365 | | | 2,752 | | | 1,529 |
Depreciation, depletion and amortisation | | | | | 26,223 | | | 24,993 | | | 26,714 |
Net gains on sale and revaluation of non-current assets and businesses | | | | | (1,640) | | | (2,141) | | | (3,460) |
(Increase)/decrease in inventories | | | | | (2,079) | | | (5,658) | | | 2,827 |
(Increase)/decrease in current receivables | | | | | (1,686) | | | 2,038 | | | 9,852 |
Increase/(decrease) in current payables | | | | | 607 | | | (2,669) | | | (7,158) |
Share of profit of joint ventures and associates | | | | | (4,225) | | | (3,545) | | | (3,527) |
Dividends received from joint ventures and associates | | | | | 4,998 | | | 3,820 | | | 4,627 |
Deferred tax, retirement benefits, decommissioning and other provisions | | | | | (3,918) | | | (823) | | | (5,827) |
Other | | | | | 286 | | | (1,226) | | | 2,648 |
Tax paid | | | | | (6,307) | | | (4,434) | | | (7,673) |
Cash flow from operating activities | | | | | 35,650 | | | 20,615 | | | 29,810 |
Capital expenditure | | | | | (20,845) | | | (22,116) | | | (26,131) |
Acquisition of BG Group plc, net of cash and cash equivalents acquired | | 29 | | | — | | | (11,421) | | | — |
Investments in joint ventures and associates | | | | | (595) | | | (1,330) | | | (896) |
Proceeds from sale of property, plant and equipment and businesses | | | | | 8,808 | | | 2,072 | | | 4,720 |
Proceeds from sale of joint ventures and associates | | | | | 2,177 | | | 1,565 | | | 276 |
Interest received | | | | | 724 | | | 470 | | | 288 |
Other | | | | | 1,702 | [A] | | (203) | | | (664) |
Cash flow from investing activities | | | | | (8,029) | | | (30,963) | | | (22,407) |
Net decrease in debt with maturity period within three months | | | | | (869) | | | (360) | | | (586) |
Other debt: | | | | | | | | | | | |
New borrowings | | | | | 760 | | | 18,144 | | | 21,500 |
Repayments | | | | | (11,720) | | | (6,710) | | | (6,023) |
Interest paid | | | | | (3,550) | | | (2,938) | | | (1,742) |
Change in non-controlling interest | | | | | 293 | | | 1,110 | | | 598 |
Cash dividends paid to: | | | | | | | | | | | |
Royal Dutch Shell plc shareholders | | 23 | | | (10,877) | | | (9,677) | | | (9,370) |
Non-controlling interest | | | | | (406) | | | (180) | | | (117) |
Repurchases of shares | | | | | — | | | — | | | (409) |
Shares held in trust: net purchases and dividends received | | | | | (717) | | | (160) | | | (39) |
Cash flow from financing activities | | | | | (27,086) | | | (771) | | | 3,812 |
Currency translation differences relating to cash and cash equivalents | | | | | 647 | | | (1,503) | | | (1,070) |
Increase/(decrease) in cash and cash equivalents | | | | | 1,182 | | | (12,622) | | | 10,145 |
Cash and cash equivalents at January 1 | | | | | 19,130 | | | 31,752 | | | 21,607 |
Cash and cash equivalents at December 31 | | 13 | | | 20,312 | | | 19,130 | | | 31,752 |
[A] Includes $2,635 million from the sale of Shell’s interest in Woodside Petroleum Limited (see Note 10).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 141 | |
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 14, 2018.
2 Significant ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
This Note describes Shell’s significant accounting policies, which are those relevant to an understanding of the Consolidated Financial Statements, and includes the measurement bases used in their preparation. It allows an understanding as to how transactions, other events and conditions are reported. It also describes: (a) judgements, apart from those involving estimations, that management makes in applying the policies that have the most significant effect on the amounts recognised in the Consolidated Financial Statements; and (b) estimations, including assumptions about the future, that management makes in applying the policies. The sources of estimation uncertainty that have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year are specifically identified as a significant estimate.
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, 2017, 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 142 | |
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 under way 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.
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, liquefied natural gas (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, the use for this purpose of proved developed reserves, which are determined using the SEC-mandated yearly average oil and gas prices, would result in depreciation charges for these assets which do not reflect the pattern in which their future economic benefits are expected to be consumed as, for example, it may result in assets with long-term expected lives being depreciated in full within one year. Therefore, in these instances, 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 of an asset as held for sale, depreciation 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,
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 143 | |
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.
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 and the quantitative impact of the use of an alternative reserve base, is presented in Note 8.
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.
The determination of cash-generating units requires judgement. Changes in this determination could impact the calculation of value in use and therefore the conclusion on the recoverability of assets’ carrying amounts when performing an impairment test.
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.
Significant estimate
Future price assumptions, presented in Note 8, 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.
Information about the carrying amounts of assets and impairments is presented in Notes 7 and 8.
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").
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 144 | |
JOINT ARRANGEMENTS AND ASSOCIATES
Arrangements under which Shell has contractually agreed to share control (see “Nature of the Consolidated Financial Statements” for the definition of control) 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, 2017, 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.
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.
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. 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. This requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. Judgements mainly relate to transfer pricing, including inter-company financing, interpretation of PSCs, expenditure deductible for tax purposes and taxation arising on disposal.
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.
On December 22, 2017, the US Tax Cuts and Jobs Act (the Act) was enacted. The effects of the Act have been recognised in 2017, as presented in Note 16, based on current interpretation of the Act and related assumptions. These may be subject to change, for example in the event that further interpretative guidance on the Act is issued.
Taxation information, including charges and deferred tax assets and liabilities, is presented in Note 16. Income taxes include taxes at higher rates levied on income from certain Integrated Gas and Upstream activities.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 145 | |
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. Defined benefit plan surpluses are recognised as assets to the extent that they are considered recoverable, which is generally by way of a refund or lower future employer contributions.
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.
Significant 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 17.
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. 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.
Significant estimates
Estimates of provisions for future decommissioning and restoration costs are 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 18.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 146 | |
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 Shell has the intention to settle on a net basis or realise the asset and settle the liability simultaneously.
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.
Significant estimate
Receivables from governments may be large and subject to disputes. Recoverability is subject to uncertainty as to the settlement of amounts including tax, royalty, cost recovery and associated interest. Information about government receivables is presented in Note 11.
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 balance sheet); for other hedged items, the amount in accumulated other comprehensive income is reclassified to income when the hedged transaction affects income.
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 147 | |
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.
Judgements and estimates
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.
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. The adoption of IFRS 9 in 2018 resulted in a decrease of $83 million in equity at January 1, 2018, mainly representing the recognition of additional provisions for impairment of receivables under the expected loss model. On a prospective basis, IFRS 9 may facilitate further use of hedge accounting and also results in different income recognition upon the sale of certain investments in securities.
IFRS 15 Revenue from Contracts with Customers was issued in 2014 and replaces IAS 18 Revenue. It provides a single model of accounting for revenue arising from contracts with customers based on the identification and satisfaction of performance obligations, and revenue from contracts with customers will be distinguished from other sources. Shell has adopted IFRS 15 with effect from January 1, 2018, and has elected to apply the modified retrospective transition approach. Although IFRS 15 does not generally represent a change from Shell’s current practice, the accounting for certain contracts, such as those with provisional pricing or take-or-pay arrangements, and for underlifts and overlifts, have been identified as areas of potential change. However, these do not have a significant effect on Shell’s accounting or disclosures, and therefore no transition adjustment will be presented.
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. It is expected that Shell will apply 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. Shell will not early adopt IFRS 16. The impact of the adoption of the new standard at January 1, 2019, will be dependent on factors such as Shell’s lease contracts at that date and the discount rate to be applied in accordance with IFRS 16, and therefore the impact cannot be determined from the disclosure of the minimum lease payments in accordance with IAS 17 in Note 14. A detailed review of Shell’s contracts is under way to determine the impact of the new standard.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 148 | |
4 SEGMENT INFORMATION
Shell is engaged in the principal aspects of the oil and gas industry in more than 70 countries and reports its business through four segments. Segmental reporting was changed with effect from 2016, in line with a change in the way Shell’s businesses are managed. Since 2016, Shell reports its business through the segments Integrated Gas (previously part of Upstream), Upstream, Downstream and Corporate. Comparative information was 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 revenue 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. 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 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:
| | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 5,078 | | | | 1,551 | | | | 8,258 | | | | (2,416 | ) | | | 12,471 | |
Revenue | | | | | | | | | | | | | | | | | | | | |
Third party | | | 32,674 | | | | 7,723 | | | | 264,731 | | | | 51 | | | | 305,179 | |
Inter-segment | | | 3,978 | | | | 32,469 | | | | 4,248 | | | | — | | | | | |
Share of profit/(loss) of joint ventures and associates | | | 1,714 | | | | 623 | | | | 1,956 | | | | (129 | ) | | | 4,164 | |
Interest and other income | | | 687 | | | | 1,188 | | | | 154 | | | | 437 | | | | 2,466 | |
Depreciation, depletion and amortisation charge, of which: | | | 4,965 | | | | 17,303 | | | | 3,877 | | | | 78 | | | | 26,223 | |
Impairment losses | | | 302 | | | | 4,118 | | | | 385 | | | | — | | | | 4,805 | |
Impairment reversals | | | 10 | | | | 605 | | | | — | | | | — | | | | 615 | |
Interest expense | | | 248 | | | | 744 | | | | 109 | | | | 2,941 | | | | 4,042 | |
Taxation charge/(credit) | | | 790 | | | | 2,409 | | | | 1,783 | | | | (636 | ) | | | 4,346 | |
| | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 2,529 | | | | (3,674 | ) | | | 6,588 | | | | (1,751 | ) | | | 3,692 | |
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 | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 149 | |
| | | | | | | | | | | | | | | | | | | | |
2015 | | $ million | |
| | Integrated Gas | | | Upstream | | | Downstream | | | Corporate | | | Total | |
CCS earnings | | | 3,170 | | | | (8,833 | ) | | | 10,243 | | | | (425 | ) | | | 4,155 | |
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 | |
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 | |
| | | | | | | | | | | | |
Reconciliation of CCS earnings to income for the period | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
CCS earnings | | | 12,471 | | | | 3,692 | | | | 4,155 | |
Current cost of supplies adjustment: | | | | | | | | | | | | |
Purchases | | | 1,252 | | | | 1,284 | | | | (2,278 | ) |
Taxation | | | (349 | ) | | | (344 | ) | | | 646 | |
Share of profit of joint ventures and associates | | | 61 | | | | 145 | | | | (323 | ) |
| | | 964 | | | | 1,085 | | | | (1,955 | ) |
Income for the period | | | 13,435 | | | | 4,777 | | | | 2,200 | |
Information by geographical area is as follows:
| | | | | | | | | | |
2017 | | $ million |
| | Europe | | Asia, Oceania, Africa | | USA | | Other Americas | | Total |
Third-party revenue, by origin | | 100,609 | | 114,683 | [A] | 66,854 | | 23,033 | | 305,179 |
Intangible assets, property, plant and equipment, joint ventures and associates at December 31 | | 43,020 | | 122,345 | | 54,294 | | 58,828 | | 278,487 |
[A] includes $62,046 million that originated from Singapore.
| | | | | | | | | | |
2016 | | $ million |
| | Europe | | Asia, Oceania, Africa | | USA | | Other Americas | | Total |
Third-party revenue, by origin | | 81,573 | | 87,635 | [A][B] | 44,615 | [B] | 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 |
[A] includes $42,533 million that originated from Singapore.
[B] As revised, following reassessment of geographical allocation resulting in an increase of $4,532 million in Asia, Oceania, Africa and a corresponding decrease in USA.
| | | | | | | | | | |
2015 | | $ million |
| | Europe | | Asia, Oceania, Africa | | USA | | Other Americas | | Total |
Third-party revenue, by origin | | 95,223 | | 95,892 | [A] | 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 |
[A] includes $46,551 million that originated from Singapore.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 150 | |
5 INTEREST AND OTHER INCOME
| | | | | | | | | | | | |
| | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Interest income | | | 677 | | | | 451 | | | | 359 | |
Dividend income (from investments in securities) | | | 375 | | | | 264 | | | | 456 | |
Net gains on sale and revaluation of non-current assets and businesses | | | 1,640 | | | | 2,141 | | | | 3,460 | |
Net foreign exchange (losses)/gains on financing activities | | | (453 | ) | | | 343 | | | | (649 | ) |
Other | | | 227 | | | | (302 | ) | | | 43 | |
Total | | | 2,466 | | | | 2,897 | | | | 3,669 | |
In 2017, net gains on sale of non-current assets and businesses arose mainly in respect of gains on the sale of Upstream assets in the UK and the USA as well as Downstream assets in Australia and Saudi Arabia, partly offset by a loss on the Motiva transaction (see Note 29). Net foreign exchange losses on financing activities in 2017 includes a charge of $545 million from the release of cumulative currency translation differences following the restructuring of funding for our North America businesses.
In 2016, net gains on sale of non-current assets and businesses arose mainly in respect of Upstream assets in North America and Downstream assets in Denmark and Japan. In addition, in respect of a decrease in Shell’s interest in Woodside Petroleum Limited (Woodside), 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.
In 2015, net gains on sale of non-current assets and businesses arose mainly in respect of interests in Nigeria (Upstream), interests in France and Norway (Downstream) and an office building in the UK (Corporate).
Other net foreign exchange losses of $47 million in 2017 (2016: $49 million; 2015: $197 million) were included in purchases.
6 INTEREST EXPENSE
| | | | | | | | | | | | |
| | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Interest incurred and similar charges | | | 3,448 | | | | 2,732 | | | | 1,832 | |
Less: interest capitalised | | | (622 | ) | | | (725 | ) | | | (839 | ) |
Other net losses/(gains) on fair value hedges of debt | | | 114 | | | | 4 | | | | (37 | ) |
Accretion expense | | | 1,102 | | | | 1,192 | | | | 932 | |
Total | | | 4,042 | | | | 3,203 | | | | 1,888 | |
The rate applied in determining the amount of interest capitalised in 2017 was 3% (2016: 3%; 2015: 3%).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 151 | |
7 INTANGIBLE ASSETS
| | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | Goodwill | | | LNG off-take and sales contracts | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | |
At January 1 | | | 13,592 | | | | 10,429 | | | | 5,085 | | | | 29,106 | |
Additions | | | 784 | | | | — | | | | 786 | | | | 1,570 | |
Sales, retirements and other movements | | | (261 | ) | | | — | | | | 37 | | | | (224 | ) |
Currency translation differences | | | 39 | | | | — | | | | 198 | | | | 237 | |
At December 31 | | | 14,154 | | | | 10,429 | | | | 6,106 | | | | 30,689 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | |
At January 1 | | | 605 | | | | 1,475 | | | | 3,059 | | | | 5,139 | |
Charge for the year | | | — | | | | 957 | | | | 612 | | | | 1,569 | |
Sales, retirements and other movements | | | (136 | ) | | | — | | | | (241 | ) | | | (377 | ) |
Currency translation differences | | | 23 | | | | — | | | | 155 | | | | 178 | |
At December 31 | | | 492 | | | | 2,432 | | | | 3,585 | | | | 6,509 | |
Carrying amount at December 31 | | | 13,662 | | | | 7,997 | | | | 2,521 | | | | 24,180 | |
| | | | | | | | | | | | | | | | |
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 | | | 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 | |
Goodwill at December 31, 2017, principally related to the acquisition of BG Group plc (BG) in 2016 (see Note 29), allocated to Integrated Gas ($4,954 million) and Upstream ($6,013 million) at the operating segment level, and to Pennzoil-Quaker State Company, a lubricants business in the Downstream segment based largely in North America. Information on annual impairment testing is included in Note 8.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 152 | |
8 PROPERTY, PLANT AND EQUIPMENT
| | | | | | | | | | | | | | | | | | | | |
2017 | | | | | | | | | | | | | | | | | | $ million | |
| | Exploration and production | | | | | | | | | | | | | |
| | Exploration and evaluation | | | Production | | | Manufacturing, supply and distribution | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 25,376 | | | | 302,532 | | | | 77,286 | | | | 20,063 | | | | 425,257 | |
Additions | | | 2,319 | | | | 15,347 | | | | 8,148 | | | | 1,352 | | | | 27,166 | |
Sales, retirements and other movements | | | (4,586 | ) | | | (34,198 | ) | | | (1,427 | ) | | | (655 | ) | | | (40,866 | ) |
Currency translation differences | | | 466 | | | | 7,510 | | | | 2,941 | | | | 1,595 | | | | 12,512 | |
At December 31 | | | 23,575 | | | | 291,191 | | | | 86,948 | | | | 22,355 | | | | 424,069 | |
Depreciation, depletion and amortisation, including impairments | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 6,363 | | | | 133,600 | | | | 39,673 | | | | 9,523 | | | | 189,159 | |
Charge for the year | | | 778 | | | | 19,155 | | | | 3,705 | | | | 1,016 | | | | 24,654 | |
Sales, retirements and other movements | | | (2,300 | ) | | | (19,615 | ) | | | (763 | ) | | | (701 | ) | | | (23,379 | ) |
Currency translation differences | | | 219 | | | | 4,385 | | | | 1,868 | | | | 783 | | | | 7,255 | |
At December 31 | | | 5,060 | | | | 137,525 | | | | 44,483 | | | | 10,621 | | | | 197,689 | |
Carrying amount at December 31 | | | 18,515 | | | | 153,666 | | | | 42,465 | | | | 11,734 | | | | 226,380 | |
| | | | | | | | | | | | | | | | | | | | |
2016 | | $ million | |
| | Exploration and production | | | | | | | | | | | | | |
| | Exploration and evaluation | | | Production | | | Manufacturing, supply and distribution | | | Other | | | Total | |
Cost | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 27,728 | | | | 239,559 | | | | 73,648 | | | | 20,988 | | | | 361,923 | |
Additions on acquisition of BG | | | 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 | |
Sales, retirements and other movements in 2017 include sales of interests in Canada, the UK and Gabon. In Canada, Shell sold its 60% interest in the Athabasca Oil Sands Project (AOSP) and its in-situ and undeveloped oil sands interests for a consideration in cash and shares in Canadian Natural Resources Limited, reported in investments in securities (see Note 10). Separately, Shell acquired a 50% controlling interest in Marathon Oil Canada Corporation, which has a 20% interest in the AOSP.
The carrying amount at December 31, 2017, included $42,121 million (2016: $45,396 million) of assets under construction. This amount excludes exploration and evaluation assets. The carrying amount at December 31, 2017, also included $986 million of assets classified as held for sale (2016: $282 million, as revised).
The carrying amount of exploration and production assets at December 31, 2017, included rights and concessions in respect of proved and unproved properties of $14,839 million (2016: $15,610 million). Exploration and evaluation assets principally comprise rights and concessions in respect of unproved properties and capitalised exploration drilling costs.
The carrying amount of assets at December 31, 2017, for which an alternative reserves base was applied in the calculation of the depreciation charge (see Note 2), was $18,115 million (2016: $14,784 million). If no alternative reserves base had been used, the pre-tax depreciation charge for the year ended December 31, 2017, would have been $5,558 million higher (2016: $9,181 million, 2015: $1,022 million).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 153 | |
Contractual commitments for the purchase of property, plant and equipment at December 31, 2017, amounted to $4,504 million (2016: $4,825 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 14).
| | | | | | | | |
Carrying amount of property, plant and equipment held under finance leases [A] | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Exploration and production | | | 8,399 | | | | 7,930 | |
Manufacturing, supply and distribution | | | 3,151 | | | | 3,108 | |
Other | | | 272 | | | | 227 | |
Total | | | 11,822 | | | | 11,265 | |
[A] See Note 14.
| | | | | | | | | | | | |
Impairments | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Impairment losses [A] | | | | | | | | | | | | |
Exploration and production | | | 4,187 | | | | 1,324 | | | | 8,387 | |
Manufacturing, supply and distribution | | | 376 | | | | 567 | | | | 458 | |
Other | | | 9 | | | | 40 | | | | 165 | |
Total | | | 4,572 | | | | 1,931 | | | | 9,010 | |
Impairment reversals [A] | | | | | | | | | | | | |
Exploration and production | | | 615 | | | | — | | | | — | |
Manufacturing, supply and distribution | | | — | | | | 36 | | | | — | |
Other | | | — | | | | 2 | | | | 3 | |
Total | | | 615 | | | | 38 | | | | 3 | |
[A] Presented by segment in Note 4, together with impairment losses and reversals in respect of intangible assets.
Impairment losses in 2017 were mainly in Upstream, and principally related to the disposal of interests in Canada and interests in Ireland classified as held for sale. 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.
For impairment testing purposes, the respective carrying amounts of property, plant and equipment and intangible assets were compared with their value in use. Cash flow projections used in the determination of value in use were made using management’s forecasts of commodity prices, market supply and demand, product margins and expected production volumes (see Note 2). These cash flows were adjusted for the risks specific to the assets, and therefore these risks were not included in the determination of the discount rate applied. The nominal pre-tax rate applied in 2017 was 6% (2016: 6%; 2015: 6%).
Oil and gas price assumptions applied for impairment testing are reviewed and, where necessary, adjusted on a periodic basis. Reviews include comparison with available market data and forecasts that reflect developments in demand such as global economic growth, technology efficiency, policy measures and, in supply, consideration of investment and resource potential, cost of development of new supply, and behaviour of major resource holders. The near-term commodity price assumptions applied in impairment testing in 2017 were as follows:
| |
| | | | | | | | | |
Commodity price assumptions [A] | | | | | | | | | |
| | 2018 | | | 2019 | | | 2020 | |
Brent crude oil ($/b) | | | 50 | | | | 60 | | | | 65 | |
Henry Hub natural gas ($/MMBtu) | | | 3.00 | | | | 3.00 | | | | 3.25 | |
[A] Money of the day.
For periods after 2020, the real terms long-term price assumptions applied were $70 per barrel (/b) (2016: $80/b) for Brent crude oil and $3.50 per million British thermal units (/MMBtu) (2016: $4.00/MMBtu) for Henry Hub natural gas.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 154 | |
| | | | | | | | | | | | |
Capitalised exploration drilling costs | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
At January 1 | | | 7,910 | | | | 7,835 | | | | 8,465 | |
Additions pending determination of proved reserves | | | 1,708 | | | | 1,762 | | | | 3,276 | |
Amounts charged to expense | | | (896 | ) | | | (834 | ) | | | (2,771 | ) |
Reclassifications to productive wells on determination of proved reserves | | | (982 | ) | | | (1,187 | ) | | | (991 | ) |
Other movements | | | 153 | | | | 334 | | | | (144 | ) |
At December 31 | | | 7,893 | | | | 7,910 | | | | 7,835 | |
Exploration drilling costs capitalised for periods greater than one year at December 31, 2017, analysed according to the most recent year of activity, are presented in the table below. They comprise $1,512 million relating to 21 projects where drilling activities were under way or firmly planned for the future and $5,068 million relating to 42 projects awaiting development concepts.
| | | | | | | | | | | | | | | | |
| | Projects | | | Wells | |
| | Number | | | $ million | | | Number | | | $ million | |
Between 1 and 5 years | | 49 | | | | 5,782 | | | 198 | | | | 4,562 | |
Between 6 and 10 years | | 11 | | | | 688 | | | 122 | | | | 1,647 | |
Between 11 and 15 years | | 3 | | | | 110 | | | 21 | | | | 371 | |
Total | | | 63 | | | | 6,580 | | | | 341 | | | | 6,580 | |
9 joint ventures and associates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shell share of comprehensive income of joint ventures and associates | | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
| | Joint ventures | | | Associates | | | Total | | | Joint ventures | | | Associates | | | Total | | | Joint ventures | | | Associates | | | Total | |
Income for the period | | | 2,102 | | | | 2,123 | | | | 4,225 | | | | 2,332 | | | | 1,213 | | | | 3,545 | | | | 908 | | [A] | | 2,619 | | | | 3,527 | |
Other comprehensive income/(loss) for the period | | | 164 | | | | 6 | | | | 170 | | | | 78 | | | | (106 | ) | | | (28 | ) | | | (73 | ) | | | 33 | | | | (40 | ) |
Comprehensive income for the period | | | 2,266 | | | | 2,129 | | | | 4,395 | | | | 2,410 | | | | 1,107 | | | | 3,517 | | | | 835 | | | | 2,652 | | | | 3,487 | |
[A] Includes an impairment loss of $837 million as a result of changes in the outlook of a joint venture in the Oceania region.
| | | | | | | | | | | | | | | | | | | | | | | | |
Carrying amount of interests in joint ventures and associates | | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
| | Joint ventures | | | Associates | | | Total | | | Joint ventures | | | Associates | | | Total | |
Net assets | | | 15,052 | | | | 12,875 | | | | 27,927 | | | | 20,555 | | | | 12,700 | | | | 33,255 | |
Shell’s interest in the Motiva Enterprises LLC (Motiva) joint venture was disposed of in 2017 (see Note 29). The carrying amount at December 31, 2016, was $5,132 million.
| | | | | | | | | | | | |
Transactions with joint ventures and associates | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Sales and charges to joint ventures and associates | | | 13,121 | | | | 24,214 | | | | 36,548 | |
Purchases and charges from joint ventures and associates | | | 10,680 | | | | 13,859 | | | | 26,440 | |
These transactions principally comprise sales and purchases of goods and services in the ordinary course of business. Related balances outstanding at December 31, 2017, and 2016, are presented in Notes 11 and 15.
| | | | | | | | |
Other arrangements in respect of joint ventures and associates | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Commitments to make purchases from joint ventures and associates | | | 78,837 | | | | 85,333 | |
Commitments to provide debt or equity funding to joint ventures and associates | | | 1,216 | | | | 2,703 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 155 | |
10 INVESTMENTS IN SECURITIES
| | | | | | | | |
Investments in securities | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Equity securities | | | 5,976 | | | | 4,784 | |
Debt securities | | | 1,246 | | | | 1,168 | |
Total | | | 7,222 | | | | 5,952 | |
At fair value | | | | | | | | |
Measured by reference to prices in active markets for identical assets | | | 5,776 | | | | 4,408 | |
Measured using predominantly unobservable inputs | | | 1,268 | | | | 1,233 | |
Total | | | 7,044 | | | | 5,641 | |
At cost | | 178 | | | 311 | |
Total | | | 7,222 | | | | 5,952 | |
Equity securities at December 31, 2017, principally comprised an 8% interest in Canadian Natural Resources Limited (see Note 8) of $3,506 million and a 15% interest in Malaysia LNG Tiga Sendirian Berhad (Tiga). Shell’s 13% interest in Woodside was disposed of in 2017. Its carrying amount at December 31, 2016, was $2,516 million. 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 | |
| | 2017 | | | 2016 | |
At January 1 | | | 1,233 | | | | 1,625 | |
Losses recognised in other comprehensive income/(loss) | | | (108 | ) | | | (333 | ) |
Other movements | | | 143 | | | | (59 | ) |
At December 31 | | | 1,268 | | | | 1,233 | |
[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. If the oil price assumption used in its valuation were to be decreased by $10 per barrel with no change in other measurement inputs, its carrying amount at December 31, 2017, would decrease by $99 million (2016: $110 million).
11 TRADE AND OTHER RECEIVABLES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Trade receivables | | | 30,721 | | | | — | | | | 25,766 | | | | — | |
Other receivables | | | 9,036 | | | | 5,525 | | | | 7,556 | | | | 5,231 | |
Amounts due from joint ventures and associates | | | 868 | | | | 1,327 | | | | 2,175 | | | | 2,510 | |
Derivative contracts (see Note 19) | | | 5,304 | | | | 919 | | | | 5,957 | | | | 405 | |
Prepayments and deferred charges | | | 3,940 | | | | 1,623 | | | | 4,210 | | | | 1,407 | |
Total | | | 49,869 | | | | 9,394 | | | | 45,664 | | | | 9,553 | |
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 at December 31, 2017, include receivables from certain governments in their capacity as joint arrangement partners, of $2,265 million (2016: $2,644 million), after provisions for impairments, that are overdue in part or in full. Recoverability and timing thereof is subject to uncertainty, however, the ultimate risk of default on the carrying amount is considered to be low. Other receivables also include income tax receivable (see Note 16) and other taxes recoverable.
Provisions for impairments deducted from trade and other receivables amounted to $881 million at December 31, 2017 (2016: $822 million, as revised).
| | | | | | | | |
Overdue trade receivables | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Overdue 1–30 days | | | 1,154 | | | | 747 | |
Overdue 31–180 days | | | 480 | | | | 649 | |
Overdue more than 180 days | | | 368 | | | | 545 | |
Total | | | 2,002 | | | | 1,941 | |
Information about offsetting, collateral and credit risk is presented in Note 19.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 156 | |
12 INVENTORIES
| | | | | | | | |
| | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Oil, gas and chemicals | | | 22,962 | | | | 19,653 | |
Materials | | | 2,261 | | | | 2,122 | |
Total | | | 25,223 | | | | 21,775 | |
Inventories at December 31, 2017, include write-downs to net realisable value of $253 million (2016: $566 million).
13 CASH AND CASH EQUIVALENTS
| | | | | | | | |
| | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Cash | | | 4,672 | | | | 3,426 | |
Short-term bank deposits | | | 3,996 | | | | 4,084 | |
Money market funds, reverse repos and other cash equivalents | | | 11,644 | | | | 11,620 | |
Total | | | 20,312 | | | | 19,130 | |
Included in cash and cash equivalents at December 31, 2017, were amounts totalling $120 million (2016: $349 million) subject to currency controls or other legal restrictions. Information about credit risk is presented in Note 19.
14 DEBT AND LEASE ARRANGEMENTS
DEBT
| | | | | | | | | | | | | | | | | | | | | | | | |
Debt | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
| | Debt (excluding finance lease liabilities) | | | Finance lease liabilities | | | Total | | | Debt (excluding finance lease liabilities) | | | Finance lease liabilities | | | Total | |
Short-term debt | | | 1,211 | | | | — | | | | 1,211 | | | | 1,787 | | | | — | | | | 1,787 | |
Long-term debt due within 1 year | | | 9,500 | | | | 1,084 | | | | 10,584 | | | | 6,574 | | | | 1,123 | | | | 7,697 | |
Current debt | | | 10,711 | | | | 1,084 | | | | 11,795 | | | | 8,361 | | | | 1,123 | | | | 9,484 | |
Non-current debt | | | 59,430 | | | | 14,440 | | | | 73,870 | | | | 69,256 | | | | 13,736 | | | | 82,992 | |
Total | | | 70,141 | | | | 15,524 | | | | 85,665 | | | | 77,617 | | | | 14,859 | | | | 92,476 | |
| | | | | | | | | | | | | | | | |
Net debt | | $ million | |
| | Current debt | | | Non-current debt | | | Cash and cash equivalents (see Note 13) | | | Net debt | |
At January 1, 2017 | | | (9,484 | ) | | | (82,992 | ) | | | 19,130 | | | | (73,346 | ) |
Cash flow | | | 11,942 | | | | (113 | ) | | | 535 | | | | 12,364 | |
Finance lease additions | | | (56 | ) | | | (1,772 | ) | | | — | | | | (1,828 | ) |
Other movements | | | (13,717 | ) | | | 13,749 | | | | — | | | | 32 | |
Currency translation differences and foreign exchange gains/(losses) | | | (480 | ) | | | (2,742 | ) | | | 647 | | | | (2,575 | ) |
At December 31, 2017 | | | (11,795 | ) | | | (73,870 | ) | | | 20,312 | | | | (65,353 | ) |
At January 1, 2016 | | | (5,530 | ) | | | (52,849 | ) | | | 31,752 | | | | (26,627 | ) |
Additions on acquisition of BG | | | (1,544 | ) | | | (19,690 | ) | | | 6,803 | | | | (14,431 | ) |
Cash flow | | | 5,092 | | | | (16,166 | ) | | | (17,922 | ) | | | (28,996 | ) |
Finance lease additions | | | (147 | ) | | | (2,581 | ) | | | — | | | | (2,728 | ) |
Other movements | | | (7,438 | ) | | | 6,687 | | | | — | | | | (751 | ) |
Currency translation differences and foreign exchange gains/(losses) | | | 83 | | | | 1,607 | | | | (1,503 | ) | | | 187 | |
At December 31, 2016 | | | (9,484 | ) | | | (82,992 | ) | | | 19,130 | | | | (73,346 | ) |
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 157 | |
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, 2017, gearing was 24.8% (2016: 28.0%).
| | | | | | | | |
Gearing | | $ million, except where indicated | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Net debt | | | 65,353 | | | | 73,346 | |
Total equity | | | 197,812 | | | | 188,511 | |
Total capital | | | 263,165 | | | | 261,857 | |
Gearing | | | 24.8 | % | | | 28.0 | % |
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, 2017 | | | Dec 31, 2016 | | | Dec 31, 2017 | | | Dec 31, 2016 | |
CP programmes | | | 20,000 | | | | 20,000 | | | | 19,659 | | | | 18,982 | |
EMTN programme | | unlimited | | | unlimited | | | N/A | | | N/A | |
US shelf registration | | unlimited | | | unlimited | | | N/A | | | N/A | |
Committed credit facility | | | 8,500 | | | | 7,480 | | | | 8,500 | | | | 7,480 | |
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 2017. No debt was issued under this programme in 2017 (2016: $4,510 million issued). 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 December 2017. No debt was issued under this registration in 2017 (2016: $12,000 million issued). 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.
In addition, other subsidiaries have access to undrawn short-term bank facilities totalling $3,409 million at December 31, 2017 (2016: $3,835 million).
Interest rate swaps have been entered into against certain fixed rate debt affecting the effective interest rate on these balances (see Note 19).
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | Contractual payments | | | | | | | | | |
| | | | | | Between | | | Between | | | Between | | | Between | | | | | | | | | | | Difference | | | | | |
| | Less than | | | 1 and 2 | | | 2 and 3 | | | 3 and 4 | | | 4 and 5 | | | 5 years | | | | | | | from carrying | | | Carrying | |
| | 1 year | | | years | | | years | | | years | | | years | | | and later | | | Total | | | amount | | | amount | |
Commercial paper | | | 341 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 341 | | | | 5 | | | | 346 | |
Bonds | | | 8,989 | | | | 8,306 | | | | 5,900 | | | | 5,047 | | | | 4,620 | | | | 35,037 | | | | 67,899 | | | | 131 | | | | 68,030 | |
Bank and other borrowings | | | 1,321 | | | | 43 | | | | 127 | | | | 56 | | | | 180 | | | | 36 | | | | 1,763 | | | | 2 | | | | 1,765 | |
Total (excluding interest) | | | 10,651 | | | | 8,349 | | | | 6,027 | | | | 5,103 | | | | 4,800 | | | | 35,073 | | | | 70,003 | | | | 138 | | | | 70,141 | |
Interest | | | 1,957 | | | | 1,688 | | | | 1,457 | | | | 1,328 | | | | 1,221 | | | | 15,293 | | | | 22,944 | | | | | | | | | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 158 | |
| | | | | | | | | | | | | | | | | | | |
2016 | | $ million |
| | Contractual payments | | | | | |
| | | | Between | | Between | | Between | | Between | | | | | | Difference | | | |
| | Less than | | 1 and 2 | | 2 and 3 | | 3 and 4 | | 4 and 5 | | 5 years | | | | from 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 | |
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 | | 32,287 | | | | | |
The fair value of debt excluding finance lease liabilities at December 31, 2017, was $74,650 million (2016: $80,408 million), mainly determined from the prices quoted for those securities.
LEASE ARRANGEMENTS
Finance lease liabilities mainly relate to contracts in Upstream and Integrated Gas for floating production, storage and offloading units, subsea equipment and power generation. Finance lease liabilities are secured on the leased assets. Operating lease contracts are, in Upstream and Integrated Gas, principally for drilling and ancillary equipment, service vessels, LNG vessels and land and buildings; in Downstream, principally for tankers, storage capacity and retail sites; and in Corporate, principally for land and buildings.
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:
| | | | | | | | | | | | | | | | |
2017 | | $ 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 | | | 2,274 | | | | 1,190 | | | | 1,084 | | | | 4,793 | |
Between 1 and 5 years | | | 8,246 | | | | 3,887 | | | | 4,359 | | | | 12,961 | |
5 years and later | | | 15,043 | | | | 4,962 | | | | 10,081 | | | | 5,715 | |
Total | | | 25,563 | | | | 10,039 | | | | 15,524 | | | | 23,469 | |
[A] Including $5,660 million in respect of drilling and ancillary equipment (see Note 8).
| | | | | | | | | | | | | | | | |
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 8).
Future minimum lease payments at December 31, 2017, are stated before deduction of amounts expected to be received under non-cancellable sub-leases of $336 million (2016: $418 million) in respect of finance leases and $300 million (2016: $252 million) in respect of operating leases.
Operating lease expense in 2017 was $4,822 million (2016: $5,063 million; 2015: $4,751 million).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 159 | |
15 TRADE AND OTHER PAYABLES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Trade payables | | | 33,196 | | | | — | | | | 28,069 | | | | — | |
Other payables | | | 5,767 | | | | 3,090 | | | | 5,007 | | | | 3,035 | |
Amounts due to joint ventures and associates | | | 2,021 | | | | 29 | | | | 1,973 | | | | 26 | |
Derivative contracts (see Note 19) | | | 5,253 | | | | 981 | | | | 6,418 | | | | 3,315 | |
Accruals and deferred income | | | 10,426 | | | | 328 | | | | 11,950 | | | | 549 | |
Total | | | 56,663 | | | | 4,428 | | | | 53,417 | | | | 6,925 | |
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 19.
16 TAXATION
| | | | | | | | | | | | |
Taxation charge/(credit) | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Current tax | | | | | | | | | | | | |
Charge in respect of current period | | | 7,204 | | | | 3,936 | | | | 6,886 | |
Adjustments in respect of prior periods | | | (613 | ) | | | (1,205 | ) | | | 172 | |
Total | | | 6,591 | | | | 2,731 | | | | 7,058 | |
Deferred tax | | | | | | | | | | | | |
Relating to the origination and reversal of temporary differences, tax losses and credits | | | (4,102 | ) | | | (2,688 | ) | | | (6,833 | ) |
Relating to changes in tax rates and legislation | | | 2,004 | | | | (200 | ) | | | (526 | ) |
Adjustments in respect of prior periods | | | 202 | | | | 986 | | | | 148 | |
Total | | | (1,896 | ) | | | (1,902 | ) | | | (7,211 | ) |
Total taxation charge/(credit) | | | 4,695 | | | | 829 | | | | (153 | ) |
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.
In 2017, deferred tax relating to changes in tax rates and legislation was mainly in respect of the US Tax Cuts and Jobs Act (the Act).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 160 | |
| | | | | | | | | | | | |
Reconciliation of applicable tax charge/(credit) at statutory tax rates to taxation charge/(credit) | | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Income before taxation | | | 18,130 | | | | 5,606 | | | | 2,047 | |
Less: share of profit of joint ventures and associates | | | (4,225 | ) | | | (3,545 | ) | | | (3,527 | ) |
Income/(loss) before taxation and share of profit of joint ventures and associates | | | 13,905 | | | | 2,061 | | | | (1,480 | ) |
Applicable tax charge/(credit) at statutory tax rates | | | 4,532 | | | | (344 | ) | | | 930 | |
Adjustments in respect of prior periods | | | (411 | ) | | | (219 | ) | | | 320 | |
Tax effects of: | | | | | | | | | | | | |
Expenses not deductible for tax purposes | | | 2,423 | | | | 2,066 | | | | 1,452 | |
Changes in tax rates and legislation (see above) | | | 2,004 | | | | (200 | ) | | | (526 | ) |
Income not subject to tax at statutory rates | | | (1,852 | ) | | | (1,740 | ) | | | (2,597 | ) |
(Recognition)/derecognition of deferred tax assets | | | (957 | ) | | | 1,575 | | | | 108 | |
Deductible items not expensed | | | (584 | ) | | | (516 | ) | | | (418 | ) |
Taxable income not recognised | | | 251 | | | | 509 | | | | 384 | |
Other | | | (711 | ) | | | (302 | ) | | | 194 | |
Taxation charge/(credit) | | | 4,695 | | | | 829 | | | | (153 | ) |
The weighted average of statutory tax rates was 33% in 2017 (2016: (17)%; 2015: (63)%). The rate in 2017 reflects a return to an overall tax charge on a pre-tax income. 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.
| | | | | | | | |
Taxes payable | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Income taxes | | | 4,062 | | | | 4,082 | |
Sales taxes, excise duties and similar levies | | | 3,188 | | | | 2,603 | |
Total | | | 7,250 | | | | 6,685 | |
Included in other receivables at December 31, 2017 (see Note 11), was income tax receivable of $933 million (2016: $1,037 million).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 161 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax | $ million | |
| | Total | | | Decommissioning and other provisions | | | Losses carried forward | | | Property, plant and equipment | | | Retirement benefits | | | Other | |
At January 1, 2017 | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 14,425 | | | | 2,944 | | | | 12,179 | | | | (6,607 | ) | | | 3,817 | | | | 2,092 | |
Deferred tax liabilities | | | (15,274 | ) | | | 4,789 | | | | 3,816 | | | | (23,846 | ) | | | 654 | | | | (687 | ) |
| | | (849 | ) | | | 7,733 | | | | 15,995 | | | | (30,453 | ) | | | 4,471 | | | | 1,405 | |
Recognised in the year | | | | | | | | | | | | | | | | | | | | | | | | |
Recognised in income | | | 1,896 | | | | (1,853 | ) | | | (3,221 | ) | | | 6,626 | | | | (622 | ) | | | 966 | |
Other movements | | | (584 | ) | | | 33 | | | | (763 | ) | | | 964 | | | | (876 | ) | | | 58 | |
Currency translation differences | | | 321 | | | | 269 | | | | 553 | | | | (662 | ) | | | 153 | | | | 8 | |
| | | 1,633 | | | | (1,551 | ) | | | (3,431 | ) | | | 6,928 | | | | (1,345 | ) | | | 1,032 | |
At December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 13,791 | | | | 3,679 | | | | 11,765 | | | | (7,698 | ) | | | 3,347 | | | | 2,698 | |
Deferred tax liabilities | | | (13,007 | ) | | | 2,503 | | | | 799 | | | | (15,827 | ) | | | (221 | ) | | | (261 | ) |
| | | 784 | | | | 6,182 | | | | 12,564 | | | | (23,525 | ) | | | 3,126 | | | | 2,437 | |
At January 1, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 11,033 | | | | 3,674 | | | | 7,688 | | | | (6,651 | ) | | | 3,461 | | | | 2,861 | |
Deferred tax liabilities | | | (8,976 | ) | | | 5,307 | | | | 3,806 | | | | (17,664 | ) | | | 309 | | | | (734 | ) |
| | | 2,057 | | | | 8,981 | | | | 11,494 | | | | (24,315 | ) | | | 3,770 | | | | 2,127 | |
Recognised in the year | | | | | | | | | | | | | | | | | | | | | | | | |
Additions on acquisition of BG | | | (5,163 | ) | [A] | | 702 | | | | 1,624 | | | | (7,310 | ) | | | 39 | | | | (218 | ) |
Recognised in income | | | 1,902 | | | | (1,445 | ) | | | 3,566 | | | | 144 | | | | 33 | | | | (396 | ) |
Other movements | | | 610 | | | | 94 | | | | (229 | ) | | | 199 | | | | 738 | | | | (192 | ) |
Currency translation differences | | | (255 | ) | | | (599 | ) | | | (460 | ) | | | 829 | | | | (109 | ) | | | 84 | |
| | | (2,906 | ) | | | (1,248 | ) | | | 4,501 | | | | (6,138 | ) | | | 701 | | | | (722 | ) |
At December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax assets | | | 14,425 | | | | 2,944 | | | | 12,179 | | | | (6,607 | ) | | | 3,817 | | | | 2,092 | |
Deferred tax liabilities | | | (15,274 | ) | | | 4,789 | | | | 3,816 | | | | (23,846 | ) | | | 654 | | | | (687 | ) |
| | | (849 | ) | | | 7,733 | | | | 15,995 | | | | (30,453 | ) | | | 4,471 | | | | 1,405 | |
[A] Comprising deferred tax assets and liabilities of $3,278 million and $8,441 million respectively.
The table above takes into consideration the offsetting of deferred tax assets and deferred tax liabilities within the same tax jurisdiction. The overall deferred tax position in a particular tax jurisdiction determines if a deferred tax balance is presented within deferred tax assets or deferred tax liabilities. Accordingly, certain deferred tax assets are presented within deferred tax liabilities, and certain deferred tax liabilities within deferred tax assets.
Other movements in deferred tax assets and liabilities principally relate to acquisitions, sales of non-current assets and businesses, and amounts recognised in other comprehensive income, which in 2017 include amounts in respect of the Act.
Before taking into consideration the offsetting described above, the amount of deferred tax assets dependent on future taxable profits not arising from the reversal of existing deferred tax liabilities, and which relate to tax jurisdictions where Shell has suffered a loss in the current or preceding year, was $12,452 million at December 31, 2017 (2016: $11,896 million). 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 $34,773 million at December 31, 2017 (2016: $39,589 million) including amounts of $28,016 million (2016: $31,669 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 $223,746 million at December 31, 2017 (2016: $211,075 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 162 | |
17 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 | |
| | 2017 | | | 2016 | | | 2015 | |
Defined benefit plans: | | | | | | | | | | | | |
Current service cost, net of plan participants’ contributions | | | 1,500 | | | | 1,527 | | | | 1,855 | |
Interest expense on obligations | | | 2,309 | | | | 2,643 | | | | 2,944 | |
Interest income on plan assets | | | (2,019 | ) | | | (2,358 | ) | | | (2,495 | ) |
Other | | | (404 | ) | | | (116 | ) | | | 207 | |
Total | | | 1,386 | | | | 1,696 | | | | 2,511 | |
Defined contribution plans | | | 429 | | | | 485 | | | | 473 | |
Total retirement benefit expense | | | 1,815 | | | | 2,181 | | | | 2,984 | |
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 same rate as that applied to the related defined benefit obligations for each plan to determine interest expense.
| | | | | | | | | | | | |
Remeasurements | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Actuarial gains/(losses) on obligations: | | | | | | | | | | | | |
Due to changes in demographic assumptions | | | 933 | | | | 809 | | | | (517 | ) |
Due to changes in financial assumptions [A] | | | (4,495 | ) | | | (11,391 | ) | | | 6,381 | |
Due to experience adjustments | | | 37 | | | | 642 | | | | 121 | |
Total | | | (3,525 | ) | | | (9,940 | ) | | | 5,985 | |
Return on plan assets in excess of interest income | | | 4,942 | | | | 5,106 | | | | 298 | |
Other movements | | | 50 | | | | 18 | | | | 55 | |
Total remeasurements | | | 1,467 | | | | (4,816 | ) | | | 6,338 | |
[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, 2017 | | | Dec 31, 2016 | |
Obligations | | | (104,285 | ) | | | (94,405 | ) |
Plan assets | | | 93,243 | | | | 81,276 | |
Net liability | | | (11,042 | ) | | | (13,129 | ) |
Retirement benefits in the Consolidated Balance Sheet: | | | | | | | | |
Non-current assets | | | 2,799 | | | | 1,456 | |
Non-current liabilities | | | (13,247 | ) | | | (14,130 | ) |
Current liabilities | | | (594 | ) | | | (455 | ) |
Total | | | (11,042 | ) | | | (13,129 | ) |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 163 | |
| | | | | | |
Defined benefit plan obligations | | $ million, except where indicated |
| | 2017 | | | 2016 | |
At January 1 | | 94,405 | | | 89,426 | |
Current service cost | | 1,550 | | | 1,585 | |
Interest expense | | 2,309 | | | 2,643 | |
Actuarial losses | | 3,525 | | | 9,940 | |
Benefit payments | | (4,579) | | | (3,847) | |
Other movements | | (949) | | | 1,006 | [A] |
Currency translation differences | | 8,024 | | | (6,348) | |
At December 31 | | 104,285 | | | 94,405 | |
Comprising: | | | | | | |
Funded pension plans | | 94,903 | | | 85,357 | |
Weighted average duration | | 19 years | | | 18 years | |
Unfunded pension plans | | 4,824 | | | 4,463 | |
Weighted average duration | | 12 years | | | 11 years | |
Other unfunded plans | | 4,558 | | | 4,585 | |
Weighted average duration | | 13 years | | | 13 years | |
[A] Includes additions to obligations on acquisition of BG of $1,958 million.
| | | | | | |
Defined benefit plan assets | | $ million, except where indicated |
| | 2017 | | | 2016 | |
At January 1 | | 81,276 | | | 80,851 | |
Return on plan assets (in excess of interest income) | | 4,942 | | | 5,106 | |
Interest income | | 2,019 | | | 2,358 | |
Employer contributions | | 1,804 | | | 1,341 | |
Plan participants’ contributions | | 50 | | | 58 | |
Benefit payments | | (4,294) | | | (3,560) | |
Other movements | | (245) | | | 1,211 | [A] |
Currency translation differences | | 7,691 | | | (6,089) | |
At December 31 | | 93,243 | | | 81,276 | |
Comprising: | | | | | | |
Quoted in active markets: | | | | | | |
Equities | | 32% | | | 29% | |
Debt securities | | 45% | | | 46% | |
Real estate | | 1% | | | 1% | |
Investment funds | | 1% | | | 1% | |
Other | | 1% | | | 1% | |
Other: | | | | | | |
Equities | | 7% | | | 9% | |
Debt securities | | 3% | | | 3% | |
Real estate | | 6% | | | 6% | |
Investment funds | | 3% | | | 2% | |
Other | | 1% | | | 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 $1.0 billion in 2018.
Additional contributions to the Netherlands defined benefit pension plan would be required if the 12-month rolling average local funding percentage falls below 105% for six months or more. At the most recent (2017) funding valuation the local funding percentage was above this level. There are no set minimum statutory funding requirements for the UK plans. Under an agreement with the trustee of the main UK defined benefit plan, Shell will provide additional contributions if the funding position falls below a certain level. For the US plans, under the Pension Protection Act there are minimum required contribution levels; forecast contributions are expected to exceed these.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 164 | |
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 |
| | 2017 | | | 2016 | | | Range of assumptions | | 2017 | | | 2016 |
Rate of increase in pensionable remuneration | | | 5% | | | | 5% | | | -1% to +1% | | (2,150) to 2,782 | | | (1,895) to 2,504 |
Rate of increase in pensions in payment | | | 2% | | | | 2% | | | -1% to +1% | | (10,120) to 12,662 | | | (8,850) to 11,271 |
Rate of increase in healthcare costs | | | 7% | | | | 7% | | | -1% to +1% | | (451) to 551 | | | (455) to 555 |
Discount rate for pension plans | | | 3% | | | | 3% | | | -1% to +1% | | 19,042 to (14,567) | | | 16,904 to (12,912) |
Discount rate for healthcare plans | | | 4% | | | | 4% | | | -1% to +1% | | 599 to (483) | | | 662 to (528) |
Expected age at death for persons aged 60: | | | | | | | | | | | | | | | |
Men | | 87 years | | | 87 years | | | -1 year to +1 year | | (1,906) to 2,022 | | | (1,743) to 1,797 |
Women | | 89 years | | | 89 years | | | -1 year to +1 year | | (1,720) to 1,828 | | | (1,484) to 1,530 |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 165 | |
18 DECOMMISSIONING AND OTHER PROVISIONS
| | | | | | |
| | $ million |
| | Decommissioning and restoration | | Other | | Total |
At January 1, 2017 | | | | | | |
Current | | 797 | | 2,987 | | 3,784 |
Non-current | | 24,368 | | 5,250 | | 29,618 |
| | 25,165 | | 8,237 | | 33,402 |
Additions | | 1,168 | | 2,630 | | 3,798 |
Amounts charged against provisions | | (491) | | (2,325) | | (2,816) |
Accretion expense | | 897 | | 141 | | 1,038 |
Disposals | | (2,807) | [A] | (95) | | (2,902) |
Remeasurements and other movements | | (4,245) | | (1,021) | | (5,266) |
Currency translation differences | | 897 | | 280 | | 1,177 |
| | (4,581) | | (390) | | (4,971) |
At December 31, 2017 | | | | | | |
Current | | 817 | | 2,648 | | 3,465 |
Non-current | | 19,767 | | 5,199 | | 24,966 |
| | 20,584 | | 7,847 | | 28,431 |
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 | | 3,965 | | 1,577 | [B] | 5,542 |
Other additions | | 976 | [C] | 4,793 | [C][D] | 5,769 |
Amounts charged against provisions | | (880) | | (2,562) | | (3,442) |
Accretion expense | | 1,013 | | 103 | | 1,116 |
Disposals | | (478) | [C] | (80) | [C] | (558) |
Remeasurements and other movements | | (2,528) | [C] | (1,410) | [C] | (3,938) |
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 |
[A] Mainly related to interests in the UK and Canada.
[B] Includes $950 million representing the fair value of contingent liabilities assumed, mainly in relation to litigation costs.
[C] As revised, to align with current year presentation.
[D] Mainly relating to onerous contracts and redundancy costs (see Note 26).
.
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. The discount rate applied at December 31, 2017 was 4% (2016: 4%).
Reviews of estimated future decommissioning and restoration costs and the discount rate applied are carried out annually. In 2017, the review identified cost reductions from more efficient execution of decommissioning and restoration activities such as onshore demolition, supply chain improvements, learning from other industries and application of technologies. In 2017, there was a decrease of $3,980 million (2016: $2,361 million) in the provision resulting from changes in cost estimates, reported within remeasurements and other movements.
Of the decommissioning and restoration provision at December 31, 2017, an estimated $3,896 million is expected to be utilised between one to five years, $3,449 million within six to 10 years, and the remainder in later periods.
Other provisions principally comprise amounts recognised in respect of environmental costs ($1,505 million at December 31, 2017; 2016: $1,482 million), litigation costs, redundancy costs, employee benefits and onerous contracts.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 166 | |
19 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial instruments and other derivative contracts in the Consolidated Balance Sheet comprise investments in securities (see Note 10), cash and cash equivalents (see Note 13), debt (see Note 14) and certain amounts reported within trade and other receivables (see Note 11) and trade and other payables (see Note 15), which include derivative contracts.
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.
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, 2017, 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, 2017, (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 2017 income before taxation by $174 million (2016: $210 million, based on the floating rate position at December 31, 2016).
The carrying amounts and maturities of debt and borrowing facilities are presented in Note 14. Interest expense is presented in Note 6.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 167 | |
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 Integrated Gas and 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 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
10% appreciation against the dollar of: | | | | | | | | | | | | | | | | |
Canadian dollar | | | (43 | ) | | | (53 | ) | | | 1,111 | | | | 1,666 | |
Euro | | | 130 | | | | (75 | ) | | | 1,086 | | | | 845 | |
Australian dollar | | | (24 | ) | | | 45 | | | | 786 | | | | 669 | |
Sterling | | | (77 | ) | | | (141 | ) | | | 632 | | | | 549 | |
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 5.
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, and 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 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. The VAR 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.
| | | | | | | | |
Value-at-risk (pre-tax) | | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
Global oil | | | 25 | | | | 29 | |
North America gas and power | | | 11 | | | | 12 | |
Europe gas and power | | | 3 | | | | 2 | |
Carbon-emission rights | | | 1 | | | | 3 | |
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
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 168 | |
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 Shell has the intention to settle on a net basis or realise the asset and settle the liability simultaneously, 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:
| | | | | | | | | | | | |
2017 | | $ 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 | | 10,642 | | 6,486 | | 4,156 | | 42 | | 51 | | 4,063 |
Within derivative contracts | | 6,987 | | 2,387 | | 4,600 | | 186 | | 2,326 | | 2,088 |
Liabilities: | | | | | | | | | | | | |
Within trade payables | | 10,442 | | 6,486 | | 3,956 | | 41 | | 51 | | 3,864 |
Within derivative contracts | | 7,315 | | 2,392 | | 4,923 | | 300 | | 2,326 | | 2,297 |
| | | | | | | | | | | | | |
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 | | 2,126 | [A] | 1,879 | [A] |
Liabilities: | | | | | | | | | | | | | |
Within trade payables | | 9,489 | | 6,535 | | 2,954 | | — | | 12 | | 2,942 | |
Within derivative contracts | | 9,434 | | 2,197 | | 7,237 | | 86 | | 2,126 | [A] | 5,025 | [A] |
[A] As revised.
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, 2017, presented within trade and other receivables, was $1,890 million (2016: $1,815 million). The carrying amount of collateral held at December 31, 2017, presented within trade and other payables, was $282 million (2016: $173 million). Collateral mainly relates to initial margins held with commodity exchanges and over-the-counter counterparty variation margins.
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 14.
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 169 | |
Carrying amounts, maturities and hedges
The carrying amounts of derivative contracts at December 31 (see Notes 11 and 15), designated and not designated as hedging instruments for hedge accounting purposes, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | Assets | | | Liabilities | | | | | |
| | Designated | | | Not designated | | | Total | | | Designated | | | Not designated | | | Total | | | Net | |
Interest rate swaps | | | — | | | | 16 | | | | 16 | | | | 165 | | | | 34 | | | | 199 | | | | (183 | ) |
Forward foreign exchange contracts | | | 22 | | | | 403 | | | | 425 | | | | — | | | | 591 | | | | 591 | | | | (166 | ) |
Currency swaps and options | | | 483 | | | | 208 | | | | 691 | | | | 815 | | | | 76 | | | | 891 | | | | (200 | ) |
Commodity derivatives | | | — | | | | 4,929 | | | | 4,929 | | | | — | | | | 4,428 | | | | 4,428 | | | | 501 | |
Other contracts | | | — | | | | 162 | | | | 162 | | | | — | | | | 125 | | | | 125 | | | | 37 | |
Total | | | 505 | | | | 5,718 | | | | 6,223 | | | | 980 | | | | 5,254 | | | | 6,234 | | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
Net losses before tax on derivative contracts, excluding realised commodity contracts and those accounted for as hedges, were $1,321 million in 2017 (2016: $414 million gains; 2015: $4,107 million gains).
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 29). 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 22).
In addition, certain contracts, mainly to hedge price risk relating to forecast commodity transactions which mature in 2018-2020, were designated in cash flow hedging relationships. In 2017, $29 million net losses for ineffectiveness were recognised in income (2016: $nil; 2015: $1 million net gains). The net carrying amount of commodity derivative contracts designated as cash flow hedging instruments at December 31, 2017, was a liability of $620 million (2016: $115 million), and 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 net carrying amount of the related derivative contracts, net of accrued interest, at December 31, 2017, was a liability of $826 million (2016: $3,472 million).
In 2016, 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. On January 1, 2017, these were de-designated as hedges following changes in the functional currency of certain entities to the US dollar.
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.
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 2018-2025, 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, 2017, of 10% in the projected gas price would, assuming other inputs remained unchanged, increase income before taxation by $30 million (2016: $33 million).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 170 | |
The contractual maturities of derivative liabilities at December 31 compare with their carrying amounts in the Consolidated Balance Sheet as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ 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 | | | Difference from carrying amount [A] | | | Carrying amount | |
Forward foreign exchange contracts | | | 315 | | | | 37 | | | | 14 | | | | 3 | | | | 2 | | | | (39 | ) | | | 332 | | | | 259 | | | | 591 | |
Currency swaps and options | | | 541 | | | | 343 | | | | 140 | | | | 304 | | | | 194 | | | | 879 | | | | 2,401 | | | | (1,510 | ) | | | 891 | |
Commodity derivatives | | | 3,002 | | | | 754 | | | | 305 | | | | 122 | | | | 74 | | | | 263 | | | | 4,520 | | | | (92 | ) | | | 4,428 | |
Other contracts | | | 146 | | | | 115 | | | | 56 | | | | 18 | | | | 1 | | | | 3 | | | | 339 | | | | (15 | ) | | | 324 | |
Total | | | 4,004 | | | | 1,249 | | | | 515 | | | | 447 | | | | 271 | | | | 1,106 | | | | 7,592 | | | | (1,358 | ) | | | 6,234 | |
[A] Mainly related to the effect of discounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | Difference from carrying amount [A] | | | 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 | |
[A] Mainly related to the effect of discounting.
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:
| | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | Prices in active markets for identical assets/liabilities | | | Other observable inputs | | | Unobservable inputs | | | Total | |
Interest rate swaps | | | — | | | | (183 | ) | | | — | | | | (183 | ) |
Forward foreign exchange contracts | | | — | | | | (166 | ) | | | — | | | | (166 | ) |
Currency swaps and options | | | — | | | | (200 | ) | | | — | | | | (200 | ) |
Commodity derivatives | | | 36 | | | | 302 | | | | 163 | | | | 501 | |
Other contracts | | | — | | | | (97 | ) | | | 134 | | | | 37 | |
Total | | | 36 | | | | (344 | ) | | | 297 | | | | (11 | ) |
| | | | | | | | | | | | | | | | |
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 | ) |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 171 | |
| | | | | | | | |
Net carrying amounts of derivative contracts measured using predominantly unobservable inputs | | | $ million | |
| | 2017 | | | 2016 | |
At January 1 | | | 468 | | | | 607 | |
Net losses recognised in revenue | | | (248 | ) | | | (361 | ) |
Purchases | | | (252 | ) | | | (227 | ) |
Sales | | | 562 | | | | 428 | |
Recategorisations (net) | | | (248 | ) | | | 56 | |
Currency translation differences | | | 15 | | | | (35 | ) |
At December 31 | | | 297 | | | | 468 | |
Included in net losses recognised in revenue in 2017 were unrealised net gains totalling $39 million relating to assets and liabilities held at December 31, 2017 (2016: $333 million).
20 SHARE CAPITAL
| | | | | | | | | | | | | | | | | | | | |
Issued and fully paid ordinary shares of €0.07 each [A] | | | | | | | | | | | | | | | | | | | | |
| | Number of shares | | | Nominal value ($ million) | |
| | A | | | B | | | A | | | B | | | Total | |
At January 1, 2017 | | | 4,428,903,813 | | | | 3,745,486,731 | | | | 374 | | | | 309 | | | | 683 | |
Scrip dividends | | | 168,232,237 | | | | — | | | | 13 | | | | — | | | | 13 | |
At December 31, 2017 | | | 4,597,136,050 | | | | 3,745,486,731 | | | | 387 | | | | 309 | | | | 696 | |
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 29) | | | 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 | |
[A] Share capital at December 31, 2017, and 2016, also included 50,000 issued and fully paid sterling deferred shares of £1 each.
At the Company’s Annual General Meeting (AGM) on May 23, 2017, 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 €190 million (representing 2,714 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 23, 2018, and the end of the AGM to be held in 2018, unless previously renewed, revoked or varied by the Company in a general meeting.
21 SHARE-BASED COMPENSATION PLANS AND SHARES HELD IN TRUST
| | | | | | | | | | | | |
Share-based compensation expense | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Equity-settled plans | | 422 | | | | 488 | | | | 621 | |
Cash-settled plans | | 380 | | | | 205 | | | | 129 | |
Total | | | 802 | | | | 693 | | | | 750 | |
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 172 | |
| | | | | | | | | | | | | | | | |
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, 2017 | | | 36 | | | | 12 | | | | 10 | | | | 1.0 | |
Granted | | | 10 | | | | 4 | | | | 3 | | | | | |
Vested | | | (12 | ) | | | (4 | ) | | | (4 | ) | | | | |
Forfeited | | | (1 | ) | | | — | | | | — | | | | | |
At December 31, 2017 | | | 33 | | | | 12 | | | | 9 | | | | 0.9 | |
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 | |
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, 2017, they held 15.2 million A shares (2016: 13.1 million), 2.9 million B shares (2016: 6.2 million) and 5.9 million A ADSs (2016: 4.9 million).
22 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, 2017 | | | 37,311 | | | | 154 | | | | 84 | | | | 1,644 | | | | (27,895 | ) | | | 11,298 | |
Other comprehensive income attributable to Royal Dutch Shell plc shareholders | | | — | | | | — | | | | — | | | | — | | | | 5,851 | | | | 5,851 | |
Scrip dividends | | | (13 | ) | | | — | | | | — | | | | — | | | | — | | | | (13 | ) |
Share-based compensation | | | — | | | | — | | | | — | | | | (204 | ) | | | — | | | | (204 | ) |
At December 31, 2017 | | | 37,298 | | | | 154 | | | | 84 | | | | 1,440 | | | | (22,044 | ) | | | 16,932 | |
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 | | | 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 | ) |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 173 | |
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 (see Note 29). 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 21). The movement represents the net of the charge for the year and the release as a result of vested awards and is after deduction of tax of $11 million in 2017 (2016: $nil; 2015: $nil).
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, 2017 | | | (13,831 | ) | | | 1,321 | | | | (144 | ) | | | (15,241 | ) | | | (27,895 | ) |
Recognised in other comprehensive income | | | 4,513 | | | | 796 | | | | (467 | ) | | | 1,467 | | | | 6,309 | |
Reclassified to income | | | 610 | | | | (211 | ) | | | (87 | ) | | | — | | | | 312 | |
Reclassified to the balance sheet | | | — | | | | — | | | | (18 | ) | | | — | | | | (18 | ) |
Tax on amounts recognised/reclassified | | | 33 | | | | 8 | | | | 20 | | | | (863 | ) | | | (802 | ) |
Total, net of tax | | | 5,156 | | | | 593 | | | | (552 | ) | | | 604 | | | | 5,801 | |
Share of joint ventures and associates | | | 53 | | | | 55 | | | | 63 | | | | (1 | ) | | | 170 | |
Other comprehensive income/(loss) for the period | | | 5,209 | | | | 648 | | | | (489 | ) | | | 603 | | | | 5,971 | |
Less: non-controlling interest | | | (113 | ) | | | — | | | | — | | | | (7 | ) | | | (120 | ) |
Attributable to Royal Dutch Shell plc shareholders | | | 5,096 | | | | 648 | | | | (489 | ) | | | 596 | | | | 5,851 | |
At December 31, 2017 | | | (8,735 | ) | | | 1,969 | | | | (633 | ) | | | (14,645 | ) | | | (22,044 | ) |
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 | ) |
[A] Includes losses of $2,024 million arising on net investment hedges.
[B] Mainly relating to the acquisition of BG.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 174 | |
23 DIVIDENDS
| | | | | | | | | | | | |
Interim dividends | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
A shares | | | | | | | | | | | | |
Cash: $1.88 per share (2016: $1.88; 2015: $1.88) | | | 4,919 | | | | 4,545 | | | | 5,203 | |
Scrip: $1.88 per share (2016: $1.88; 2015: $1.88) | | | 3,558 | | | | 3,491 | | | | 2,154 | |
Total – A shares | | | 8,477 | | | | 8,036 | | | | 7,357 | |
B shares | | | | | | | | | | | | |
Cash: $1.88 per share (2016: $1.88; 2015: $1.88) | | | 5,958 | | | | 5,132 | | | | 4,167 | |
Scrip: $1.88 per share (2016: $1.88; 2015: $1.88) | | | 1,193 | | | | 1,791 | | | | 448 | |
Total – B shares | | | 7,151 | | | | 6,923 | | | | 4,615 | |
Total | | | 15,628 | | | | 14,959 | | | | 11,972 | |
In addition, on February 1, 2018, the Directors announced a further interim dividend in respect of 2017 of $0.47 per A share and $0.47 per B share. The total dividend is estimated to be $3,921 million and is payable on March 26, 2018, to shareholders on the register at February 16, 2018. The Scrip Dividend Programme has been cancelled with effect from the fourth quarter 2017 interim dividend.
Dividends on A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends on B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends on ADSs are paid in dollars.
24 EARNINGS PER SHARE
| | | | | | | | | | | | |
| | 2017 | | | 2016 | | | 2015 | |
Income attributable to Royal Dutch Shell plc shareholders ($ million) | | | 12,977 | | | | 4,575 | | | | 1,939 | |
Weighted average number of A and B shares used as the basis for determining: | | | | | | | | | | | | |
Basic earnings per share (million) | | | 8,223.4 | | | | 7,833.7 | | | | 6,320.3 | |
Diluted earnings per share (million) | | | 8,299.0 | | | | 7,891.7 | | | | 6,393.8 | |
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.
25 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
GENERAL
In the ordinary course of business, Shell subsidiaries are subject to a number of contingencies arising from litigation and claims brought by governmental, including tax authorities, and private parties. 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 amounts claimed in relation to such events and, if such claims against Shell were successful, the costs of implementing the remedies sought in the various cases could be substantial. Based on information available to date and taking into account that in some cases it is not practicable to estimate the possible magnitude or timing of any resultant payments, management believes that the foregoing are not expected to have a material adverse impact on Shell’s Consolidated Financial Statements. However, there remains a high degree of uncertainty around these contingencies, as well as their potential effect on future operations, earnings, cash flows and Shell’s financial condition.
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 lawsuits 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 35 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 lawsuits pending at December 31, 2017, will have a material adverse impact on Shell. However, there remains a high degree of uncertainty regarding the potential outcome of some of these pending lawsuits, as well as their potential effect on future operations, earnings, cash flows and Shell’s financial condition.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 175 | |
CLIMATE CHANGE LITIGATION
Municipalities in California and New York have filed nine lawsuits against oil and gas companies, including Royal Dutch Shell plc. The plaintiffs seek damages for claimed harm to their public and private infrastructure from rising sea levels allegedly due to climate change caused by the defendants’ fossil fuel products. Management believes the outcome of these matters should be resolved in a manner favourable to Shell, however, there remains a high degree of uncertainty regarding the ultimate outcome of these lawsuits, as well as their potential effect on future operations, earnings, cash flows and Shell’s financial condition.
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. Management, however, believes that the outcomes of these matters will ultimately be resolved in a manner favourable to Shell. However, there remains a high degree of uncertainty regarding these cases, as well as their potential effect on future operations, earnings, cash flows and Shell’s financial condition.
The authorities in various countries are investigating Shell Nigeria Exploration and Production Company Ltd.’s (SNEPCO’s) investment in Nigerian oil block OPL 245 and the 2011 settlement of litigation pertaining to that block with regard to potential anti-bribery, anti-corruption and anti-money laundering laws. On January 27, 2017, the Nigeria Federal High Court issued an Interim Order of Attachment for OPL 245, pending the conclusion of the investigation. SNEPCO applied for and was granted a discharge of this order on constitutional and procedural grounds. Also in Nigeria, in March 2017, criminal charges alleging official corruption and conspiracy to commit official corruption were filed against SNEPCO, one current Shell employee and third parties including ENI SpA and one of its subsidiaries. Those proceedings are ongoing. In March 2017, parties alleging to be shareholders of Malabu Oil and Gas Company Ltd. filed an action to challenge the 2011 settlement and the award of OPL 245 to SNEPCO and an ENI SpA subsidiary by the Federal Government of Nigeria. Those proceedings are also ongoing. On February 14, 2017, Royal Dutch Shell plc received a notice of request for indictment from the Milan public prosecutor with respect to this matter. On December 20, 2017, Royal Dutch Shell plc along with four former Shell employees including one former executive were remanded to trial in Milan. On March 5, 2018, the Court of Milan declared that the first hearing is scheduled for May 14, 2018. Based on Shell’s review of the Prosecutor of Milan's file and all of the information and facts currently available to Shell, management does not believe that there is a basis to convict Shell. Furthermore, management is not aware of any evidence to convict any former or current Shell employee. Investigations by authorities in other jurisdictions are ongoing.
However, there remains a high degree of uncertainty around these contingencies, as well as their potential effect on future operations, earnings, cash flows and Shell’s financial condition. Accordingly, at this time, it is not practicable to estimate the magnitude and timing of any possible obligations or payments.
Any violation of the US Foreign Corrupt Practices Act or other relevant anti-bribery, anti-corruption or anti-money laundering legislation could have a material adverse effect on Royal Dutch Shell plc’s earnings, cash flows and financial condition.
26 EMPLOYEES
| | | | | | | | �� | | | | |
Employee costs | | $ million | |
| | 2017 | | | 2016[A] | | | 2015 | |
Remuneration | | | 10,855 | | | | 11,985 | | | | 12,558 | |
Social security contributions | | | 844 | | | | 867 | | | | 830 | |
Retirement benefits (see Note 17) | | | 1,815 | | | | 2,181 | | | | 2,984 | |
Share-based compensation (see Note 21) | | | 802 | | | | 693 | | | | 750 | |
Total | | | 14,316 | | | | 15,726 | | | | 17,122 | |
[A] In addition, there were redundancy costs of $1,441 million.
| | | | | | | | | | | | |
Average employee numbers | | Thousand | |
| | 2017 | | | 2016 | | | 2015 | |
Integrated Gas | | 11 | | | | 13 | | | | 13 | |
Upstream | | 18 | | | | 22 | | | | 22 | |
Downstream | | 40 | | | | 40 | | | | 43 | |
Corporate [A] | | 17 | | | | 17 | | | | 15 | |
Total | | | 86 | | | | 92 | | | | 93 | |
[A] Includes all employees working in business service centres irrespective of the segment they support.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 176 | |
27 DIRECTORS AND SENIOR MANAGEMENT
. | | | | | | | | | | | | |
Remuneration of Directors of the Company | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Emoluments | | 11 | | | | 10 | | | | 12 | |
Value of released awards under long-term incentive plans | | | 5 | | | | 8 | | | | 1 | |
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. 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 2017, retirement benefits were accrued in respect of qualifying services under defined benefit plans by three Directors.
Further information on the remuneration of the Directors can be found in the Directors’ Remuneration Report on pages 94-117.
| | | | | | | | | | | | |
Directors and Senior Management expense | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Short-term benefits | | 23 | | | | 21 | | | | 21 | |
Retirement benefits | | 3 | | | | 3 | | | | 4 | |
Share-based compensation | | 17 | | | | 15 | | | | 19 | |
Termination and related amounts | | 3 | | | | 4 | | | | — | |
Total | | | 46 | | | | 43 | | | | 44 | |
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 and shares (for the period for which performance is assessed), other benefits and employer social security contributions. Prior to 2017, these included the 50% of annual bonuses delivered in cash, and share-based compensation included the appropriate proportion of the deferred element (under the Deferred Bonus Plan). Following shareholder approval at the 2017 AGM, the Deferred Bonus Plan has been removed and 50% of the bonus is delivered in shares subject to a three-year holding period.
28 AUDITOR’s REMUNERATION
| | | | | | | | | | | | |
| | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Fees in respect of the audit of the Consolidated and Parent Company Financial Statements, including audit of consolidation returns | | | 27 | | | | 32 | | | | 5 | |
Other audit fees, principally in respect of audits of accounts of subsidiaries | | | 21 | | | | 17 | | | | 46 | |
Total audit fees | | | 48 | | | | 49 | | | | 51 | |
Audit-related fees [A] | | | 4 | | | | 2 | | | | 2 | |
Fees in respect of other non-audit services [B] | | | 1 | | | | 1 | | | | — | |
Total | | | 53 | | | | 52 | | | | 53 | |
[A] Categorised as fees for audit services for US reporting purposes. Aggregate audit fees for US reporting purposes amounted to $52 million in 2017 (2016: $51 million; 2015: $53 million).
[B] Categorised as all other fees for US reporting purposes and mainly related to agreed-upon-procedures.
In addition, the auditor provided audit services to retirement benefit plans for employees of subsidiaries. Remuneration amounted to $1 million in 2017 (2016: $1 million; 2015: $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 2017 and 2016 relates to EY and for 2015 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 177 | |
29 Business combinations
MOTIVA TRANSACTION
On May 1, 2017, Shell and Saudi Refining Inc. (SRI) completed the separation of assets, liabilities and businesses of Motiva, a 50:50 joint venture. Shell assumed sole ownership of two refineries, 11 distribution terminals and certain Shell-branded fuel retail markets in the USA. The transaction enables Shell to combine the assets retained from the joint venture with other Shell Downstream assets in North America, in line with its strategy to deliver increased cash and returns through simpler and highly integrated businesses. It was accounted for as a disposal of Shell’s 50% interest in Motiva and a subsequent business acquisition.
The fair value of Shell’s interest in the joint venture on May 1, 2017, was $3,847 million, based on Shell’s assessment. This fair value was used, for accounting purposes, as the consideration recognised for the disposal. The loss on sale of $546 million comprised the excess of $28 million of the consideration above the carrying amount of Shell’s interest in the joint venture (including associated deferred tax liabilities) of $3,819 million, less a non-cash tax charge of $574 million which crystallised upon the disposal.
The fair value of $3,847 million also served as the purchase consideration for the net assets acquired. As set out below, goodwill of $355 million was recognised on the acquisition, being the excess of the purchase consideration over the fair value of the net assets acquired and $957 million received in cash from SRI. The fair value of net assets acquired was based on an independent valuation using cash flow projections based on the historical performance of the newly acquired assets, forecasted pricing for various related commodities and existing business plan information. The fair value of Shell’s interest in the joint venture, the fair value of the net assets acquired, and therefore the resultant goodwill, remain provisional although no significant adjustments are expected.
| | | | |
Goodwill recognised | | $ million | |
Fair value of Shell’s interest in the Motiva joint venture | | | 3,847 | |
Less: cash received | | | 957 | |
Less: fair value of net assets acquired | | | | |
Intangible assets | | | 656 | |
Property, plant and equipment | | | 2,685 | |
Inventories | | | 927 | |
Other assets | | | 94 | |
Debt (non-current) | | | (115 | ) |
Trade and other payables (non-current) | | | (65 | ) |
Deferred tax (non-current liabilities) | | | (318 | ) |
Retirement benefits (non-current liabilities) | | | (975 | ) |
Decommissioning and other provisions (non-current) | | | (132 | ) |
Current liabilities | | | (222 | ) |
Total fair value of net assets acquired | | | 2,535 | |
Goodwill | | 355 | |
The cash inflow from this transaction of $887 million was included within proceeds from sale of joint ventures and associates in the Consolidated Statement of Cash Flows, being the net effect of the $957 million cash received from SRI and a payment by Shell of $70 million to SRI in respect of the transfer of certain retirement benefit liabilities.
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.
In 2016, 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. 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 178 | |
Supplementary information – oil and gas (unaudited)
The information set out on pages 179-198 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, 2017, were divided into 80% developed and 20% undeveloped on a barrel of oil equivalent basis. For the Shell share of joint ventures and associates, the proved reserves at December 31, 2017, were divided into 91% developed and 9% 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, 2017, 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 1,941 million barrels of crude oil and natural gas liquids, and 12,588 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 13 and our “Proved reserves assurance process” below). These estimates remain subject to revision and are unaudited supplementary information.
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 32 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 179 | |
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 181-183. Significant changes in these proved reserves are discussed below.
PROVED RESERVES 2017-2016
Shell subsidiaries
Europe
The net increase of 61 million barrels in revisions and reclassifications resulted from field performance studies and development activities in Denmark, Norway and the UK. The sale of minerals in place of 50 million barrels occurred in the UK.
Asia
The net increase of 153 million barrels in revisions and reclassifications was mainly in Oman and Malaysia. The increase of 95 million barrels in extensions and discoveries was in Kazakhstan and Malaysia.
USA
The net increase of 235 million barrels in revisions and reclassifications resulted from field performance studies and development activities in respect of Stones and Mars in the Gulf of Mexico, and the Delaware Permian Basin. The increase of 242 million barrels in extensions and discoveries was in the Delaware Permian Basin, Appomattox and Vicksburg in the Gulf of Mexico.
Canada
The sale of minerals in place of 1,992 million barrels in synthetic crude oil resulted from the sale of our 60% interest in the Athabasca Oil Sands Project (AOSP) and our in-situ and undeveloped oil sands interests. The purchase of minerals in place of 664 million barrels in synthetic crude oil resulted from the separate acquisition of a 50% controlling interest in Marathon Oil Canada Corporation, which has a 20% interest in the AOSP.
Shell share of joint ventures and associates
Asia
The net increase of 76 million barrels in revisions and reclassifications was mainly in Brunei.
PROVED RESERVES 2016-2015
Shell subsidiaries
Acquisition of BG Group plc
Purchases of minerals in place included 1,205 million barrels additions on acquisition of BG Group plc (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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 180 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | 435 | | | | 1,386 | | | | 128 | | | | 529 | | | | 491 | | | | 18 | | | | 2,014 | | | | 2 | | | | 992 | | | | 3,979 | | | | 2,014 | | | | 2 | | | | 5,995 | |
Revisions and reclassifications | | | 61 | | | | 153 | | | | 13 | | | | 23 | | | | 235 | | | | 8 | | | | (3 | ) | | | 2 | | | | 38 | | | | 531 | | | | (3 | ) | | | 2 | | | | 530 | |
Improved recovery | | | — | | | | 35 | | | | — | | | | — | | | | 38 | | | | — | | | | — | | | | — | | | | — | | | | 73 | | | | — | | | | — | | | | 73 | |
Extensions and discoveries | | | — | | | | 95 | | | | — | | | | — | | | | 242 | | | | 7 | | | | — | | | | — | | | | 30 | | | | 374 | | | | — | | | | — | | | | 374 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 664 | | | | — | | | | — | | | | 2 | | | | 664 | | | | — | | | | 666 | |
Sales of minerals in place | | | (50 | ) | | | — | | | | — | | | | (14 | ) | | | — | | | | — | | | | (1,992 | ) | | | (2 | ) | | | — | | | | (64 | ) | | | (1,992 | ) | | | (2 | ) | | | (2,058 | ) |
Production [A] | | | (90 | ) | | | (187 | ) | | | (9 | ) | | | (75 | ) | | | (109 | ) | | | (11 | ) | | | (34 | ) | | | (2 | ) | | | (114 | ) | | | (595 | ) | | | (34 | ) | | | (2 | ) | | | (631 | ) |
At December 31 | | | 356 | | | | 1,482 | | | | 132 | | | | 463 | | | | 899 | | | | 22 | | | | 649 | | | | — | | | | 946 | | | | 4,300 | | | | 649 | | | | — | | | | 4,949 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 7 | | | | 256 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 263 | | | | — | | | | — | | | | 263 | |
Revisions and reclassifications | | | 6 | | | | 76 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 82 | | | | — | | | | — | | | | 82 | |
Improved recovery | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | 3 | |
Extensions and discoveries | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production | | | (1 | ) | | | (35 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (36 | ) | | | — | | | | — | | | | (36 | ) |
At December 31 | | | 12 | | | | 301 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 313 | | | | — | | | | — | | | | 313 | |
Total | | | 368 | | | | 1,783 | | | | 132 | | | | 463 | | | | 899 | | | | 22 | | | | 649 | | | | — | | | | 946 | | | | 4,613 | | | | 649 | | | | — | | | | 5,262 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 325 | | | | — | | | | — | | | | — | | | | 325 | | | | — | | | | 325 | |
[A] Included 1 million barrels consumed in operations for synthetic crude oil.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | 257 | | | | 1,184 | | | | 36 | | | | 461 | | | | 437 | | | | 14 | | | | 1,387 | | | | 2 | | | | 543 | | | | 2,932 | | | | 1,387 | | | | 2 | | | | 4,321 | |
At December 31 | | | 250 | | | | 1,364 | | | | 46 | | | | 373 | | | | 569 | | | | 21 | | | | 649 | | | | — | | | | 651 | | | | 3,274 | | | | 649 | | | | — | | | | 3,923 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 4 | | | | 215 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 219 | | | | — | | | | — | | | | 219 | |
At December 31 | | | 11 | | | | 253 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 264 | | | | — | | | | — | | | | 264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2017 | | | | | | | | | | | | | | | | | | | | | | | 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 | | | 178 | | | | 202 | | | | 92 | | | | 68 | | | | 54 | | | | 4 | | | | 627 | | | | — | | | | 449 | | | | 1,047 | | | | 627 | | | | — | | | | 1,674 | |
At December 31 | | | 106 | | | | 118 | | | | 86 | | | | 90 | | | | 330 | | | | 1 | | | | — | | | | — | | | | 295 | | | | 1,026 | | | | — | | | | — | | | | 1,026 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3 | | | | 41 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | — | | | | — | | | | 44 | |
At December 31 | | | 1 | | | | 48 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 49 | | | | — | | | | — | | | | 49 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 181 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 182 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 183 | |
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 186-188. 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 2017-2016
Shell subsidiaries
Europe
The sale of minerals in place of 224 thousand million scf was mainly the UK fields: Elgin-Franklin, Everest, J-Area, Lomond and Erskine.
Asia
The net increase of 979 thousand million scf in revisions and reclassifications resulted from field performance updates and development activities in Kazakhstan and Malaysia. The increase of 549 thousand million scf in extensions and discoveries was mainly in China and Kazakhstan.
Oceania
The net decrease of 574 thousand million scf in revisions and reclassifications resulted from field performance updates and development activities. There was a decrease of 958 thousand million scf in the Surat Basin (Australia) and an increase of 384 thousand million scf from Jansz-lo, Prelude, Gorgon (all Australia) and Maui (New Zealand). The purchases of minerals in place of 204 thousand million scf were in the Surat Basin.
Africa
The net increase of 287 thousand million scf in revisions and reclassifications resulted from field performance updates and development activities, mainly in Kolo Creek in Nigeria.
USA
The net increase of 958 thousand million scf in revisions and reclassifications resulted from field performance updates and development activities in Tioga, East Texas and North Louisiana and the Delaware Permian Basin. The increase of 1,163 thousand million scf in extensions and discoveries was mainly in Tioga, the Delaware Permian Basin, Appomattox and Kaikias.
Canada
The net increase of 412 thousand million scf in revisions and reclassifications resulted from field performance studies and development activities in Groundbirch, Waterton and Fox Creek. The increase of 205 thousand million scf in extensions and discoveries was in Groundbirch and Fox Creek.
Shell share of joint ventures and associates
Europe
The net decrease of 1,027 thousand million scf in revisions and reclassifications was mainly in the Netherlands, due to further reassessment of Groningen compression.
Asia
The net increase of 652 thousand million scf in revisions and reclassifications resulted from field performance studies and development activities in Brunei and Russia.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 184 | |
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 Petroleum Limited in Australia.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed and undeveloped reserves 2017 | | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,741 | | | | 11,073 | | | | 9,051 | | | | 2,225 | | | | 675 | | | | 844 | | | | 1,650 | | | | 29,259 | |
Revisions and reclassifications | | | 197 | | | | 979 | | | | (574 | ) | | | 287 | | | | 958 | | | | 412 | | | | 45 | | | | 2,304 | |
Improved recovery | | | — | | | | 66 | | | | — | | | | — | | | | 74 | | | | — | | | | — | | | | 140 | |
Extensions and discoveries | | | 2 | | | | 549 | | | | — | | | | — | | | | 1,163 | | | | 205 | | | | 6 | | | | 1,925 | |
Purchases of minerals in place | | | — | | | | — | | | | 204 | | | | — | | | | 3 | | | | 43 | | | | 27 | | | | 277 | |
Sales of minerals in place | | | (224 | ) | | | — | | | | — | | | | (7 | ) | | | (11 | ) | | | (6 | ) | | | — | | | | (248 | ) |
Production [A] | | | (616 | ) | | | (845 | ) | | | (703 | ) | | | (423 | ) | | | (293 | ) | | | (226 | ) | | | (227 | ) | | | (3,333 | ) |
At December 31 | | | 3,100 | | | | 11,822 | | | | 7,978 | | | | 2,082 | | | | 2,569 | | | | 1,272 | | | | 1,501 | | | | 30,324 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 6,497 | | | | 4,754 | | | | 31 | | | | — | | | | — | | | | — | | | | — | | | | 11,282 | |
Revisions and reclassifications | | | (1,027 | ) | | | 652 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | (366 | ) |
Improved recovery | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
Extensions and discoveries | | | — | | | | 11 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | |
Purchases of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales of minerals in place | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Production [B] | | | (345 | ) | | | (454 | ) | | | (21 | ) | | | — | | | | — | | | | — | | | | — | | | | (820 | ) |
At December 31 | | | 5,125 | | | | 4,964 | | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | 10,108 | |
Total | | | 8,225 | | | | 16,786 | | | | 7,997 | | | | 2,082 | | | | 2,569 | | | | 1,272 | | | | 1,501 | | | | 40,432 | |
Reserves attributable to non-controlling interest in Shell subsidiaries at December 31 | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | |
[A] Included 215 thousand million standard cubic feet consumed in operations.
[B] Included 41 thousand million standard cubic feet consumed in operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved developed reserves 2017 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 3,437 | | | | 10,569 | | | | 3,966 | | | | 1,618 | | | | 563 | | | | 458 | | | | 1,172 | | | | 21,783 | |
At December 31 | | | 2,978 | | | | 11,460 | | | | 5,026 | | | | 1,493 | | | | 1,652 | | | | 859 | | | | 1,225 | | | | 24,693 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 5,240 | | | | 4,110 | | | | 31 | | | | — | | | | — | | | | — | | | | — | | | | 9,381 | |
At December 31 | | | 5,055 | | | | 4,275 | | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | 9,349 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved undeveloped reserves 2017 | | Thousand million standard cubic feet | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Shell subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 304 | | | | 504 | | | | 5,085 | | | | 607 | | | | 112 | | | | 386 | | | | 478 | | | | 7,476 | |
At December 31 | | | 122 | | | | 362 | | | | 2,952 | | | | 589 | | | | 917 | | | | 413 | | | | 276 | | | | 5,631 | |
Shell share of joint ventures and associates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1 | | | 1,257 | | | | 644 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,901 | |
At December 31 | | | 70 | | | | 689 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 759 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 186 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 188 | |
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 – Shell subsidiaries | | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 34,902 | | | | 94,535 | | | | 51,052 | | | | 29,276 | | | | 49,389 | | | | 32,576 | | | | 50,620 | | | | 342,350 | |
Future production costs | | | 15,672 | | | | 30,894 | | | | 18,264 | | | | 11,496 | | | | 29,505 | | | | 20,242 | | | | 30,924 | | | | 156,997 | |
Future development costs | | | 7,852 | | | | 12,558 | | | | 14,062 | | | | 4,920 | | | | 14,200 | | | | 5,115 | | | | 6,210 | | | | 64,917 | |
Future tax expenses | | | 5,747 | | | | 18,048 | | | | 1,169 | | | | 9,064 | | | | 2,177 | | | | 2,509 | | | | 4,888 | | | | 43,602 | |
Future net cash flows | | | 5,631 | | | | 33,035 | | | | 17,557 | | | | 3,796 | | | | 3,507 | | | | 4,710 | | | | 8,598 | | | | 76,834 | |
Effect of discounting cash flows at 10% | | | 825 | | | | 15,115 | | | | 5,773 | | | | (9 | ) | | | (796 | ) | | | 3,077 | | | | 2,325 | | | | 26,310 | |
Standardised measure of discounted future net cash flows | | | 4,806 | | | | 17,920 | | | | 11,784 | | | | 3,805 | | | | 4,303 | | | | 1,633 | | | | 6,273 | | | | 50,524 | |
Non-controlling interest included | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 870 | | | | — | | | | 871 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 – Shell share of joint ventures and associates | | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Future cash inflows | | | 22,725 | | | | 37,954 | | | | 69 | | | | — | | | | — | | | | — | | | | — | | | | 60,748 | |
Future production costs | | | 17,442 | | | | 17,592 | | | | 54 | | | | — | | | | — | | | | — | | | | — | | | | 35,088 | |
Future development costs | | | 1,051 | | | | 7,605 | | | | 64 | | | | — | | | | — | | | | — | | | | — | | | | 8,720 | |
Future tax expenses | | | 1,803 | | | | 5,172 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,975 | |
Future net cash flows | | | 2,429 | | | | 7,585 | | | | (49 | ) | | | — | | | | — | | | | — | | | | — | | | | 9,965 | |
Effect of discounting cash flows at 10% | | | 1,008 | | | | 1,862 | | | | (14 | ) | | | — | | | | — | | | | — | | | | — | | | | 2,856 | |
Standardised measure of discounted future net cash flows | | | 1,421 | | | | 5,723 | | | | (35 | ) [A] | | | — | | | | — | | | | — | | | | — | | | | 7,109 | |
[A] While proved reserves are economically producible at the 2017 yearly average price, the standardised measure of discounted future net cash flows was negative for those proved reserves at December 31, 2017, due to addition of overhead, tax and abandonment costs and ongoing commitments post production of proved reserves.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 190 | |
CHANGE IN STANDARDISED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES
| | | | | | | | | | | | |
2017 | | $ million | |
| | Shell subsidiaries | | | Shell share of joint ventures and associates | | | Total | |
At January 1 | | | 27,718 | | | | 4,176 | | | | 31,894 | |
Net changes in prices and production costs | | | 34,190 | | | | 3,952 | | | | 38,142 | |
Revisions of previous reserves estimates | | | 13,769 | | | | 1,931 | | | | 15,700 | |
Extensions, discoveries and improved recovery | | | 3,901 | | | | 79 | | | | 3,980 | |
Purchases and sales of minerals in place | | | (2,068 | ) | | | — | | | | (2,068 | ) |
Development cost related to future production | | | (4,823 | ) | | | 461 | | | | (4,362 | ) |
Sales and transfers of oil and gas, net of production costs | | | (27,544 | ) | | | (3,652 | ) | | | (31,196 | ) |
Development cost incurred during the year | | | 14,262 | | | | 536 | | | | 14,798 | |
Accretion of discount | | | 3,844 | | | | 630 | | | | 4,474 | |
Net change in income tax | | | (12,725 | ) | | | (1,004 | ) | | | (13,729 | ) |
At December 31 | | | 50,524 | | | | 7,109 | | | | 57,633 | |
| | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 191 | |
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 | |
| | 2017 | | | 2016 | |
Cost | | | | | | | | |
Proved properties [A] | | | 276,002 | | | | 286,509 | |
Unproved properties | | | 23,707 | | | | 25,582 | |
Support equipment and facilities | | | 6,112 | | | | 6,418 | |
| | | 305,821 | | | | 318,509 | |
Depreciation, depletion and amortisation | | | | | | | | |
Proved properties [A] | | | 132,823 | | | | 129,243 | |
Unproved properties | | | 5,193 | | | | 6,569 | |
Support equipment and facilities | | | 3,436 | | | | 3,245 | |
| | | 141,452 | | | | 139,057 | |
Net capitalised costs | | | 164,369 | | | | 179,452 | |
[A] Includes capitalised asset decommissioning and restoration costs and related depreciation.
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
| | | | | | | | |
| | $ million | |
| | 2017 | | | 2016 | |
Cost | | | | | | | | |
Proved properties [A] | | | 42,370 | | | | 40,773 | |
Unproved properties | | | 2,657 | | | | 2,992 | |
Support equipment and facilities | | | 4,452 | | | | 4,383 | |
| | | 49,479 | | | | 48,148 | |
Depreciation, depletion and amortisation | | | | | | | | |
Proved properties [A] | | | 31,844 | | | | 28,712 | |
Unproved properties | | | 20 | | | | 20 | |
Support equipment and facilities | | | 3,142 | | | | 3,054 | |
| | | 35,006 | | | | 31,786 | |
Net capitalised costs | | | 14,473 | | | | 16,362 | |
[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.
SHELL SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Other[A] | | | America | | | Total | |
Acquisition of properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved | | | — | | | | — | | | | — | | | | 10 | | | | — | | | | 2,246 | | | | 19 | | | | 2,275 | |
Unproved | | | — | | | | 12 | | | | — | | | | 18 | | | | 141 | | | | 320 | | | | 57 | | | | 548 | |
Exploration | | | 329 | | | | 135 | | | | 38 | | | | 138 | | | | 1,354 | | | | 235 | | | | 600 | | | | 2,829 | |
Development | | | 776 | | | | 840 | | | | 2,493 | | | | 371 | | | | 4,123 | | | | 722 | | | | 1,671 | | | | 10,996 | |
[A] Comprises Canada, Honduras and Mexico.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 [A] | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Other[B] | | | America | | | Total | |
Acquisition of properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proved | | | 1,978 | | | | 4,709 | | | | 6,917 | | | | 926 | | | | 132 | | | | — | | | | 28,803 | | | | 43,465 | |
Unproved | | | 280 | | | | — | | | | 2 | | | | 357 | | | | 87 | | | | 20 | | | | 102 | | | | 848 | |
Exploration | | | 338 | | | | 400 | | | | 34 | | | | 247 | | | | 1,043 | | | | 415 | | | | 574 | | | | 3,051 | |
Development | | | 2,289 | | | | 1,982 | | | | 3,352 | | | | 1,087 | | | | 3,497 | | | | 701 | | | | 1,788 | | | | 14,696 | |
[A] Including $44,127 million of related costs incurred on acquisition of BG. The comparatives have been amended to conform with the current year presentation.
[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.
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
Joint ventures and associates did not incur costs in the acquisition of oil and gas properties in 2017, 2016 or 2015.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Exploration | | | 3 | | | | 82 | | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | 93 | |
Development | | | (22 | ) | [A] | | 660 | | | | 58 | | | | — | | | | — | | | | — | | | | — | | | | 696 | |
[A] Includes a revision of decommissioning and restoration provisions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 193 | |
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES EARNINGS
The results of operations for oil and gas producing activities are shown in the tables below. Taxes other than income tax include cash-paid royalties to governments outside North America.
SHELL SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | Africa | | | USA | | | Other[A] | | | America | | | Total | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third parties | | | 1,193 | | | | 2,708 | | | | 1,414 | | | | 1,872 | | | | 1,080 | | | | 339 | | | | 689 | | | | 9,295 | |
Sales between businesses | | | 7,120 | | | | 9,061 | | | | 2,400 | | | | 3,218 | | | | 5,119 | | | | 2,938 | | | | 5,245 | | | | 35,101 | |
Total | | | 8,313 | | | | 11,769 | | | | 3,814 | | | | 5,090 | | | | 6,199 | | | | 3,277 | | | | 5,934 | | | | 44,396 | |
Production costs excluding taxes | | | 2,509 | | | | 2,469 | | | | 1,110 | | | | 1,365 | | | | 2,558 | | | | 1,571 | | | | 1,218 | | | | 12,800 | |
Taxes other than income tax | | | 89 | | | | 556 | | | | 119 | | | | 287 | | | | 98 | | | | 1 | | | | 1,691 | | | | 2,841 | |
Exploration | | | 243 | | | | 245 | | | | 42 | | | | 129 | | | | 868 | | | | 142 | | | | 276 | | | | 1,945 | |
Depreciation, depletion and amortisation | | | 2,560 | | | | 2,892 | | | | 1,777 | | | | 1,863 | | | | 3,410 | | | | 3,886 | | | | 3,374 | | | | 19,762 | |
Other costs/(income) | | | (157 | ) | | | 1,073 | | | | (382 | ) | | | 145 | | | | 114 | | | | 1,050 | | | | 469 | | | | 2,312 | |
Earnings before taxation | | | 3,069 | | | | 4,534 | | | | 1,148 | | | | 1,301 | | | | (849 | ) | | | (3,373 | ) | | | (1,094 | ) | | | 4,736 | |
Taxation charge/(credit) | | | 1,689 | | | | 2,969 | | | | (202 | ) | | | (361 | ) | | | 363 | | | | (1,486 | ) | | | (294 | ) | | | 2,678 | |
Earnings after taxation | | | 1,380 | | | | 1,565 | | | | 1,350 | | | | 1,662 | | | | (1,212 | ) | | | (1,887 | ) | | | (800 | ) | | | 2,058 | |
[A] Comprises Canada, Honduras and Mexico.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 (credit)/charge | | | (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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 194 | |
SHELL SHARE OF JOINT VENTURES AND ASSOCIATES
Oceania included Shell’s 14% share of Woodside from January 2015 to April 2016, when its accounting classification was changed from an associate to an investment in securities. Woodside is a publicly-listed company on the Australian Securities Exchange for which we have limited access to data; accordingly, the numbers are estimated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | $ million | |
| | | | | | | | | | | | | | | | | | | North America | | | South | | | | | |
| | Europe | | | Asia | | | Oceania | | | | Africa | | | USA | | | Canada | | | America | | | Total | |
Third-party revenue | | | 1,646 | | | | 4,503 | | | | 58 | | | | | — | | | | — | | | | — | | | | — | | | | 6,207 | |
Total | | | 1,646 | | | | 4,503 | | | | 58 | | | | | — | | | | — | | | | — | | | | — | | | | 6,207 | |
Production costs excluding taxes | | | 337 | | | | 729 | | | | 93 | | | | | — | | | | — | | | | — | | | | — | | | | 1,159 | |
Taxes other than income tax | | | 631 | | | | 705 | | | | 4 | | | | | — | | | | — | | | | — | | | | — | | | | 1,340 | |
Exploration | | | 7 | | | | 57 | | | | 4 | | | | | — | | | | — | | | | — | | | | — | | | | 68 | |
Depreciation, depletion and amortisation | | | 188 | | | | 1,654 | | | | 40 | | | | | — | | | | — | | | | — | | | | — | | | | 1,882 | |
Other costs/(income) | | | (83 | ) | | | 511 | | | | (60 | ) | | | | — | | | | — | | | | — | | | | — | | | | 368 | |
Earnings before taxation | | | 566 | | | | 847 | | | | (23 | ) | | | | — | | | | — | | | | — | | | | — | | | | 1,390 | |
Taxation charge | | | 173 | | | | 197 | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | 370 | |
Earnings after taxation | | | 393 | | | | 650 | | | | (23 | ) | | | | — | | | | — | | | | — | | | | — | | | | 1,020 | |
| | | | | | | | | | | | | | | | | |
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 | | 383 | [A] | 705 | | 123 | | | — | | — | | — | | — | | 1,211 |
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) | | (11) | [A] | 401 | | (28) | | | — | | — | | — | | — | | 362 |
Earnings before taxation | | 383 | | 458 | | (169) | | | — | | — | | — | | — | | 672 |
Taxation charge | | 91 | | 23 | | 8 | | | — | | — | | — | | — | | 122 |
Earnings after taxation | | 292 | | 435 | | (177) | | | — | | — | | — | | — | | 550 |
[A] As revised.
| | | | | | | | | | | | | | | | | |
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 | | 414 | [A] | 745 | | 215 | | | — | | — | | — | | — | | 1,374 |
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/(income) | | 189 | [A] | 580 | | 11 | | | — | | — | | — | | — | | 780 |
Earnings before taxation | | 691 | | 1,492 | | (781) | | | — | | — | | — | | — | | 1,402 |
Taxation charge | | 237 | | 242 | | 19 | | | — | | — | | — | | — | | 498 |
Earnings after taxation | | 454 | | 1,250 | | (800) | | | — | | — | | — | | — | | 904 |
[A] As revised.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 195 | |
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 | |
| | 2017 | | | 2016 | | | 2015 | |
| | Developed | | | Undeveloped | | | Developed | | | Undeveloped | | | Developed | | | Undeveloped | |
| | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | |
Europe [A] | | | 6,463 | | | | 2,071 | | | | 14,119 | | | | 6,187 | | | | 6,556 | | | | 2,197 | | | | 18,216 | | | | 10,241 | | | | 7,152 | | | | 2,194 | | | | 14,623 | | | | 7,732 | |
Asia | | | 25,975 | | | | 9,139 | | | | 35,305 | | | | 18,730 | | | | 26,003 | | | | 9,199 | | | | 58,463 | | | | 36,298 | | | | 25,581 | | | | 9,181 | | | | 36,658 | | | | 22,995 | |
Oceania | | | 3,296 | | | | 1,255 | | | | 22,406 | | | | 13,985 | | | | 1,939 | | | | 822 | | | | 37,876 | | | | 24,109 | | | | 2,041 | | | | 530 | | | | 51,740 | | | | 16,975 | |
Africa | | | 4,663 | | | | 1,938 | | | | 33,453 | | | | 20,811 | | | | 5,083 | | | | 2,315 | | | | 41,517 | | | | 29,152 | | | | 4,650 | | | | 2,071 | | | | 40,435 | | | | 27,058 | |
North America – USA | | | 1,936 | | | | 1,134 | | | | 2,718 | | | | 1,937 | | | | 2,002 | | | | 1,197 | | | | 4,151 | | | | 2,577 | | | | 1,659 | | | | 1,158 | | | | 5,033 | | | | 4,262 | |
North America – Canada | | | 953 | | | | 651 | | | | 16,714 | | | | 15,005 | | | | 976 | | | | 670 | | | | 26,149 | | | | 19,402 | | | | 1,227 | | | | 745 | | | | 32,706 | | | | 25,716 | |
South America | | | 1,302 | | | | 606 | | | | 9,338 | | | | 6,196 | | | | 1,315 | | | | 547 | | | | 17,759 | | | | 14,643 | | | | 100 | | | | 52 | | | | 7,851 | | | | 3,621 | |
Total | | | 44,588 | | | | 16,794 | | | | 134,053 | | | | 82,851 | | | | 43,874 | | | | 16,947 | | | | 204,131 | | | | 136,422 | | | | 42,410 | | | | 15,931 | | | | 189,046 | | | | 108,359 | |
[A] Includes Greenland.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of productive wells [A] (at December 31) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | | 2016 | | | 2015 | | |
| | Oil | | | Gas | | | Oil | | | Gas | | | Oil | | | Gas | | |
| | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | | Gross | | | Net | | |
Europe | | | 1,156 | | | | 303 | | | | 1,235 | | | | 392 | | | | 1,215 | | | | 321 | | | | 1,232 | | | | 403 | | | | 1,272 | | | | 344 | | | | 1,229 | | | | 392 | | |
Asia | | | 9,410 | | | | 3,132 | | | | 711 | | | | 283 | | | | 9,261 | | | | 3,141 | | | | 656 | | | | 263 | | | | 8,271 | | | | 2,853 | | | | 334 | | | | 190 | | |
Oceania | | | — | | | | — | | | | 3,499 | | | | 1,926 | | | | — | | | | — | | | | 3,257 | | | | 1,734 | | | | — | | | | — | | | | 624 | | | | 234 | | |
Africa | | | 380 | | | | 155 | | | | 180 | | | | 122 | | | | 662 | | | | 289 | | | | 191 | | | | 127 | | | | 821 | | | | 334 | | | | 129 | | | | 86 | | |
North America – USA | | | 15,408 | | | | 7,817 | | | | 1,636 | | | | 717 | | | | 15,532 | | | | 7,892 | | | | 3,046 | | | | 2,136 | | | | 15,331 | | | | 7,893 | | | | 2,522 | | | | 2,403 | | |
North America – Canada | | | — | | | | — | | | | 892 | | | | 794 | | | | 283 | | | | 283 | | | | 941 | | | | 781 | | | | 286 | | | | 286 | | | | 1,209 | | | | 1,059 | | |
South America | | | 111 | | | | 47 | | | | 55 | | | | 32 | | | | 73 | | | | 28 | | | | 50 | | | | 26 | | | | 25 | | | | 15 | | | | 7 | | | | 2 | | |
Total | | | 26,465 | | | | 11,454 | | | | 8,208 | | | | 4,266 | | | | 27,026 | | | | 11,954 | | | | 9,373 | | | | 5,470 | | | | 26,006 | | | | 11,725 | | | | 6,054 | | | | 4,366 | | |
[A] The number of productive wells with multiple completions (more than one formation producing into the same well bore) at December 31, 2017, was 1,946 gross (761 net); 2016: 1,721 gross, corrected from 1,754 (686 net, corrected from 691); 2015:1,778 gross, corrected from 1,811 (755 net, corrected from 760).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 196 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Number of net productive wells and dry holes drilled | | | | | | | | | | | | | | | | | |
| | 2017 | | | 2016 | | | 2015 | |
| | Productive | | | Dry | | | Productive | | | Dry | | | Productive | | | Dry | |
Exploratory [A] | | | | | | | | | | | | | | | | | | | | | | | | |
Europe | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | 2 | |
Asia | | | 3 | | | | 5 | | | | 2 | | | | 4 | | | | — | | | | 11 | |
Oceania | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | 3 | |
Africa | | | 2 | | | | 3 | | | | 4 | | | | 2 | | | | 5 | | | | — | |
North America – USA | | | 9 | | | | 6 | | | | 40 | | | | 2 | | | | 35 | | | | 8 | |
North America – Canada | | | 30 | | | | 5 | | | | — | | | | — | | | | 73 | | | | 5 | |
South America | | | 6 | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
Total | | | 52 | | | | 20 | | | | 46 | | | | 8 | | | | 114 | | | | 30 | |
Development | | | | | | | | | | | | | | | | | | | | | | | | |
Europe | | | 5 | | | | — | | | | 10 | | | | 1 | | | | 10 | | | | — | |
Asia | | | 312 | | | | 4 | | | | 265 | | | | — | | | | 252 | | | | 2 | |
Oceania | | | 63 | | | | — | | | | 184 | | | | — | | | | 2 | | | | — | |
Africa | | | 24 | | | | 3 | | | | 15 | | | | — | | | | 24 | | | | — | |
North America – USA | | | 237 | | | | — | | | | 137 | | | | — | | | | 433 | | | | — | |
North America – Canada | | | 56 | | | | 1 | | | | 50 | | | | — | | | | 20 | | | | 2 | |
South America | | | 1 | | | | — | | | | 3 | | | | — | | | | 3 | | | | 1 | |
Total | | | 698 | | | | 8 | | | | 664 | | | | 1 | | | | 744 | | | | 5 | |
[A] Productive wells are wells with proved reserves allocated. Exploratory wells in the process of drilling are excluded and presented separately below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of wells in the process of exploratory drilling [A] | | | | | | | | | | | | | | | 2017 | |
| | At January 1 | | | 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 | |
Europe | | | 25 | | [B] | | 12 | | | | (4 | ) | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | 3 | | | | 1 | | | | 22 | | | | 11 | |
Asia | | | 96 | | [C] | | 38 | | [C] | | (24 | ) | | | (13 | ) | | | (15 | ) | | | (5 | ) | | | 14 | | | | 5 | | | | 71 | | | | 25 | |
Oceania | | | 198 | | | | 65 | | | | (4 | ) | | | (2 | ) | | | (148 | ) | | | (48 | ) | | | 4 | | | | 2 | | | | 50 | | | | 17 | |
Africa | | | 45 | | [D] | | 27 | | | | (3 | ) | | | (2 | ) | | | (6 | ) | | | (3 | ) | | | 6 | | | | 5 | | | | 42 | | | | 27 | |
North America – USA | | | 178 | | | | 126 | | | | (86 | ) | | | (47 | ) | | | (9 | ) | | | (8 | ) | | | 131 | | | | 67 | | | | 214 | | | | 138 | |
North America – Canada | | | 39 | | [E] | | 39 | | [E] | | (29 | ) | | | (29 | ) | | | (6 | ) | | | (6 | ) | | | 1 | | | | 1 | | | | 5 | | | | 5 | |
South America | | | 51 | | | 28 | | [F] | | (19 | ) | | | (14 | ) | | | (4 | ) | | | (2 | ) | | | 18 | | | | 8 | | | | 46 | | | | 20 | |
Total | | | 632 | | | | 335 | | | | (169 | ) | | | (108 | ) | | | (190 | ) | | | (73 | ) | | | 177 | | | | 89 | | | | 450 | | | | 243 | |
[A] Wells in the process of drilling includes exploratory wells pending further evaluation.
[B] Corrected from 26.
[C] Corrected from 94 gross (37 net).
[D] Corrected from 46.
[E] Corrected from 11 gross (11 net).
[F] Corrected from 27.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 197 | |
| | | | | | | | | | | | | | | | |
Number of wells in the process of development drilling | | 2017 | |
| | At January 1 | | | At December 31 | |
| | Gross | | | Net | | | Gross | | | Net | |
Europe | | | 17 | | | | 6 | | | | 7 | | | | 2 | |
Asia | | | 35 | | | | 11 | | | | 75 | | | | 29 | |
Oceania | | | 5 | | | | 1 | | | | 1 | | | | — | |
Africa | | | 8 | | | | 3 | | | | — | | | | — | |
North America – USA | | | 14 | | | | 11 | | | | 144 | | | | 97 | |
North America – Canada | | | 3 | | | | 2 | | | | 21 | | | | 18 | |
South America | | | 9 | | | | 2 | | | | 12 | | | | 3 | |
Total | | | 91 | | | | 36 | | | | 260 | | | | 149 | |
In addition to the present activities mentioned above, the following recovery methods are operational in the following countries: water flooding (Brazil (including water alternating gas), Brunei, Denmark, Malaysia, Nigeria, Norway, Oman, Russia, the UK and the USA); gas injection (Brunei, Kazakhstan, Malaysia, Nigeria and Oman); steam injection (Canada, the Netherlands, Oman and the USA), and polymer flooding (Oman).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 198 | |
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).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 199 | |
| | | | | | | | | | | | | |
Statement of Income | | $ million | | |
| | Notes | | | 2017 | | | 2016 | | |
Dividend income | | | | | | | 10,958 | | | | 14,132 | | |
Interest and other income | | | 3 | | | | 49 | | | | 612 | | |
Administrative expenses | | | | | | | (53) | | | | (488) | [A] | |
Interest and other expense | | | 3 | | | | (26) | | | | (25) | | |
Income before taxation | | | | | | | 10,928 | | | | 14,231 | | |
Taxation (credit)/charge | | | 6 | | | | (23) | | | | 26 | | |
Income for the period | | | | | | | 10,951 | | | | 14,205 | | |
[A] Includes BG acquisition costs
| | | | | | | | | | | | | |
Balance Sheet | | $ million | | |
| | Notes | | | Dec 31, 2017 | | | Dec 31, 2016 | | |
Assets | | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | | |
Investments in subsidiaries | | | 4 | | | | 256,882 | | | | 256,583 | | |
Deferred tax | | | 6 | | | | 598 | | | | 352 | | |
| | | | | | | 257,480 | | | | 256,935 | | |
Current assets | | | | | | | | | | | | | |
Amounts due from subsidiaries | | | 13 | | | | 5,022 | | | | 4,680 | | |
Cash and cash equivalents | | | | | | | 3 | | | | 2 | | |
| | | | | | | 5,025 | | | | 4,682 | | |
Total assets | | | | | | | 262,505 | | | | 261,617 | | |
Liabilities | | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 5 | | | | 332 | | | | 224 | | |
| | | | | | | 332 | | | | 224 | | |
Current liabilities | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 5 | | | | 4,333 | | | | 4,049 | | |
| | | | | | | 4,333 | | | | 4,049 | | |
Total liabilities | | | | | | | 4,665 | | | | 4,273 | | |
Equity | | | | | | | | | | | | | |
Share capital | | | 8 | | | | 696 | | | | 683 | | |
Other reserves | | | 9 | | | | 235,366 | | | | 235,573 | | |
Retained earnings | | | | | | | 21,778 | | | | 21,088 | | |
Total equity | | | | | | | 257,840 | | | | 257,344 | | |
Total liabilities and equity | | | | | | | 262,505 | | | | 261,617 | | |
|
Signed on behalf of the Board /s/ Jessica Uhl |
|
Jessica Uhl |
Chief Financial Officer |
March 14, 2018 |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 200 | |
| | | | | | | | | | | | | | | | | | | | |
Statement of Changes in Equity | | $ million | |
| | Notes | | | Share capital | | | Other reserves | | | Retained earnings | | | Total equity | |
At January 1, 2017 | | | | | | | 683 | | | | 235,573 | | | | 21,088 | | | | 257,344 | |
Comprehensive income for the period | | | | | | | — | | | | — | | | | 10,951 | | | | 10,951 | |
Dividends paid | | | 10 | | | | — | | | | — | | | | (15,628 | ) | | | (15,628 | ) |
Scrip dividends | | | 10 | | | | 13 | | | | (13 | ) | | | 4,751 | | | | 4,751 | |
Share-based compensation | | | 9 | | | | — | | | | (194 | ) | | | 616 | | | | 422 | |
At December 31, 2017 | | | | | | | 696 | | | | 235,366 | | | | 21,778 | | | | 257,840 | |
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 | |
| | | | | | | | | | | | |
Statement of Cash Flows | | $ million | |
| | Notes | | | 2017 | | | 2016 | |
Income for the period | | | | | | | 10,951 | | | | 14,205 | |
Adjustment for: | | | | | | | | | | | | |
Dividend income | | | | | | | (10,958 | ) | | | (14,132 | ) |
Tax | | | | | | | (23 | ) | | | 26 | |
Interest income | | | | | | | (24 | ) | | | (17 | ) |
Interest and other expense | | | | | | | 26 | | | | 25 | |
Share-based compensation | | | | | | | 25 | | | | 21 | |
(Increase)/decrease in working capital | | | | | | | (333 | ) | | | 13,868 | |
Cash flow from operating activities | | | | | | | (336 | ) | | | 13,996 | |
Acquisition of BG Group plc | | 15 | | | | — | | | | (19,036 | ) |
Dividends received | | | | | | | 10,958 | | | | 14,132 | |
Interest received | | | | | | | 24 | | | | 17 | |
Share-based compensation | | | | | | | 258 | | | | 130 | |
Cash flow from investing activities | | | | | | | 11,240 | | | | (4,757 | ) |
Cash dividends paid | | | 10 | | | | (10,877 | ) | | | (9,677 | ) |
Interest and other expense paid | | | | | | | (26 | ) | | | (25 | ) |
Cash flow from financing activities | | | | | | | (10,903 | ) | | | (9,702 | ) |
Increase/(decrease) in cash and cash equivalents | | | | | | | 1 | | | | (463 | ) |
Cash and cash equivalents at January 1 | | | | | | | 2 | | | | 465 | |
Cash and cash equivalents at December 31 | | | | | | | 3 | | | | 2 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 201 | |
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 14, 2018.
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 137-178. 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 213-216.
The Company’s principal activity is being the parent company for Shell, as described in Note 1 to the Consolidated Financial Statements.
2 SIGNIFICANT 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 and changes to IFRS not yet adopted.
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. 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. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Future price assumptions are presented in Note 8 to the Consolidated Financial Statements.
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 21 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 202 | |
CHANGES TO IFRS NOT YET ADOPTED
The adoption of IFRS 9 Financial Instruments in 2018 has been assessed and does not have a significant effect on the Company’s accounting or disclosures. See Note 3 to the Consolidated Financial Statements for information on changes to IFRS not yet adopted for Shell.
3 INTEREST AND OTHER INCOME/EXPENSE
| | | | | | | | | |
| | $ million | | |
| | 2017 | | | 2016 | | |
Interest and other income | | | | | | | | | |
Interest income | | | 24 | | | | 17 | | |
Foreign exchange gains | | | 25 | | | | 595 | | |
Total | | | 49 | | | | 612 | | |
Interest and other expense | | | | | | | | | |
Interest expense | | | (26 | ) | | | (19 | ) | |
Other expense | | | — | | | | (6 | ) | |
Total | | | (26 | ) | | | (25 | ) | |
4 INVESTMENTS IN SUBSIDIARIES
| | | | | | | | | |
| | $ million | | |
| | 2017 | | | 2016 | | |
At January 1 | | | 256,583 | | | | 203,066 | | |
Additions | | | — | | | | 53,118 | | [A] |
Share-based compensation | | | 779 | | | | 645 | | |
Recovery of vested share-based compensation | | | (480 | ) | | | (246 | ) | |
At December 31 | | | 256,882 | | | | 256,583 | | |
[A] See Note 15.
5 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Dec 31, 2017 | | | Dec 31, 2016 | |
| | Current | | | Non-current | | | Current | | | Non-current | |
Amounts due to subsidiaries (see Note 13) | | | 3,859 | | | | — | | | | 3,593 | | | | — | |
Accruals and other liabilities | | | 318 | | | | 332 | | | | 302 | | | | 224 | |
Withholding tax payable | | | 153 | | | | — | | | | 152 | | | | — | |
Unclaimed dividends | | | 3 | | | | — | | | | 2 | | | | — | |
Total | | | 4,333 | | | | 332 | | | | 4,049 | | | | 224 | |
Accruals and other liabilities are principally in respect of cash-settled share-based compensation.
6 TAXATION
| | | | | | | | |
Taxation (credit)/charge | | $ million | |
| | 2017 | | | 2016 | |
Deferred tax | | | | | | | | |
Relating to the origination and reversal of temporary differences | | | — | | | | 24 | |
Adjustments in respect of prior periods | | | (23 | ) | | | 2 | |
Taxation (credit)/charge | | | (23 | ) | | | 26 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 203 | |
| | | | | | | | |
Reconciliation of applicable tax charge at statutory tax rate to taxation (credit)/charge | $ million | |
| | 2017 | | | 2016 | |
Income before taxation | | | 10,928 | | | | 14,231 | |
Applicable tax charge at the statutory tax rate of 25.0% (2016: 25.0%) | | | 2,732 | | | | 3,558 | |
Adjustments in respect of prior periods | | | (23 | ) | | | 2 | |
Tax effects of: | | | | | | | | |
Income not subject to tax at statutory rates | | | (2,744 | ) | | | (3,681 | ) |
Expenses not deductible for tax purposes | | | 6 | | | | 112 | |
Other | | | 6 | | | | 35 | |
Taxation (credit)/charge | | | (23 | ) | | | 26 | |
Taxes payable are reported within accounts payable and accrued liabilities (see Note 5).
| | | | | | | | |
Deferred tax assets | | $ million | |
| | 2017 | | | 2016 | |
At January 1 | | | 352 | | | | 438 | |
Recognised in income | | | 23 | | | | (26 | ) |
Other movements | | | 223 | | | | (60 | ) |
At December 31 | | | 598 | | | | 352 | |
Deferred tax assets are recognised in respect of credits carried forward and for an amount of $476 million at December 31, 2017 (2016: $271 million) in respect of tax losses, which are available for relief against future taxable profits for up to nine years from the year in which the losses were incurred.
7 FINANCIAL INSTRUMENTS
Financial assets and liabilities in the Company’s Balance Sheet comprise cash and cash equivalents, amounts due from subsidiaries (see Note 13) and certain amounts reported within accounts payable and accrued liabilities (see Note 5). The fair value of financial assets and liabilities at December 31, 2017, and 2016, approximates their carrying amount.
Information on financial risk management is presented in Note 19 to the Consolidated Financial Statements. Foreign currency derivatives are used by the Company to manage foreign exchange risk, which arises when certain transactions are denominated in a currency that is not the Company’s functional currency. There were no derivative financial instruments held at December 31, 2017, or 2016.
8 SHARE CAPITAL
| | | | | | | | | | | | | | | | | | | | |
Issued and fully paid ordinary shares of €0.07 each [A] | | | | | | | | |
| | Number of shares | | | Nominal value ($ million) | |
| | A | | | B | | | A | | | B | | | Total | |
At January 1, 2017 | | | 4,428,903,813 | | | | 3,745,486,731 | | | | 374 | | | | 309 | | | | 683 | |
Scrip dividends | | | 168,232,237 | | | | — | | | | 13 | | | | — | | | | 13 | |
At December 31, 2017 | | | 4,597,136,050 | | | | 3,745,486,731 | | | | 387 | | | | 309 | | | | 696 | |
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 | |
[A] Share capital at December 31, 2017, and 2016, also included 50,000 issued and fully paid sterling deferred shares of £1 each.
At the Company’s Annual General Meeting (AGM) on May 23, 2017, 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 €190 million (representing 2,714 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 23, 2018, and the end of the AGM to be held in 2018, 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 Group plc, now BG Group Limited (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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 204 | |
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 21 to the Consolidated Financial Statements.
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. From April 2016, there were changes to the taxation of dividends for individual shareholders resident in the UK. The dividend tax credit was abolished, and a tax-free dividend allowance introduced.
Description of dividend access mechanism
Shell Transport and BG have each issued a dividend access share 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 appropriate. 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 Company’s acquisition of BG (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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 205 | |
9 OTHER RESERVES
| | | | | | | | | | | | | | | | | | | | |
| | $ million | |
| | Merger reserve | | | Share premium reserve | | | Capital redemption reserve | | | Share plan reserve | | | Total | |
At January 1, 2017 | | | 234,244 | | | | 154 | | | | 84 | | | | 1,091 | | | | 235,573 | |
Scrip dividends | | | (13 | ) | | | — | | | | — | | | | — | | | | (13 | ) |
Share-based compensation | | | — | | | | — | | | | — | | | | (194 | ) | | | (194 | ) |
At December 31, 2017 | | | 234,231 | | | | 154 | | | | 84 | | | | 897 | | | | 235,366 | |
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 | |
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 (see Note 15).
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 21 to the Consolidated Financial Statements) and share-based compensation for the year is the net of the charge to equity and the release as a result of vested awards.
10 DIVIDENDS
See Note 23 to the Consolidated Financial Statements.
11 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
See Note 25 to the Consolidated Financial Statements.
12 DIRECTORS AND SENIOR MANAGEMENT
See Note 27 to the Consolidated Financial Statements for the remuneration of Directors of the Company. In 2017, the Company recognised $25 million (2016: $22 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, 2017, is set out in Exhibit 8.
| | | | | | | | | | | | | | | | |
| | $ million | |
| | Amounts due from subsidiaries | | | Amounts due to subsidiaries (see Note 5) | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Shell Petroleum | | | 4,502 | | | | 4,201 | | | | 672 | | | | 409 | |
Shell Treasury Centre Limited | | | 518 | | | | 476 | | | | — | | | | — | |
Shell Treasury Luxembourg Sarl | | | — | | | | — | | | | 3,164 | | | | 3,163 | |
Other | | | 2 | | | | 3 | | | | 23 | | | | 21 | |
Total | | | 5,022 | | | | 4,680 | | | | 3,859 | | | | 3,593 | |
The amount due from Shell Petroleum, which is denominated in dollars, is repayable on demand. Interest is calculated at US LIBOR less 0.058% (2016: US LIBOR less 0.103%) and interest income in 2017 was $19 million (2016: $12 million).
The amount due from Shell Treasury Centre Limited (STCL) comprises call deposits in dollars, sterling and euros. Interest is calculated at US LIBOR less 0.058% (2016: US LIBOR less 0.103%) on dollar balances, at GBP LIBOR less 0.137% (2016: GBP LIBOR less 0.137%) on sterling balances and at Euro Overnight Index Average (EONIA) less 0.1% (2016: EONIA less 0.1%) on euro balances, unless this results in a negative interest rate in which case no interest is earned. Interest income in 2017 from STCL was $5 million (2016: $4 million).
The net amount due to Shell Treasury Luxembourg Sarl at December 31, 2017, which is repayable on demand, comprises an interest-bearing receivable of €1,289 million (2016: €1,183 million) and an interest-bearing payable of $4,707 million (2016: $4,408 million). Interest on euro balances is calculated at EONIA less 0.1% (2016: EONIA less 0.1%) unless this results in a negative interest rate in which case no interest is earned. Interest on dollar balances is calculated at US LIBOR (2016: US LIBOR). Net interest expense on these balances in 2017 was $26 million (2016: $19 million).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 206 | |
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, 2017, or 2016.
The Company settles general and administrative expenses of the Trust, including the auditor’s remuneration.
The Company has guaranteed contractual payments totalling $58,527 million at December 31, 2017 (2016: $61,684 million), and related interest, in respect of listed debt issued by Shell International Finance B.V.
14 AUDITOR’S REMUNERATION
See Note 28 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 207 | |
Independent Auditor’s Report to Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust and the Board of Directors of Royal Dutch Shell plc
Opinion on the Financial Statements
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, 2017, 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) and IFRS as issued by the International Accounting Standards Board (IASB).
In our opinion, the Financial Statements:
■ | give a true and fair view of the Royal Dutch Shell Divided Access Trust’s (the Trust) affairs as at December 31, 2017, and of its income for the year then ended; and |
■ | have been properly prepared both in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB. |
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)). Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report below. We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s Ethical Standards, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Use of our report
This report is made solely to the Trustee of the Royal Dutch Shell Dividend Access Trust (the Trustee) and the Board of Directors of Royal Dutch Shell plc. (the Directors), as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the Trustee and the Directors 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 Trust and the Trustee and the Directors as a body, for our audit work, for this report, or for the opinions we have formed.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
■ | the Trustee’s use of the going concern basis of accounting in the preparation of the Financial Statements is not appropriate; or |
■ | the Trustee has not disclosed in the Financial Statements any identified material uncertainties that may cast significant doubt about the Trust’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date of approval of the Financial Statements. |
Other information
The other information comprises the information included in the annual report, other than the Financial Statements and our auditor’s report thereon. The Directors are responsible for the other information.
Our opinion on the Financial Statements does not cover the other information and, we do not express any form of assurance conclusion thereon.
In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
Responsibilities of the Trustee
The Trustee is responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Trustee determines is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Trustee is responsible for assessing the Trust’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Trustee either intends to liquidate the Trust or to cease operations, or have no realistic alternative but to do so. The Trustee is also 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 and as issued by the IASB 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 and as issued by the IASB.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 208 | |
Independent Auditor’s Report to Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust and the Board of Directors of Royal Dutch Shell plc
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
/s/ Ernst & Young LLP
London
March 14, 2018
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 2017 only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2017.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 209 | |
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
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Royal Dutch Shell Dividend Access Trust (the Trust) as of December 31, 2017, and 2016, the related statements of income, comprehensive income, changes in equity and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the Financial Statements). In our opinion, the Financial Statements present fairly, in all material respects, the financial position of the Trust at December 31, 2017, and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and in conformity with IFRS as adopted by the European Union.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Trust’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 14, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Trustee of the Trust (the Trustee) and the management of Royal Dutch Shell plc (the Management). Our responsibility is to express an opinion on the Trust’s Financial Statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by the Trustee and Management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Trust’s auditor since 2016.
London, United Kingdom
March 14, 2018
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
Opinion on Internal Control over Financial Reporting
We have audited the Royal Dutch Shell Dividend Access Trust’s (the Trust) internal control over financial reporting as of December 31, 2017, 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). In our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Financial Statements of the Trust, and our report dated March 14, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Trustee of the Trust (the Trustee) and the management of Royal Dutch Shell plc (the Management) 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 82. Our responsibility is to express an opinion on the Trust’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 210 | |
Report of Independent Registered Public Accounting Firm
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Ernst & Young LLP
London, United Kingdom
March 14, 2018
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 2017 only and do not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2017.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 211 | |
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 Statement of Changes in Equity, the Statement of Cash Flows, and the related Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements for the year ended December 31, 2015 present fairly, in all material respects, the results of operations and cash flows of the Royal Dutch Shell Dividend Access Trust (the Trust) 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 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 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 audit provides 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 2017 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2017.
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 212 | |
Royal Dutch Shell Dividend Access Trust Financial Statements
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 213 | |
| | | | | | | | | | | | |
Statement of Income | | £ million | |
| | 2017 | | | 2016 | | | 2015 | |
Dividend income | | | 4,567 | | | | 3,879 | | | | 2,726 | |
Income before taxation and for the period | | | 4,567 | | | | 3,879 | | | | 2,726 | |
| | | | | | | | | | | | |
Statement of Comprehensive Income | | £ million | |
| | 2017 | | | 2016 | | | 2015 | |
Income for the period | | | 4,567 | | | | 3,879 | | | | 2,726 | |
Comprehensive income for the period | | | 4,567 | | | | 3,879 | | | | 2,726 | |
| | | | | | | | | | | | |
Balance Sheet | | £ million | |
| | Notes | | | Dec 31, 2017 | | | Dec 31, 2016 | |
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 14, 2018 | | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 214 | |
| | | | | | | | | | | | | | | | |
Statement of Changes in Equity | | £ million | |
| | Notes | | | Capital account | | | Revenue account | | | Total equity | |
At January 1, 2017 | | | | | | | — | | | | — | | | | — | |
Comprehensive income for the period | | | | | | | — | | | | 4,567 | | | | 4,567 | |
Distributions made | | | 6 | | | | — | | | | (4,567 | ) | | | (4,567 | ) |
At December 31, 2017 | | | | | | | — | | | | — | | | | — | |
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 | | | | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Statement of Cash Flows | | £ million | |
| | 2017 | | | 2016 | | | 2015 | |
Income for the period | | | 4,567 | | | | 3,879 | | | | 2,726 | |
Adjustment for: | | | | | | | | | | | | |
Dividends received | | | (4,567 | ) | | | (3,879 | ) | | | (2,726 | ) |
Cash flow from operating activities | | | — | | | | — | | | | — | |
Dividends received | | | 4,567 | | | | 3,879 | | | | 2,726 | |
Cash flow from investing activities | | | 4,567 | | | | 3,879 | | | | 2,726 | |
Cash distributions made | | | (4,567 | ) | | | (3,879 | ) | | | (2,725 | ) |
Cash flow from financing activities | | | (4,567 | ) | | | (3,879 | ) | | | (2,725 | ) |
Change in cash and cash equivalents | | | — | | | | — | | | | 1 | |
Cash and cash equivalents at January 1 | | | 2 | | | | 2 | | | | 1 | |
Cash and cash equivalents at December 31 | | | 2 | | | | 2 | | | | 2 | |
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 215 | |
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.
Shell Transport and BG Group plc, now BG Group Limited (BG), have each issued a dividend access share 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 14, 2018.
The financial results of the Trust are included in the Consolidated and Parent Company Financial Statements on pages 137-178 and pages 199-207 respectively.
3 SIGNIFICANT 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 £2,302,549 (2016: £1,972,676) 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 23 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 £2,970 million (2016: £2,533 million; 2015: £2,726 million) in respect of the dividend access share from Shell Transport and £1,597 million (2016: £1,346 million) in respect of the dividend access share from BG. The Trust made distributions of £4,567 million (2016: £3,879 million; 2015: £2,726 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 2017 audit services was £33,750 (2016: £33,750; 2015: £33,750).
FINANCIAL STATEMENTS AND SUPPLEMENTS SHELL ANNUAL REPORT AND FORM 20-F 2017 | 216 | |
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 221.
[A] At February 16, 2018, 478,067,812 A ADSs and 307,432,534 B ADSs were outstanding, representing 21% and 16% of the respective share capital class, held by 5,700 and 925 holders of record with an address in the USA, respectively. In addition to holders of ADSs, at February 16, 2018, 35,338 A shares and 1,034,164 B shares of €0.07 each were outstanding, representing 0.001% and 0.027% of the respective share capital class, held by 331 and 3,178 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 31/12/17 | | 4.87% | | 5.79% |
Weighting on AEX at 31/12/17 | | 15.92% | | not included |
Share capital
The issued and fully paid share capital of the Company at February 16, 2018, was as follows:
| | | | |
Share capital | | | | |
| | Issued and fully paid |
| | Number | | Nominal value |
Ordinary shares of €0.07 each | | | | |
A shares | | 4,597,136,050 | | €321,799,524 |
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 2017 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, 2017, trusts and trust-like entities holding shares for the benefit of employee share plans of Shell held (directly and indirectly) 30 million shares of the Company with an aggregate market value of $998 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.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 217 | |
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, 2017, are given below.
| | | | | | | | | | | | | | | | | | | | | | | | |
Direct shareholdings | | | | | | | | | | | | | | | | | | | | | | | | |
| | A shares | | | B shares | | | Total | |
| | Number | | | % | | | Number | | | % | | | Number | | | % | |
Euroclear Nederland | | | 2,012,545,344 | | | | 43.78 | | | | 14,824,206 | | | | 0.40 | | | | 2,027,369,550 | | | | 24.30 | |
BNY (Nominees) Limited | | | 787,847,266 | | | | 17.14 | | | | 597,789,774 | | | | 15.96 | | | | 1,385,637,040 | | | | 16.61 | |
Chase Nominees Limited | | | 85,008,779 | | | | 1.85 | | | | 245,221,731 | | | | 6.55 | | | | 330,230,510 | | | | 3.96 | |
State Street Nominees Limited (OM02) | | | 129,034,595 | | | | 2.81 | | | | 160,840,178 | | | | 4.29 | | | | 289,874,773 | | | | 3.47 | |
SIGNIFICANT INDIRECT SHAREHOLDINGS
Interests of investors with 3% or more of A and B shares combined at December 31, 2017, are given below.
| | | | | | | | | | | | | | | | | | | | | | | | |
Indirect shareholdings | | | | | | | | | | | | | | | | | | | | | | | | |
| | A shares | | | B shares | | | Total | |
| | Number | | | % | | | Number | | | % | | | Number | | | % | |
BlackRock, Inc. | | | 361,174,730 | | | | 7.86 | | | | 261,634,575 | | | | 6.99 | | | | 622,809,305 | | | | 7.47 | |
The Capital Group Companies, Inc. | | | 68,717,359 | | | | 1.49 | | | | 375,623,767 | | | | 10.03 | | | | 444,341,126 | | | | 5.33 | |
The Vanguard Group, Inc. | | | 148,617,903 | | | | 3.23 | | | | 118,899,011 | | | | 3.17 | | | | 267,516,914 | | | | 3.21 | |
NOTIFICATION OF MAJOR SHAREHOLDINGS
As at December 31, 2017, the Company had been notified by the following investor of its interests in the Company’s shares pursuant to Disclosure Guidance and Transparency Rule (DTR) 5.
| | | | | | | | | | | | | | | | | | | | | | | | |
Investor | | | | | | | | | | | | | | | | | | | | | | | | |
| | A shares | | | B shares | | | Total [B] | |
| | Number | | | % | | | Number | | | % | | | Number | | | % | |
BlackRock, Inc. [A] | | | 277,045,557 | | | | 6.10 | | | | 218,422,847 | | | | 5.83 | | | | 495,468,404 | | | | 5.97 | |
[A] The Company received numerous notifications from BlackRock, Inc. during 2017. The information given is derived from the most recent notification.
[B] Excludes financial instruments according to Art. 13(1)(a) of Directive 2004/109/EC (DTR 5.3.1.1 (a)) and financial instruments with similar economic effect according to Art. 13(1)(b) of Directive 2004/109/EC (DTR 5.3.1.1 (b)).
The Company did not receive any further notifications pursuant to DTR 5 in the period from December 31, 2017, to February 16, 2018 (being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 218 | |
Dividends
The following tables show the dividends on each class of share and each class of ADS for the years 2013-2017.
| | | | | | | | | | | | | | | | | | | | |
A and B shares | | $ | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Q1 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | |
Q2 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | |
Q3 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | |
Q4 | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.47 | | | | 0.45 | |
Total announced in respect of the year | | | 1.88 | | | | 1.88 | | | | 1.88 | | | | 1.88 | | | | 1.80 | |
| | | | | | | | | | | | | | | | | | | | |
A shares | | € [A] | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Q1 | | | 0.42 | | | | 0.42 | | | | 0.42 | | | | 0.35 | | | | 0.34 | |
Q2 | | | 0.39 | | | | 0.42 | | | | 0.42 | | | | 0.36 | | | | 0.34 | |
Q3 | | | 0.40 | | | | 0.44 | | | | 0.43 | | | | 0.38 | | | | 0.33 | |
Q4 | | 0.38 | | | | 0.44 | | | | 0.42 | | | | 0.43 | | | | 0.32 | |
Total announced in respect of the year | | 1.59 | | | | 1.72 | | | | 1.69 | | | | 1.53 | | | | 1.34 | |
Amount paid during the year | | | 1.65 | | | | 1.70 | | | | 1.71 | | | | 1.42 | | | | 1.34 | |
[A] Euro equivalent, rounded to the nearest euro cent.
| | | | | | | | | | | | | | | | | | | | |
B shares | | Pence [A] | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Q1 | | | 37.12 | | | | 32.98 | | | | 30.75 | | | | 28.03 | | | | 28.99 | |
Q2 | | | 36.28 | | | | 35.27 | | | | 30.92 | | | | 29.09 | | | | 28.67 | |
Q3 | | | 35.02 | | | | 37.16 | | | | 31.07 | | | | 30.16 | | | | 27.51 | |
Q4 | | 33.91 | | | | 38.64 | | | | 32.78 | | | | 31.20 | | | | 26.88 | |
Total announced in respect of the year | | 142.33 | | | | 144.05 | | | | 125.52 | | | | 118.48 | | | | 112.05 | |
Amount paid during the year | | | 147.06 | | | | 138.19 | | | | 123.94 | | | | 114.16 | | | | 113.96 | |
[A] Sterling equivalent.
| | | | | | | | | | | | | | | | | | | | |
A and B ADSs | | $ | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Q1 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | |
Q2 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | |
Q3 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | |
Q4 | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.94 | | | | 0.90 | |
Total announced in respect of the year | | | 3.76 | | | | 3.76 | | | | 3.76 | | | | 3.76 | | | | 3.60 | |
Amount paid during the year | | | 3.76 | | | | 3.76 | | | | 3.76 | | | | 3.72 | | | | 3.56 | |
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 219 | |
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 $ | |
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 | |
2017 | | | 28.25 | | | | 22.73 | | | | 27.77 | | | | 66.92 | | | | 50.32 | | | | 66.71 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | London Stock Exchange B shares | | | New York Stock Exchange B ADSs | |
| | High pence | | | Low pence | | | Year-end pence | | | High $ | | | Low $ | | | Year-end $ | |
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 | |
2017 | | | 2,513 | | | | 2,037 | | | | 2,509 | | | | 68.48 | | | | 53.10 | | | | 68.29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $ | |
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 | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Q1 | | | 26.87 | | | | 23.53 | | | | 2,404 | | | | 2,137 | | | | 56.39 | | | | 50.32 | | | | 59.56 | | | | 53.46 | |
Q2 | | | 25.66 | | | | 22.83 | | | | 2,254 | | | | 2,037 | | | | 56.26 | | | | 51.08 | | | | 58.53 | | | | 53.10 | |
Q3 | | | 25.71 | | | | 22.73 | | | | 2,307 | | | | 2,039 | | | | 60.66 | | | | 52.44 | | | | 62.61 | | | | 53.56 | |
Q4 | | | 28.25 | | | | 25.55 | | | | 2,513 | | | | 2,299 | | | | 66.92 | | | | 60.05 | | | | 68.48 | | | | 61.69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $ | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September | | | 25.71 | | | | 23.09 | | | | 2,307 | | | | 2,134 | | | | 60.66 | | | | 54.95 | | | | 62.61 | | | | 56.44 | |
October | | | 27.00 | | | | 25.55 | | | | 2,431 | | | | 2,299 | | | | 63.28 | | | | 60.05 | | | | 65.60 | | | | 61.69 | |
November | | | 28.25 | | | | 25.93 | | | | 2,513 | | | | 2,355 | | | | 65.83 | | | | 61.46 | | | | 67.40 | | | | 63.45 | |
December | | | 28.05 | | | | 26.74 | | | | 2,510 | | | | 2,353 | | | | 66.92 | | | | 63.10 | | | | 68.48 | | | | 64.56 | |
2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January | | | 29.15 | | | | 27.65 | | | | 2,617 | | | | 2,480 | | | | 72.43 | | | | 66.91 | | | | 74.60 | | | | 68.49 | |
February | | | 28.23 | | | | 24.20 | | | | 2,482 | | | | 2,247 | | | | 69.69 | | | | 61.02 | | | | 71.00 | | | | 61.92 | |
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 220 | |
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 222.
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, 2017, to February 16, 2018, the Company received $2,165,198 from the Depositary.
Scrip Dividend Programme
The Company operated a Scrip Dividend Programme until the third quarter of 2017 which enabled shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends (if approved by the Board). Only new A shares were issued under the programme, including to shareholders who hold B shares. More information can be found at www.shell.com/scrip.
DIVIDEND REINVESTMENT PLAN
With effect from the fourth quarter 2017 interim dividend, the Dividend Reinvestment Plan (DRIP) provided by Equiniti Financial Services Limited (EFSL), part of the same group of companies as Royal Dutch Shell plc’s Registrar, Equiniti, was reintroduced. More information can be found at www.shareview.co.uk/info/drip or by contacting Equiniti.
The dividend reinvestment options offered by ABN AMRO Bank N.V. and The Bank of New York Mellon were also reintroduced at this time. More information can be found by contacting the relevant provider.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 221 | |
|
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 restrictions affecting those individuals, entities, government bodies, corporations or agencies that are subject to European Union (EU) sanctions, for example, regarding Syria, and those sanctions adopted by the government of the UK, 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 holders of the Company’s ordinary shares who are non-residents of the UK, or affecting the import or export of capital.
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 SHARES
There is no Dutch withholding tax on dividends on B shares or B ADSs, provided that such dividends are paid on the dividend access shares pursuant to the dividend access mechanism (see “Dividend access mechanism for B shares” on page 86). Dividends paid on the dividend access shares are treated as UK-source for tax purposes and there is no UK withholding tax on them. From April 2016, there were changes to the taxation of dividends for individual shareholders resident in the UK. The dividend tax credit was abolished, and a tax-free dividend allowance introduced.
In 2017, all dividends with respect to B shares and B ADSs were paid on the dividend access shares 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 shares 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 shares 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.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 222 | |
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.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 223 | |
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 affiliates of Royal Dutch Shell plc. 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.
At December 31, 2017, we have a receivable of $10.5 million outstanding with the National Iranian Oil Company (NIOC) associated with our previous upstream activities conducted prior to the imposition of European Union sanctions.
In 2017, we agreed to extend the term of a memorandum of understanding and a separate confidentiality agreement, each originally signed in 2016, with NIOC to cover a joint review of a number of oil and gas opportunities. In April 2017, we entered into a confidentiality and restricted use agreement with the National Petrochemical Company (NPC) regarding a potential midstream opportunity in Iran. In August 2017, we signed an amendment to extend the term of a non-binding letter of intent that was signed in 2016 with NPC to cover a joint review of opportunities in the Iranian petrochemicals sector. In August 2017, we entered into a technology licence agreement with Petrochemical Industries Design and Engineering Company (PIDEC) to provide licence and engineering services to Abadan Oil Refinery Company (AORC) in relation to Cansolv sulphur dioxide (SO2) scrubbing technology, as well as a separate end-user licence agreement with AORC for a continuing licence for the Cansolv SO2 technology once PIDEC’s work at Abadan has been completed. In addition, a separate agreement was signed at the same time between Shell, the Iran branch of Shell Development B.V. (SDI) and PIDEC, for the arrangement of payments due under the licence and engineering agreement to be made to SDI in Iran. There was no gross revenue or net profit associated with these agreements.
In December 2016, we entered into a technology licence agreement with Hamedan Ibn Sina Petrochemical Company for a Shell ethylene process, and during 2017 this generated gross revenue of $6.3 million and a net profit of $0.2 million. Hamedan Ibn Sina Petrochemical Company payments were made into our account at Karafarin Bank.
In 2017, we received gross revenue of $236,602 into our account at Karafarin Bank from Bank Mellat in relation to advisory services provided to Marun Petrochemical Company, pursuant to an advisory agreement entered into in June 2017. No net profit was associated with these services in 2017.
In 2017, two oil cargoes, which we purchased from NIOC in December 2016, were subsequently sold to a Shell refinery, resulting in gross revenue of
$212 million and net profit of $3.4 million. In 2017, we purchased oil cargoes from NIOC, which were subsequently sold to a Shell refinery, resulting in gross revenue of $221 million and net profit of $7.5 million. Freight and ancillary services pertaining to these cargoes, amounting to approximately $11 million and $3 million, have not been settled with NIOC and National Iranian Tanker Company, respectively. Shell may consider future business opportunities with NIOC, including the purchase and trading of oil, however no opportunities are currently being contemplated.
In 2017, we paid $13 for a 2013 corporate income tax claim, $84 in stamp duty in relation to a 2008/2009 value-added tax claim and $818 for a 2013 value-added tax claim to the Iranian Ministry of Finance, through our Iranian accountant Bayat Rayan. There was no gross revenue or net profit associated with these transactions.
In 2017, we paid $7,579 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.
In 2017, Shell employees met with Iranian officials in Iran. In relation to these travelling Shell employees, $21,411 was paid to Iranian authorities for visas, airport services and exit fees; $187 was paid to Bimeh Insurance Company for travel insurance; $5,637 was paid to Iranian airlines for flight tickets; and $298 was paid to Iranian hotels. We also discovered $224 in travel visa costs in relation to 2016 that were not previously disclosed. We also paid $127 to the Iranian embassy in the Netherlands to ratify documents. In addition, we paid $28,099 in conference registration fees for conferences in Iran attended by Shell employees. The conferences attended were the Petroleum Conference – Iran 2017; the Iran Renewable Energy Commercial Conference; the Iranian Petroleum and Energy Club Congress and Exhibition; and the Iran Petrochemical Forum. 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 2017, we provided downstream retail services to the Iranian Embassy in Argentina. This transaction generated gross revenue of $441 and an estimated net profit of $63. We have no contractual agreement with this embassy.
We maintain accounts with Karafarin Bank where our cash deposits (balance of $8.4 million at December 31, 2017) generated non-taxable interest income of $0.4 million in 2017, and we paid $450 in bank charges. We have made payments amounting to $1.2 million through our account in Karafarin Bank to a variety of non-sanctioned parties. We made a bank transfer of $1,164 to test the ability to transfer funds from our Karafarin Bank account to Syndicate Bank in India.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 224 | |
Non-GAAP measures reconciliations
These non-GAAP measures, also known as alternative performance measures, are financial measures other than those defined in International Financial Reporting Standards which Shell considers provide useful information.
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 Cash flow from operating activities in the “Consolidated Statement of Cash Flows”.
| | | | | | | | | | | | |
Reconciliation of CCS earnings to income for the period | | | | | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Earnings on a current cost of supplies basis (CCS earnings) | | | 12,471 | | | | 3,692 | | | | 4,155 | |
Attributable to non-controlling interest | | | (390 | ) | | | (159 | ) | | | (313 | ) |
Earnings on a current cost of supplies basis attributable to Royal Dutch Shell plc shareholders | | | 12,081 | | | | 3,533 | | | | 3,842 | |
Current cost of supplies adjustment | | | 964 | | | | 1,085 | | | | (1,955 | ) |
Non-controlling interest | | | (68 | ) | | | (43 | ) | | | 52 | |
Income attributable to Royal Dutch Shell plc shareholders | | | 12,977 | | | | 4,575 | | | | 1,939 | |
Non-controlling interest | | | 458 | | | | 202 | | | | 261 | |
Income for the period | | | 13,435 | | | | 4,777 | | | | 2,200 | |
CAPITAL INVESTMENT
Capital investment is a measure used to make decisions about allocating resources and assessing performance.
| | | | | | | | | | | | |
Capital investment reconciliation | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Capital expenditure [A] | | | 20,845 | | | | 22,116 | | | | 26,131 | |
Capital investment related to the acquisition of BG Group plc | | | — | | | | 52,904 | | | | — | |
Investments in joint ventures and associates [A] | | | 595 | | | | 1,330 | | | | 896 | |
Exploration expense, excluding exploration wells written off | | | 1,048 | | | | 1,274 | | | | 2,948 | |
Finance leases | | | 1,074 | | | | 2,343 | | | | 91 | |
Other | | | 444 | | | | (90 | ) | | | (1,205 | ) |
Capital investment | | | 24,006 | | | | 79,877 | | | | 28,861 | |
Of which | | | | | | | | | | | | |
Integrated Gas | | | 3,827 | | | | 26,214 | | | | 5,178 | |
Upstream | | | 13,648 | | | | 47,507 | | | | 18,349 | |
Downstream | | | 6,416 | | | | 6,057 | | | | 5,119 | |
Corporate | | | 115 | | | | 99 | | | | 215 | |
[A] Included within Cash flow from investing activities in the “Consolidated Statement of Cash Flows”.
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 | |
| | 2017 | | | 2016 | | | 2015 | |
Organic capital investment | | | 22,177 | | | | 26,913 | | | | 28,403 | |
Inorganic capital investment | | | 1,829 | | | | 52,964 | | | | 458 | |
Total capital investment | | | 24,006 | | | | 79,877 | | | | 28,861 | |
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 for any share consideration received or contingent consideration initially recognised upon the related divestment, as well as proceeds from sale of interests in entities while retaining control (for example, proceeds from sale of interests in Shell Midstream Partners, L.P.).
| | | | | | | | | | | | |
Divestments reconciliation | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Proceeds from sale of property, plant and equipment and businesses [A] | | | 8,808 | | | | 2,072 | | | | 4,720 | |
Proceeds from sale of joint ventures and associates [A] | | | 2,177 | | | | 1,565 | | | | 276 | |
Share and contingent consideration [B] | | | 3,046 | | | | 275 | | | | — | |
Proceeds from sale of interests in entities while retaining control [C] | | | 278 | | | | 1,108 | | | | 595 | |
Other | | | 3,031 | | [D] | | (36 | ) | | | (51 | ) |
Divestments | | | 17,340 | | | | 4,984 | | | | 5,540 | |
Of which | | | | | | | | | | | | |
Integrated Gas | | | 3,077 | | | | 352 | | | | 269 | |
Upstream | | | 11,542 | | | | 1,726 | | | | 2,478 | |
Downstream | | | 2,703 | | | | 2,889 | | | | 2,282 | |
Corporate | | | 18 | | | | 17 | | | | 511 | |
[A] Included within Cash flow from investing activities in the “Consolidated Statement of Cash Flows”.
[B] With effect from 2017, this is valued at the date of the related divestment, instead of when these shares are disposed of or the contingent consideration is realised. There is also no impact on divestments as a result of any revaluation. Comparative information, which only affects the Upstream segment in 2016, has been adjusted. In 2017, it mainly comprises $2,829 million for shares in Canadian Natural Resources Limited received as partial consideration in the oil sands divestment (see Note 8 to the “Consolidated Financial Statements” on page 153).
[C] Included within “Change in non-controlling interest” in Cash flow from financing activities in the “Consolidated Statement of Cash Flows”.
[D] Includes proceeds of $2,635 million from the sale of shares in Woodside Petroleum Limited.
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 225 | |
OPERATING EXPENSES
Operating expenses is a measure of Shell’s cost management performance, comprising items from the “Consolidated Statement of Income” as follows.
| | | | | | | | | | | | |
Operating expenses | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Production and manufacturing expenses | | | 26,652 | | | | 28,434 | | | | 28,095 | |
Selling, distribution and administrative expenses | | | 10,509 | | | | 12,101 | | | | 11,956 | |
Research and development | | | 922 | | | | 1,014 | | | | 1,093 | |
Total | | | 38,083 | | | | 41,549 | | | | 41,144 | |
Of which | | | | | | | | | | | | |
Integrated Gas | | | 5,471 | | | | 6,479 | | | | 4,088 | |
Upstream | | | 12,656 | | | | 14,501 | | | | 15,740 | |
Downstream | | | 19,583 | | | | 19,681 | | | | 20,816 | |
Corporate | | | 373 | | | | 888 | | | | 500 | |
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 | |
| | 2017 | | | | 2016 | | | | 2015 | |
Income for the period | | 13,435 | | | | 4,777 | | | | 2,200 | |
Interest expense after tax | | 2,995 | | | | 2,730 | | | | 2,030 | |
Income before interest expense | | 16,430 | | | | 7,507 | | | | 4,230 | |
Capital employed – opening | | 280,988 | | | | 222,500 | | | | 218,326 | |
Capital employed – closing | | 283,477 | | | | 280,988 | | | | 222,500 | |
Capital employed – average | | 282,233 | | | | 251,744 | | | | 220,413 | |
ROACE | | 5.8% | | | | 3.0% | | | | 1.9% | |
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.
| | | | | | | | | | | | |
Free cash flow | | $ million | |
| | 2017 | | | 2016 | | | 2015 | |
Cash flow from operating activities | | | 35,650 | | | | 20,615 | | | | 29,810 | |
Cash flow from investing activities | | | (8,029 | ) | | | (30,963 | ) | | | (22,407 | ) |
Free cash flow | | | 27,621 | | | | (10,348 | ) | | | 7,403 | |
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 226 | |
Index to the Exhibits
Exhibit No. | | Description | | Page |
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). | | |
| | | | |
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). | | |
| | | | |
2.1 | | Amended and Restated Dividend Access Trust Deed dated December 22, 2015, (incorporated by reference to Exhibit 2 to the Annual Report for the fiscal year ended December 31, 2015, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the US Securities and Exchange Commission on March 10, 2016). | | |
| | | | |
4.1 | | Shell Provident Fund Regulations and Trust Agreement, as amended (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). | | |
| | | | |
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). | | |
| | | | |
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). | | |
| | | | |
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). | | |
| | | | |
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). | | |
| | | | |
7.1 | | Calculation of Ratio of Earnings to Fixed Charges. | | E1 |
| | | | |
7.2 | | Calculation of Return on Average Capital Employed (ROACE) (incorporated by reference to page 226 herein). | | |
| | | | |
7.3 | | Calculation of gearing (incorporated by reference to page 22 and Note 14 to the Consolidated Financial Statements on page 158 herein). | | |
| | | | |
8.1 | | Significant Shell subsidiaries at December 31, 2017. | | E2 |
| | | | |
12.1 | | Section 302 Certification of Royal Dutch Shell plc. | | E21 |
| | | | |
12.2 | | Section 302 Certification of Royal Dutch Shell plc. | | E22 |
| | | | |
13.1 | | Section 906 Certification of Royal Dutch Shell plc. | | E23 |
| | | | |
99.1 | | Consent of Ernst & Young LLP, London, United Kingdom. | | E24 |
| | | | |
99.2 | | Consent of PricewaterhouseCoopers LLP, London, United Kingdom. | | E25 |
| | | | |
99.3 | | Consent of Ernst & Young LLP, London, United Kingdom, relating to the Royal Dutch Shell Dividend Access Trust. | | E26 |
| | | | |
99.4 | | Consent of PricewaterhouseCoopers CI LLP, Jersey, Channel Islands, relating to the Royal Dutch Shell Dividend Access Trust. | | E27 |
| | | | |
101 | | Interactive data files. | | |
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 227 | |
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 14, 2018 | |
ADDITIONAL INFORMATION SHELL ANNUAL REPORT AND FORM 20-F 2017 | 228 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | FINANCIAL CALENDAR IN 2018 | | | | | | | | |
| | The Annual General Meeting will be held on May 22, 2018. | | | | |
| | | | | | | | | | | | | |
| | | | | 2017 Fourth | | 2018 First | | 2018 Second | | 2018 Third | | |
| | | | | quarter [A] | | quarter [B] | | quarter [B] | | quarter [B] | | | |
| | Results announcements | | February 1 | | April 26 | | July 26 | | November 1 | | | |
| | Interim dividend timetable | | | | | | | | | | | |
| | Announcement date | | February 1 [C] | | April 26 | | July 26 | | November 1 | | |
| | Ex-dividend date [D] | | February 15 | | May 10 | | August 9 | | November 15 | | |
| | Record date | | February 16 | | May 11 | | August 10 | | November 16 | | |
| | Closing date for currency election [E] | | March 2 | | May 25 | | August 24 | | November 30 | | |
| | Euro and sterling equivalents announcement date | | March 9 | | June 4 | | September 3 | | December 6 | | |
| | Payment date | | March 26 | | June 18 | | September 17 | | December 19 | | | |
| | [A] In respect of the financial year ended December 31, 2017. [B] In respect of the financial year ending December 31, 2018. [C] The Directors do not propose to recommend any further distribution in respect of 2017. [D] The New York Stock Exchange (NYSE), with effect from September 5, 2017, reduced the standard settlement cycle in accordance with the SEC amendments to Exchange Act Rule 15c6-1(a). Under these rules, regular settlement will occur on a T+2 basis for trades occurring on or after the SEC's implementation date of September 5, 2017. As a result, RDS A and B ADSs traded on the NYSE markets will now settle in line with RDS A and B shares traded on European markets, which moved to a T+2 settlement basis for trades in 2014, resulting in the same ex-dividend date for RDS A and B shares, and RDS A and B ADSs. Record dates will not change. [E] A different 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. | | |
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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 505000 | | Annual Report/20-F service for US residents | |
| Lancing | | Louisville, KY 40233-5000 | | +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 | | | | |
| | | | 462 South 4th Street Suite 1600 | | | | |
| For online information about your holding | | Louisville KY 40202 | | | | |
| and to change the way you receive your | | USA | | | | |
| company documents: | | | | | | |
| www.shareview.co.uk | | +1 888 737 2377 (USA) | | | | |
| | | | +1 201 680 6825 (international) | | | | |
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| | | | shrrelations@cpushareownerservices.com | | | | |
| | | | www.mybnymdr.com | | | | |
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