Shell plc (SHEL) Earnings Call Transcript

Ben and Jessica, 2 questions, if I might. The first is just goes back to the capital frame and CapEx. The CapEx range, you've decided upon '23 to '27, as and when you move past this near-term period. How have you determined that? Is it top down? Is it bottom up? Is it really in essence around affordability and balancing cash? And the second question is, Ben, how do I think about -- how do I model what you're doing in renewables and energy solutions? I mean, the nice thing about counting gigawatts, and it's counting gigawatts because it's very easy to count the capital that goes in and it's very easy to make an assumption what the return is, is that the way I should be approaching things in the context of your business just thinking what's your capital spend and what kind of return do I assume? And what will you be able to provide us with over time to give us some indication on the progress that's actually being made, the returns that are being achieved, so on and so forth?

Thanks very much, Lucas, on that 2 really important questions. I will take the first one and a stab at the second one. And I'm sure that Jessica has a few points to that as well. So the '23 to '27 is basically a combination of 2 factors that are driving it. First of all, we know how much opportunity we have in the funnel. And we know that, at this point in time, if we say it's '19 to '22, we are severely constraining the business who has a lot more spending potential at this point in time than we give them to spend. So therefore, we have to take a measured view and say, "Okay, we think we can step up." As a matter of fact, we could step up a whole lot more if we wanted to, but we should be able to figure out what is a reasonable amount of spend to step up with in order to really accelerate the opportunity delivery that we have. But then at the same time, it's also an affordability question. We have to balance a number of things at the same time. We have to make sure that we pay out 20% to 30% of CFFO, and I'm sure you would also ask is it going to be 20% or 30%. Well, the closer we are to the 30%, of course, the lesser the opportunity for also spending it on ourselves. So we have to get the balance right. And at the same time, we also need to continue to delever the balance sheet. So it's a combination of, on the one hand, looking at do we have enough opportunity to spend money on and secondly, what do we really think is a balanced approach, where all 3 objectives are being served. That is a bit of an art, but there's a bit of science behind it as well. Now on your second question, how do you model us, well, indeed, you could argue that it's a lot easier, isn't it? If you just have gigawatts, you multiply it with whatever you make out of a gigawatt. And then all of a sudden, you are there. And the same would be true for barrels of sustainable aviation fuel. That's not a solution that we have chosen basically also because we don't think that actually is how value gets created. Value gets created much more by, again, the product design, the inherent properties, the convenience, the uniqueness, et cetera, et cetera, which is just more than what it is that we produce. Moreover, we aim to sell more than what we produce as well. Same story as we have for oil and gas. We sell more than we produce. So I'm afraid you will have to start working back from the customer with us on that, Lucas, and we will have to help you with that. So we have to equip you with new guidance, new metrics, new ways of looking at it, profit margins, et cetera, et cetera. So you can actually see whether it's a legitimate and a sensible way to model our profitability. But the fundamental point is, and I hope you don't take this comment wrongly, we do not set the ambitions and the targets and our strategy for ease of modeling. We do it because we think it is the only sensible way to approach value over volume strategy. Jessica, anything to add?

Ben, I think you covered the points well. I would say that we've provided return expectations for each of our businesses, so that also gives insight in terms of what we're expecting to generate from the capital that we deploy. It's important to keep in mind that for marketing, we also get -- we create value through our OpEx as well. So to Ben's point, we're going to continue to need to work with you and the market to make sure we're providing meaningful disclosure, so that we can get the full value from each of our businesses, our existing marketing business as well as the businesses of the future.

Next question is from Alastair Syme of Citi.

Ben, look, I really like the idea of the shareholder vote on the energy transition plan. Can I just get you to explain what exactly you will get shareholders to vote on, how specific you're going to be? And just to clarify, under the bylaws, what percentage of shareholders will need for the vote to pass? And then secondly, one of the big changes you look to have done today on the carbon intensity side, you're sort of pushing a lot on the nature-based solutions. And I think in your speech, you referenced 300 million tonnes by 2050. Yes, I think right before you said 300 million tonnes is a sort of far as the size of Great Britain. So can you talk about the quality of projects you're seeing in this arena as you look to scale that business up?

Great questions, Alastair. So the first one, what we will be doing this year is indeed bring out a report, which we will have to do before, of course, the voting season starts. That lays out our strategy. And it will be very much based on what it is we are selling today, and then we will give an update in 3 years' time. And we will ask for an advisory vote on that. So we haven't changed the bylaws of the company. We're not going to. We just make a commitment to do this, and we will just see what our shareholders think. And in the intervening years, we will give an update on how we are doing on that report, on what it is that we laid out and, again, ask for an advisory vote from shareholders. And it is a more structural way of being in dialogue with our shareholders, which we want to do and also to get a sense of whether they believe we're on the right track, whether we are doing the right things. Of course, at this point in time, we do get resolutions to vote on when it comes to climate change, but we believe that's not the resolution that sets our agenda out. So in a way, it is taking back a little bit, the agenda for the AGM when we have a dialogue with shareholders, which we believe is meaningful. Now on your NBS question, indeed, we put numbers out there. I think probably, it is better to look at the near-term number, where we say by the end of this decade, we are thinking of 120 million tonnes per annum of nature-based solution type offsets. And of course, they need to be the highest possible quality offsets. There is no doubt in our minds that the world is going to need offsets, and that's not because we like it or we think that, that's the only way. That's also what the IPCC believes. And actually, the numbers that we have in there are quite in the middle of the range that the IPCC scenarios tell us is going to be needed if the world is going to get to 1.5 degrees. So what we will do is, first of all, of course, focus on can we eliminate carbon emissions; secondly, can we reduce carbon emissions. And only if there are certain carbon emissions that cannot be eliminated or reduced, can we mop them up meaningfully with nature-based solutions predominantly, of course, for our customers, not for ourselves. And we will take only the highest quality projects. And we will be in a continuous dialogue with people who are experts in this field to see what is in the highest quality project and the highest quality offset therefore that we can originate.

Next question comes from Jon Rigby of UBS.

Two questions. The first, I guess, goes a little bit back to what Lucas was asking you. I think as we've gone through, I think all of your audience is well used to these sort of transition-oriented strategy changes. And I guess, one of the pushbacks that are coming up a lot is there's a rate of return on the new asset portfolios around renewables. And it seems to me is that you have a different -- differentiated strategy, this sort of intermediation between the producer and the customer seems to be sort of elegant solution. But I guess my question is, how confident are you that you have a set of some of competitive advantages that makes you better able to do this model than any of your peers. Or put another way, do you have a sort of defensive moat, some kind of way of defending this as a competitive position? And what gives you confidence that you can do it and replicate it and then maintain it over the future because it does look different to what a lot of your peers are doing? The second, just a comment. I think you've talked historically about a world-class investment case and a compelling investment case. Can you just talk a little more, particularly, I think, now as the oil companies are all sort of slightly disbursing in terms of strategy, maybe it's -- they're not the best comp for you. How do you think about what qualifies as any one of those 2 descriptions?

Thanks very much, Jon. I'll take the first. Jessica, would you mind taking the second? So I think you -- in a way, you described it, well, Jon. You described it in a slightly different way than we, of course, put it. You talk about intermediary. We like to think of ourselves as truly sort of working with the customer on their solutions. And then, indeed, we will play a role working from a customer back to what it is that we need to own in order to enable and facilitate the -- that particular value chain. It doesn't mean, by the way, that we won't be owning assets. As a matter of fact, we will be owning assets. Even more so, we will be causing assets to happen. So I can see ourselves, of course, when we transact with very large players like Amazon or others in this space who like to buy renewable power, for instance, from us, that would like to see us also creating new renewable capacity. Otherwise, of course, it is an issue for them. It could be construed as taking away renewable power from, say, other economies. So we need to cause assets to happen, but we don't necessarily always need to continue to own these assets, and that is the way we differentiate perhaps from others who probably see, in a more convenient way perhaps for modelers, the energy transition as just another resource play where you basically create an advantaged asset to produce a commodity that you sell into a merchant market. And we believe there is just not enough return in it. And it doesn't necessarily play to what I believe is a towering strength of this company, which is working with customers not just in a single energy solution, but a whole range of energy solutions, and not just providing the energy itself, but providing everything around it, the risk management, the price exposure, the uninterruptability, et cetera, et cetera, et cetera. So is that a model that can be attacked by others? Of course. I would trust that to be plenty of competition. But who is best placed at this point in time? I think we're probably right there at the top, Jon, and that is why we have chosen this approach. Jessica, to you.

Great. Thanks, Ben. I'm tempted to add on that, but I want to be sensitive to time, but it's an area that I have a lot of energy around, no pun intended. Turning to the compelling investment case and what qualifies and the world-class investment case. What we started the presentation off with today is that our investment case is founded on the strength of our strategy. And at the core of that, that we're speaking to today is how we're going to drive lower carbon energy system and create value for our shareholders that is complemented and integral also with how we impact the environment and people's lives. So what we're trying to achieve as a company and how we're trying to play our role in society as a company is the basis of our investment case. Now turning kind of more into directly the shareholder perspective on that. What we offer today from an investment case is a progressive dividend. We're going to provide solid cash returns to our shareholders through the energy transition, and I think that's a respectable level of growth that we're targeting over the near to medium term. But importantly, we're also transitioning the company to ensure that we have the cash flows through the medium term as well as the long term, which will ultimately translate into our ability to increase shareholder distributions further, either through increased dividends or share buybacks and, importantly, to increase the share price so that our shareholders can enjoy a total shareholder return that's driven not only by the cash that we provide back to our shareholders, but by the growth of the value of the company because we've got the right strategy, we've got the right assets, we've got the right people, and we're going to be able to create differentiated returns, going back to Ben's point. I think there's few companies that can offer the nature of solutions that we're offering to a company like Amazon to be able to manage the complexity of the power system on behalf of our customers, while also helping them with sustainable aviation fuel or renewable natural gas to power their trucks in the -- from a delivery perspective or companies that are able to do things like HKN and the connection to hydrogen and Pernis and creating the hydrogen economy in Europe. Our ability to span that spectrum, I think, is differentiated, and a few will be able to replicate.

Next question is from Lydia Rainforth of Barclays.

Two questions again from me. Firstly, then, on the idea of the customer and being the center part of it, can you just talk about the willingness of the customer to pay for carbon because, obviously, that sort of makes a difference if you're saying we don't want to deal with customers that don't embrace low carbon, that willingness to pay for carbon really matters? So just any thoughts on that. And then secondly, just on the $35 billion OpEx number, you said you want to keep that just below that level, well, that is where it is. How should we think about that going forward in terms of good OpEx, be it on the marketing side or on the digitalization side? Obviously, there will be some good costs and bad costs as to how we should think about that longer term.

Thank you, Lydia. Two very good questions. I'll take the second one -- sorry, the first one. Jessica takes the second. I think, of course, you're absolutely right. Everything in this world can only be paid for by consumers and taxpayers. And therefore, we have to make sure that the conditions are being created for them to do so. Now we believe some of it will be driven by incentives, some of it will be driven by mandates, but a lot of it will also be driven by our customers wanting and needing to meet their own net zero-emission targets over the next 30 years as well. There is no way, I believe, that a modern airline will be able to say, well, this doesn't apply to us or a trucking company or a shipping company or a steel-making company. So indeed, people are looking for these solutions. It's easy enough to make a pledge. But then the day thereafter, you have to start figuring out how you're going to get there. And quite often, indeed, that is a matter of, well, adopting new technologies that may be more expensive, but may also come down in price. And maybe it's also a matter of making sure that the new attributes, the low carbon attribute is either being valued by the end consumer or it is being mandated by regulation and governments and always being encouraged by them. And therefore, the challenge on a sector-by-sector basis is going to be slightly different. And we therefore have to work together with all the participants around such a sector, so indeed, the provider of the service, the maker of whatever the appliances that the sector uses, a plane or a truck or whatever else, but also the energy providers to figure out what is the recipe that is going to get there. It won't happen automatically, Lydia, if you were sort of going after that aspect. Absolutely, it won't happen automatically. It needs to be orchestrated. It needs to be designed. But society asks all of us together. Nobody wants to live in a planet that has 2 or 3 degrees temperature change. And therefore, one way or other, we will figure it out. And we believe again that most of the value and that type of figuring out is going to be located with our customers than with the assets that will produce that new green commodity. Jessica?

Lydia, the way you framed the OpEx question, I think, is absolutely right. To manage OpEx effectively and for the right outcomes, we do need to be nuanced. And there's an important piece of our OpEx portfolio that needs to be managed for efficiency purposes, where you really try and drive down the cost safely and appropriately to get the right unit operating cost in our upstream business or integrated gas business. But as you pointed out, there's important parts of our growth story that's tied to investing in new markets, and that shows up in the form of OpEx, rather than in CapEx, particularly in our marketing business. So we're highly attuned to these realities, and we try and ensure we've got the right conversations happening and aren't being too quick to assume that the efficiency conversation that applies in upstream applies appropriately in marketing, but also we have to have the right level of pressure. You can't just have one part of your business having kind of a free ride, so to speak, on the OpEx side. So we're trying to bring a lot of discipline to OpEx management across the portfolio. But as you said, there's certain parts of our company where growing OpEx will be necessary. That's included in the $35 billion. So the underlying OpEx reduction is actually more significant than what that $35 billion suggests because there's actually increases, as you would expect, in our marketing business and, as you rightly pointed out, also in terms of supporting our digitalization efforts across the group, where we are investing in people and technology to ensure we really drive our digital agenda. So I think you covered it appropriately. We're managing it in a nuanced way, and the $35 billion includes both of those elements.

Next question from Michele Della Vigna of Goldman Sachs.

Ben and Jessica, it's Michele. Two, if I may, one on oil and gas and one on decarbonization. In oil and gas, if I compare your current budget with the one that you announced a couple of years ago, it's about a 30%, 40% reduction for integrated gas and E&P. And I was wondering if perhaps you could give us some more details as to how much do you think that reduction is activity and how much is actually increase to capital efficiency and cost deflation. And then on decarbonization, Ben, you highlight very importantly how the consumer will play a key role here. But the reality is the consumer today doesn't know the exact carbon footprint of the goods and of the services that they buy. How quickly do you think we can get into a world where, actually, the consumer can know the exact carbon footprint of what they acquire and therefore can drive a differentiated strategy of going to the companies that can offer differentiated lower carbon goods?

Yes, 2 very valid questions, Michele. Let me try and take them both. You're absolutely right in that we have, indeed, significantly reduced the capital allocation to the combination of upstream and integrated gas. Now the good news is a lot of it comes actually from further efficiency improvements. If you go through the materials that we put on the web, you will see some really impressive reductions in unit development cost on upstream or what we call unit technical cost in LNG, and they are really significant. And we think there is actually more to come still. We are still not back to the point where we believe we can be and where we have been, for that matter, in the past. So we get more bang for the buck for starters. But secondly, it is also very important to note that, yes, indeed, we are going to make choices, and that does mean that we are not going to necessarily spend anymore in upstream at the level that will sustain or even grow this business volumetrically. So it is all about making sure, if you make choices, hence, the core and the lean model and that we really allocate our capital that we believe there is running room and it has a lot of value to be harvested. In integrated gas for that matter, we believe we can still continue to grow this business a little bit because that is also what the world needs, and we can participate in a profitable growth. Now on your question of the end consumer carbon footprint, I think this will take a long time. It has, of course, been talked about for such a long period of time that if you could only make carbon footprints known to end consumers, they could make their choices accordingly or the carbon price embedded there, et cetera. We cannot wait for that. I think in the end, we will have to work with our counterparties who quite often have to work with other counterparties who will get to the end consumer. And we have to make up, together with these customers, our mind what is sensible, what is needed. I also don't think for that matter that we have to make total transparency for customers to start reacting differently, and let me just give you one little anecdote. We talk about carbon price and say, well, if customers would only know what the carbon price was, that would change their behavior. You know what? The country where I live, we have a carbon price in petrol, which is if you -- that's what we call, of course, tax, which is about $350 per tonne. As a result of that, do people change their driving behaviors? I don't think so. So many of these things are not as elastic as you think, but we have to work together with our counterparties to find out what is a sensible way to drive these carbon emissions and the carbon intensities of the value chains down because everybody knows the pressure is on, whether you are indeed an airline, a trucking company or whether you produce materials that are energy intensive. Everybody understands that the pressure is on to reduce the carbon intensity. And therefore, there is enough for us to work with to make progress.

Next question is from Adam Matthews of England Pension Board.

I think that's Church of England Pension Board. Just on behalf of Climate Act 100 that Sylvia van Waveren-Severs and I are the sort of representatives to Shell. Really, just to note, we welcome the steps that you've outlined today, in particular, the complete clarity around the 2050 net zero target. I think you've removed any question about whether it's comprehensive enough. You've really sort of put the detailing that's needed on that, and it is comprehensive and industry leading. Also really welcomed the commitment to put a transition plan to develop at the AGM. This is really leading. And again, this, I think, is an important step. In that context, just in terms of developing that transition plan, I think it's really important that investors, and particularly through CA100 that we're able to sort of differentiate companies at developing different plans and that we really need a sort of common lens to be able to assess those plans against the targets that are being set, and really to encourage you and your team to sort of work with investors in defining a net zero standard for oil and gas sector. That's something that I think is going to be critical to ensuring that the transition plans that are put to vote are really judged in an appropriate way, that can enable companies such as Shell to pursue a strategy that may be different from peers that are being pursued. My question really then just turns to 2 aspects of the transition plan, carbon capture and storage and use and also the nature-based solutions. And just what do you anticipate as the major challenge in delivering against the need of those 2 steps in the strategy you've outlined? And really, where are the sort of new partnerships and the sort of the major obstacles to sort of realizing the role that you're going to need to play in what you're setting out here?

Great. Thank you very much, Adam, first of all, for your endorsement. And also thank you very much for the very constructive relationship that we've had for such a long period of time now. And let me reassure, we will continue to work with Climate Action 100+ also as we put our plans together, also as we figure out what is the right standard for doing this and also as we figure out how do we continue to report as a sector, an oil and gas sector, an energy sector, in a way that is meaningful. I think we can both benefit from it. And I do not believe there is actually any competitive dissidence in providing a common approach to it. So on your question on CCS and nature-based solutions, I think, first of all, as I said, there are -- they are both tools that we need to have. And I think everybody who is knowledgeable about that fields that agree with us, but it -- but I think it's fair to say also that certainly on CCS, it has taken a time before it starts to take off. But I do believe we are at that moment now. It -- I do believe we are at an inflection point. Of course, rising carbon prices will help, but also the realization of many governments that we need CCS if we want to sustain our industry in this country. There is no way that you're just going to equip industry with renewable power, and then they will be fine. In some cases, you will have to go to other solutions. And I think also, governments and industries are realizing a very diffused emissions and emissions that cannot be immediately changed with technology, like, for instance, whether it's cars or aviation, need something like nature-based solutions. So I think we have taken a major hurdle in my mind in the last few quarters, years, but challenges remain. I think we have to continue to convince ourselves, but also the outside world that we do the right thing when we invest in nature, and that it's verifiable, that is real, et cetera. And we need carbon markets to make it even more efficient. So Article 6 of the Paris Agreement is an important improvement step that we have to take. And when it comes to CCS, well, of course, either mandates or a higher price on carbon. And then, with it, probably, border adjustment mechanisms are going to be needed to make it happen as well. But I do determine, I do discern at this point in time a much higher aptitude -- attitude and aptitude to make it happen. I think that actually brings us to the end of our session this afternoon. So can I again thank you very much for all these questions and for joining the call. I'm really excited, as I hopefully feel you can tell about our strategy, about the opportunities that we see in the route to net zero. And myself and the leadership team of Shell look forward to continuing the conversation with you over the coming days, weeks and months. And can I also please remind you again, look at our website, shell.com. You will find a host of additional information there. And with that I'd like to close this Q&A session. Thank you.