SHELL PUBLISHES ANNUAL REPORT AND ACCOUNTS
12-Mar-2020
Royal Dutch Shell plc published its Annual
Report and Accounts for the year ended December 31, 2019.
The 2019 Annual Report and Accounts can be
downloaded from www.shell.com/annualreport.
In compliance with 9.6.1 of the Listing Rules,
on March 12, 2020, a copy of the 2019 Annual Report and Accounts
was submitted to the National Storage Mechanism. This document will
shortly be available for inspection at
http://www.morningstar.co.uk/uk/NSM.
Printed copies of the 2019 Annual Report and
Accounts will be available from April 16, 2020, and can be
requested, free of charge,
at www.shell.com/annualreport.
The Annual Report and Accounts will be submitted
to the Annual General Meeting to be held on May 19, 2020.
Royal Dutch Shell plc will also file its Form
20-F for the year ended December 31, 2019, with the U.S. Securities
and Exchange Commission today. The Form 20-F will be available for
download from
www.shell.com/investors/financial-reporting/sec-filings.html
or www.sec.gov.
A condensed set of the Royal Dutch Shell plc
financial statements and information on important events that have
occurred during the financial year and their impact on the
financial statements were included in the 4th quarter 2019 and full
year unaudited results announcement released on January 30, 2020.
In addition, a condensed set of the Royal Dutch Shell plc interim
financial statements was included in the 2nd quarter 2019 and half
year unaudited results announcement released on Aug 1, 2019. This
information, together with the information set out in the Appendix
below, which is extracted from the 2019 Annual Report and Accounts
constitutes the material required for the purposes of compliance
with DTR 6.3.5R. This announcement should be read in
conjunction with, and is not a substitute for reading, the full
2019 Annual Report and Accounts.
The extracts from the 2019 Annual Report and
Accounts included in this announcement may contain forward-looking
statements concerning the financial condition, results of
operations and businesses of Royal Dutch Shell plc. All statements
other than statements of historical fact are, or may be deemed to
be, forward-looking statements. Forward-looking statements are
statements of future expectations that are based on management’s
current expectations and assumptions and involve known and unknown
risks and uncertainties that could cause actual results,
performance or events to differ materially from those expressed or
implied in these statements. Forward-looking statements include,
among other things, statements concerning the potential exposure of
Shell to market risks and statements expressing management’s
expectations, beliefs, estimates, forecasts, projections and
assumptions. These forward-looking statements are identified by
their use of terms and phrases such as “aim”, “ambition”,
“anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”,
“intend”, “may”, “objectives”, “outlook”, “plan”, “probably”,
“project”, “risks”, “schedule”, “seek”, “should”, “target”, “will”
and similar terms and phrases.
There are a number of factors that could affect
the future operations of Royal Dutch Shell plc and could cause
those results to differ materially from those expressed in any
forward-looking statements set out in the extracts from the 2019
Annual Report and Accounts included in this announcement, including
(without limitation): (a) price fluctuations in crude oil and
natural gas; (b) changes in demand for Royal Dutch Shell plc’s
products; (c) currency fluctuations; (d) drilling and production
results; (e) reserves estimates; (f) loss of market share and
industry competition; (g) environmental and physical risks; (h)
risks associated with the identification of suitable potential
acquisition properties and targets, and successful negotiation and
completion of such transactions; (i) the risk of doing business in
developing countries and countries subject to international
sanctions; (j) legislative, fiscal and regulatory developments
including regulatory measures addressing climate change; (k)
economic and financial market conditions in various countries and
regions; (l) political risks, including the risks of expropriation
and renegotiation of the terms of contracts with governmental
entities, delays or advancements in the approval of projects and
delays in the reimbursement for shared costs; and (m) changes in
trading conditions.
The extracts from the 2019 Annual Report and
Accounts included in this announcement may contain references to
Royal Dutch Shell plc’s website and to the Shell Sustainability
Report. These references are for convenience only. Royal
Dutch Shell plc is not incorporating by reference into those
extracts or the 2019 Annual Report and Accounts any information
posted on www.shell.com or in the Shell Sustainability
Report.
Page numbers and section cross-references in the
Appendix below refer to pages and sections in the 2019 Annual
Report and Accounts. Defined terms used in the Appendix below refer
to terms as defined in the 2019 Annual Report and Accounts.
APPENDIX
RISK FACTORS
The principal risks and uncertainties relating
to the Company are set out on pages 27-36 of the 2019 Annual Report
and Accounts. The following is extracted in full and unedited text
from the 2019 Annual Report and Accounts:
The risks discussed below could have a material adverse effect
separately, or in combination, on our earnings, cash flows and
financial condition. Accordingly, investors should carefully
consider these risks.
Further background on each risk is set out in the relevant
sections of this Report indicated by way of cross references under
each risk factor.
The Board’s responsibility for identifying, evaluating and
managing our significant risks is discussed in “Other Regulatory
and Statutory Information” on pages 168-171.
Risk description:
We are exposed to macroeconomic risks including fluctuating
prices of crude oil, natural gas, oil products and chemicals.
The prices of crude oil, natural gas, oil products and chemicals
are affected by supply and demand, both globally and regionally.
Furthermore, macroeconomic risks can affect demand for our
products. Government actions may also affect the prices of crude
oil, natural gas, oil products and chemicals. This could happen,
for example, by promoting the sale of lower-carbon electric
vehicles or even through the future prohibition of sales of new
diesel or gasoline vehicles, such as the prohibition in the United
Kingdom (UK) beginning in 2035. Prices for oil and gas can also
move independently of each other. Factors that influence supply and
demand include operational issues, natural disasters, weather,
pandemics, such as the COVID-19 (coronavirus) outbreak, political
instability, conflicts, economic conditions and actions by major
oil and gas producing countries. In a low oil and gas price
environment, we would generate less revenue from our Upstream and
Integrated Gas businesses, and, as a result, parts of those
businesses could become less profitable, or could incur losses. Low
oil and gas prices have also resulted and could continue to result
in the de-booking of proved oil or gas reserves, if they become
uneconomic in this type of price environment. Prolonged periods of
low oil and gas prices, or rising costs, have resulted and could
continue to result in projects being delayed or cancelled. Assets
have also been impaired in the past, and there could be impairments
in the future. Low oil and gas prices could also affect our ability
to maintain our long-term capital investment programme and dividend
payments. Prolonged periods of low oil and gas prices could
adversely affect the financial, fiscal, legal, political and social
stability of countries that rely significantly on oil and gas
revenue. In a high oil and gas price environment, we could
experience sharp increases in costs, and, under some
production-sharing contracts, our entitlement to proved reserves
would be reduced. Higher prices could also reduce demand for our
products, which could result in lower profitability, particularly
in our Downstream business. Also, higher prices can result in more
capacity being built which results in an oversupply of products
that can negatively impact our LNG and Chemicals business.
Accordingly, price fluctuations could have a material adverse
effect on our earnings, cash flows and financial condition.
See “Market overview” on page 37.
How this risk is managed:
We maintain a diversified portfolio to mitigate the impact of
price volatility. We test the resilience of our projects and other
opportunities against a range of crude oil, natural gas, oil
product and chemical prices and costs. We prepare annual strategic
and financial plans that consider and analyse the impact of
different pricing scenarios on our businesses and company as a
whole. These plans are appraised regularly throughout the year. We
also aim to maintain a strong balance sheet to provide resilience
against weak market prices.
Risk description:
Our ability to deliver competitive returns and pursue commercial
opportunities depends in part on the accuracy of our price
assumptions.
We use a range of oil and gas price assumptions, which we review
on a periodic basis, to evaluate projects and commercial
opportunities. If our assumptions prove to be incorrect, it could
have a material adverse effect on our earnings, cash flows and
financial condition.
See “Market overview” on page 39.
How this risk is managed:
The range of commodity prices used in our project and portfolio
evaluations is subject to a rigorous assessment of short, medium
and long-term market drivers.
Risk description:
Our ability to achieve our strategic objectives depends on how
we react to competitive forces.
We face competition in each of our businesses. We seek to
differentiate our products; however, many of them are competing in
commodity-type markets. Accordingly, failure to manage our costs as
well as our operational performance could result in a material
adverse effect on our earnings, cash flows and financial condition.
We also compete with state-owned oil and gas entities with access
to vast financial resources. State-owned entities could be
motivated by political or other factors in making their business
decisions. Accordingly, when bidding on new leases or projects, we
could find ourselves at a competitive disadvantage as these
state-owned entities may not require a competitive return. If we
are unable to obtain competitive returns when bidding on new leases
or projects, it could have a material adverse effect on our
earnings, cash flows and financial condition.
See “Strategy and outlook” on page 20.
How this risk is managed:
We continually assess the external environment – the markets and
the underlying economic, political, social and environmental
drivers that shape them – to evaluate changes in competitive forces
and business models. We use multiple future scenarios to assess the
resilience of our strategy. We maintain business strategies and
plans that focus on actions and capabilities to create and sustain
competitive advantage.
Risk description:
We seek to execute divestments in the pursuit of our strategy.
We may not be able to successfully divest these assets in line with
our strategy.
We may not be able to successfully divest assets at acceptable
prices or within the timeline envisaged due to market conditions or
credit risk. This would result in increased pressure on our cash
position and potential impairments. In some cases, we have also
retained certain liabilities following a divestment. Even in cases
where we have not expressly retained certain liabilities, we may
still be held liable for past acts, failures to act or liabilities
that are different from those foreseen. We may also face
liabilities if a purchaser fails to honour their commitments.
Accordingly, if we are unable to divest assets at acceptable prices
or within our envisaged timeframe, this could have a material
adverse effect on our earnings, cash flows and financial
condition.
See “Strategy and outlook” on page 22.
How this risk is managed:
We carefully tailor our sales processes against buyers’
perceived expectations to deliver the most competitive outcomes. As
a general principle, the sales processes are set up so that buyers
will acquire the assets including all related liabilities. For some
assets, Shell may agree to retain certain liabilities, which are
closely monitored and for which appropriate provisions are
made.
Risk description:
Our future hydrocarbon production depends on the delivery of
large and integrated projects, as well as on our ability to replace
proved oil and gas reserves.
We face numerous challenges in developing capital projects,
especially those which are large and integrated. Challenges
include: uncertain geology; frontier conditions; the existence and
availability of necessary technology and engineering resources; the
availability of skilled labour; the existence of transportation
infrastructure; project delays; the expiration of licenses;
potential cost overruns; and technical, fiscal, regulatory,
political and other conditions. These challenges are particularly
relevant in certain developing and emerging-market countries, in
frontier areas and in deep-water fields, such as off the coast of
Brazil. We may fail to assess or manage these and other risks
properly. Such potential obstacles could impair our delivery of
these projects, our ability to fulfil the value potential
determined at the time of the project investment approval, and/or
our ability to fulfil related contractual commitments. These could
lead to impairments and could have a material adverse effect on our
earnings, cash flows and financial condition.
Future oil and gas production will depend on our access to new
proved reserves through exploration, negotiations with governments
and other owners of proved reserves and acquisitions, as well as on
developing and applying new technologies and recovery processes to
existing fields. Failure to replace proved reserves could result in
lower future production, potentially having a material adverse
effect on our earnings, cash flows and financial condition.
Oil and gas production available for sale
Million boe [A]
|
2019 |
2018 |
2017 |
Shell subsidiaries |
1,182 |
1,179 |
1,168 |
Shell share of joint ventures and associates |
156 |
159 |
170 |
Total |
1,338 |
1,338 |
1,338 |
[A] Natural gas volumes are converted into oil equivalent using
a factor of 5,800 scf per barrel.Proved developed and undeveloped
oil and gas reserves [A][B] (at December 31)
Million boe [C]
|
2019 |
2018 |
2017 |
Shell subsidiaries |
9,980 |
10,294 |
10,177 |
Shell share of joint ventures and associates |
1,116 |
1,285 |
2,056 |
Total |
11,096 |
11,578 |
12,233 |
Attributable to non-controlling interest in Shell subsidiaries |
304 |
331 |
325 |
- We manage our total proved reserves base without distinguishing
between proved reserves from subsidiaries and those from joint
ventures and associates.
- Includes proved reserves associated with future production that
will be consumed in operations.
- Natural gas volumes are converted into oil equivalents using a
factor of 5,800 scf per barrel.
See “Shell Story” on page 17.
How this risk is managed:
We continue to explore for, and mature, hydrocarbons across our
Deep Water, Conventional Oil and Gas, Shales and Integrated Gas
strategic themes. We use our subsurface, project and technical
expertise and actively manage non-technical risks across a
diversified portfolio of opportunities and projects. This is done
with an integrated approach from basin choice through to
development, where we employ a number of competitive techniques and
benchmark our approach internally and externally.
Risk description:
The estimation of proved oil and gas reserves involves
subjective judgements based on available information and the
application of complex rules; therefore, subsequent downward
adjustments are possible.
The estimation of proved oil and gas reserves involves
subjective judgements and determinations based on available
geological, technical, contractual and economic information.
Estimates could change because of new information from production
or drilling activities, or changes in economic factors, including
changes in the price of oil or gas and changes in the regulatory
policies of host governments, or other events.
Estimates could also be altered by acquisitions and divestments,
new discoveries, and extensions of existing fields and mines, as
well as the application of improved recovery techniques. Published
proved oil and gas reserves estimates could also be subject to
correction due to errors in the application of published rules and
changes in guidance. Downward adjustments could indicate lower
future production volumes and could also lead to impairment of
assets. This could have a material adverse effect on our earnings,
cash flows and financial condition.
See “Supplementary information – oil and gas (unaudited)” on
page 239.
How this risk is managed:
A central group of reserves experts undertake the primary
assurance of the proved reserves bookings.
A multidisciplinary committee reviews and endorses all major
proved reserves bookings. All proved reserves bookings are reviewed
by Shell’s Audit Committee, with final approval residing with
Shell’s Executive Committee. The Internal Audit function also
provides further assurance through audits of the control
framework.
Risk description:
Rising climate change concerns have led and could lead to
additional legal and/or regulatory measures which could result in
project delays or cancellations, a decrease in demand for fossil
fuels, potential litigation and additional compliance
obligations.
In December 2015, 195 nations adopted the Paris Agreement, which
we fully support. The Paris Agreement aims to limit increases in
global temperatures to well below two degrees Celsius above
pre-industrial levels and to pursue efforts to limit the
temperature increase even further to 1.5 degrees Celsius. As a
result, we expect continued and increased attention to climate
change from all sectors of society. This attention has led, and we
expect it to continue to lead, to additional regulations designed
to reduce greenhouse gas (GHG) emissions.
We expect that a growing share of our GHG emissions will be
subject to regulation, resulting in increased compliance costs and
operational restrictions. If our GHG emissions rise alongside our
ambitions to increase the scale of our business, our regulatory
burden will increase proportionally. We also expect that GHG
regulation, as well as emission reduction actions by customers,
will continue to result in suppression of demand for fossil fuels,
either through taxes, fees and/or incentives to promote the sale of
lower-carbon electric vehicles or even through the future
prohibition of sales of new diesel or gasoline vehicles, such as
the prohibition in the United Kingdom (UK) beginning in 2035. This
could result in lower revenue and, in the long term, potential
impairment of certain assets.
In addition, the physical effects of climate change such as, but
not limited to, rise in temperature, sea-level rise and
fluctuations in water levels could adversely impact both our
operations and supply chains.
In some countries, governments, regulators, organisations and
individuals have filed lawsuits seeking to hold fossil fuel
companies liable for costs associated with climate change. While we
believe these lawsuits to be without merit, losing any of these
lawsuits could have a material adverse effect on our earnings, cash
flows and financial condition.
Additionally, some groups are pressuring certain investors to
divest their investments in fossil fuel companies. If this were to
continue, it could have a material adverse effect on the price of
our securities and our ability to access capital markets.
Additionally, some groups are pressuring commercial and investment
banks from financing fossil fuel companies. Furthermore, according
to press reports, some financial institutions also appear to be
considering limiting their exposure to certain fossil fuel
projects. Accordingly, our ability to use financing for future
projects may be adversely impacted. This could also adversely
impact our potential partners’ ability to finance their portion of
costs, either through equity or debt.
If we are unable to find economically viable, as well as
publicly acceptable, solutions that reduce our GHG emissions and/or
GHG intensity for new and existing projects or for the products we
sell, we could experience additional costs or financial penalties,
delayed or cancelled projects, and/or reduced production and
reduced demand for hydrocarbons. This could have a material adverse
effect on our earnings, cash flows and financial condition.
If we are unable to keep pace with society’s energy transition
or we are unable to provide the desired low-GHG-emissions products
needed to facilitate society’s energy transition, it could have a
material adverse effect on our earnings, cash flows and financial
condition.
See “Climate change and energy transition” on page 93.
How this risk is managed:
The risk is actively monitored and reviewed by the Executive
Committee. These regular reviews lead to actions designed to
address all the different components of the risk. Overall the
mitigation of the risk is addressed through our strategy to thrive
in the energy transition. This is made up of three components:
■ reducing
the GHG emissions intensity of our operations;
■
demonstrating resilience by adopting the guidance on disclosure by
the Task Force on Climate-related Financial Disclosures; and
■ working
towards our ambition to reduce the Net Carbon Footprint of the
energy products we sell, in step with society’s drive to reduce GHG
emissions.
Please refer to the risk factor “The nature of our operations
exposes us, and the communities in which we work, to a wide range
of health, safety, security and environment risks” for further
explanation of how the physical effects of climate change on our
operations and supply chains are managed.
Risk description:
Our business exposes us to risks of social instability,
criminality, civil unrest, terrorism, piracy, cyber-disruption,
acts of war and pandemic diseases, such as the COVID-19
(coronavirus) outbreak, that could have a material adverse effect
on our operations.
As seen in recent years, these risks can manifest themselves in
the countries in which we operate and elsewhere. These risks affect
people and assets. Potential risks include: acts of terrorism; acts
of criminality including maritime piracy; cyber-espionage or
disruptive cyber-attacks; conflicts including war, civil unrest and
environmental and climate activism (including disruptions by
non-governmental and political organisations); and pandemic
diseases, such as the COVID-19 (coronavirus) outbreak.
The above risks can threaten the safe operation of our
facilities and transport of our products, cause disruption of
operational activities, environmental harm, loss of life, injuries
and impact the well-being of our people.
These risks could have a material adverse effect on our
earnings, cash flows and financial condition.
See “Environment and society” on page 84.
How this risk is managed:
We seek to obtain the best possible information to enable us to
assess threats and risks. We conduct detailed assessments for all
our sites and activities, and implement appropriate measures to
deter, detect and respond to security risks. Further mitigations
include the strengthening of the security of sites, reduction of
our exposure as appropriate, journey management, information risk
management as well as crisis management and business continuity
measures. We conduct training and awareness campaigns for staff and
provide travel and health advice and 24/7 assistance while
travelling.
Risk description:
We operate in more than 70 countries that have differing degrees
of political, legal and fiscal stability. This exposes us to a wide
range of political developments that could result in changes to
contractual terms, laws and regulations. In addition, we and our
joint arrangements and associates face the risk of litigation and
disputes worldwide.
Developments in politics, laws and regulations can and do affect
our operations. Potential impacts include: forced divestment of
assets; expropriation of property; cancellation or forced
renegotiation of contract rights; additional taxes including
windfall taxes, restrictions on deductions and retroactive tax
claims; antitrust claims; changes to trade compliance regulations;
price controls; local content requirements; foreign exchange
controls; changes to environmental regulations; changes to
regulatory interpretations and enforcement; and changes to
disclosure requirements. Any of these, individually or in
aggregate, could have a material adverse effect on our earnings,
cash flows and financial condition.
In addition to the above risks, the UK left the European Union
(EU) on January 31, 2020 and enters into a period of transition
which ends on December 31, 2020. The UK has stated that it will not
extend the period of transition and has confirmed plans to
introduce import controls on EU goods at the border after the
period of transition ends. Whatever the outcome of negotiations, we
may experience delays in moving our products and employees between
the UK and EU. Also, additional tariffs and taxes could impact the
demand for some of our products. This potential delay and reduced
demand for our products, combined with the potential adverse
changes in macroeconomic conditions in both the EU and UK, could
have a material adverse effect on our earnings and cash flows.
From time to time, social and political factors play a role in
unprecedented and unanticipated judicial outcomes that could
adversely affect Shell. Non-compliance with policies and
regulations could result in regulatory investigations, litigation
and, ultimately, sanctions. Certain governments and regulatory
bodies have, in Shell’s opinion, exceeded their constitutional
authority by: attempting unilaterally to amend or cancel existing
agreements or arrangements; failing to honour existing contractual
commitments; and seeking to adjudicate disputes between private
litigants. Additionally, certain governments have adopted laws and
regulations that could potentially conflict with other countries’
laws and regulations, potentially subjecting us to both criminal
and civil sanctions. Such developments and outcomes could have a
material adverse effect on our earnings, cash flows and financial
condition.
See “Other Regulatory and Statutory Information” on page
134.
How this risk is managed:
We continuously monitor geopolitical developments and societal
issues relevant to our interests. Our Legal and Tax functions are
organised globally and support the business lines in ensuring
compliance with local laws and fiscal regulations. Our Government
Relations department engages with governments in countries where we
operate to understand and influence local policies and to advocate
Shell’s position on topics relevant to our industry. We are
prepared to exit a country if we believe we can no longer operate
in that country in accordance with our standards and applicable
law, and we have done so in the past.
Risk description:
The nature of our operations exposes us, and the communities in
which we work, to a wide range of health, safety, security and
environment risks.
The health, safety, security and environment (HSSE) risks to
which we, and the communities in which we work, are potentially
exposed cover a wide spectrum, given the geographic range,
operational diversity and technical complexity of our operations.
These risks include the effects of natural disasters (including
weather events), earthquakes, social unrest, personal health and
safety lapses, and crime. If a major risk materialises, such as an
explosion or hydrocarbon spill, this could result in injuries, loss
of life, environmental harm, disruption of business activities, and
loss or suspension of our license to operate or ability to bid on
mineral rights. Accordingly, this could have a material adverse
effect on our earnings, cash flows and financial condition.
Our operations are subject to extensive HSSE regulatory
requirements that often change and are likely to become more
stringent over time. Governments could require operators to adjust
their future production plans, as has been done in the Netherlands,
affecting production and costs. We could incur significant
additional costs in the future due to compliance with these
requirements or as a result of violations of, or liabilities under,
laws and regulations, such as fines, penalties, clean-up costs and
third-party claims. Therefore, HSSE risks, should they materialise,
could have a material adverse effect on our earnings, cash flows
and financial condition.
See “Environment and society” on page 84.
How this risk is managed:
We have standards and a clear governance structure to help
manage potential impacts. They are defined in our Health, Safety,
Security, Environment and Social Performance (HSSE & SP)
control framework and supporting guidance documents. The process
safety and HSSE & SP assurance team provides assurance on the
effectiveness of HSSE & SP controls to the Board. We also
routinely prepare and practice our emergency response to potential
incidents such as a spill or a fire.
Risk description:
A further erosion of the business and operating environment in
Nigeria could have a material adverse effect on us.
In our Nigerian operations, we face various risks and adverse
conditions. These include: security issues surrounding the safety
of our people, host communities and operations; sabotage and theft;
our ability to enforce existing contractual rights; litigation;
limited infrastructure; potential legislation that could increase
our taxes or costs of operations; the effect of lower oil and gas
prices on the government budget; and regional instability created
by militant activities. These risks or adverse conditions could
have a material adverse effect on our earnings, cash flows and
financial condition.
See “Upstream” on page 57.
How this risk is managed:
We test the economic and operational resilience of our Nigerian
projects against a wide range of assumptions and scenarios. We seek
to proportionally share risks and funding commitments with
joint-venture partners. We monitor the security situation, and
liaise with host communities, governmental and non-governmental
organisations to help promote peaceful and safe operations.
Risk description:
Production from the Groningen field in the Netherlands causes
earthquakes that affect local communities.
Shell and ExxonMobil are 50:50 shareholders in Nederlandse
Aardolie Maatschappij B.V. (NAM). An important part of NAM’s gas
production comes from the onshore Groningen gas field, in which
EBN, a Dutch government entity, has a 40% interest and NAM a 60%
interest. The gas field is in the process of being closed down due
to gas-production-induced earthquakes. Some of these earthquakes
have caused damage to houses and other structures in the region,
resulting in complaints and lawsuits from the local community. The
Government has announced their intent for accelerated closed down
to reduce Groningen production to zero by mid-2022. The exact date
is still to be decided. While we are hopeful the closing down of
the Groningen gas field will reduce the number and strength of
earthquakes in the region, any additional earthquakes and lawsuits
could have further adverse impacts on our earnings, cash flows and
financial condition.
See “Upstream” on page 54.
How this risk is managed:
NAM is working with the Dutch government and other stakeholders
to fulfil its obligations to residents of the area, which include
compensation for damage caused by the earthquakes. Negotiations
with the state are ongoing to determine how the accelerated
close-down should be managed. Specific remediations within the
agreed scope of responsibilities are planned. NAM’s joint-venture
partners will review its financial robustness against different
scenarios for Groningen’s liabilities and costs, with the objective
that the venture can self-fund any additional expenses and
claims.
Risk description:
Our future performance depends on the successful development and
deployment of new technologies and new products.
Technology and innovation are essential to our efforts to meet
the world’s energy demands in a competitive way. If we do not
continue to develop or deploy technology and new products, or fully
leverage our data effectively in a timely and cost-effective
manner, there could be a material adverse effect on the delivery of
our strategy and our license to operate. We operate in environments
where advanced technologies are utilised. In developing new
technologies and new products, unknown or unforeseeable
technological failures or environmental and health effects could
harm our reputation and license to operate or expose us to
litigation or sanctions. The associated costs of new technology are
sometimes underestimated, or delays occur. If we are unable to
develop the right technology and products in a timely and
cost-effective manner, or if we develop technologies and products
that adversely impact the environment or health of individuals,
there could be a material adverse effect on our earnings, cash
flows and financial condition.
See “Shell Story” on page 18.
How this risk is managed:
Shell’s Technology organisation and the relevant lines of
business work together to determine the content, scope and budget
for developing new technology that supports our activities. The new
technology is developed to ensure portfolio alignment with Shell’s
strategic ambitions and deployment commitments. A significant
proportion of Shell’s technology contributes to Shell’s New
Energies portfolio and Net Carbon Footprint ambition, and is built
around key relationships with leading academic research institutes
and universities. We also benefit from working with start-ups. In
our Shell GameChanger programme, we help companies to mature
early-stage technologies.
In our Shell Ventures scheme, we invest in and partner with
start-ups and small and medium-sized enterprises that are in the
early stages of developing new technologies.
Risk description:
We are exposed to treasury and trading risks, including
liquidity risk, interest rate risk, foreign exchange risk and
credit risk. We are affected by the global macroeconomic
environment as well as financial and commodity market
conditions.
Our subsidiaries, joint arrangements and associates are subject
to differing economic and financial market conditions around the
world. Political or economic instability affects such markets.
We use debt instruments, such as bonds and commercial paper, to
raise significant amounts of capital. Should our access to debt
markets become more difficult, the potential impact on our
liquidity could have a material adverse effect on our operations.
Our financing costs could also be affected by interest rate
fluctuations or any credit rating deterioration.
We are exposed to changes in currency values and to exchange
controls as a result of our substantial international operations.
Our reporting currency is the US dollar. However, to a material
extent, we hold assets and are exposed to liabilities in other
currencies. While we undertake some foreign exchange hedging, we do
not do so for all our activities. Furthermore, even where hedging
is in place, it may not function as expected.
We are exposed to credit risk; our counterparties could fail or
could be unable to meet their payment and/ or performance
obligations under contractual arrangements. Although we do not have
significant direct exposure to sovereign debt, it is possible that
our partners and customers may have exposure which could impair
their ability to meet their obligations. In addition, our pension
plans invest in government bonds, and therefore could be affected
by a sovereign debt downgrade or other default.
If any of the risks set out above materialise, they could have a
material adverse effect on our earnings, cash flows and financial
condition.
See “Liquidity and capital resources” on page 80 and Note 19 to
the “Consolidated Financial Statements” on pages 227-231.
How this risk is managed:
We utilise various financial instruments for managing exposure
to foreign exchange and interest rate movements. Our treasury
operations are highly centralised and seek to manage credit
exposures associated with our substantial cash, foreign exchange
and interest rate positions. Our portfolio of cash investments is
diversified to avoid concentrating risk in any one instrument,
country or counterparty. Other than in exceptional cases, the use
of external derivative instruments is confined to specialist
central treasury organisations that have appropriate skills,
experience, supervision, control and reporting systems. Credit risk
policies are in place to ensure that sales of products are made to
customers with appropriate creditworthiness, and include detailed
credit analysis and monitoring of customers against counterparty
credit limits. Where appropriate, netting arrangements, credit
insurance, prepayments and collateral are used to manage credit
risk. We maintain a committed credit facility. Management believes
it has access to sufficient debt funding sources (capital markets)
and to undrawn committed borrowing facilities to meet foreseeable
requirements.
Risk description:
We are exposed to commodity trading risks, including market and
operational risks.
Commodity trading is an important component of our Upstream,
Integrated Gas and Downstream businesses and is integrated with our
supply business. Processing, managing and monitoring a large number
of trading transactions across the world, some of which are
complex, exposes us to operational and market risks, including
commodity price risks. We use derivative instruments such as
futures and contracts for differences to hedge market risks.
However, we do not hedge all our activities and where hedging is in
place, it may not function as expected. The risk of ineffective
controls and oversight of trading activities and the risk that
traders, individually or as a group, could act intentionally
outside of the limits and controls, could have material adverse
effect on our earnings, cash flows and financial condition.
See “Liquidity and capital resources” on page 80 and
Note 19 to the “Consolidated Financial Statements” on pages
227-231.
How this risk is managed:
In effecting commodity trades and derivative contracts, the
company operates within procedures and policies designed to ensure
that risks are managed within authorised limits. For example, the
use of external derivative instruments is confined to specialist
trading organisations that have appropriate skills, experience,
supervision, control and reporting systems. There is regular review
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. Our trading organisation has a
compliance manual addressing our operational risks which all staff
are required to follow.
Risk description:
We have substantial pension commitments, funding of which is
subject to capital market risks and other factors.
Liabilities associated with defined benefit pension plans are
significant, as can be cash funding requirement of such plans; both
depend on various assumptions. Volatility in capital markets or
government policies, and the resulting consequences for investment
performance and interest rates, as well as changes in assumptions
for mortality, retirement age or pensionable remuneration at
retirement, could result in significant changes to the funding
level of future liabilities. We operate a number of defined benefit
pension plans and, in case of a shortfall, we could be required to
make substantial cash contributions (depending on the applicable
local regulations) resulting in a material adverse effect on our
earnings, cash flows and financial condition.
See “Liquidity and capital resources” on page 81.
How this risk is managed:
A pensions forum, chaired by the Chief Financial Officer
oversees Shell’s input to pension strategy, policy and operation.
The forum is supported by a risk committee in reviewing the results
of assurance processes with respect to pension risks. Local
trustees manage the
funded defined benefit pension plans, with contributions paid
based on independent actuarial valuations in accordance with local
regulations.
Risk description:
We mainly self-insure our risk exposure. We could incur
significant losses from different types of risks that are not
covered by insurance from third-party insurers.
Our insurance subsidiaries provide hazard insurance coverage to
other Shell entities and only reinsure a portion of their risk
exposures. Such reinsurance would not provide any material coverage
in the event of a large-scale safety and environmental incident.
Accordingly, in the event of a material incident, there would not
be any material proceeds available from third-party insurance
companies to meet our obligations.
Therefore, we may incur significant losses from different types
of risks that are not covered by insurance from third-party
insurers, potentially resulting in a material adverse effect on our
earnings, cash flows and financial condition.
See “Corporate” on page 79.
How this risk is managed:
We continuously assess the safety performance of our operations
and make risk mitigation recommendations, where relevant, to reduce
the risk of an accident to as low as possible. Our insurance
subsidiaries are adequately capitalised and transfer risks to
third-party insurers where economical, effective and relevant.
Risk description:
An erosion of our business reputation could have a material
adverse effect on our brand, our ability to secure new resources or
access capital markets, and on our license to operate.
Our reputation is an important asset. The Shell General Business
Principles (Principles) govern how Shell and its individual
companies conduct their affairs, and the Shell Code of Conduct
instructs employees and contract staff on how to behave in line
with the Principles. Our challenge is to ensure that all employees
and contract staff, more than 100,000 in total, comply with the
Principles and the Code of Conduct. Real or perceived failures of
governance or regulatory compliance or a perceived lack of
understanding of how our operations affect surrounding communities
could harm our reputation.
Societal expectations of businesses are increasing, with a focus
on business ethics, quality of products, contribution to society,
minimising environmental impacts, and safety. There is increasing
focus on the role of oil and gas in the context of climate change
and energy transition.
This could negatively affect our brand, reputation and license
to operate, which could impact our ability to deliver our strategy,
consumer demand for our branded and non-branded products, harm our
ability to secure new resources and contracts, and limit our
ability to access capital markets or attract staff. Many other
factors, including the materialisation of the risks discussed in
several of the other risk factors, could negatively impact our
reputation and could have a material adverse effect on our
earnings, cash flows and financial condition.
See “Other Regulatory and Statutory Information” on pages 167
and “Our people” on page 100.
How this risk is managed:
We continuously assess and monitor the external environment for
potential risks to our reputation.
We have mitigation plans in place for identified brand and
reputation risks at the Group, country and line of business level.
Our country chairs are responsible for the implementation of
country reputation plans which are updated annually. We
continuously develop and defend our brand in line with Shell’s
purpose and promises, and target our investments to drive brand
differentiation, relevance and preference.
Risk description:
Many of our major projects and operations are conducted in joint
arrangements or with associates. This could reduce our degree of
control, as well as our ability to identify and manage risks.
In cases where we are not the operator, we have limited
influence over, and control of, the behaviour, performance and
costs of operation of such joint arrangements or associates.
Despite not having control, we could still be exposed to the risks
associated with these operations, including reputational,
litigation (where joint and several liability could apply) and
government sanction risks. For example, our partners or members of
a joint arrangement or an associate (particularly local partners in
developing countries) may not be able to meet their financial or
other obligations to the projects, threatening the viability of a
given project. Where we are the operator of a joint arrangement,
the other partner(s) could still be able to veto or block certain
decisions, which could be to our overall detriment. Accordingly,
where we have limited influence, we are exposed to operational
risks that could have a material adverse effect on our earnings,
cash flows and financial condition.
See “Other Regulatory and Statutory Information” on page
169.
How this risk is managed:
Shell appoints a Joint Venture Asset Manager, whose
responsibility is to manage performance (create and protect value
for Shell) by influencing operators and other partners to adapt
their operating practices to appropriately drive value and mitigate
identified risks. An annual assurance review takes place on the
alignment of standards and processes in joint ventures with the
standards applicable to Shell. Any gaps identified are followed up
by the Joint Venture Asset Manager.
Risk description:
We rely heavily on information technology systems in our
operations.
The operation of many of our business processes depends on
reliable information technology (IT) systems. Our IT systems are
increasingly concentrated in terms of geography, number of systems,
and dependent on key contractors supporting the delivery of IT
services. Shell is the target of attempts to gain unauthorised
access to our IT systems and our data through various channels,
including more sophisticated and coordinated attempts often
referred to as advanced persistent threats. Breaches have occurred,
including to our UK LiveWIRE application where approximately
196,000 accounts and personal data were compromised. Where systems,
customers’ accounts and data have been compromised, we undertake to
notify all relevant regulators and impacted customers, in
accordance with countries’ laws and regulations, including privacy
requirements. Timely detection is becoming increasingly complex,
but we seek to detect and investigate all such security incidents,
aiming to prevent their recurrence. Disruption of critical IT
services, or breaches of information security, could harm our
reputation and have a material adverse effect on our earnings, cash
flows and financial condition.
See “Corporate” on page 79.
How this risk is managed:
We continuously measure and improve our cyber-security
capabilities. To reduce the likelihood of successful cyberattacks
our cyber-security capabilities are embedded into our IT systems.
Our IT landscape is protected by various detective and protective
technologies. The identification and assessment capabilities are
built into our IT support processes and adhere to industry best
practices. The security of IT services, operated by external IT
companies, is managed through contractual clauses and through
formal supplier assurance reports. Shell invests constantly in
efforts to embed and improve our controls and monitoring
activities. In case of breaches, all entities, including the ones
not yet fully integrated into Shell’s systems and processes, are
required to report and leverage Shell’s information security
capabilities.
Risk description:
Violations of antitrust and competition laws carry fines and
expose us and/or our employees to criminal sanctions and civil
suits.
Antitrust and competition laws apply to Shell and its joint
ventures and associates in the vast majority of countries where we
do business. Shell and its joint ventures and associates have been
fined for violations of antitrust and competition laws in the past.
These include a number of fines by the European Commission
Directorate-General for Competition (DG COMP). Due to DG COMP’s
fining guidelines, any future conviction of Shell or any of its
joint ventures or associates for violation of EU competition law
could result in significantly larger fines and have a material
adverse effect on us. Violation of antitrust laws is a criminal
offence in many countries, and individuals can be imprisoned or
fined. In certain circumstances, directors may receive director
disqualification orders. It is also now common for persons or
corporations allegedly injured by antitrust violations to sue for
damages. Any violation of these laws can harm our reputation and
could have a material adverse effect on our earnings, cash flows
and financial condition.
See “Other Regulatory and Statutory Information” on page
167.
How this risk is managed:
We maintain an antitrust programme with adequate resources, a
comprehensive governance structure and established reporting lines.
Clear guidance is provided to staff, which includes requirements in
Shell’s Ethics & Compliance manual, an antitrust specific
website, training modules where completion is monitored and regular
messages from Shell leaders on the importance of managing antitrust
risks. Staff must understand and comply with the “Protect Shell
Policy”, which explains Shell’s position on managing competitively
sensitive information.
Risk description:
Violations of anti-bribery, tax-evasion and anti-money
laundering laws carry fines and expose us and/or our employees to
criminal sanctions, civil suits and ancillary consequences (such as
debarment and the revocation of licenses).
Anti-bribery, tax-evasion and anti-money laundering laws apply
to Shell, its joint ventures and associates in all countries where
we do business. Shell and its joint ventures and associates have in
the past settled with the US Securities and Exchange Commission
regarding violations of the US Foreign Corrupt Practices Act. Any
violation of anti-bribery, tax-evasion or anti-money laundering
laws, including those potential violations associated with Shell
Nigeria Exploration and Production Company Limited’s investment in
Nigerian oil block OPL 245 and the 2011 settlement of litigation
pertaining to that block, could have a material adverse effect on
our earnings, cash flows and financial condition.
See “Our people” on page 100, “Other Regulatory and Statutory
Information” on page 167 and Note 25 to the “Consolidated Financial
Statements” on pages 235-237.
How this risk is managed:
We maintain an anti-bribery and anti-money laundering (ABC/AML)
programme with adequate resources, a comprehensive governance
structure and established reporting lines in place. Clear guidance
is provided to staff, which includes requirements in Shell’s Ethics
& Compliance manual, an ABC/AML specific website, training
modules where completion is monitored and regular messages from
Shell leaders on the importance of management of ABC/AML risks. As
to OPL 245, the 2011 settlement was a fully legal transaction with
Eni and the Federal Government of Nigeria, represented by the most
senior officials of the relevant ministries. We maintain our view
that there is no basis to convict Shell, or any of our former
employees who are also on trial, in Milan.
Risk description:
Violations of data protection laws carry fines and expose us
and/or our employees to criminal sanctions and civil suits.
Data protection laws apply to Shell and its joint ventures and
associates in the vast majority of countries where we do business.
Most of the countries we operate in have data protection laws and
regulations. Additionally, the EU General Data Protection
Regulation (GDPR) came into effect in May 2018, which increased
penalties up to a maximum of 4% of global annual turnover for
breach of the regulation.
The GDPR requires mandatory breach notification, the standard
for which is also followed outside the EU (particularly in Asia).
Non-compliance with data protection laws could expose us to
regulatory investigations, which could result in fines and
penalties and harm our reputation. In the past we have breached the
GDPR and some investigations are still ongoing with European
regulators. To date no material fines have been imposed, however,
no assurance can be provided that future breaches would have
similar outcomes. In addition to imposing fines, regulators may
also issue orders to stop processing personal data, which could
disrupt operations. We could also be subject to litigation from
persons or entities allegedly affected by data protection
violations. Violation of data protection laws is a criminal
offence in some countries, and individuals can be imprisoned or
fined. Any violation of these laws or harm to our reputation could
have a material adverse effect on our earnings, cash flows and
financial condition.
See “Other Regulatory and Statutory Information” on page
167.
How this risk is managed:
We maintain a data privacy programme with adequate resources, a
comprehensive governance structure and established reporting lines.
Clear guidance is provided to staff, which includes requirements in
Shell’s Ethics & Compliance manual, a data privacy specific
website, training modules where completion is monitored and regular
messages from Shell leaders on the importance of managing data
privacy risks. The requirements for incident management, set forth
in our Binding Corporate Rules have been revised to comply with
reporting requirements under GDPR, as has our approach to privacy
impact assessments. In 2020 we have established a Privacy by Design
programme to enhance our controls in this area.
Risk description:
Violations of trade compliance laws and regulations, including
sanctions, carry fines and expose us and our employees to criminal
sanctions and civil suits.
We use “trade compliance” as an umbrella term for various
national and international laws designed to regulate the movement
of items across national boundaries and restrict or prohibit trade
and other dealings with certain parties. The number and breadth of
such laws continue to expand. For example, the EU and the USA
continue to impose restrictions and prohibitions on certain
transactions involving countries such as Syria, Venezuela, Russia
and Cuba. In addition, the USA continues to have comprehensive
sanctions in place against Iran, while the EU and other nations
continue to maintain
targeted sanctions. Additional restrictions and controls
directed at defined oil and gas activities in Russia, which were
imposed by the EU and the USA in 2014, remain in force. Further
restrictions regarding Russia were introduced by the USA in 2017
and expanded in 2018. Both the EU and the USA introduced sectoral
sanctions against Venezuela in 2017, which the USA expanded in 2018
and 2019. The US sanctions primarily target the government of
Venezuela and the oil industry. Many other nations are also
adopting trade-control programmes similar to those administered by
the EU and the USA. This expansion of sanctions, including the
frequent additions of prohibited parties, combined with the number
of markets in which we operate and the large number of transactions
we process, make compliance with all sanctions complex and at times
challenging. Shell has voluntarily self-disclosed potential
violations of sanctions in the past. Any violation of one or more
of these regimes could lead to loss of import or export privileges,
significant penalties on or prosecution of Shell or its employees
and could harm our reputation and have a material adverse effect on
our earnings, cash flows and financial condition.
See “Other Regulatory and Statutory Information” on page
167.
How this risk is managed:
We continue to develop and maintain a trade compliance programme
with adequate resources, a comprehensive governance structure and
established reporting lines.
Clear guidance is provided to staff, which includes requirements
in Shell’s Ethics & Compliance manual, a trade compliance
specific website, training modules where completion is monitored
and regular messages from Shell leaders on the importance of
managing trade compliance risks. The effectiveness of the trade
compliance programme is assessed annually (or more frequently if
necessary).
Investors should also consider the following, which could limit
shareholder remedies.
The Company’s Articles of Association determine the jurisdiction
for shareholder disputes. This could limit shareholder
remedies.
Our Articles of Association generally require that all disputes
between our shareholders in such capacity and the Company or our
subsidiaries (or our Directors or former Directors), or between the
Company and our Directors or former Directors, be exclusively
resolved by arbitration in The Hague, the Netherlands, under the
Rules of Arbitration of the International Chamber of Commerce. Our
Articles of Association also provide that, if this provision is to
be determined invalid or unenforceable for any reason, the dispute
could only be brought before the courts of England and Wales.
Accordingly, the ability of shareholders to obtain monetary or
other relief, including in respect of securities law claims, could
be determined in accordance with these provisions.
RELATED PARTY TRANSACTIONS
Disclosures in relation to the related party
transactions are set out on page 167 of the 2019 Annual Report and
Accounts. The following is extracted in full and unedited text from
the 2019 Annual Report and Accounts:
Other than disclosures given in Notes 9, 27 and
29 to the “Consolidated Financial Statements” on pages 213, 237,
and 238, there were no transactions or proposed transactions that
were material to either the Company or any related party. Nor were
there any transactions with any related party that were unusual in
their nature or conditions.
DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE
PREPARATION OF THE ANNUAL REPORT AND ACCOUNTS
The following statement is extracted in full and
is unedited text from page 171 of the 2019 Annual Report and
Accounts.
The Directors are responsible for preparing the
Annual Report, including the financial statements, in accordance
with applicable laws and regulations. These require the Directors
to prepare financial statements for each financial year. As such,
the Directors have prepared the Consolidated and Parent Company
Financial Statements in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU).
In preparing these financial statements, the Directors have also
elected to comply with IFRS as issued by the International
Accounting Standards Board (IASB). The Directors must not approve
the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of Shell and the Company
and of the profit or loss of Shell and the Company for that period.
In preparing these financial statements, the Directors are required
to:
■ adopt the going concern basis unless it is
inappropriate to do so;
■ select suitable accounting policies and then
apply them consistently;
■ make judgements and accounting estimates that
are reasonable and prudent; and
■ state whether IFRS as adopted by the EU and
IFRS as issued by the IASB have been followed.
The Directors are responsible for keeping
adequate accounting records that are sufficient to show and explain
the transactions of Shell and the Company and disclose with
reasonable accuracy, at any time, the financial position of Shell
and the Company and to enable them to ensure that the financial
statements comply with the Companies Act 2006 (the Act) and, as
regards the Consolidated Financial Statements, with Article 4 of
the IAS Regulation and therefore are in accordance with IFRS as
adopted by the EU. The Directors are also responsible for
safeguarding the assets of Shell and the Company and hence for
taking reasonable steps for the prevention and detection of fraud
and other irregularities.
Each of the Directors, whose names and functions
can be found on pages 111-112, confirms that, to the best of their
knowledge:
■ the financial statements, which have been
prepared in accordance with IFRS as adopted by the EU and with IFRS
as issued by the IASB give a true and fair view of the assets,
liabilities, financial position and profit of Shell and the
Company; and
■ the Management Report includes a fair review
of the development and performance of the business and the position
of Shell, together with a description of the principal risks and
uncertainties that it faces.
Furthermore, so far as each of the Directors is
aware, there is no relevant audit information of which the auditors
are unaware, and each of the Directors has taken all the steps that
ought to have been taken in order to become aware of any relevant
audit information and to establish that the auditors are aware of
that information.
The Directors consider that the Annual Report,
including the financial statements, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess Shell’s position and performance,
business model and strategy.
The Directors consider it appropriate to
continue to adopt the going concern basis of accounting in
preparing the financial statements.
The Directors are responsible for the
maintenance and integrity of the Shell website (www.shell.com).
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Signed on behalf of the Board
LINDA M. COULTER
Company Secretary
March 11, 2020
Enquiries
Shell Media Relations International: +44 20
7934 5550 Americas: +1 713 241 4544
Shell Investor Relations International: +31 70
377 4540 North America: +1 832 337 2034
LEI number of Royal Dutch Shell plc:
21380068P1DRHMJ8KU70Classification: Annual financial and audit
reports
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