Description
The report for the financial year 2009 - 2010 of shell.
ROYAL DUTCH SHELL PLC ANNUAL REPORT AND FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2009
ANNUAL REPORT
OUR BUSINESSES
a
c
d
E
b M
J
K
F H M l G I N
CHEMICAL PRODUCTS USED FOR
? Plastics ? Coatings ? Detergents
REFINED OIL PRODUCTS GAS AND ELECTRICITY
? Industrial use ? Domestic use
? (Bio) Fuels ? Lubricants ? Bitumen ? Liquefied petroleum gas
UPSTREAM
? Exploring for oil and gas a ? Developing fields b ? Producing oil and gas c ? Mining oil sands d ? Extracting bitumen E ? Liquefying gas by cooling (LNG) F ? Regasifying LNG G ? Converting gas to liquid products (GTL) H ? Generating wind energy I
DOWNSTREAM
? Refining oil into fuels and lubricants J ? Producing petrochemicals K ? Developing biofuels l ? Trading M ? Retail sales N ? Managing CO2 emissions ? Supply and distribution ? Business-to-business sales
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009 Commission file number 1-32575
Royal Dutch Shell plc
(Exact name of registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organisation)
Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands Tel. no: 011 31 70 377 9111
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class Name of Each Exchange on Which Registered
American Depositary Receipts representing Class A ordinary shares of the issuer of an aggregate nominal value e0.07 each American Depositary Receipts representing Class B ordinary shares of the issuer of an aggregate nominal value of e0.07 each 1.30% Guaranteed Notes due 2011 5.625% Guaranteed Notes due 2011 Floating Guaranteed Notes due 2011 4.95% Guaranteed Notes due 2012 4.0% Guaranteed Notes due 2014 3.25% Guaranteed Notes due 2015 5.2% Guaranteed Notes due 2017 4.3% Guaranteed Notes due 2019 6.375% Guaranteed Notes due 2038
New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Outstanding as of December 31, 2009: 3,454,731,900 Class A ordinary shares of the nominal value of e0.07 each. 2,667,562,105 Class B ordinary shares of the nominal value of e0.07 each. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¥ Yes n If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. n Yes ¥ Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¥ Yes n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP n International Financial Reporting Standards as issued by the International Accounting Standards Board ¥ Other n If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 n Item 18 n If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). n Yes ¥
Copies of notices and communications from the Securities and Exchange Commission should be sent to: Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR, The Hague, The Netherlands Attn: Mr. M. Brandjes
No No
No
No
2
Shell Annual Report and Form 20-F 2009 About this Report
ABOUT THIS REPORT
This Report serves as the Annual Report and Accounts in accordance with UK requirements and as the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission (SEC) for the year ended December 31, 2009, for Royal Dutch Shell plc (the Company) and its subsidiaries (collectively known as Shell). It presents the Consolidated Financial Statements of Shell (pages 97-139) and the Parent Company Financial Statements of Shell (pages 159-167). Cross references to Form 20-F are set out on pages 175-176 of this Report. In this Report “Shell” is sometimes used for convenience where references are made to the Company and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. “Subsidiaries”, “Shell subsidiaries” and “Shell companies” as used in this Report refer to companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. The Consolidated Financial Statements consolidate the financial statements of the Parent Company and all subsidiaries. The companies in which Shell has significant influence but not control are referred to as “associated companies” or “associates” and companies in which Shell has joint control are referred to as “jointly controlled entities”. Joint ventures are comprised of jointly controlled entities and jointly controlled assets. In this Report, associates and jointly controlled entities are also referred to as “equityaccounted investments”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect (for example, through our 34% shareholding in Woodside Petroleum Ltd.) ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interests. Except as otherwise specified, the figures shown in the tables in this Report represent those in respect of subsidiaries only, without deduction of minority interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through both subsidiaries and equity-accounted investments. All of a subsidiary’s production, processing or sales volumes are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of equity-accounted investments, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. The Financial Statements contained in this Report have been prepared in accordance with the provisions of the Companies Act 2006, Article 4 of the International Accounting Standards (IAS) Regulation and with both International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS as adopted by the European Union. IFRS as defined above includes International Financial Reporting Interpretations Committee (IFRIC) interpretations. Except as otherwise noted, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency. The Business Review (BR) and other sections of this Report contain forward-looking statements (within the meaning of the United States
Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Shell. 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 forwardlooking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “scheduled”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for the Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserve 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 as a result of climate changes; (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. Also see “Risk factors” for additional risks and further discussion. All forward-looking statements contained in this Report are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forwardlooking statement speaks only as of the date of this Report. Neither the Company nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Report. This Report contains references to Shell’s website. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com.
Documents on display
Documents concerning the Company, or its predecessors for reporting purposes, which are referred to in this Report have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. For further information on the operation of the public reference room and the copy charges, please call the SEC at (800) SEC-0330. All of the SEC filings made electronically by Shell are available to the public at the SEC website at www.sec.gov (commission file number 1-32575). This Report, as well as the Annual Review, is also available, free of charge, at www.shell.com/annualreport or at the offices of Shell in The Hague, the Netherlands and London, UK. You may also obtain copies of this Report, free of charge, by mail.
Shell Annual Report and Form 20-F 2009 About this Report
3
ABBREVIATIONS
CURRENCIES
$ £ ¤ CHF C$
UNITS OF MEASUREMENT
US dollar sterling euro Swiss franc Canadian dollar
acre b(/d) bcf/d boe(/d) (k)dwt MMBtu mtpa MW per day scf
PRODUCTS
approximately 0.4 hectares or 4 square kilometres barrels (per day) billion cubic feet per day barrel of oil equivalent (per day); natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel (thousand) deadweight tonnes million British thermal units million tonnes per annum megawatts volumes are converted to a daily basis using a calendar year standard cubic feet
GTL LNG LPG NGL
MISCELLANEOUS
gas to liquids liquefied natural gas liquefied petroleum gas natural gas liquids
ADR AGM CO2 DBP EMTN FID GHG HSSE IFRIC IFRS LTIP NGO OML OPEC OPL PSA PSC PSP R&D REMCO RSP SEC TRCF WTI
American Depositary Receipt Annual General Meeting carbon dioxide deferred bonus plan euro medium-term note final investment decision greenhouse gas health, safety, security and environment International Financial Reporting Interpretations Committee International Financial Reporting Standards long-term incentive plan non-governmental organisation onshore oil mining lease Organization of the Petroleum Exporting Countries oil prospecting licence production-sharing agreement production-sharing contract performance share plan research and development Remuneration Committee restricted share plan United States Securities and Exchange Commission total recordable case frequency West Texas Intermediate
4
Shell Annual Report and Form 20-F 2009 About this Report
TABLE OF CONTENTS
5 6 7 8 8 10 11 13 16 19 38 44 45 49 50 53 56 57 60 76 87 96 140 158 170 177 Our locations Chairman’s message Chief Executive Officer’s review Business Review Key performance indicators Selected financial data Business overview Risk factors Summary of results and strategy Upstream Downstream Corporate Liquidity and capital resources Our people Environment and society The Board of Royal Dutch Shell plc Senior Management Report of the Directors Directors’ Remuneration Report Corporate governance Additional shareholder information Consolidated Financial Statements Supplementary information – oil and gas Parent Company Financial Statements Royal Dutch Shell Dividend Access Trust Financial Statements Exhibits
Shell Annual Report and Form 20-F 2009 Our locations
5
OUR LOCATIONS
Upstream Europe Austria Belgium Bulgaria Czech Republic Denmark Finland France Germany Gibraltar Greece Hungary Ireland Italy Luxembourg The Netherlands Norway Poland Portugal Slovakia Slovenia Spain Sweden Switzerland UK Ukraine Asia Brunei China Guam India Indonesia Iran Iraq Japan Jordan Kazakhstan Laos Malaysia Oman Pakistan Papua New Guinea Philippines Qatar Russia Saudi Arabia Singapore South Korea Sri Lanka Syria Taiwan Thailand Turkey United Arab Emirates Vietnam Australia/Oceania Australia New Zealand
m
Downstream
m m m m
Upstream Africa Algeria Benin Botswana Burkina Faso Cameroon Cape Verde Islands Côte d’Ivoire Egypt Gabon Ghana Guinea Kenya Libya Madagascar Mali Mauritius Morocco Namibia Nigeria La Réunion Senegal South Africa Tanzania Togo Tunisia Uganda North America Barbados Canada Costa Rica Dominican Republic El Salvador Mexico Panama Puerto Rico Trinidad & Tobago USA South America Argentina Brazil Chile Colombia French Guiana Guyana Peru Venezuela
m
Downstream
m m m m
m
m m m
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
m m m m m m m
m m m m m m m m m m m
m m m m m m m m m m m m m
m m m m m m m m m m m m m m
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
6
Shell Annual Report and Form 20-F 2009 Chairman’s message
CHAIRMAN’S MESSAGE
In 2009 the world felt the acute effects of the global recession. Oil demand experienced its steepest drop since 1982. Consumption of natural gas in the European Union fell more than it ever has before. Refining margins were put under great pressure, as were the margins in the petrochemicals business. Financing of projects tightened as banks rebuilt their balance sheets. And the treasuries of many countries came under severe strain. By the end of 2009, unprecedented economic-stimulus packages and the irrepressible growth of key Asian nations appeared to turn around the global economy. But weak consumer demand and lingering unemployment in the USA and Europe are likely to weigh down the recovery for some time. We responded swiftly to the downturn, restructuring Shell to make it more competitive. And we did so without diluting the talents that make our company strong. At the same time, we retained our long-term view. We stuck to our capital-spending plans throughout 2009 and continued working on the energy projects that form the foundations of our future. With economic recovery, global demand for energy will resume its growth, in step with increasing population and rising wealth in developing countries. Supplies of all kinds of energy – not just oil and gas but also renewables – will struggle to keep pace. And even while energy use grows, carbon dioxide (CO2) emissions must be kept in check. As the world evolves toward a low-carbon energy system in the years and decades ahead, our unrivalled tradition of technical innovation positions us well.
Our technology enables us to find and produce crude oil and natural gas in hard-to-reach places, from the deep ocean to the frozen Arctic. It will one day enable us to produce transport fuels from unusual sources, such as agricultural waste. We are already applying our technology to capitalise on our supplies of natural gas, the cleanest-burning fossil fuel. When used to generate electricity, it emits half the CO2 of coal. New production techniques help us coax it out of impermeable rock. We aim to maintain our leading position in liquefied natural gas, allowing us to extract gas in far-flung locations and transport it to markets in sea-going tankers. We are also turning natural gas into high-performance lubricants and liquid transport fuels. All of this means that by 2012 more than half of our production will be natural gas. Shell excels at applying technology to complex projects on a massive scale. The offshore fields that we recently brought on-stream in Brazil and Russia attest to that. We are following a similar project-engineering approach in several demonstration projects to capture CO2 and store it safely underground. We are also working to squeeze more value out of every unit of energy we use in our operations. And we are introducing new products and services that help our customers become more efficient energy-users themselves. Making the world’s energy supply secure, affordable and sustainable is not just a worthy goal; it is a global imperative. It will take time, and it will take a lot of effort. But with our far-sightedness and technical prowess, we can contribute to the endeavour even as we deliver the results that our shareholders expect in the long term.
Jorma Ollila
Chairman
Shell Annual Report and Form 20-F 2009 Chief Executive Officer’s review
7
CHIEF EXECUTIVE OFFICER’S REVIEW
It is a privilege for me to give my first review of Shell’s performance as its Chief Executive Officer. I am proud to report how these trying times have brought out some of our best qualities. Our new field developments and ramp-ups produced enough oil and gas in 2009 to offset the natural decline of our older fields. The reliability of our refineries also improved. We reduced underlying operating costs by more than $2 billion. And our cash inflows and outflows were broadly balanced in both Upstream and Downstream. But despite our best efforts, 2009 earnings amounted to $12.7 billion, down from $26.5 billion the year before. The reasons for the drop span all our businesses. Our production decreased because of lower demand for natural gas, although divestments and OPEC quotas were partly responsible as well. Lower oil and gas prices also contributed to lower Upstream revenues. Global demand for oil products weakened and refining margins declined to historical lows, reducing our Downstream earnings. Lower sales volumes and margins affected our chemicals performance. Those tough economic realities highlight the need for us to do better in containing our costs and improving our competitiveness. Our performance improved in 2009 in many of the areas we monitor related to sustainable development. Our occupational injury rate was the lowest we have ever recorded. However, tragically we did incur 20 work related fatalities during 2009. To help bring down such fatalities – ideally to zero – we launched a set of safety rules to address specifically the work-time practices with the greatest risk to life. We had a good year in 2009 in exploration. We discovered gas in shale formations of North America and off shore western Australia. There were 11 notable discoveries. Additions to our proved reserves were more than double our production volumes for the year. We will continue to apply our exploration capabilities wherever they are appropriate, including our new leases in Egypt, South Africa and French Guiana. Resources found will be matured into the project funnel that drives our growth. Several major projects already matured in our Upstream portfolio in 2009 – with several more set to reach first production within a few years. Together with our partners, we completed Russia’s first liquefied natural gas (LNG) plant, Sakhalin II, one of the world’s largest integrated projects. In 2009, the Parque das Conchas project offshore Brazil began delivering heavy oil from fields in waters two kilometres deep. In 2010 our Perdido platform in the Gulf of Mexico will tap fields lying under more than three kilometres of water – a world record. At such depths sophisticated sub-sea equipment is needed, and it has to be built on site by remote-controlled machines in near-freezing darkness. Our Pearl gas to liquids project in Qatar will apply Shell technology to convert some 1.6 billion cubic feet of gas per day into liquid transport fuel and other high-quality oil products and petrochemical feedstocks. The Qatargas 4 project will take about the same amount of gas and turn it into LNG. Both projects are progressing well; construction is expected to be completed by the end of 2010 with production ramp-up in 2011.
We have agreed with our partners to begin construction on one of the world’s largest natural gas developments: the Gorgon offshore gas field of Australia. The project will nearly double Australia’s LNG output. It is also expected to pioneer the large scale capture and storage of carbon dioxide. In late 2009, we secured an important position in Iraq with the government contract for developing the Majnoon field – a huge field in a country with great potential. Our Downstream portfolio will need to be carefully reassessed in view of the overcapacity in the refining industry and the growth potential for petrochemicals in Asia. But some new business opportunities were already opened up by 2009 developments. Our new lubricants complex in Zhuhai – our sixth such facility in China – will help us to supply the world’s fastest-growing lubricants market. With the potential for expansion, the complex could become one of Shell’s top three lubricants blending plants. We also started up the first of several new advanced processing units at the Shell Eastern Petrochemicals Complex in Singapore. All the new units are expected to be up and running in 2010, reinforcing our ambition to maintain a leading position in the regional market. We have expanded our association with Iogen and Codexis to develop better enzymes and processes for the production of biofuels from straw. In early 2010 we announced our intention to form a $12 billion joint venture with Cosan in Brazil for the production, supply, distribution and retailing of ethanol-based transport fuels. Our successful projects, our new business opportunities and our continued financial flexibility give me confidence to face the economic uncertainties of 2010. Thereafter, a period of production and cash-flow growth awaits us. To reach it, we will have to rely even more on technical ingenuity, project management and operational excellence – the very things that distinguish us from our competitors. To channel our skills more quickly, more effectively and more economically, last year I reorganised our business units. One of the main aims was to concentrate in one unit the accountabilities for delivering major new projects and developing new technologies. That will better position us to execute Upstream operations and secure access to resources. It will also help us better manage the many environmental and societal issues associated with developing oil and gas fields. These changes, which were implemented shortly after I took on the position of CEO, were not a reaction to transient tough times. In the short term they did accelerate our plans to reduce complexity, overheads and – ultimately – costs. But in the long term they will improve our performance by sharpening our external focus and giving added impetus to our technology and innovation. I look forward to seeing our revitalised organisation succeed in 2010 and beyond.
Peter Voser
Chief Executive Officer
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Shell Annual Report and Form 20-F 2009 Business Review ? Key performance indicators
BUSINESS REVIEW
KEY PERFORMANCE INDICATORS
Shell scorecard
Refinery and chemical plant availability 2009 93.3% 2008 92.5%
Total shareholder return 2009 22.6%
2008
(33.5)%
Refinery and chemical plant availability is the weighted average of the actual uptime of plants as a percentage of their maximum possible uptime. The weighting is based on the capital employed. It excludes downtime due to uncontrollable factors, such as hurricanes. This indicator is a measure of operational excellence of Shell’s Downstream manufacturing facilities.
Total shareholder return (TSR) is the difference between the share price at the start of the year and the share price at the end of the year, plus gross dividends paid during the calendar year (reinvested quarterly), expressed as a percentage of the year-start share price. The TSRs of major publicly-traded oil and gas companies can be directly compared, providing a way to determine how Shell is performing against its industry peers.
Total reportable case frequency (injuries per million working hours) 2009 1.4 2008 1.8
Total reportable case frequency (TRCF) is the number of staff or contractor injuries requiring medical treatment or time off for every million hours worked. It is a standard measure of occupational safety.
Net cash from operating activities ($ billion) 2009 21 2008 44
Net cash from operating activities is the total of all cash receipts and payments associated with our sales of oil, gas, chemicals and other products. The components that provide a reconciliation from income for the period are listed in the Consolidated Statement of Cash Flows on page 100. This indicator reflects Shell’s ability to generate cash for investment and distributions to shareholders. For scorecard purposes only, it is adjusted to exclude taxes paid on divestments.
Production available for sale (thousands boe/d) 2009 3,142 2008 3,248
Production is the sum of all average daily volumes of unrefined oil and natural gas produced for sale. The unrefined oil comprises crude oil, natural gas liquids and synthetic crude oil. The gas volume is converted into energy-equivalent barrels of oil to make the summation possible. Changes in production have a significant impact on Shell’s cash flow.
Sales of liquefied natural gas (million tonnes) 2009 13.4 2008 13.1
Sales of liquefied natural gas (LNG) is a measure of the operational excellence of Shell’s Upstream business and the LNG market demand.
Shell Annual Report and Form 20-F 2009 Business Review ? Key performance indicators
9
Additional performance indicators
Reserves
Operational spills over 100 kilograms 2009 264 2008
275
Proved oil and gas reserves (million boe) 2009 14,132 2008 10,903
Operational spills are the total number of spills of oil and oil products over 100 kilograms per spill that resulted from our operations.
Employees (thousands) 2009 101
2008
102
Employees is the number of notional full-time employees whose work hours would be equivalent to those of all staff actually holding full-time and part-time employment contracts with Shell subsidiaries, averaged throughout the year.
Proved oil and gas reserves (excluding minority interest) are the total estimated quantities of oil and gas that geoscience and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs, as at December 31, under existing economic and operating conditions. Gas volumes are converted into barrels of oil equivalent (boe). Reserves are crucial to an oil and gas company, since they constitute the source of future production. Reserves estimates are subject to change based on a wide variety of factors, some of which are unpredictable; see pages 13 to 15. The proved reserves volumes reported for 2009 have been established using the new SEC rules on oil and gas reporting.
Income for the period ($ million) 2009 12,718 2008
26,476
Income for the period is the total of all the earnings from every business segment. It is of fundamental importance for a sustainable commercial enterprise.
Return on average capital employed 2009 8.0% 2008
18.3%
Return on average capital employed (ROACE) is defined as annual income, adjusted for after-tax interest expense, as a percentage of average capital employed during the year. Capital employed is the sum of total equity and total debt. ROACE measures the efficiency of Shell’s utilisation of the capital that it employs and is a common measure of business performance; see page 48.
Gearing 2009 15.5%
2008
5.9%
Gearing is defined as net debt (total debt minus cash and cash equivalents) as a percentage of total capital (net debt plus total equity), at December 31. It is a measure of the degree to which Shell’s operations are financed by debt. (For further information see Note 16 to the Consolidated Financial Statements.)
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Shell Annual Report and Form 20-F 2009 Business Review ? Selected financial data
SELECTED FINANCIAL DATA
The selected financial data set out below is derived, in part, from the Consolidated Financial Statements. This data should be read in conjunction with the Consolidated Financial Statements and related Notes, as well as the Business Review in this Report.
CON SO L I D ATE D S TATE ME N T OF I N COME A N D OF COMPR E HE N S I V E I N COME DATA $ MILLION
Revenue Income from continuing operations Income/(loss) from discontinued operations Income for the period Income attributable to minority interest Income attributable to Royal Dutch Shell plc shareholders Comprehensive income attributable to Royal Dutch Shell plc shareholders
2009 278,188 12,718 – 12,718 200 12,518 19,141
2008 458,361 26,476 – 26,476 199 26,277 15,228
2007 355,782 31,926 – 31,926 595 31,331 36,264
2006 318,845 26,311 – 26,311 869 25,442 30,113
2005 306,731 26,568 (307) 26,261 950 25,311 20,945
CON SO L I D ATE D B A L A N CE SH E E T D ATA
$ MILLION
Total assets Total debt Share capital Equity attributable to Royal Dutch Shell plc shareholders Minority interest
2009 292,181 35,033 527 136,431 1,704
2008 282,401 23,269 527 127,285 1,581
2007 269,470 18,099 536 123,960 2,008
2006 235,276 15,773 545 105,726 9,219
2005 219,516 12,916 571 90,924 7,000
E ARN I N G S PE R S HA RE
$
Basic earnings per ¤0.07 ordinary share from continuing operations from discontinued operations Diluted earnings per ¤0.07 ordinary share from continuing operations from discontinued operations
2009 2.04 2.04 – 2.04 2.04 –
2008 4.27 4.27 – 4.26 4.26 –
2007 5.00 5.00 – 4.99 4.99 –
2006 3.97 3.97 – 3.95 3.95 –
2005 3.79 3.84 (0.05) 3.78 3.83 (0.05)
S HA R E S
NUMBER
Basic weighted average number of Class A and B shares Diluted weighted average number of Class A and B shares
2009 6,124,906,119 6,128,921,813
2008 6,159,102,114 6,171,489,652
2007 6,263,762,972 6,283,759,171
2006 6,413,384,207 6,439,977,316
2005 6,674,179,767 6,694,427,705
OTH E R F IN ANCIAL DATA
$ MILLION
Net cash from operating activities Net cash used in investing activities Dividends paid Net cash used in financing activities (Decrease)/increase in cash and cash equivalents Earnings by segment Upstream Downstream Corporate Total Capital investment [A] Upstream Downstream Corporate Total
2009 21,488 26,234 10,717 829 (5,469) 8,354 3,054 1,310 12,718 23,951 7,510 274 31,735
2008 43,918 28,915 9,841 9,394 5,532 26,506 39 (69) 26,476 32,166 6,036 242 38,444
2007 34,461 14,570 9,204 19,393 654 18,094 12,445 1,387 31,926 21,362 5,295 415 27,072
2006 31,696 20,861 8,431 13,741 (2,728) 17,852 8,165 294 26,311 20,281 4,346 269 24,896
2005 30,113 8,761 10,849 18,573 2,529 15,827 10,106 328 26,261 13,698 3,450 288 17,436
[A] Capital expenditure, exploration expense and new equity and loans in equity-accounted investments.
Shell Annual Report and Form 20-F 2009 Business Review ? Business overview
11
BUSINESS OVERVIEW
History
From 1907 until 2005, Royal Dutch Petroleum Company (Royal Dutch) and The “Shell” Transport and Trading Company, p.l.c. (Shell Transport) were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group” (Group). Operating activities were conducted through the subsidiaries of Royal Dutch and Shell Transport. In 2005, Royal Dutch Shell plc (Royal Dutch Shell) became the single parent company of Royal Dutch and Shell Transport, the two former public parent companies of the Group (the Unification). Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands.
BU SINESSES Upstream International
manages the upstream business outside the Americas. It searches for and recovers crude oil and natural gas, liquefies and transports gas and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream International also manages the global LNG business and the wind business in Europe. The activities are organised within geographical units, some business-wide managed activities and supporting activities.
Upstream Americas
manages the upstream business in North and South America. It searches for and recovers crude oil and natural gas, liquefies and transports gas and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream Americas also extracts bitumen from oil sands that is converted into synthetic crude oil. Additionally, it manages the US based wind business. It comprises operations organised into business-wide managed activities and supporting activities. manages Shell’s manufacturing, distribution and marketing activities for oil products and chemicals. These activities are organised into globally managed classes of business, including chemicals, some regionally and globally managed activities and supporting activities. Manufacturing and supply includes refining, supply and shipping of crude oil. Marketing sells a range of products including fuels, lubricants, bitumen and liquefied petroleum gas (LPG) for home, transport and industrial use. Chemicals produces and markets petrochemicals for industrial customers, including the raw materials for plastics, coatings and detergents used in the manufacture of textiles, medical supplies and computers. Downstream also trades Shell’s flow of hydrocarbons and other energy related products, supplies the Downstream businesses, markets gas and power and provides shipping services. Downstream also oversees Shell’s interests in alternative energy (excluding wind) and CO2 management.
Activities
Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. Our oil and gas producing heartlands are the core countries that have the available infrastructure, expertise and remaining growth potential for Shell to sustain strong operational performance and support continued investment. They are Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA. Russia represents a new heartland with Sakhalin II on-stream in 2009, and we expect Qatar to become a heartland in the coming years. We are bringing new oil and gas supplies on stream from major field developments. We are also investing in growing our gas-based business through liquefied natural gas (LNG) and gas to liquids (GTL) projects. For example, we are building one of the world’s largest GTL projects in Qatar, and we are participating in the Gorgon LNG project in Australia. At the same time, we are exploring for oil and gas in prolific geological formations that can be conventionally developed, such as those found in the Gulf of Mexico, Brazil and Australia. But we also are exploring for hydrocarbons in formations, such as low-permeability gas reservoirs in the USA, Canada and China, which can be economically developed only by unconventional means. We also have a diversified and balanced portfolio of refineries and chemicals plants and are a major distributor of biofuels. We have the largest retail portfolio of our peers, and delivered strong growth in differentiated fuels. We have a strong position not only in the major industrialised countries but also in the developing ones. The distinctive Shell pecten (a trademark in use since the early part of the twentieth century) and trademarks in which the word Shell appears support this marketing effort throughout the world.
Downstream
Projects & Technology
manages the delivery of Shell’s major projects and drives the research and innovation to create technology solutions. It provides technical services and technology capability covering both Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment and contracting and procurement.
SEGMENTAL REPORTING
Organisation
On July 1, 2009, Peter Voser succeeded Jeroen van der Veer as Chief Executive Officer (CEO). On the same date, a series of changes in the organisation and responsibilities of senior management became effective. The changes were part of the reorganisation programme, called “Transition 2009”. The aim of the programme was to enhance accountability for operating performance and technology development within Shell’s organisation, thereby quickening decision-making and execution as well as reducing costs.
With effect from July 1, 2009, Upstream consists of the activities previously reported in the Exploration & Production, Gas & Power (excluding solar) and Oil Sands segments. It combines the operating segments Upstream International and Upstream Americas, which have similar economic characteristics and these operating segments are similar in respect of the nature of products and services, the nature of production processes, type and class of customers and the methods of distribution. Downstream consists of the activities previously reported in the Oil Products and Chemicals segments and solar. Upstream and Downstream earnings include their respective elements of Projects & Technology and of trading activities. Corporate represents the key support functions comprising holdings and treasury, headquarters, central functions and Shell’s insurance activities. Comparative information in this Report has been reclassified.
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Shell Annual Report and Form 20-F 2009 Business Review ? Business overview
RE V E N U E BY B U S IN E SS SE G M E N T (IN C LUD IN G IN TE R - SE G ME N T SA LE S)
$ MILLION
2009 Upstream Third parties Inter-segment Downstream Third parties Inter-segment Corporate Third parties Inter-segment 27,996 27,144 55,140 250,104 258 250,362 88 – 88
2008 45,975 42,333 88,308 412,347 466 412,813 39 – 39
2007 32,014 35,264 67,278 323,711 569 324,280 57 – 57
RE VE N U E BY G E O G RAPH ICA L AR E A [A] (E XC LUD IN G IN TE R - SE G ME N T SA LE S)
$ MILLION
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 103,424
80,398 60,721 33,645 278,188
% 2008 37.2 184,809
28.9 120,889 21.8 100,818 12.1 51,845 100.0 458,361
% 40.3
26.4 22.0 11.3 100.0
2007 138,089
90,141 87,548 40,004 355,782
%
38.8 25.3 24.6 11.3 100.0
[A] With effect from 2009, the reporting of third-party revenue by geographical area has been changed to reflect better the location of certain business activities. Comparative information is reclassified.
Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
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RISK FACTORS
Shell’s operations and earnings are subject to risks from changing conditions in competitive, economic, political, legal, regulatory, social, industry, business and financial fields. These risks could have a material adverse effect separately or in combination on Shell’s operational performance, earnings or financial condition. Investors should carefully consider the risks below and the limitation of shareholder remedies associated with our Articles of Association as discussed below.
Shell’s operating results and financial condition are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals.
PRO VE D DE VE L OPE D A N D U N DE VE L OPE D RE S E RVE S [A] (AT D E CE MBE R 31)
MILLION BOE [C]
Shell subsidiaries (less minority interest) Shell share of equity-accounted investments Total
2009 [D] 2008 [E] 2007 [E] 9,846 7,078 6,669 4,286 14,132 3,825 10,903 4,140 10,809
[A] We manage our total proved reserves base without distinguishing between proved oil and gas reserves associated with our equity-accounted investments and proved oil and gas reserves from subsidiaries. The SEC and FASB adopted revised standards for oil and gas reserves reporting for 2009. Prior years’ reserves quantities have been determined on the basis of the predecessor rules, accordingly proven minable oil sands reserves of 997 million boe are not included in 2008 (2007: 1,111 million boe). [C] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. [D] Includes proved reserves associated with future production that will be consumed in operations and synthetic crude oil reserves. [E] Does not include volumes expected to be produced and consumed in our operations and synthetic crude oil reserves.
Prices of oil, natural gas, oil products and chemicals are affected by supply and demand. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations have a material effect on our earnings and our financial condition. For example, in a low oil and gas price environment Shell would generate less revenue from its Upstream production, and as a result certain long-term projects might become less profitable or even incur losses. Additionally, low oil and gas prices could result in the debooking of oil or natural gas reserves, if they become uneconomic in this type of environment. Prolonged periods of low oil and gas prices, or rising costs, could also result in projects being delayed or cancelled, as well as in the impairment of certain assets. In a high oil and gas price environment, we can experience sharp increases in cost and under some production-sharing contracts our entitlement to reserves would be reduced. Higher prices can also reduce demand for our products. Lower demand for our products might result in lower profitability, particularly in our Downstream business. Oil and gas prices can move independently from each other.
Shell’s future hydrocarbon production depends on the delivery of large and complex projects, as well as the ability to replace oil and gas reserves.
Shell’s ability to achieve its strategic objectives depends on our reaction to competitive forces.
We face significant competition in each of our businesses. While we try to differentiate our products, many of them are competing in commodity-type markets. If we do not manage our expenses adequately, our cost efficiency might deteriorate and our unit costs might increase. This in turn might erode our competitive position. Increasingly, we compete with state-run oil and gas companies, particularly in seeking access to oil and gas resources. Today, these state-run oil and gas companies control vastly greater quantities of oil and gas resources than the major publicly held oil and gas companies. State-run entities have access to significant resources and may be motivated by political or other factors in their business decisions which may harm our competitive position or access to desirable projects.
An erosion of Shell’s business reputation would have a negative impact on our licence to operate, our brand, our ability to secure new resources and our financial performance.
We face numerous challenges in developing capital projects, especially large ones. Challenges include uncertain geology, frontier conditions, the existence and availability of necessary technology and engineering resources, availability of skilled labour, project delays and potential cost overruns, as well as technical, fiscal, regulatory, political and other conditions. Such potential obstacles may impair our delivery of these projects, as well as our ability to fulfil related contractual commitments, and, in turn, adversely affect our operational performance and financial position. Future oil and gas production will depend on our access to new proved reserves through exploration, negotiations with governments and other owners of known reserves, and acquisitions. Failure to replace proved reserves could result in lower future production.
OIL AND GAS PRODUCTION AVAILABLE FOR SALE [A] MILLION BOE
Shell is one of the world’s leading energy brands, and our brand and reputation are important assets. The Shell General Business Principles and Code of Conduct govern how Shell and our individual companies conduct our affairs. While we seek to ensure compliance with these requirements by all of our 101 thousand employees, it is a significant challenge. Failure – real or perceived – to follow these principles, or other real or perceived failures of governance or regulatory compliance could harm our reputation. This could impact our licence to operate, damage our brand, harm our ability to secure new resources and affect our operational performance and financial condition.
Rising climate change concerns could lead to additional regulatory measures that may result in project delays and higher costs.
Subsidiaries Equity-accounted investments Total
2009 828 319 1,147
2008 846 314 1,160
2007 886 295 1,181
[A] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. Includes synthetic crude oil production.
Emissions of greenhouse gases and associated climate change are real risks to Shell. In the future, in order to help meet the world’s energy demand, we expect more of our production to come from unconventional sources than at present. Energy intensity of production of oil and gas from unconventional sources can be higher than that of production from conventional sources. Therefore, in the long term, it is expected that both the CO2 intensity of our production as well as our absolute CO2 emissions might increase, for example from the expansion of oil sands activities in Canada. Also our Pearl GTL project in Qatar is expected to increase our CO2 emissions when production begins. Over time, we expect that a growing share of our CO2
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Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
emissions will be subject to regulation and carry a cost. If we are unable to find economically viable as well as publicly accepted solutions that reduce our CO2 emissions for new and existing projects or products, regulatory and/or political and societal pressures could lead to project delays, additional costs as well as compliance and operational risks.
The nature of Shell’s operations exposes us to a wide range of significant health, safety, security and environment (HSSE) risks.
meet their financial or other obligations to the projects, threatening the viability of a given project.
Reliable information technology (IT) systems are a critical enabler of our operations.
The HSSE risks, to which we are potentially exposed, cover a wide spectrum, given the geographic range, operational diversity and technical complexity of Shell’s daily operations. Shell has significant operations in difficult geographies or climate zones, as well as environmentally sensitive regions which exposes us to the risk, amongst others, of major process safety incidents, effects of natural disasters, social unrest, personal health and safety and crime. If a major HSSE risk, such as an explosion or hydrocarbon spill due to a process safety incident, materialises, this could result in injuries, loss of life, environmental harm, disruption to business activities and, depending on their cause and severity, material damage to Shell’s reputation.
Shell operates in over 90 countries, with differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments and resulting changes to laws and regulations.
Organisational changes and process standardisation, which lead to more reliance on a decreasing number of global systems, outsourcing and relocation of information technology services as well as increased regulations increase the risk that our IT systems may fail to deliver products, services and solutions in a compliant, secure and efficient manner.
Shell’s future performance depends on successful development and deployment of new technologies.
Technology and innovation are essential to Shell. If we do not develop the right technology, do not have access to it or do not deploy it effectively, it may affect the delivery of our strategy, our profitability and our financial condition.
The general macroeconomic environment as well as financial and commodity market conditions influence Shell’s operating results and financial condition as our business model involves trading, treasury, interest rate and foreign exchange risks.
Developments in politics, laws and regulations can and do affect our operations and earnings. Potential developments include forced divestment of assets; expropriation of property; cancellation of contract rights; additional windfall taxes and other retroactive tax claims; import and export restrictions; foreign exchange controls; and changing environmental regulations. In our Upstream activities these developments could additionally affect land tenure, re-writing of leases, entitlement to produced hydrocarbons, production rates, royalties and pricing. Parts of our Downstream business are subject to price controls in some countries. When such risks materialise they can affect the employees, reputation, operational performance and financial position of Shell as well as of the Shell companies located in the country concerned. If we do not comply with policies and regulations, it may result in regulatory investigations, lawsuits and ultimately sanctions.
Shell’s international operations expose us to social instability, terrorism and acts of war or piracy that could significantly impact our business.
Shell companies are subject to differing economic and financial market conditions throughout the world. Political or economic instability affect such markets. For example, if the current worldwide economic downturn deepens or is prolonged, it could contribute to instability in financial markets. Shell uses debt instruments such as bonds and commercial paper to raise significant amounts of capital. Should our access to debt markets become more difficult, we might not be able to maintain a level of liquidity required to fund the implementation of our strategy. Trading and treasury risks include among others exposure to movements in commodity prices, interest rates and foreign exchange rates, counterparty default and various operational risks (see also pages 81-82). As a global company doing business in over 90 countries, we are exposed to changes in currency values and exchange controls. While Shell does undertake some currency hedging, we do not do so for all of our activities. The resulting exposure could affect our earnings and cash flow (see Notes 4 and 23 to the Consolidated Financial Statements).
The estimation of reserves is a process that involves subjective judgements based on available information, so subsequent downward adjustments are possible. If actual production from such reserves is lower than current estimates indicate, our profitability and financial condition could be negatively impacted.
Social and civil unrest, both within the countries in which we operate and internationally, can and does affect operations and earnings. Potential developments that could impact our business include international conflicts, including war, acts of political or economic terrorism and acts of piracy on the high seas, as well as civil unrest and local security concerns that threaten the safe operation of our facilities and transport of our products. If such risks materialise, they can result in injuries and disruption to business activities, which could have a material adverse effect on our operational performance and financial condition, as well as our reputation.
Our investment in joint ventures and associated companies may reduce our degree of control as well as our ability to identify and manage risks.
The estimation of oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. The estimate may change because of new information from production or drilling activities or changes in economic factors. It may also alter because of acquisitions and disposals, new discoveries and extensions of existing fields and mines, as well as the application of improved recovery techniques. Published reserves estimates may also be subject to correction due to the application of published rules and guidance. Any downward adjustment would indicate lower future production volumes and may adversely affect our earnings as well as our financial condition.
The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This might limit shareholder remedies.
Many of our major projects and operations are conducted in joint ventures or associated companies. In certain cases, we may have less influence over and control of the behaviour, performance and cost of operations in which a Shell company holds an interest. Additionally, our partners or members of a joint venture or associated company (particularly local partners in developing countries) may not be able to
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
Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
15
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 for any reason determined to be invalid or unenforceable, the dispute may only be brought in the courts of England and Wales. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions. Please see “Corporate governance” for further information.
Violations of antitrust and competition law pose a financial risk for Shell and expose Shell or our employees to criminal sanctions.
Shell has substantial pension commitments, whose funding is subject to capital market risks.
Antitrust and competition laws apply to Shell companies in the vast majority of countries in which we do business. Shell companies have been fined for violations of antitrust and competition law. These include a number of fines by the European Commission Directorate-General for Competition (DG COMP). Due to the DG COMP’s fining guidelines, any future conviction of Shell companies for violation of European Union (EU) competition law could result in significantly enhanced fines. Violation of antitrust laws is a criminal offence in many countries, and individuals can be either imprisoned or fined. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages.
An erosion of the business and operating environment in Nigeria could adversely impact our earnings and financial position.
The risk regarding pensions is the ability to fund defined benefit plans to the extent that the pension assets fail to meet future liabilities. Liabilities associated with and cash funding of pensions can be significant and are dependent on various assumptions. Volatility in capital markets and the resulting consequences for investment performance as well as interest rates, may result in significant changes to the funding level of future liabilities. In case of a shortfall, Shell might be required to make substantial cash contributions, depending on the applicable regulations per country. For example, as a result of the funding shortfall experienced at the end of 2008, employer contributions to defined benefit pension funds in 2009 were $3.6 billion higher than in 2008. See “Liquidity and capital resources” for further discussion.
Shell companies face the risk of litigation and disputes worldwide.
From time to time cultural and political factors play a significant role in unprecedented and unanticipated judicial outcomes contrary to local and international law. In addition, certain governments, states and regulatory bodies have, in the opinion of Shell, exceeded their constitutional authority by attempting unilaterally to amend or cancel existing agreements or arrangements; by failing to honour existing contractual commitments; and by seeking to adjudicate disputes between private litigants. Adverse outcomes in these areas could have a material effect on our operations and financial condition.
Shell is currently under investigation by the United States Securities and Exchange Commission and the United States Department of Justice for violations of the US Foreign Corrupt Practices Act.
We face various risks in our Nigerian operations. These risks include security issues surrounding the safety of our people, host communities, and operations, our ability to enforce existing contractual rights, limited infrastructure and potential legislation that could increase our taxes. The Nigerian government is contemplating new legislation to govern the petroleum industry which, if passed into law, would likely have a significant influence on Shell’s existing and future activities in that country and could adversely affect our financial returns from projects in that country.
Shell has investments in Iran and Syria, countries against which the US government imposed sanctions. We could be subject to sanctions or other penalties in connection with these activities.
In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has an ongoing internal investigation and is co-operating with the US Department of Justice and the US Securities and Exchange Commission investigations. As a result of these investigations, Shell may face fines and additional costs.
US laws and regulations identify certain countries, including Iran and Syria, as state sponsors of terrorism and currently impose economic sanctions against these countries. Certain activities and transactions in these countries are banned. Breaking these bans can trigger penalties including criminal and civil fines and imprisonment. For Iran, US law sets a limit of $20 million in any 12-month period on certain investments knowingly made in that country, prohibits the transfer of goods or services made with the knowledge that they will contribute materially to that country’s weapons capabilities and authorises sanctions against any company violating these rules (including denial of financings by the US export/import bank, denial of certain export licences, denial of certain government contracts and limits of loans or credits from US financial institutions). However, compliance with this investment limit by European companies is prohibited by Council Regulation No. 2271/96 adopted by the Council of the EU, which means the statutes conflict with each other in some respects. While Shell did not exceed the limit on investments in Iran in 2009, we have exceeded it in the past and may exceed the US-imposed investment limits in Iran in the future. While we seek to comply with legal requirements in our dealings in these countries, it is possible that Shell or persons employed by Shell could be found to be subject to sanctions or other penalties under this legislation in connection with their activities in these countries.
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Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
SUMMARY OF RESULTS AND STRATEGY
S E GM E N T E ARN IN GS $ MILLION
The gearing ratio was 15.5% at the end of 2009, compared with 5.9% at the end of 2008. The change reflects the increase of the total debt in combination with a decrease in the cash and cash equivalents position in 2009.
2009 Upstream Downstream Corporate Income for the period 8,354 3,054 1,310 12,718
2008 26,506 39 (69) 26,476
2007 18,094 12,445 1,387 31,926
Market overview
The demand for oil and gas is strongly linked to the strength of the global economy. For that reason, projected economic growth is considered an indicator of the future demand for our products and services. Following the extreme contraction in the global economy in the fourth quarter of 2008 and first quarter of 2009 that was triggered by the severe financial crisis in the USA and Europe, world output accelerated over the remaining quarters of 2009. The recession ended in most major economies by the third quarter of the year. This turnaround was due in part to the extraordinary macroeconomic stimulus and financial sector supports implemented by governments and central banks to contain the crisis. In this context, the global economy contracted by (0.8%) in 2009, down from growth of 3.2% in 2008 and 5.1% in 2007. In 2010, global output growth is expected to recover, but the recovery is likely to be slow and uncertain given the depth of contraction in 2009.
OIL AND NATURAL GAS PRICES
Earnings 2009-2007
The most significant factors affecting year-to-year comparisons of earnings and cash flow generated by our operating activities are: changes in realised oil and gas prices; oil and gas production levels; and refining and marketing margins. During 2009, oil prices increased, but the average price was lower than in 2008. Gas prices and refining margins declined sharply, because of weaker demand and high industry inventory levels. Oil and gas production available for sale in 2009 was 3,142 thousand barrels of oil equivalent per day (boe/d), compared with 3,248 thousand boe/d in 2008 (including mined oil sands production of 78 thousand b/d). Earnings in 2009 were 52% lower than in 2008, when they were 17% lower than in 2007. The decrease reflected lower realised oil and gas prices and lower production in Upstream as well as lower margins and sales volumes in Downstream. These effects more than offset the positive effect on earnings of increasing oil prices on inventory. In 2009, Upstream earnings were $8,354 million, 68% lower than in 2008 and 54% lower than in 2007. Earnings in 2009 reflected the effect of significantly lower realised prices for both oil and gas in combination with lower production volumes. Moreover, the 2008 earnings included significant gains from the divestment of various assets. In 2008, earnings increased by 46% from 2007, mainly reflecting higher realised oil and gas prices, partly offset by lower production volumes. Downstream earnings in 2009 were $3,054 million, compared with $39 million in 2008 and $12,445 million in 2007. When earnings are adjusted for the impact of changing oil prices on inventory, then earnings in 2009 decreased significantly with respect to 2008 because lower demand drove down our realised refining margins and most of our realised marketing margins in 2009. The adjusted earnings also decreased between 2007 and 2008 because of lower margins on chemical products, lower refining margins in the USA and higher operating costs.
Oil prices rose steadily through 2009. Brent crude oil started the year at $40 per barrel and in mid-November reached the $78 mark, which is approximately where it ended the year. On average, however, 2009 prices were considerably lower than they were in 2008. Brent crude oil averaged $61.55 per barrel in 2009, compared with $97.14 in 2008, and West Texas Intermediate averaged $61.75 per barrel in 2009, compared with $99.72 a year earlier. Natural gas prices also spanned a wide range in 2009. The Henry Hub prices trended downwards between January and September: from a monthly average high of $5.27 per million British thermal units (MMBtu) in January down to a monthly low of $2.88 in September, when inventories were hitting an all-time high and production had to be discouraged. From October until the end of 2009, however, Henry Hub gas prices reversed the trend with the onset of winter weather. Overall, the Henry Hub gas price averaged $3.90 per MMBtu in 2009 compared with $8.85 in 2008. In the UK, prices at the National Balancing Point averaged 30.93 pence/therm in 2009 compared with 58.06 pence/therm in 2008. Unlike crude oil pricing, which is global in nature, gas prices can vary significantly from region to region. Shell produces and sells natural gas in regions whose supply, demand and regulatory circumstances differ markedly from those of the US’s Henry Hub or the UK’s National Balancing Point. Natural gas prices in continental Europe and in the Asia-Pacific region are predominantly indexed to oil prices. In Europe, contractual time-lag effects resulted in a continued price decline throughout the first half of 2009, while demand was at the same time severely impacted by the recession. Oil-indexed prices started to recover in the fourth quarter, maintaining a very significant premium above the UK’s National Balancing Point.
OIL AND NATURAL GAS PRICES FOR INVESTMENT EVALUATION
Balance sheet and capital investment
Shell’s strategy to invest in the development of major growth projects, primarily in Upstream, explains the most significant changes to the balance sheet in 2009. Property, plant and equipment increased by $19.6 billion mainly as a result of capital investment of $31.7 billion, 17% lower than capital investment in 2008. The effect of capital investment on property, plant and equipment was partly offset by depreciation, depletion and amortisation of $14.5 billion in 2009. Of the 2009 capital investment, $24 billion related to Upstream projects that will primarily deliver organic growth over the long term. These projects include several multi-billion-dollar, integrated facilities that are expected to provide significant cash flows for the coming decades. In 2009, the total debt increased by $11.8 billion. Overall, total equity increased by $9.3 billion in 2009, to $138.1 billion.
The range of possible future crude oil and natural gas prices used in project and portfolio evaluations within Shell are determined after assessment of short-, medium- and long-term price drivers under different sets of assumptions. Historical analysis, trends and statistical volatility are all part of this assessment, as are analyses of possible future economic conditions, geopolitics, OPEC actions, supply costs
Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
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and the balance of supply and demand. Sensitivity analyses are used to test the impact of low-price drivers, such as economic weakness, and high-price drivers, such as strong economic growth and low investment levels in new production. Short-term events, such as relatively warm winters or cool summers, weather-and (geo)political-related supply disruptions, contribute to price volatility. Shell expects oil prices to typically average $50 to $90 per barrel and screens new upstream opportunities inside this range. Shell uses a grid based on low, medium and high oil and gas prices to test the economic performance of long-term projects. As part of our normal business practice, the range of prices used for this purpose is always subject to review and change.
REFINING AND PETROCHEMICAL MARKET TRENDS
and project-management skills that allow us to deliver large oil and gas projects, and the management of integrated value chains. We leverage our diverse and global business portfolio and customer-focused businesses built around the strength of the Shell brand.
OUTLOOK
We have defined three distinct layers for Shell’s strategy development: near-term performance focus, medium-term growth delivery and maturing next generation project options.
Performance focus
Refining margins were lacklustre in all key refining centres in 2009. Margins came under downward pressure with the reduced demand due to the global recession. On top of that, there was significant refinery overcapacity following the start-up of major refining facilities in Asia. Demand for petrochemicals recovered during the second half of 2009, as GDP growth resumed and restocking took place. Global ethylene demand grew a little under 1% in 2009 after suffering a decline of over 3% in 2008. Industry refining margins in 2010 are likely to remain fundamentally weak because of the expected ongoing global excess product inventory, particularly for middle distillates.
In the near-term, we will emphasise performance focus. We will work on continuous improvements in operating performance, with an emphasis on health, safety and environment, asset performance and operating costs, including plans for $1 billion of cost savings in 2010. There will be asset sales of up to $3 billion per year as Shell exits from non-core positions across the company. We have new initiatives that are expected to improve on Shell’s industry-leading Downstream, focusing on the most profitable positions and growth potential. Shell has plans to exit from 15% of its world-wide refining capacity and from selected retail and other marketing positions, and is taking steps to improve the quality of its chemicals assets. We plan net capital investment of some $29 billion in 2010 (net capital investment represents capital investment, less divestment proceeds). This amount relates largely to investments in projects where the final investment decision has already been taken or is expected to be taken in 2010. This excludes any impact of the indicative offer to acquire Arrow Energy Limited.
Growth delivery
Strategy and outlook
STRATEGY
Our strategy seeks to reinforce our position as a leader in the oil and gas industry in order to provide a competitive shareholder return while helping to meet global energy demand in a responsible way. Intense competition will remain for access to resources by our Upstream businesses and new markets by our Downstream businesses. We believe our technology, project-delivery capability and operational excellence will remain key differentiators for our businesses. In Upstream, we focus on exploration for new oil and gas reserves and developing major projects where our technology and know-how adds value to the resource holders. In our Downstream businesses, our emphasis remains on sustained cash generation from our existing assets and selective investments in growth markets. We will continue to focus on capital and cost discipline. We expect around 80% of our capital investment in 2010 to be in our Upstream projects. In Downstream, we aim to maintain relatively steady capital employed. Meeting the growing demand for energy worldwide in ways that minimise environmental and social impact is a major challenge for the global energy industry. We are committed to improving energy efficiency in our own operations, supporting customers in managing their energy demands and continuing to research and develop technologies that increase efficiency and reduce emissions in oil and gas production. Our commitment to technology and innovation continues to be at the core of our strategy. As energy projects become more complex and more technically demanding, we believe our technical expertise will be a deciding factor in the growth of our businesses. Our key strengths include the development and application of technology, the financial
Organic capital investment is expected to be $25 to $30 billion per year for 2011 to 2014, as Shell invests for long-term growth. Annual spending will be driven by the timing of investment decisions and the near-term macro outlook. Cash flow from operations excluding working capital was $24 billion in 2009. Shell expects cash flow to grow by around 50% from 2009 to 2012 assuming a $60 oil price and a more normal environment for natural gas prices and downstream. In an $80 environment, 2012 cash flow should be at least 80% higher than 2009 levels. In Downstream, Shell is adding new chemicals capacity in Singapore and refining capacity in the USA, and making selective growth investment in marketing. Oil and gas production is expected to average 3.5 million boe/d in 2012, compared to 3.1 million boe/d in 2009, an increase of 11%, and with confidence of further growth to 2014.
Maturing next generation project options
Shell has built up a substantial portfolio of options for the next wave of growth. This portfolio has been designed to capture price upside, and minimise Shell’s exposure to industry challenges from cost inflation and political risk. Key elements of this opportunity set are in the Gulf of Mexico, USA and Canada tight gas, and Australia LNG. These are the projects that have the potential to underpin production growth to the end of the decade. Shell is working to mature these projects, with an emphasis on financial returns.
Reserves and production
Shell added 4,417 million boe of proved oil and gas reserves before production, of which 3,632 million boe comes from Shell subsidiaries
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Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
and 785 million boe is associated with the Shell share of equityaccounted investments. Included in the 4,417 million boe is 1,630 million boe of synthetic crude oil reserves. Last year, we had reported 997 million boe of proven minable oil sands reserves as of December 31, 2008. As a result of the SEC rule changes these proven minable reserves have been converted to synthetic crude oil proved reserves and are included in the 1,630 million boe. Accordingly we will no longer be reporting proven minable oil sands reserves. The increase of 4,417 million boe of proved oil and gas reserves also includes approximately 270 million boe associated with other SEC changes in proved reserves reporting. Furthermore, for the first time we have included 599 million boe proved reserves associated with future production that will be consumed in operations (for example, as fuel gas). Finally, the total additions reflect a net positive impact from commodity price changes of approximately 260 million boe proved reserves. In 2009, total oil and gas production available for sale was 1,147 million boe. An additional 40 million boe was produced and consumed in operations. Production available for sale from subsidiaries was 828 million boe with an additional 35 million boe consumed in operations. The Shell share of the production available for sale of equity-accounted investments was 319 million boe with an additional 5 million boe consumed in operations. Accordingly, after taking into account total production we had a net increase of 3,230 million boe in proved oil and gas reserves of which 2,769 million boe is from subsidiaries and 461 million boe is associated with the Shell share of equity-accounted investments. Details of Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved reserves are summarised in the table on page 29 and are set out under the heading “Supplementary information – Oil and gas” on pages 140-149.
that stands most to profit from what they deliver. In doing so, we also established useful links between our Upstream and Downstream technologies. The new R&D organisation also enables us to introduce further simplification and standardisation in the way we manage the development of technology. Our R&D programme for 2010 will remain on the same general course as that for 2009. But it will benefit from the clearer lines of sight now established between a technology’s creation and its ultimate deployment in the field.
Key accounting estimates and judgements
Please refer to Note 3 to the Consolidated Financial Statements for a discussion of key accounting estimates and judgements.
Legal proceedings
Please refer to Note 28 to the Consolidated Financial Statements for a discussion of legal proceedings.
Audit fees
Please refer to Note 29 to the Consolidated Financial Statements for a discussion of auditors’ fees and services.
Research and development
In 2009, our research and development (R&D) expenses were $1,125 million, compared with $1,230 million in 2008 and $1,167 million in 2007. Our R&D programme adapts and applies technologies that reduce the energy requirements, environmental impacts and running costs of our current operations. It also develops technologies that help us capitalise on business-growth opportunities, both in Upstream and in Downstream. And it can create entirely new technologies, such as those needed for alternative fuels or carbon capture and sequestration, which may become part of the world’s energy system in the longer term. The technologies we created, developed and applied in our businesses during 2009 certainly spanned that wide range of purpose. For example, our current operations were made more efficient by the many Smart Field implementations that optimised production from oil and gas fields and by the catalysts we manufactured for the nearly completed Pearl GTL plant. New exploration prospects were identified in the Middle East and Africa with novel seismic survey technologies. And new markets were opened by our high-mileage FuelSave gasoline formulation, which was launched in various countries. Unprecedented technological achievements were also in the works in 2009, so that we can build a floating LNG plant for the offshore Prelude and Concerto fields of Australia and realise a full-scale cellulose-to-ethanol plant for next-generation biofuels. With the Transition 2009 reorganisation, we sharpened the accountability for delivery of all aspects of our R&D programme. We also linked the programme’s projects more closely with the business
Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
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UPSTREAM
K E Y S TAT I ST I CS $ MILLION
2009 Revenue (including inter-segment sales) Segment earnings Including: Production and manufacturing expenses Selling, distribution and administrative expenses Exploration Depreciation, depletion and amortisation Share of profit of equity-accounted investments Capital investment Oil and gas production available for sale (thousand boe/d) LNG sales volume (million tonnes) Proved reserves (million boe) [A] 55,140 8,354 13,958 2,206 2,178 9,875 3,852 23,951 3,142 13.40 14,132
2008
2007
88,308 67,278 26,506 18,094 13,763 2,030 1,995 9,906 7,521 32,166 3,248 13.05 10,903 13,122 2,015 1,822 9,913 5,446 21,362 3,315 13.18 10,809
lower realised oil and gas prices. Higher costs and lower sales volumes also contributed slightly to the decline. The earnings decline was partly offset by lower royalties, lower taxes and higher trading contributions. Additionally, 2009 earnings included a net charge of $134 million compared with net gains of $3,487 million in 2008. The net charge of $134 million in 2009 mainly relates to impairments and redundancy charges, partly offset by exceptional tax items, and divestment gains. The net gains of $3,487 million in 2008 mainly related to the divestment of assets in Australia, Canada, Germany, the Netherlands, Nigeria, the UK and the USA, which were partly offset by the mark-to-market valuation of certain UK gas contracts and an exceptional tax charge due to new legislation in Italy. While natural gas production was flat in 2009, LNG sales volumes of 13.40 million tonnes were 3% higher than in 2008. This increase reflected the ramp-up in sales volumes from the Sakhalin II LNG project and Train 5 at the Australian North West Shelf project, which were partly offset by lower volumes from Nigeria LNG and reduced LNG demand due to the recession. Segment earnings in 2008 were $26,506 million, 46% higher than in 2007, due to the impact of higher realised oil and gas prices. This was partly offset by lower production volumes, particularly in the USA, where hurricanes affected operations. Higher taxes, royalties and exploration costs also reduced 2008 earnings. Net gains of $3,487 million in 2008 compared with net gains of $1,471 million in 2007. The net gains in 2007 mainly related to asset divestments and various taxation credits, which were partly offset by the mark-to-market valuation of certain UK gas contracts and a charge mainly relating to the onshore assets in Nigeria, including impairments and provisions arising from the funding and security situation there.
[A] Excludes minority interest. Minable oil sands reserves of 997 million boe in 2008 and 1,111 million boe in 2007 are not included in the proved reserves.
Overview
Our Upstream businesses explore for and extract crude oil and natural gas, often in joint ventures with international and national oil companies. We liquefy natural gas by cooling and transport it to customers across the world. We also convert natural gas to liquids (GTL) to provide cleaner burning fuels. Upstream markets and trades natural gas and power in support of our businesses. We extract bitumen – an especially thick, heavy oil – from mined oil sands and convert it to synthetic crude oil. We are also developers of wind power as a means to generate electricity.
Capital investment, portfolio actions and business development
Capital investment in 2009 was $24 billion. This represents a 26% decrease from 2008, which included over $8 billion in acquisitions, primarily relating to Duvernay Oil Corp. Capital investment included exploration expenditure of $4.5 billion (2008: $11.0 billion). In Abu Dhabi, Shell signed an agreement with Abu Dhabi National Oil Company (ADNOC) to extend the GASCO joint venture for a further 20 years. In Australia, Shell and its partners took the final investment decision (FID) for the Gorgon LNG project (Shell share 25%). Gorgon will supply global gas markets to at least 2050, with a capacity of 15 million tonnes (100% basis) of LNG per year and a major carbon capture and storage scheme. Shell has announced a front-end engineering and design study for a floating LNG (FLNG) project, with the potential to deploy these facilities at the Prelude offshore gas discovery in Australia (Shell share 100%). In Australia, Shell confirmed that it has accepted Woodside Petroleum Ltd.’s (Woodside) entitlement offer of new shares at a total cost of $0.8 billion, maintaining its 34.27% share in the company; $0.4 billion was paid in 2009 with the remainder paid in 2010. In Bolivia and Brazil, Shell sold its share in a gas pipeline and in a thermoelectric power plant and its related assets for a total of around $100 million. In Canada, the Government of Alberta and the national government jointly announced their intent to contribute $0.8 billion of funding towards the Quest carbon capture and sequestration project. Quest,
Earnings 2009-2007
The economic environment in 2009 was a challenge to both Shell and the industry. According to the International Energy Agency, the 2009 oil demand decline of 1.5% is the largest decline since 1982. Similarly, we faced gas demand declines in Europe and the USA of some 7% and 2% respectively. At the same time, global liquefied natural gas (LNG) capacity increased by 20% in 2009, exerting downward pressure on global gas prices. Spot gas prices were significantly lower in 2009 than in 2008. Much of Shell’s natural gas and LNG portfolio has term contracts with price realisations that trailed oil price trends, typically by 4 to 6 months. Gas production represented 47% of total production of 3,142 thousand boe/d. The chart below illustrates the significant difference in direction between Shell’s realised prices for oil and gas in 2009.
RE A L I SE D PRI CE
$120 $100 $80 $60 $40 $20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2008 2008 2008 2009 2009 2009 2009 Oil Natural gas
$/BOE
Segment earnings in 2009 were $8,354 million, 68% lower than in 2008. The decrease in 2009 from 2008 was mainly due to significantly
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
which is at the feasibility study stage, could capture CO2 from the Athabasca Oil Sands Project at the Scotford Upgrader, for underground storage. In Egypt, Shell signed agreements to acquire a 40% holding and become the operator on the Alam El Shawish West Concession, where oil and gas discoveries have been confirmed. In Iraq, Shell was awarded a contract as lead operator in developing the Majnoon field (Shell interest 45%). Production is expected to reach 1.8 million boe/d, up from a current level of approximately 45 thousand boe/d (100% basis). In addition, Shell was awarded a 15% share in a contract for the development of the West Qurna 1 field. According to the contracts’ provisions, Shell’s equity entitlement volumes will be lower than the Shell interest implies. In the USA, the FID was taken on the Caesar Tonga project (Shell interest 22.4%), with estimated peak production of 40 thousand boe/d (100% basis). In Africa and Europe, Shell has agreed to an asset swap with Hess Corporation to acquire assets in Gabon and in the UK North Sea in return for Shell’s interest in a pair of Norwegian offshore fields (subject to government approval and other requisite consents).
contain. Shell also saw particularly strong results from exploration and appraisal drilling in the North American Haynesville and Groundbirch tight gas areas. In appraisal drilling, Shell participated in three notable successes in onshore and offshore Australia and the UK. In total, Shell participated in 345 successful wells drilled outside proved areas. This comprises 28 conventional oil and gas wells and 148 unconventional gas exploration and appraisal wells, as well as 169 additional appraisal wells intended to extend proved areas near existing assets. In 2009, Shell added acreage to our exploration portfolio mainly from new licences in Australia, Brazil, Canada, Guyana, Italy, Jordan, Norway and the USA, and successfully bid for new exploration licences in Egypt, South Africa and French Guiana. Shell acquired one licence in the Exmouth area, offshore north-west Australia. In Brazil, Shell was awarded 5 blocks in the onshore frontier Sao Francisco Basin. In Canada, Shell expanded our acreage holdings in British Columbia. In Guyana, the farm-in agreement to the Stabroek licence was finalised. In Italy, Shell farmed into six blocks in the deepwater Sicily Channel area. In Jordan, an oil shale concession agreement was finalised. In Norway, Shell was awarded two licences in the 20th bid round. In the US Gulf of Mexico, Shell was awarded exploration rights on 42 blocks in two lease sales, of which 39 were in lease sale 208. In total, Shell secured rights to some 97,000 km2 of new exploration acreage. Overall, our exploration acreage increased in 2009 relative to 2008, mainly due to the acreage additions in locations noted above, partly offset by a combination of divestments, relinquishments and licence expiry of acreage in various countries (mainly Canada, Malaysia and the UK).
Production
In 2009, hydrocarbon production averaged 3,142 thousand boe/d, which was 3% lower than in 2008 and 5% lower than in 2007. Lower production in 2009 when compared with 2008 is attributable to field declines, OPEC restrictions, lower production in Nigeria due to security issues, and higher maintenance downtime, mainly in the UK. A reduction in gas demand due to the global recession was also a key factor. These declines were partly offset by ramp-up of new fields, PSC price effects and a comparatively mild 2009 hurricane season in the USA. Field declines affecting production were predominantly in the UK and the USA, but were also seen in Australia, Brazil, Canada, Denmark, Malaysia and Norway. The effect of declining fields was more than offset by production from new fields. In Brazil, production started from the multi-field Parque das Conchas (BC-10) project (Shell interest 50%). Production wells, which are some two kilometres deep, are linked to a floating production, storage and offloading vessel with a capacity to process 100 thousand barrels of oil and 50 million cubic feet of natural gas a day (100% basis). In Brunei, field-development projects at Mampak Block 4 and Bugan came on-stream in 2009. In Norway, the Ormen Lange gas field (Shell interest 17%) reached peak production in November 2009. The field delivers gas to the UK market. In Russia, the Sakhalin II project (Shell interest 27.5%) achieved peak production of over 400 thousand boe/d in the third quarter. It also successfully ramped up production from its two LNG trains, ahead of schedule. Production continued to increase from the Salym fields (Shell interest 50%), reaching almost 160 thousand boe/d during the latter half of 2009.
Outlook
Shell, along with the oil and gas industry as a whole, was impacted by the global recession during 2009. Compared with the previous year, the business environment was characterised by overall weaker oil and gas demand, reduced spending on non-core development and exploration activities and lower average realised prices. Although oil prices did recover throughout the year, this was driven more by disciplined production controls from OPEC and other oil producing countries than from a recovery in underlying demand. In the short term, uncertainties around the robustness of the global economic recovery continue to present the industry with challenges in terms of investment choices, and require a sharp and sustained increase in emphasis on cost management. Longer term we do believe that global energy demand will again experience strong growth based on the fundamentals of an increasing global population and economic development, with supplies of easy-to-access oil and gas remaining challenged to keep up with demand. This long-term view on global energy demand means that Shell’s strategy, which has been pursued consistently for several years, remains unchanged. The implementation of our strategy will see us actively manage our portfolio around four themes: maximising long-term value in our existing businesses, especially in our heartlands, by striving for, and sustaining, operational excellence and a keen focus on competitive cost management; maturing our substantial resource base to bring new projects onstream, in particular long-life assets with attractive price upside, through the leveraging of our strong commercial and technical capabilities; further building our resource base through an aggressive, focused, exploration programme and selective new business development; and
Exploration
During 2009, Shell participated in 11 notable discoveries in Australia, Malaysia, Norway, Oman and the US Gulf of Mexico. Discoveries will be evaluated in order to establish the extent of the volumes they
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continuing our industry leadership in integrated gas developments and increasing our unconventional gas business. Based on production, our heartlands have traditionally included Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA. Russia represents a new heartland with Sakhalin II on-stream in 2009, and we expect Qatar to become a heartland in the coming years. Underpinning these four themes is a foundation of technology; Shell’s ability to develop and deploy technology is a key differentiator, with applications across the value chain, and we continue significant investment in R&D to support this position. We continue to pursue an aggressive exploration programme and we are adding more acreage in support of our strategy themes. Our emphasis remains on drilling large exploration prospects and plays, in selected basins, and targeting under-explored areas with significant potential. The programme is further complemented by our focused Near Field Exploration programme aiming to leverage existing infrastructure near selected Shell production facilities around the world. Shell seeks to build on its position as one of the world’s largest natural gas producers and retain our position as industry leader in LNG, with a significant presence in the key markets of North America, Asia-Pacific and Europe. We aim to access and monetise new natural gas resources by offering competitive value propositions to our customers and major resource holders. In doing so, we leverage a diverse natural gas portfolio; global capabilities including technical and commercial skills, financing, marketing, trading, shipping and project management expertise; premium market access (for LNG and GTL); and leading technology. With Sakhalin II in Russia now on-stream, integrated gas focus moves to the completion of the Qatar projects, and to further progress in Australia, notably on the Gorgon LNG project, and on moving towards FID on the Prelude floating LNG development. This latter project is an exciting opportunity, continuing Shell’s tradition of driving technological innovation to unlock new resources. In North America, we continue to progress our onshore unconventional gas developments in Pinedale (Wyoming), Haynesville (Louisiana), Groundbirch (British Columbia) and other assets largely as planned, whilst utilising the inherent flexibility some of these developments provide to manage shorter term activity levels. With respect to Nigeria, the impact of continued security problems in the Niger Delta, and partner funding limitations within the onshore joint venture, continue to present challenges. While we have achieved some success with both funding and restoring production, the security situation remains fragile. Shell’s operating capability with existing assets and infrastructure remains strong in a country with a plentiful hydrocarbon resource base. However, the future industry outlook is uncertain, with the government contemplating the introduction of a new Petroleum Industry Bill, which could potentially reduce the economic attractiveness of oil and gas projects. Unconventional oil is a material component of our portfolio and in 2009 Shell and others in the oil sands industry reacted to the recession and low oil prices by deferring projects. This has eased the pressure on the demand for labour, and with energy costs also falling, a lower cost environment is starting to materialise. Looking forward it is anticipated that this trend will reverse, although the extreme labour shortages of recent years are not expected to return. The outlook for energy costs is also higher as the economy moves out of recession. These market factors underpin Shell’s continued focus on operational excellence and cost management to ensure a robust business.
Proved reserves
Details of Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved reserves are summarised in the table on page 29 and are set out under the heading “Supplementary information – Oil and gas” on pages 140-149. It should be noted that totals are further influenced by commodity price effects. In December 2008, the United States Securities and Exchange Commission (SEC) and subsequently in January 2010 the Financial Accounting Standards Board (FASB) adopted revisions to oil and gas reporting rules in order to modernise and update the oil and gas reserves estimation and disclosure requirements. Our proved reserves volumes reported for the end of 2009 have been determined in accordance with these updated rules. In 2009, we updated and enhanced our reserves assurance process by creating a central group of reserves experts, whom on average have over 25 years experience in the oil and gas industry. This group of experts are part of the Reserves Assurance and Reporting organisation (RAR). RAR provides primary assurance for all proved reserves bookings. A Vice President with over 35 years’ experience in the oil and gas industry currently heads RAR. He is a member of the Society of Petroleum Engineers and holds a Bachelor of Science in Petroleum Engineering from the University of Tulsa, Oklahoma, USA and Master of Science degrees in both Petroleum Engineering and Operations Research from Stanford University, California, USA. This RAR organisation reports directly to an Executive Vice President of Finance, who is a member of the Upstream Reserves Committee. The Upstream Reserves Committee is a multidisciplinary committee consisting of senior representatives from the Finance, Legal, Projects & Technology and the Upstream organisations. The Upstream Reserves Committee reviews and endorses all proved reserves bookings with final approval remaining with Shell’s Executive Committee. Internal Audit also provides secondary assurance through risk-based audits, focusing on the control framework and large proved reserves bookings. In 2009, Shell added 4,417 million boe of proved oil and gas reserves before accounting for production, of which 3,632 million boe comes from Shell subsidiaries and 785 million boe is associated with Shell’s share of equity-accounted investments. Included in the 4,417 million boe is 1,630 million boe of synthetic crude oil reserves that, as a result of SEC rule changes, can now be considered proved oil and gas reserves as well as approximately 270 million boe associated with other SEC rule changes pertaining to the use of reliable technologies and the use of analogues. The application of reliable technologies contributed approximately 150 million boe of the 270 million boe. The most significant increases related to the use of wireline pressure gradients and wireline testing. If the 2009 year-end spot price had been used instead of the new SEC requirement to use the 12 month average commodity price, this would have resulted in a reduction of about 160 million boe. Finally, the 4,417 million boe includes 599 million boe that is expected to be consumed in our operations (for example as fuel gas). Total production available for sale in 2009 was 1,147 million boe and an additional 40 million boe was consumed in our operations. Production from Shell subsidiaries was 828 million boe with an additional 35 million boe consumed in operations. Production associated with the Shell share of equity-accounted investments was 319 million boe with an additional 5 million boe consumed in operations. Accordingly, after taking into account production and volumes consumed in operations, we had a net increase of 3,230 million boe in proved oil and gas reserves of which
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
2,769 million boe is from Shell subsidiaries and 461 million boe is associated with the Shell share of equity-accounted investments.
SHELL SUBSIDIARIES
barrels, of which 54 million barrels is attributed to revisions and reclassifications and 2 million barrels to extensions and discoveries; after taking into account production of 7 million barrels, the bitumen proved reserves were 57 million barrels at December 31, 2009.
DEPRECIATION, DEPLETION AND AMORTISATION
Before taking into account production, Shell subsidiaries added 3,632 million boe of proved oil and gas reserves. This includes 843 million barrels of oil and natural gas liquids, 1,103 million boe (6,397 thousand million scf) of natural gas, 1,630 million barrels of synthetic crude oil and 56 million boe of bitumen. Of those volumes 2,266 million boe came from revisions and reclassifications. The revisions and reclassifications include 1,207 million barrels of synthetic crude oil, of which 997 million boe had been previously booked as proven minable oil sands reserves and 325 million boe for volumes expected to be consumed in operations. Also contributing to the 3,632 million boe was a net 2 million boe relating to acquisitions and divestments; 1,324 million boe from extensions and discoveries of which 96 million boe are related to volumes consumed in operations; and 40 million boe from improved recovery. After taking into account production of 863 million boe (of which 35 million boe was consumed in operations), Shell subsidiaries added 1,017 million boe of proved developed reserves and 1,752 million boe of proved undeveloped reserves.
SHELL’S EQUITY- ACCOUNTED IN VESTMENTS
The changes resulting from the revised SEC rules to Shell’s estimates of proved developed reserves affect prospectively from 2010 the amounts of depreciation, depletion and amortisation charged. These changes will not have a material impact.
Proved undeveloped reserves
The net addition to proved undeveloped reserves was 2,055 million boe in 2009. During the year we converted approximately 556 million boe of proved undeveloped reserves to proved developed reserves, of which approximately 40% is related to fields with no previously reported proved developed reserves. We spent approximately $7.3 billion in developing proved undeveloped reserves in 2009. As at December 31, 2009 we had 7,602 million boe of proved undeveloped reserves. As at December 31, 2009, approximately 1,064 million boe have been held as proved undeveloped reserves for five years or longer. A majority of these reserves are in locations where Shell has a proven track record of developing major projects, such as in the Netherlands, Nigeria, Norway, Russia and the USA. These proved undeveloped reserves relate primarily to long-life fields. Approximately 90% of these proved undeveloped reserves are associated with currently producing fields. These reserves are expected to be converted from proved undeveloped to proved developed over time as development activities are undertaken to meet contractual obligations and production facilities are expanded or upgraded. The majority of these undeveloped proved reserves are associated with fields that will produce for decades. Accordingly, over the life of these fields, we will be required to provide gas compression and drill additional wells to support existing gas delivery commitments as well as a number of phased developments that will optimise the use of production facilities. In the coming years we expect an increase in our proved undeveloped reserves that have been held for five years or longer due to the relatively recent commencement of construction of major, long-lasting production projects in Canada, Kazakhstan and Qatar.
Before taking into account production, Shell’s equity-accounted investments added 785 million boe of proved reserves, 331 million barrels from oil and natural gas liquids and 454 million boe (2,634 thousand million scf) of natural gas. The majority of these additions – 745 million boe – were from revisions and reclassifications. Included in the 745 million boe is 177 million boe for volumes expected to be consumed in operations and 568 million boe due to extension of licences, improved well performance, ongoing development and commodity price changes. After taking into account production of 324 million boe (of which 5 million boe was consumed in operations), Shell’s equity-accounted investments added 158 million boe to proved developed reserves and 303 million boe to proved undeveloped reserves.
PROVED SYNTHETIC CRUDE OIL RESERVES
As a result of SEC rules changes, we are required to report proved synthetic crude oil reserves from our Canadian oil sands operations. Accordingly, in 2009 we added 1,630 million barrels of synthetic crude oil to our proved oil and gas reserves before accounting for production. Last year, we had reported as proven minable oil sands reserves 997 million barrels. As a result of the SEC rules changes these proven minable oil sands reserves have been converted to synthetic crude oil reserves and are included in the 1,630 million barrels of proved synthetic crude oil reserves. Accordingly, we will no longer be reporting proven minable oil sands reserves. Also included in the 1,630 million barrels are 423 million barrels related to new mine extensions. In 2009 we had synthetic crude oil production of 31 million barrels of which 2 million barrels were consumed in operations. Therefore, as at December 31, 2009 we had total net proved synthetic crude oil reserves of 1,599 million barrels, of which 691 million barrels were proved developed reserves and 908 million barrels were proved undeveloped reserves.
BITUMEN
Delivery commitments
Shell sells crude oil and natural gas from its producing operations under a variety of contractual obligations. Most contracts generally commit Shell to sell quantities based on production from specified properties, some natural gas sales contracts specify delivery of fixed and determinable quantities, as discussed below. Shell is contractually committed to deliver to third parties and affiliates a total of approximately 4,500 billion cubic feet of natural gas from 2010 through 2012 from Australia, Brunei, China, Malaysia, Nigeria, Norway, Philippines, Russia and the UK. The sales contracts contain a mixture of fixed and variable pricing formulas that are generally referenced to the prevailing market price for crude oil, natural gas or other petroleum products at the time of delivery. Shell believes it can satisfy these contracts from gas sources in these regions. Shell has met all contractual delivery commitments.
Business and property
Shell subsidiaries and equity-accounted investments are involved in all aspects of Upstream activities, including matters such as land tenure, entitlement to produced hydrocarbons, production rates, royalties,
The bitumen proved reserves are reported under the SEC rules definition as other natural resources. The net increase in these proved reserves, before taking into account production, was 56 million
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pricing, environmental protection, social impact, exports, taxes and foreign exchange. The conditions of the leases, licences and contracts under which oil and gas interests are held vary from country to country. In almost all cases (outside North America), the legal agreements generally are granted by or entered into with a government, government entity or state oil company, and the exploration risk practically always rests with the oil company. In North America, these agreements may also be with private parties who own mineral interests. Of these agreements, the following are most relevant to Shell’s interests: Licences (or concessions), which entitle the holder to explore for hydrocarbons and exploit any commercial discoveries. Under a licence, the holder bears the risk of exploration, development and production activities and of financing these activities. In principle, the licence holder is entitled to the totality of production minus any royalties in kind. The state or state oil company may sometimes enter as a joint venture participant sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the state oil company or agency has an option to purchase a certain share of production. Lease agreements are typically used in North America and are usually governed by similar terms as licences. However, participants may include governments or private entities and royalties are either paid in cash or in kind. PSCs entered into with a state or state oil company oblige the oil company, as contractor, to provide all the financing generally, and bear the risk of exploration, development and production activities in exchange for a share of the production. Usually this share consists of a fixed or variable part, which is reserved for the recovery of contractor’s cost (cost oil); the remainder is split with the state or state oil company on a fixed or volume/revenue-dependent basis. In some cases, the state oil company will participate in the rights and obligations of the contractor and will share in the costs of development and production. Such participation can be across the venture or on a per field basis. Additionally, as the price of oil or gas increases above certain pre-determined levels, Shell’s entitlement share of production would normally decrease.
EUROPE Denmark
been producing for 15 years, and the Ormen Lange gas field (Shell interest 17%), which reached peak production in 2009. Shell was also the operator of the development phase of the Troll field and is a partner in the Statfjord field, both of which were producing in 2009. Shell also holds interests in potential development assets and in several Norwegian gas transportation and processing systems, pipelines and terminals.
UK
In terms of production volumes, Shell is one of the largest oil and gas exploration and production companies operating in the UK. It operates a significant number of its interests in the UK Continental Shelf on behalf of a 50:50 joint venture with ExxonMobil. Most of Shell’s UK oil and gas production comes from the North Sea. Natural gas comes from associated gas in mixed oil and gas fields in the northern sector of the North Sea and gas fields in the southern sector. Crude oil comes from the central and northern fields. In the Atlantic Margin area, Shell has interests as a non-operating participant principally in the West of Shetlands area, which encompasses the Schiehallion, Clair and Loyal fields.
Rest of Europe
In Ireland, the Corrib Gas Project (Shell interest 45%, operator) is currently under development, and is largely complete (pending final decision from the Irish planning board on an application for a nine kilometres onshore pipeline). Shell also has interests in Austria, Germany, Greece, Hungary, Italy, Slovakia, Spain, Sweden and Ukraine.
ASIA (INCLUDING MIDDLE EAST AND RUSSIA) Brunei
Shell holds a 46% interest in a producing concession until 2042. Shell’s interest will reduce to 36.8% in July 2012, when the government increases its position to a 20% fully participating stake in the concession. Shell also holds an interest in one other non-operated exploration licence.
The Netherlands
Shell and the Brunei government are 50:50 shareholders in Brunei Shell Petroleum Company Sendirian Berhad (BSP). BSP holds long-term oil and gas concession rights onshore and offshore Brunei and sells most of its natural gas production to Brunei LNG Sendirian Berhad (BLNG, Shell interest 25%). BLNG was the first LNG plant in the Asia Pacific region and sells most of the LNG on long-term contracts to buyers in Japan and South Korea. Shell has a 35% interest in the Block B concession where gas is produced from the Maharaja Lela Field. Shell also has a 54% operating interest in exploration Block A.
China
Shell has interests in various assets through its participation in Nederlandse Aardolie Maatschappij B.V. (NAM), a 50:50 joint venture between Shell and ExxonMobil. Those assets are operated by NAM. An important part of NAM’s gas production is from its onshore Groningen gas field, in which the Dutch government has a 40% financial interest, with NAM retaining the remaining share. During 2009 a field renovation project was completed.
Norway
Shell operates the onshore Changbei tight gas field (Shell interest 50% average) under a PSC with PetroChina. Shell also participates in the offshore Xijiang fields (Shell interests ranging from 24.5% to 47.8%).
Iran
Shell is a partner in over 20 production licences on the Norwegian continental shelf. Shell is operator in eight of these, including those of the Shell-operated Draugen oil field (Shell interest 26%), which has
Iran is a major resource holder. It has the world’s second largest oil and natural gas resources. At current global gas usage rates, Iran’s gas is enough to supply the entire world for about 10 years. Given the size and global importance of Iranian hydrocarbon resources, Shell finds it hard to see a future in which production of these resources would not, at some point, play an important role in the global energy supply and demand balance. Major new projects to deliver hydrocarbon resources to customers can easily take more than 10 years to prepare, and require the completion
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
of a number of phases of feasibility work before any final decision can be taken. It is hard to predict how circumstances in any one country will evolve over that period. Some countries that today appear stable may become less stable and vice versa. It therefore makes sense for Shell and other international energy companies to prepare a portfolio of possible new energy projects in a variety of different locations, and to leave a final investment decision on whether to proceed until the last practicable moment. We recognise that there are export controls and sanctions legislation in various jurisdictions targeting Iran. We have established programmes to manage compliance with such applicable laws, including the US Export Administration Regulations and the Iranian Transaction Regulations. However, as discussed in the Risk factors section (pages 13 to 15) conflicting US and European Union regulations in this area complicate compliance matters for European companies. Shell Exploration B.V. (Shell interest 100%) has a 70% interest in an agreement with the National Iranian Oil Company (NIOC) concerning the Soroosh/Nowrooz fields. The development phase is completed and all permanent facilities were handed over to NIOC in 2005. Since then, the Soroosh/Nowrooz fields have been producing, with NIOC being responsible for all aspects of the operations. The term of the agreement expires when all petroleum costs and the remuneration fee have been recovered, which is expected to occur in 2010. A project framework agreement for the Persian LNG project was signed in 2004 with Repsol and the National Iranian Oil Co. to take forward the Persian LNG project to the next stage of design. Under this agreement, it is envisaged that Shell would acquire a 50% interest in a project to develop phases of the South Pars field in the Persian Gulf and a 25% interest in the midstream liquefaction company. In early 2007, Shell and Repsol entered into a service contract with respect to development of the South Pars fields for the Persian LNG project. Negotiations on commercial issues continued to make progress in 2009. During 2009 we have also looked to mature the technical basis of the project, including front-end engineering design work for the offshore facilities and for the liquefaction plant. The parties will not reach a final decision on whether to proceed with the project until the remaining significant commercial and engineering work is complete. As with all projects, decision timing is fundamentally driven by the need to ensure first class decision quality. Our main concern is getting the remaining significant commercial and engineering work right. When we come to make a final investment decision, we will take political considerations into account. Naturally, we are following international developments closely and keeping a wide range of governments and other stakeholders informed. We are also providing China Petroleum and Chemical Corporation with technical services relating to their development of the Yadavaran field in Iran. At this time, we have not made any decision on whether to take an equity stake in the project. Shell’s investments and activities in Iran are not material to our revenues, earnings or assets. In general, potential US sanctions could have a material adverse effect on our future earnings (see Risk factors).
Iraq
was also awarded a 15% interest in the West Qurna 1 field, as part of the ExxonMobil-led consortium. According to the contracts’ provisions, Shell’s equity entitlement volumes will be lower than the Shell interest implies. Shell signed a heads of agreement with the Iraqi Ministry of Oil in September 2008 which sets out the commercial principles to establish a joint venture between Shell and the South Gas Company. The South Gas Company would be the 51% majority shareholder in the joint venture, with Shell holding 44% and Mitsubishi Corporation holding 5%. The joint venture would gather, treat and process raw gas produced within Basrah and sell the processed natural gas (and associated products such as condensate and LPG) for use in the domestic and export markets. The government has extended the heads of agreement by six months from its current expiry date in March 2010.
Kazakhstan
Shell has a 16.81% share in the offshore Kashagan field. This shallowwater field covers an area of approximately 3,400 km2. Phased development of the field will lead to an expected plateau production of 300 thousand boe/d (100%) from phase 1, increasing further with additional phases of development. Shell is now executing Kashagan Phase 2 front-end engineering and design. Shell and KazMunayGas will manage production operations on behalf of the operator. Shell is also a 55% partner in the Pearls production-sharing agreement (PSA) that covers an area of some 1,000 km 2 in a water depth of nine metres in the North Caspian Sea. The block contains two oil discoveries, Khazar (2007) and Auezov (2008), which are currently under appraisal. In 2009, a successful appraisal well and production test were completed on the Khazar discovery. The Caspian Pipeline Consortium (Shell interest 5.1%) exports production from west Kazakhstan to the Black Sea. The pipeline is 1,510 kilometres long and has been operational since October 2001. In December 2009, the Caspian Pipeline Consortium shareholders approved a pipeline expansion implementation plan. The expansion project is expected to be fully completed in early 2015.
Malaysia
Shell, as contractor to Petronas, produces oil and gas located offshore of Sarawak and Sabah under 15 PSCs, where Shell’s interests range from 30% to 80%. In Sabah, Shell operates four producing offshore oil fields (with a 50% interest in three and 80% in the other). Shell also has interests in offshore PSCs for the exploration and development of three blocks with interests ranging from 35% to 40%. In addition, Shell has a 50% interest in offshore blocks ND-6 and ND-7. Shell operates the unitised Gumusut field (Shell interest 33%), which is currently being developed, and the Malikai field (Shell interest 35%). Shell has a 30% interest in the Kebabangan field held through the Kebabangan Cluster PSC and the Kebabangan Petroleum Operating Company. Shell took FID to proceed with the F28 field development (Shell interest 50%) project under the SK308 PSC in 2009. In Sarawak, Shell is the operator of 16 gas fields, in which its interests range from 37.5% to 70%. Shell also has a 40% interest in the PETRONAS Carigali operated Baram Delta PSC and a 50% exploration interest in SK-307. In 2009, over 92% of the gas produced by Shell in Malaysia was supplied to the LNG complex in Bintulu, Sarawak (see table on page 37).
The Iraqi Ministry of Oil awarded Shell a 20-year contract as lead contractor in the development of the Majnoon oilfield. Shell will operate the development and production service contract. The Iraqi state owns 25% of the participating interest and Shell will hold a 45% share with Petronas holding the remaining 30%. Majnoon, located in southern Iraq, is considered one of the world’s largest oil fields. The current level of production is approximately 45 thousand boe/d. Shell
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Shell also operates a GTL plant (see table on page 37), adjacent to the LNG facilities. Using Shell technology, the plant converts natural gas into high-quality middle distillates and other specialty products.
Oman
Syria
Shell has a 34% interest in Petroleum Development Oman (PDO), which is the operator of an oil concession expiring in 2044. The government of Oman holds a 60% interest in the concession and Private Oil Holdings Oman Ltd. (POHOL) holds the remaining 40%. Shell has an 85% shareholding in POHOL. PDO has a portfolio of field-development projects that will build on the successful delivery of ongoing enhanced oil recovery projects and other chemical and thermal pilots. Shell also participates in the development of the Mukhaizna oil field (Shell interest 17%) where horizontal steam flooding will be applied on a large scale. Additionally, Shell has a 30% interest in Oman LNG which mainly supplies Asian markets under long-term contracts, and an interest of 11% in Qalhat LNG.
Philippines
A registered branch of Syria Shell Petroleum Development B.V. (Shell interest 100%) holds interests ranging from 62.5% to 66.67% in three PSCs (Deir Ez Zor, Fourth Annex and Ash Sham). These were extended by 10 years in December 2008 and now expire between 2018 and 2024. In addition, Shell companies are parties to a gas utilisation agreement for the collection, processing and sharing of natural gas from designated fields for use in Syrian power generation and other industrial plants. Al Furat Petroleum Company, a Syrian joint stock company in which Syria Shell Petroleum Development B.V. holds a 31.25% to 33.3% interest, performs operations under these contracts. Shell South Syria Exploration Limited (Shell interest 100%) entered into two production-sharing contracts, effective from February 2007, for Blocks 13 and 15 in the south of Syria. There is a four-year exploration period for these blocks, expiring in February 2011, and seismic data acquisition was completed in 2008. Prospect maturation and drilling preparation is ongoing. Shell completed a 30% farm-out to Tri Ocean Energy in November 2009. Shell remains operator with 70% interest.
United Arab Emirates
Shell has a 45% interest in the deep-water PSC for block SC-38, which includes a production licence for the Malampaya, Camago and San Martin fields. Current production comprises gas and condensate from the Malampaya field via a platform north-west of the island of Palawan. Shell also holds a 55% interest in block SC-60, an area offshore of north-east Palawan.
Qatar
In Abu Dhabi, Shell holds a concessionary share of 9.5% in the onshore crude oil and natural gas liquids operations of the Abu Dhabi Company for Onshore Oil Operations (ADCO). The licence expires in 2014. Shell also has a 15% interest in the licence of Abu Dhabi Gas Industries Limited (GASCO), which extracts and exports propane and butane as well as heavier liquid hydrocarbons from the wet natural gas associated with the oil produced by ADCO. Shell signed an agreement with Abu Dhabi National Oil Company (ADNOC) to extend the GASCO Joint Venture for a further twenty years to 2028.
Rest of Asia
In 2006, construction started on the integrated Pearl GTL project. Shell provides 100% of project funding under the development and PSA with the government of the State of Qatar. The fully integrated project includes Upstream production of some 1.6 bcf/d of well-head gas from two unmanned platforms in Qatar’s North Field, transport and processing of the gas to produce around 120 thousand b/d of natural gas liquids and ethane, and the conversion of the remaining gas into 140 thousand b/d of high-quality liquid hydrocarbon products in the world’s largest GTL plant. Construction is scheduled to be completed by the end of 2010 with production ramp-up in 2011. The Qatargas 4 LNG project (Shell interest 30%) is progressing. The project comprises facilities to produce some 1.4 bcf/d of natural gas from Qatar’s North Field, an onshore gas-processing facility and an LNG complex yielding 70 thousand b/d of natural gas liquids and 7.8mtpa of LNG, and shipping of the LNG to markets in North America, China and Dubai. Construction of the Qatargas 4 project is expected to be substantially complete by the end of 2010.
Russia
Shell also has interests in India, Japan, Jordan, Pakistan, Saudi Arabia, Singapore, South Korea and Turkey.
AUSTRALIA/ OCEAN IA Australia
Shell has interests in offshore production and exploration licences in the North West Shelf (NWS) and Greater Gorgon areas of the Carnarvon Basin, as well as in the Browse Basin and Timor Sea area. Some interests in these areas are held directly, and some indirectly through a 34.27% shareholding in Woodside. Woodside is the operator on behalf of six joint venture participants of the NWS gas, condensate and oil fields, of which Shell has a 22.4% interest. Construction of the North Rankin 2 low-pressure gas platform continued in 2009, which will be linked to the existing North Rankin A platform and is designed to recover remaining low-pressure gas from the North Rankin fields. Shell has a 25% interest in the Gorgon development project covering the offshore Greater Gorgon fields, with the exception of Io gas field, where Shell has a 12.5% interest. The final investment decision on the project was taken in September 2009, and construction activities on Barrow Island commenced in December 2009. Gorgon is the largest single resource project in Australia and, at 15mtpa, the world’s largest foundation LNG project. Shell is operator and 100% equity holder of a permit in the Browse Basin, in which 12 exploration wells have been drilled, finding two separate gas fields – Prelude and Concerto. After evaluating development options, Shell is working towards deployment of FLNG technology. FLNG processes gas in situ at the offshore gas field
Shell’s main asset is the Sakhalin II project (Shell interest 27.5%), an integrated oil and gas export project in a sub-arctic environment. The construction of the project was completed in 2009, and the first LNG from Russia was exported in March 2009. Plateau production from the Sakhalin II project will be some 400 thousand boe/d of oil and gas, supplying 9.6mtpa of LNG from two production trains. Shell has a 50% interest in the Salym fields in Western Siberia, where production increased, reaching almost 160 thousand boe/d during the latter half of 2009.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
location, reducing project costs and minimising the environmental footprint. During 2009, Shell entered the front-end engineering and design phase for Prelude FLNG. Environmental approval work is continuing. Also in the Browse basin, Shell is a participant in the Woodside operated Browse Joint Venture (Shell interest approximately 25%) covering the Torosa, Brecknock and Calliance gas fields. The Browse Joint Venture participants have agreed to enter the Basis of Design phase for development of the Browse gas resources at the Kimberley LNG Precinct. Utilising our 30% equity interest in the Surat and Bowen basin Coal Seam Gas (CSG) reserves we hold in an alliance with Arrow Energy, Shell has progressed its Shell Australia LNG CSG project in Gladstone, Queensland. The project has been granted ‘significant project’ status by the state government, triggering the environmental permitting process. Shell holds further interests in the Sunrise and Evans Shoal gas fields in the Timor Sea (Shell interests 38% and 25% respectively). Sunrise joint venture partners are considering two concepts for the development of Greater Sunrise gas, which would be delivered either to an offshore Shell FLNG plant or to the onshore Darwin LNG plant. Shell has a 33% interest in the WA-16-R permit, where a discovery was made with the Iago-2 well. Development options are being assessed. Shell also has gas rights in the Crux field (AC/P23) and in the Libra-1 gas discovery in the Shell-operated AC/P41 block (Shell interest 80%).
New Zealand
Offshore Nigeria The main offshore activities are carried out by Shell Nigeria Exploration and Production Company (SNEPCo – Shell interest 100%) with interests in three deep-water blocks, of which two are operated by Shell. This includes the Bonga field 120 kilometres offshore with a production capacity of more than 200 thousand barrels of oil and 150 million standard cubic feet of gas per day. Deep-water offshore activities are typically governed through PSCs with the Nigerian National Petroleum Corporation.
SPDC also holds an interest in six shallow water offshore leases, of which five expired on November 30, 2008. However, under the Nigerian Petroleum Act, SPDC is entitled to an extension. Currently, the status quo is maintained following a court order issued on November 26, 2008. The parties involved are pursuing a negotiated resolution. Production from one of the leases – the Sea Eagle FPSO (“EA licence”) restarted on July 2, 2009, following the shut-down as a result of security incidents in 2006. Other Shell companies in Nigeria have an interest in deep-water block OPL 322 and a disputed interest in OML 122. Furthermore, the ownership of the licence and the rights in the OPL 245 PSC are the subject of ongoing litigation. Shell also has a 25.6% interest in NLNG, which operates six LNG trains with a total capacity of 21.6mtpa (100%). NLNG currently has operational control of 24 LNG vessels.
Rest of Africa
Shell has an 83.75% interest in the offshore Maui gas field, a 50% interest in the onshore Kapuni gas field and a 48% interest in the offshore Pohokura gas field. The produced gas is sold domestically, mainly under long-term contracts. Shell also has interests in other exploration licence areas in the Taranaki Basin.
AFRICA Nigeria Onshore Nigeria
In Egypt, Shell has a 50% interest in the Badr El-Din Petroleum Company joint venture with the Egyptian General Petroleum Corporation (the Egyptian national oil company). Shell also participates in the deep-water North East Mediterranean Deepwater concession and the North West Damietta concession. In 2009, Shell acquired a 40% working interest in the Alam El Shawish West concession, located in the Egyptian western desert. In Gabon, Shell has interests in nine onshore mining concessions and exploitation permits, and operates six of them. The three non-Shelloperated concessions expire between 2010 and 2021. Shell also holds the Igoumou Marin permit in ultra-deep water and two exploration and production-sharing contracts offshore Gabon. In South Africa, Shell won the exploration rights in the Orange Basin deep-water area off the country’s west coast in November 2009. The exploration area covers approximately 37,000 km2. In December 2009, the South African Petroleum Authorities (Petroleum Agency SA) awarded Shell a Technical Cooperation Permit for a one-year study to determine the hydrocarbon potential in parts of the Karoo Basin in central South Africa. Shell also has interests in Algeria, Cameroon, Ghana, Libya, Morocco and Tunisia.
NORTH AMERICA Canada
The Shell Petroleum Development Company of Nigeria Ltd. (SPDC) is the operator of a joint venture (Shell interest 30%) that holds 30 onshore oil mining leases (OML) in the Niger Delta. The leases expire in 2019. In 2009, SPDC ramped up power output of the 640 MW Afam VI Power Plant and fuel gas production from the Okoloma Gas Plant in the Niger Delta, and continued to deliver production from gas wells associated with the project – collectively known as the Afam Integrated Gas and Power Project. The Afam VI Power Plant is capable of delivering over 400 MW since July 2009, but the lack of upgrades on the Nigeria electricity grid limits full production.
The Gbaran-Ubie integrated oil and gas project (Shell interest 30%) is developing an area of approximately 650 km2 in Bayelsa State. When fully operational, it is expected at its peak to produce one bcf/d of gas and 70 thousand b/d of oil. SPDC will drill more than 30 new oil and gas wells, and is building a central processing facility with gas delivery to power plants and Nigeria LNG Ltd. (NLNG). On the financing side, progress has been made towards full implementation of the Modified Carry Agreements (MCAs) and the bridge loan signed in 2008 and 2009. All requirements for the utilisation of the bridge loan and the implementation of the MCAs have been met in the fourth quarter of 2009.
Shell produces natural gas, NGL, bitumen, synthetic crude oil and sulphur mainly in Alberta and British Columbia where the main leases/ assets are held. In total, Shell holds over 2,100 leases. Canadian exploration rights are generally granted for varying terms, depending upon the provincial jurisdiction and applicable regulations. Subject to certain conditions, exploration rights can be converted to production leases, which may be
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extended as long as there is commercial production pursuant to the lease. The Alberta government implemented a new royalty framework effective January 1, 2009, which increased royalty rates in both the pre-payout and post-payout periods based on a sliding scale linked to WTI price movement. This resulted in a pre-payout royalty rate increase ranging from 1% to 9% of gross revenues, and a post-payout rate increase ranging from the greater of between 25% and 40% of net revenues or between 1% and 9% of gross revenues (depending on WTI price).
Gas
completing a minimum level of development prior to their expiry, leases may be extended.
USA
The majority of Shell’s Canadian gas production comes from the Foothills region of Alberta. Shell also owns and operates four natural gas processing and sulphur extraction plants in southern and southcentral Alberta and is among the world’s largest producers and marketers of sulphur. In addition, it holds a 31.3% interest in the Sable Offshore Energy Project, a natural gas complex offshore eastern Canada, has a non-operating 20% interest in an early stage deepwater exploration asset off the east coast of Newfoundland and is a joint venture participant in the Mackenzie Gas Pipeline proposal in northern Canada.
Shell is a producer of oil and gas in the Gulf of Mexico (GoM), onshore tight gas (south Texas, Wyoming and Louisiana) and heavy oil (California). The majority of Shell’s oil and gas production interests are acquired under leases granted by the owner of the minerals underlying the relevant acreage (including many leases for federal onshore and offshore tracts). Such leases are currently running on an initial fixed term that is automatically extended by the establishment of production for as long as production continues, subject to compliance with the terms of the lease (including, in the case of federal leases, extensive regulations imposed by federal law). In Alaska, Shell holds over 410 federal leases in the Beaufort and Chukchi seas but did not pursue offshore drilling or seismic programmes on them in 2009. It concentrated on obtaining permits and other preparatory work to advance more limited single-year drilling plans in 2010. The modified plans, developed in consultation with native stakeholders, were approved by the Minerals Management Service. Final Environmental Protection Agency air permits, however, still remain to be granted before drilling can begin. Shell hopes to drill exploratory wells in the north Alaska offshore in 2010.
Gulf of Mexico
In 2009, Shell continued unconventional gas development in westcentral Alberta and east-central British Columbia through drilling programmes and investment in infrastructure facilitating new production. Shell holds approximately 600 thousand tight gas acres (2,400 km2) in these areas, and the Groundbirch area reached a 100 million scf/d production milestone in November.
Bitumen
Shell produces and markets bitumen, a very heavy crude oil, through cold (primary) production and thermal (enhanced) recovery in the Peace River area of Alberta, and established a steam-assisted gravity drainage project (Phase 1) near Cold Lake, Alberta.
The Gulf of Mexico is the major production area, accounting for some 60% of Shell’s oil and gas production in the USA. Shell holds more than 460 federal offshore leases in the Gulf, about a quarter of them producing. Shell operates five deep-water tension leg platforms, and a dozen others, with average Shell-share production of over 270 thousand boe/d in 2009. Key producing fields are Auger, Mars, Ram Powell, Ursa, Princess, Brutus, NaKika and Deimos. Shell, with partners, are advancing the Perdido project (Shell interest 35.4%) in the far south-west Gulf of Mexico throughout 2009 and will achieve first oil in 2010. Shell will operate this ultra deep water spar facility.
Additional heavy oil resources and advanced recovery technologies are under evaluation on about 1,200 km2 in the Grosmont oil sands area, also in north Alberta. The Athabasca Oil Sands Project (AOSP) in northeast Alberta mines bitumen-saturated sand from which synthetic crude oil is produced. AOSP, operated by Shell, is a joint venture (Shell share 60%) that holds the Muskeg River Mine lease (Lease 13).
Oil sands/synthetic crude oil
The oil sand is open-pit mined, using a truck and shovel operation, then processed in on-site bitumen extraction and clean-up facilities to yield a bitumen product. Power and steam for the operations are provided from an on-site co-generation facility, which is owned and operated by an independent power company, in combination with boiler facilities owned by the joint venture. The bitumen is transported by pipeline for processing at the Scotford Upgrader, which is operated by Shell and located in the Edmonton area of central Alberta. Scotford’s upgrading process adds hydrogen to the bitumen, breaking up the large hydrocarbon molecules. Using this process we produce a wide range of synthetic crude oils suitable as a feedstock for refineries, which process them into refined products such as gasoline. AOSP’s current bitumen production capacity is 155 thousand boe/d (Shell interest 60%). An expansion of AOSP, expected to be completed in 2010 to 2011, will add about 100 thousand barrels of daily production capacity (Shell interest 60%). Shell also holds a number of other minable oil sands leases in the Athabasca region with expiry dates ranging from 2010 to 2020. By
Onshore Shell continues to operate efficient multi-rig onshore gas-well drilling programmes in south Texas and Wyoming, where Shell and partners recorded their first full year under revised federal environmental rules allowing year-round operations. Shell also added to its substantial acreage position in the Haynesville shale tight-gas opportunity of north-west Louisiana. Our Haynesville activities are being executed through joint operations (Shell interest 50%), with approximately 25 drilling rigs in operation as at January 1, 2010 between Shell and partners, and a ramp-up of operations is planned for 2010.
Shell holds a 51.8% interest in Aera Energy LLC, a US-based exploration and production company with assets in the San Joaquin Valley and Los Angeles Basin areas of southern California. Aera operates more than 15,000 wells, producing about 170 thousand boe/d of heavy oil and gas, and accounting for approximately 30% of the state’s production. Shell continues research into the development of oil shale resources in the Piceance Basin of north-west Colorado, and holds three federal leases for future oil shale activities.
LNG and wind
Shell holds capacity rights in US LNG import terminals, at the Cove Point and Elba Island regasification terminals. In the wind energy business, Shell has interests in eight US wind projects (Shell interest 50%) with a total installed capacity of 899 MW.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
Mexico
Shell has a 50% interest in an LNG regasification terminal at Altamira, on Mexico’s gulf coast, and a 75% interest in a separate marketing company that holds the capacity rights in the terminal. Shell also holds capacity rights at the Costa Azul LNG import terminal in Baja California on Mexico’s west coast.
SOUTH AMERICA Brazil
Shell produces oil and gas from the offshore Parque das Conchas (BC-10) field, which came on-stream in 2009 (Shell operated; interest 50%) and Bijupirá and Salema fields (Shell operated; interest 80%). Shell also has an interest in an operated offshore development block and interests in seven deep-water exploration blocks in the Campos, Santos and Espirito Santo basins. Shell operates two of these blocks with interests ranging from 17.5% to 100%. Shell operates two heavy oil fields in block BS-4 (Shell interest 40%) in the Santos Basin where potential development concepts are being assessed. Shell formally received exploration rights to five onshore blocks comprising over 11,000 km2 in the Sao Francisco basin. ˜ Shell holds an 18% interest in Brazil Companhia de Gas de Sao Paulo ˜ (Comgás), a natural gas distribution company in the state of Sao Paulo. ˜
Rest of South America
Shell also has interests in Argentina, Colombia, French Guiana, Guyana and Venezuela.
LNG supply and shipping
Four operations aim to secure LNG supplies for downstream natural gas markets: Shell Western LNG; Shell Eastern LNG; Shell International Trading Middle East LNG; and Shell North American LNG (all Shell interests 100%). These operations primarily use ships (currently a fleet of eight, of which one is on long-term-charter to a third party) which have been acquired, leased or chartered by Shell Tankers Singapore Ltd., Shell Tankers (UK) Ltd and Shell Bermuda (Overseas) Ltd. All of the five Shell owned LNG vessels in the shipping fleet are managed by Shell International Trading and Shipping Company Ltd.
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SU MMARY OF OI L A N D G A S R E SE RV E S FOR S HE L L S U B S I D IA RI E S AN D SH E L L SH A RE OF E QU I T Y- A C COU N T E D I N V E S T ME N T S AT DE CE MB E R 3 1 , 2 0 0 9 [ A]
BASED ON AVERAGE PRICES FOR 2009
Oil and natural gas liquids million barrels Proved developed Europe Asia Australia/Oceania Africa North America USA Canada South America Proved undeveloped Europe Asia Australia/Oceania Africa North America USA Canada South America Total proved developed and undeveloped Europe Asia Australia/Oceania Africa North America USA Canada South America Total 393 761 79 379 465 23 52 133 1,069 56 356 245 15 5
Natural gas thousand million scf 12,306 4,391 1,400 957 1,304 754 178 3,529 15,421 5,232 2,081 1,019 418 65
Synthetic crude oil million barrels
Bitumen million barrels
Total all products million boe 2,515 1,518 320 544 690 873 83 741 3,728 958 715 421 1,023 16
691
29
908
28
526 1,830 135 735 710 38 57 4,031
15,835 19,812 6,632 3,038 2,323 1,172 243 49,055
3,256 5,246 1,278 1,259 1,111 1,896 99 14,145
1,599 1,599
57 57
[A] Including minority interest. Natural gas has been converted to an oil equivalent basis at 5,800 scf per barrel.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
LO CATI ON OF OI L AN D G A S PRO DU CI N G ACTI VITI E S (AT D ECE MBER 31, 2009 ) [A]
CA PITAL E X PE N D I T U RE ON O I L AN D G A S ACT I V I TI E S AN D E X PL O RATI ON E X PE N S E OF S HE L L SU BS ID I A R IE S BY G E O GR APHI CA L ARE A [A] $ MILLION
Exploration Europe Denmark Germany Ireland Italy The Netherlands Norway Sweden UK Ukraine Asia Brunei China Iran Jordan Kazakhstan Malaysia Oman Pakistan Philippines Qatar Russia Saudi Arabia Syria United Arab Emirates Australia/Oceania Australia New Zealand Africa Algeria Cameroon Egypt Gabon Libya Nigeria Tunisia North America USA Canada South America Argentina Brazil Colombia Guyana Venezuela
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
Development and/or production
m m m m m m m
Shell operator
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
2009 2008 2,618 2,818 4,539 969 2,351 4,114 4,305 537 19,433 4,633 698 1,824 5,597 6,854 955 23,379
2007 2,767 4,014 488 2,209 3,873 1,298 189 14,838
m m m m m
[A] Capital expenditure is the cost of acquiring property, plant and equipment for exploration and production activities, and – following the successful efforts method in accounting for exploration costs – includes exploration drilling costs capitalised pending determination of commercial reserves. In the case of major capital projects, the related interest cost is included until these are placed in service. Exploration expense is the cost of geological and geophysical surveys and of other exploratory work charged to income as incurred. Exploration expense excludes depreciation and release of currency translation differences. Includes synthetic crude oil activities ($3,133 million).
m m m
m m m
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
O IL AN D G AS AVE RA GE I N DU STRY PRI CE S
2009 Brent ($/b) [A] WTI ($/b) [A] Henry Hub ($/MMBtu) UK National Balancing Point (pence/therm) 61.55 61.75 3.90 30.93
2008 97.14 99.72 8.85 58.06
2007 72.45 72.16 6.94 30.01
[A] Average industry prices differ from realised prices because the quality, and therefore the price, of actual crude oil produced differs from the blends used for market pricing purposes or quoted blends.
m
[A] Including equity-accounted investments. Where an equity-accounted investment has properties outside its base country, those properties are not shown in this table. In several countries where “Shell operator” is indicated, Shell is the operator of some but not all exploration and/or production ventures.
Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
31
Average realised price by geographical area
OI L AN D N ATU RAL GA S L IQ U I DS $/BARREL
2009 Shell share of Shell subsidiaries 55.53 57.50 50.47 61.45 57.25 39.26 57.76 57.39 equity-accounted investments 56.97 36.53 56.16 [A] – 56.24 – 58.00 42.49 Shell subsidiaries 89.28 95.92 85.92 98.52 97.95 67.07 79.42 92.75
2008 Shell share of equity-accounted investments 86.33 49.78 99.99 [A] – 89.74 – 82.25 63.59 Shell subsidiaries 68.45 67.49 72.70 72.92 66.49 50.27 63.09 67.99
2007 Shell share of equity-accounted investments 73.12 53.53 78.29 [A] – 64.45 – 71.21 59.23
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate. Includes bitumen.
NATURAL G AS
$/SCF
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
Shell subsidiaries 7.06 3.61 5.29 1.71 4.36 3.73 3.18 4.83
2009 Shell share of equity-accounted investments 8.17 4.26 3.94 [A] – 5.02 – – 6.73
Shell subsidiaries 9.46 4.67 2.96 1.67 9.61 7.71 4.37 6.85
2008 Shell share of equity-accounted investments 10.87 7.06 4.13 [A] – 12.15 – – 9.63
Shell subsidiaries 7.24 3.46 2.22 1.20 7.23 5.90 3.58 5.14
2007 Shell share of equity-accounted investments 8.54 3.15 1.81 [A] – 9.85 – – 6.83
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate.
SY N TH E TI C CRU DE O I L
$/BARREL
North America – Canada
2009 Shell subsidiaries 56.23
BITUMEN
$/BARREL
2009 Shell North America – Canada subsidiaries 50.00
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
Average production costs by geographical area
OI L , N ATU R AL G AS L I Q U I DS AN D N AT U RAL G A S [A ] $/BOE
2009 Shell share of Shell subsidiaries 11.91 5.86 3.63 9.71 12.11 16.63 12.94 9.88 equity-accounted investments 3.18 5.44 5.59 – 15.74 – 12.75 5.72 Shell subsidiaries 9.25 7.01 3.41 7.53 9.54 17.67 10.76 8.61
2008 Shell share of equity-accounted investments 3.41 4.99 3.40 – 18.46 – 11.26 5.67 Shell subsidiaries 9.15 7.20 2.64 7.62 7.88 15.43 11.09 8.19
2007 Shell share of equity-accounted investments 3.58 3.75 3.23 – 15.15 – 10.54 4.95
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
[A] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate.
S Y N TH E T IC CR U D E OI L
$/BARREL
North America – Canada
2009 Shell subsidiaries 39.83
BITUMEN
$/BARREL
2009 Shell subsidiaries North America – Canada 18.32
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Oil and gas production (available for sale)
CRUDE OIL AND N ATURA L GAS LIQUIDS PRODUCTION [ A] THOUSAND B/D
2009 Shell share of Shell subsidiaries Europe UK Denmark Norway Italy The Netherlands Germany Total Europe Asia Oman United Arab Emirates Russia Brunei Malaysia Syria China Iran Philippines Others Total Asia Australia/Oceania Australia New Zealand Total Australia/Oceania Africa Nigeria Gabon Cameroon Egypt Total Africa North America USA Canada Total North America South America Brazil Others Total South America Total 110 107 62 30 – 3 312 195 – – 2 39 22 11 5 4 – 278 18 12 30 231 29 12 12 284 195 20 215 24 1 25 1,144 equity-accounted investments – – – – 5 – 5 – 127 106 76 – – – – – 1 310 35 – 35 – – – – – 78 – 78 – 9 9 437 Shell subsidiaries 154 114 67 32 – 3 370 192 – – 1 38 22 14 10 5 – 282 17 12 29 266 30 13 9 318 190 46 236 23 1 24 1,259
2008 Shell share of equity-accounted investments – – – – 5 – 5 – 146 70 80 – – – – – 1 297 39 – 39 – – – – – 82 – 82 – 11 11 434 Shell subsidiaries 183 126 69 35 – 4 417 191 – – 2 42 24 17 10 5 – 291 25 13 38 287 31 14 10 342 238 47 285 22 1 23 1,396
2007 Shell share of equity-accounted investments – – – – 6 – 6 – 146 51 90 – – – – – 1 288 33 – 33 – – – – – 86 – 86 – 9 9 422
[A] Includes natural gas liquids. Royalty purchases are excluded. In those countries where PSCs operate, the figures shown represent the entitlement of the subsidiaries concerned under those contracts. Includes bitumen production.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
NATURA L G AS PRODUCTION [ A]
MILLION SCF/DAY
Shell subsidiaries Europe The Netherlands Norway UK Denmark Germany Italy Others Total Europe Asia Malaysia Brunei China Russia Philippines Syria Others Total Asia Australia/Oceania Australia New Zealand Total Australia/Oceania Africa Nigeria Egypt Total Africa North America USA Canada Total North America South America Brazil Others Total South America Total – 593 561 335 311 31 – 1,831 886 44 257 – 121 4 92 1,404 383 218 601 292 163 455 1,055 530 1,585 18 63 81 5,957
2009 Shell share of equity-accounted investments 1,639 – – – – – – 1,639 – 473 – 192 – – – 665 216 – 216 – – – 6 – 6 – – – 2,526
Shell subsidiaries – 492 678 406 333 29 – 1,938 874 51 231 – 113 6 86 1,361 345 216 561 552 145 697 1,048 406 1,454 33 65 98 6,109
2008 Shell share of equity-accounted investments 1,741 – – – – – – 1,741 – 499 – – – – – 499 215 – 215 – – – 5 – 5 – – – 2,460
Shell subsidiaries – 357 663 369 390 34 – 1,813 865 47 106 – 109 7 76 1,210 339 230 569 584 167 751 1,124 402 1,526 35 58 93 5,962
2007 Shell share of equity-accounted investments 1,518 – – – – – 19 1,537 – 506 – – – – – 506 203 – 203 – – – 6 – 6 – – – 2,252
[A] In those countries where PSCs operate, the figures shown represent the entitlements of the companies concerned under those contracts.
SYN TH E TIC CR U DE OIL PRO DUCTION
THOUSAND B/D
North America – Canada
2009 Shell subsidiaries 80
BITUMEN PR ODUCTION
THOUSAND B/D
2009 Shell North America – Canada subsidiaries 19
MI N E D OI L S A N DS PRO D U CTI ON
THOUSAND B/D
Athabasca Oil Sands Project after royalties
2008 78
2007 81
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OI L AN D GA S ACR E AG E [A] (AT D E CE MBE R 31)
THOUSAND ACRES
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
Developed Gross Net 9,045 2,592 30,969 2,276 7,393 1,030 966 126 51,805 11,108 568 2,615 597 628 59 18,167
2009 Undeveloped Gross Net 9,770 3,653 78,382 82,945 27,096 6,250 26,712 18,081 249,236 40,547 24,326 18,656 5,027 19,448 7,178 118,835
Developed Gross Net 9,646 2,785 31,252 2,146 7,314 1,009 1,025 115 52,507 11,260 552 2,582 593 707 53 18,532
2008 Undeveloped Gross Net 8,924 3,038 74,749 79,548 26,959 6,238 27,792 4,387 228,597 36,811 23,052 20,290 4,973 19,546 1,877 109,586
Developed Gross Net 10,253 2,894 32,677 2,013 7,568 1,067 803 114 54,495 11,971 516 2,709 620 544 54 19,308
2007 Undeveloped Gross Net 10,384 3,007 76,890 82,560 38,203 4,825 27,409 4,387 244,658 32,269 20,791 24,079 3,542 19,200 1,877 104,765
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
N U M B E R OF PRO DU CT IV E W E L L S [ A] ( AT D EC EMBER 3 1)
Gross Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total 1,544 6,751 39 1,150 15,425 446 72 25,427
Oil Net 423 2,250 6 415 7,835 382 32 11,343
Gross 1,343 207 566 80 1,640 947 12 4,795
2009 Gas Net 446 99 122 53 1,170 713 5 2,608
Gross 1,569 6,043 42 1,163 15,505 429 68 24,819
Oil Net 422 2,038 9 420 7,828 365 29 11,111
Gross 1,323 200 319 79 1,412 888 12 4,233
2008 Gas Net 440 95 60 49 1,037 665 5 2,351
Gross 1,638 5,652 31 1,028 15,493 360 67 24,269
Oil Net 427 1,906 7 374 7,825 303 29 10,871
Gross 1,334 178 116 71 1,040 339 12 3,090
2007 Gas Net 452 85 34 47 765 262 6 1,651
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
N U M B E R OF N E T PRO DU CTIVE W E L L S A N D DRY H OL E S DRI L L E D
Productive Exploratory Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Development Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total 6 38 24 8 49 32 1 158 15 260 27 12 424 45 5 788
2009 Dry 3 10 3 4 2 19 – 41 – 3 – 1 1 – – 5
Productive 9 27 6 13 13 41 3 112 7 210 3 17 475 59 2 773
2008 Dry 3 4 2 4 4 46 1 64 1 1 – 1 1 – – 4
Productive 10 41 3 11 23 50 1 139 18 185 3 22 475 42 2 747
2007 Dry 1 7 8 6 3 10 1 36 1 2 – – 2 – – 5
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
N U MBE R OF W E LL S I N THE PR OCE S S OF E XP LOR ATORY DRI LL I N G [A] [C ][ D]
2009
Wells in the process of Wells in the process of drilling at January 1 and drilling at January 1 and determined as dry allocated proved during the year At January 1 reserves during the year Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net 33 11 54 19 56 11 42 27 54 24 77 73 17 8 333 173 (7) (2) (6) (1) (18) (3) (15) (11) (11) (6) (26) (23) (6) (3) (89) (49) (4) (1) (6) (3) (2) – (13) (9) – – (3) (3) (1) – (29) (16)
New wells in the process of drilling at December 31 12 5 25 11 116 22 8 6 73 45 11 11 2 1 247 101
At December 31 34 13 67 26 152 30 22 13 116 63 59 58 12 6 462 209
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest. [C] Wells in the process of drilling includes exploratory wells temporarily suspended. [D] In addition to the present activities above Shell has on going activities related to the installation of waterflood projects in Europe, Asia and North America; activities related to steam floods are in progress in Europe, Asia and North America and gas compression is being installed in Europe.
N U MBE R OF W E L L S I N T HE PR OCE S S OF DE V E L OPME N T D RI L L I N G [A ][ B]
2009
At January 1 Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net 23 4 65 29 5 1 5 2 90 47 12 11 – – 200 94
At December 31 16 3 69 22 28 6 3 1 100 47 41 34 1 1 258 114
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
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SH E L L IN T E RE S T I N L N G L I QU E FA CT I ON PL A N T CA PA CI TY (AT D ECE MBER 31, 2009 )
Australia North West Shelf Brunei LNG Malaysia LNG (Dua and Tiga) Nigeria LNG Oman LNG Qalhat (Oman) LNG Sakhalin LNG [A] As reported by the operator. Our interests in the Dua and Tiga plants are due to expire in 2015 and 2023 respectively.
Location Karratha Lumut Bintulu Bonny Sur Sur Prigorodnoye
Shell interest (%) 22 25 15 26 30 11 27.5
100% capacity (mtpa) [A] 16.3 7.8 14.6 21.6 7.1 3.7 9.6
LN G L I QUE FACTIO N PLA N T CAPA CITY UN DE R CO N S TR U CTIO N (AT DE CE MBER 31, 2009 )
Location Australia Pluto 1 Gorgon Qatargas 4 [A] As reported by the operator. Based on 90% Woodside shareholding in the Pluto 1 plant. Karratha Barrow Island Ras Laffan
Shell interest (%) 31 25 30
100% capacity (mtpa) [A] 4.3 15.3 7.8
L N G R E GA SI F I CATI ON TE R MI N A L CA PA CI T Y (AT D E CEMBE R 31, 2 009)
Huelva Barcelona Hazira Altamira Cove Point Costa Azul Elba Island Elba Expansion
Location Huelva, Spain Barcelona, Spain Gujarat, India Altamira, Mexico Lusby, MD, USA Baja California, Mexico Elba Island, GA, USA Elba Island, GA, USA
Shell capacity rights (mtpa) 0.3 [A] 0.9 [A] 2.2 3.3 1.8 2.9 2.8 4.2
Capacity right period 2001-2009 2005-2020 from 2005 from 2006 2003-2023 2008-2028 2006-2036 2010-2035
Status In operation In operation In operation In operation In operation In operation In operation In construction
Start-up date 1988 1969 2005 2006 2003 2008 2006 2010
[A] Capacity rights as at end 2009, which will change over capacity right period. Capacity leased to third party until 2010.
G TL PL A N T S (AT D EC EMBER 31 , 200 9)
Bintulu Pearl Train 1 Pearl Train 2
Location Malaysia Qatar Qatar
Shell interest (%) 72 100 100
100% capacity (b/d) 14,700 70,000 70,000
Status In operation In construction In construction
L N G G AS CARR IE RS [ A] (AT D EC EMBER 31 )
Contract Owned/demise-hire (LNG) Time-charter (LNG) Total [A] Excludes LNG ships owned or chartered by LNG joint ventures. Three of these ships were on flexible charter based on market demand.
2009 5 3 8
2008 5 4 9
number of ships 2007 6 5 11
2009 657 427 1,084
thousand cubic metres 2008 2007 657 797 566 849 1,233 1,646
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Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
DOWNSTREAM
K E Y STAT I ST I CS $ MILLION
remainder of this section pertains to earnings excluding the oil-price effect on inventory. Our 2009 Refining earnings were significantly below those of 2008, due to substantially lower industry and realised refining margins worldwide. Weak margins were the result of lower demand, industrywide excess inventory and new industry refining capacity, which was brought on-stream. In addition, Refining earnings were impacted by asset impairments and redundancy and restructuring provisions. Marketing earnings related to oil products decreased compared with 2008, due to lower marketing sales volumes and lower Retail and B2B margins, which were partly offset by higher Lubricants margins. These earnings were further reduced by redundancy and restructuring provisions as well as impairments. Earnings from trading activities were higher than in 2008 as the market remained in a contango structure (forward prices higher than current spot prices) throughout most of the year and benefited from storage opportunities and arbitrage opportunities (the pricing difference between markets). Earnings in Chemicals were higher than in 2008 due to higher income from equity-accounted investments and higher divestment gains, which were partly offset by lower realised margins and lower sales volumes. Downstream earnings in 2009 included net charges of $1,682 million reflecting asset impairments mainly relating to refining assets, redundancy and restructuring provisions, a charge related to the estimated fair value accounting of commodity derivatives, non-cash pension charges, a charge related to a retirement healthcare-plan modification and other provisions. These charges were partly offset by tax credits and gains from divestments, including benefits from the sale of our share in a bitumen joint venture in Australia and 49% of our shares in two petrochemical joint ventures in Singapore. In 2009, revenues decreased by $162,451 million compared with 2008, reflecting lower average oil prices in 2009 and lower sales volumes due to weak demand. Production and manufacturing expenses in 2009 decreased by $396 million compared with those of 2008. The decrease was driven by the sale of our French refineries in 2008, the impact of lower refinery intakes and sales volumes on processing fees and transport costs and the effect of a stronger US dollar on non-dollar denominated costs. These cost-decreasing factors were partly offset by the impact of higher redundancy and restructuring provisions. Selling, distribution and administrative expenses increased between 2008 and 2009 as a result of significantly higher pension charges and redundancy provisions associated with structural cost reduction actions, which outweighed the impact of ongoing cost reductions and the effect of a stronger US dollar on non-dollar denominated costs. Depreciation, depletion and amortisation increased by $825 million compared with the same period a year ago, largely because of impairments. After taking into account the impact of rising oil prices on inventory, our share of profit from equity-accounted investments decreased in 2009 compared with 2008, primarily as a result of significantly lower refining margins. This was partly offset by higher income in the Chemicals business.
2009 Revenue (including inter-segment sales) Segment earnings Including: Production and manufacturing expenses Selling, distribution and administrative expenses Depreciation, depletion and amortisation Share of profit of equity-accounted investments Capital investment Refinery availability (%) Chemical plant availability (%) Refinery processing intake (thousand boe/d) Oil products sales volumes (thousand b/d) Chemicals sales volumes (thousand tonnes) 250,362 3,054
2008 412,813 39
2007 324,280 12,445
11,829 14,505 4,399 1,110 7,510 93 92 3,067 6,156 18,311
12,225 14,451 3,574 17 6,036 91 94 3,388 6,568 20,327
10,546 13,858 3,106 2,904 5,295 91 93 3,779 6,625 22,555
Overview
Shell’s Downstream organisation is made up of a number of different businesses. Collectively these turn crude oil into a range of refined products, which are moved and marketed around the world for domestic, industrial and transport use. These include gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants and bitumen. In addition, we produce and sell petrochemicals for industrial use worldwide. Our Manufacturing business includes Refining, Supply and Distribution. Marketing includes our Retail, Business to Business (B2B), Lubricants, Alternative Energies and CO2 businesses. Our Chemicals business has dedicated Manufacturing and Marketing units of its own. We also trade crude oil, oil products and petrochemicals primarily to optimise feedstock for our Manufacturing business and to supply our Marketing businesses. Shell’s Downstream businesses have faced a very difficult operating environment during 2009 as a result of the global economic downturn, weak demand and rising oil prices. At the same time, some 2 million barrels per day of new refining capacity came on line in 2009, further impacting the already existing excess supply in the market at a time when industry-wide inventories were at high levels.
Earnings 2009-2007
Segment earnings in 2009 were $3,054 million, compared with $39 million in 2008 and $12,445 million in 2007. In 2009, segment earnings were estimated to be positively impacted by rising oil prices on our inventory by $2,796 million (a negative impact of $5,270 million in 2008 and a positive impact of $3,857 million in 2007). This impact is caused by the price difference between the purchase date of oil for conversion and products and the date of sale of the product. The prices of our purchases and sales are both linked to the oil prices at the transaction date. In a rising oil price environment the purchase is made at a lower price when compared to a higher price at the moment of the sale. In 2009, after taking into account the impact of rising oil prices on our inventory, earnings fell by 95% from 2008. The discussion in the
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Refinery processing intake in 2009 declined 9% from 2008 despite improved availability, reflecting reduced run rates due to weak demand, new industry capacity brought on-stream and the sale of the French refineries in the first quarter of 2008. Total oil products sales volumes in 2009 were 6% lower than in 2008. Oil products marketing sales volumes (adjusted for the impact of divestments) dropped by some 3%, mainly because of lower B2B volumes, partly offset by increased Retail sales volumes. In 2009, Chemical sales volumes decreased by 10% compared with those of 2008, primarily due to lower demand resulting from the global economic downturn. In 2008, segment earnings were adversely impacted by falling oil prices on inventory by $5,270 million. In 2007, earnings benefited from the impact of increasing oil prices on inventory by $3,857 million. In 2008, after taking into account the impact of falling oil prices on our inventory, earnings fell by 38% from 2007. Our 2008 Refining earnings were lower than those of 2007 due to lower realised margins in the USA, which were partly offset by higher realised margins in Europe and the Asia-Pacific region. Additionally, 2008 refining earnings were adversely impacted by higher unplanned downtime (6.5% compared with 5.7% in 2007), which included the hurricane impact in the US Gulf Coast region, as well as currencyexchange impacts and higher operating costs compared with those of 2007. Marketing earnings in 2008 related to oil products increased (excluding impairments) on the basis of higher Retail, B2B and Base Oil Lubricants margins. Higher margins were partly offset by lower sales volumes relative to 2007 and currency-exchange impacts. Earnings from trading activities in 2008 were higher than in 2007, driven by the return of more favourable trading conditions during the year as the market shifted back into contango and trading benefited from arbitrage opportunities. In 2008, Chemicals earnings were lower relative to 2007, reflecting significantly lower margins (particularly in the USA), volume decline, lower income from equity-accounted investments and higher operating expenses. Downstream earnings in 2008 included net charges of $435 million relating to impairments, provisions and a charge related to the estimated fair value accounting of commodity derivatives. These were partly offset by gains from divestments, including the sale of our refineries in France and the Dominican Republic, as well as by tax credits and pension accounting adjustments. In 2008, Downstream revenue increased by $88,533 million compared with 2007, reflecting higher average oil prices in 2008. Production and manufacturing expenses increased by $1,679 million relative to 2007, largely because of increased refinery maintenance costs, higher energy-related costs, increased trading expenses and the effect of a weaker US dollar on non-dollar denominated costs. Selling, distribution and administrative expenses increased by $593 million between 2007 and 2008 as a result of higher energyrelated distribution costs, higher corporate and functional costs, additional costs related to governance changes (Canada and
Alternative Energy) and the effect of a weaker US dollar on non-dollar denominated costs. Depreciation, depletion and amortisation in 2008 increased by $468 million, largely because of impairments. In 2008, after taking into account the impact of falling oil prices on inventory, our share of profit from equity-accounted investments decreased from 2007, mainly due to lower income from Motiva and Deer Park as a result of lower industry refining margins in the USA and the impact of hurricanes in the US Gulf Coast. We also obtained lower income from the Nanhai chemical plant in 2008 because of weakened demand and higher feedstock costs. Refinery processing intake declined in 2008 by around 10% relative to 2007, reflecting the sale of our French refineries and higher unplanned outages. Total oil products sales volumes in 2008 were 1% lower than in 2007. Adjusted for the impact of divestments, oil products marketing sales volumes were in line with those in 2007. In 2008, Chemical sales volumes fell by 10% from the levels of 2007, largely due to the performance of our base chemicals business in the USA.
Capital investment and portfolio actions
Capital investment was $7.5 billion in 2009, of which $4.4 billion was in Manufacturing, $1.7 billion was in Marketing and $1.4 billion was new equity and loans in equity-accounted investments. Around 62% of our 2009 capital expenditure was to maintain integrity and performance of our asset base; a slightly higher percentage than the 2007-2009 average of around 57%. Investments were aligned with the strategy of selective growth, portfolio concentration and operational excellence. The two main growth investments are the expansion of the Port Arthur refinery in Texas and the Shell Eastern Petrochemicals Complex (SEPL) in Singapore. During 2009, the monoethylene glycol unit within the SEPL started up successfully. Shell also started construction of a new hydrodesulphurisation plant at the Pernis refinery in the Netherlands to manufacture cleaner-burning oil products. In the Marketing businesses, we continued to invest in selected markets such as Germany and China in our Retail business, and in China and Russia to grow our Lubricants business. Several developments in 2009 led to the concentration of our global Downstream portfolio. Shell agreed to sell its Downstream businesses in Greece. The retail network will continue to operate under the Shell brand. This transaction is subject to regulatory approvals. Shell sold 49% of its interest in Petrochemical Corporation of Singapore and in The Polyolefin Company to Qatar Petroleum International. In Canada, Shell announced the decision to convert the Montreal East Refinery into a terminal for distribution of gasoline, diesel and aviation fuels.
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Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
In Australia and New Zealand, Shell announced the sale of its share in two bitumen joint ventures. The sale will be concluded in several phases and finalised by 2014. The portfolio concentration will continue. Some 15% of Shell’s worldwide refining capacity – some 560 thousand barrels per day – is under review for possible disposal, conversion to terminals or closure. In 2008 capital investment was $6.0 billion of which $4.0 billion was in Manufacturing, $1.9 billion was in Marketing and $0.1 billion was new equity and loans in equity-accounted investments. The main investments included expenditure in the fully integrated Shell Eastern Petrochemicals Complex in Singapore and refining investments to maintain the integrity and performance of the asset base. Retail investments included upgrades in selected European markets and growth in Asia, while Lubricants investments prioritised growth in the East.
145 billion litres of fuel in 2009. With more than 100 years of experience in fuel development we believe we are a leading provider of innovative fuels. Differentiated fuels with special formulations designed to clean engines and improve performance are available in more than 60 countries under the Shell V-Power brand. Our Fuel Economy formula for gasoline and diesel is now available in nearly 30 countries, including the new Shell FuelSave brand recently introduced in 5 countries. Our 2009 global customer tracker survey ranked Shell number one globally as the preferred global brand of service stations.
Lubricants
Outlook
Industry refining margins in 2010 are likely to remain fundamentally weak because of the expected ongoing global excess product inventory, particularly for middle distillates. Margins may recover slightly in the latter half of 2010, as increased demand for middle distillates might coincide with further improvement in the global economy. However, the overall strengthening of margins is likely to be tempered by the large excess refinery capacity. The eventual margin level will be influenced by the pace of the global economic recovery, the extent of refinery rationalisation in the face of weak margins and the pace of new refining capacity start-ups in China, India and the USA. The growth of demand for petrochemicals in 2010 is expected to be in line with GDP growth. Sizeable cracker capacity expansion projects in the Middle East and China, delayed during 2009, are expected to come on-stream. They will be joining other expansions that were scheduled for 2010. Cracker capacity is expected to increase at a rate twice that of demand growth, placing significant pressure on loading rates and margins during the year.
Shell Lubricants sells more branded lubricants than any other lubricants manufacturer and is also the largest marketer of lubricants overall, with a 13% share of the global finished lubricants market in volume terms (2008). We sell technically advanced lubricant products to customers across the transport sector for passenger cars, trucks and coaches, as well as in manufacturing, mining, power generation, agriculture and construction industries. Our products are available in around 100 countries.
Business to Business (B2B)
B2B sells fuels and speciality products and services to a broad range of commercial customers and consists of six separate businesses:
Shell Aviation provides fuel every day at over 850 airports across some 55 countries, for more than 7,000 aircraft, refuelling a plane every 12 seconds. Shell Marine Products
provides fuels, lubricants and related technical services to the marine industry. We supply over 100 grades of marine lubricants and 20 different types of marine fuel for vessels powered by diesel, steam and gas turbine engines. We serve more than 15,000 customer vessels, ranging from large ocean going tankers to small fishing boats in more than 600 ports in 49 countries.
Shell Gas (LPG)
provides liquefied petroleum gas and related services in 29 countries to domestic, commercial and industrial customers for activities as diverse as transport, cooking, heating, and lighting applications.
Business and property
MANUFACTU RIN G Refining Shell Commercial Fuels provides transport, industrial and heating fuels and related services to more than 200,000 customers in more than 40 countries. Our Commercial Road Transport business supplies road haulage and bus companies worldwide through a global network of sites and offers payment through Shell’s card system. More than 500,000 fuel cards are in operation. Shell Bitumen
We have interests in more than 35 refineries worldwide with the capacity to process some 4 million barrels of crude oil per day. Our refining portfolio is global with approximately 40% of our refining capacity in Europe and Africa, 30% in the Americas and 30% in AsiaPacific. Our refineries make a wide range of products including gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, liquefied petroleum gas and sulphur.
Supply and Distribution
With 9,000 kilometres of pipeline, more than 2,500 storage tanks and some 250 distribution facilities in around 60 countries, our Supply and Distribution infrastructure is well positioned for global delivery. Deliveries include feedstocks for Shell refineries and finished products for Shell’s Downstream marketing businesses and customers worldwide.
MARKETING Retail
supplies around 11,000 tonnes of bitumen products every day to some 1,600 customers worldwide; the equivalent of resurfacing one kilometre of road every four minutes. Shell Bitumen continues to grow in key markets, most notably in the paving solutions and airport sectors. We are also developing innovative products like Warm Asphalt Mix and Shell Floraphalte that can be mixed and laid at lower temperatures to reduce energy use and carbon dioxide emissions.
Shell Sulphur Solutions
develops sulphur products that provide innovative uses for sulphur, a natural by-product of oil and gas processing. These include Shell Thiopave, a paving solution that can prolong road life; Shell Thiocrete, a highly durable, fast-setting concrete; and Shell Thiogro, a new family of fertilisers to enhance crop yields in sulphur-responsive soils.
The Shell branded fuels retail network is the world’s largest with around 44,000 service stations in more than 80 countries, selling more than
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
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Alternative Energies and CO 2
Shell Alternative Energies investigates and develops alternative energy technologies with a long-term aspiration to develop business opportunities. Our focus is on biofuels. Shell is building capacity in conventional biofuels that meet our corporate and social responsibility and is researching advanced biofuels technologies. We also continue to evaluate and explore the potential of hydrogen as an alternative energy carrier for the longer term. Shell CO2 is responsible for coordinating and driving CO2 management activities across the company.
CHEMICALS Manufacturing
OI L PRODUCTS – CO ST OF CRU DE O I L PRO CE SS E D OR CO N S U ME D [A ]
$ PER BARREL
Total
2009 58.96
2008 94.05
2007 71.83
[A] Includes Upstream margin on crude supplied by Shell and equity-accounted investment exploration and production companies.
OPE R ABL E CRU DE OI L DI STI L LATIO N CAPA CI TY [A ]
THOUSAND BARRELS/CALENDAR DAY [C]
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 1,519 935 801 384 3,639
2008 1,601 923 803 351 3,678
2007 1,815 953 835 350 3,953
We have interests in more than 30 chemical manufacturing sites worldwide, including joint ventures. Our chemical manufacturing portfolio produces a range of base chemicals including ethylene, propylene and aromatics, and intermediate chemicals such as styrene monomer, propylene oxide, solvents, detergent alcohols, ethylene oxide and ethylene glycol. Our portfolio has the capacity to produce some 5 million tonnes of ethylene per annum.
Marketing
[A] Shell average operating capacity for the year and excluding mothballed capacity. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil. [C] Calendar day capacity is the maximum sustainable capacity minus capacity loss due to normal unit downtime.
Shell Chemicals sells a range of petrochemicals to industrial customers globally. The products are widely used in plastics, coatings and detergents, which in turn are used in products such as fibres and textiles, thermal and electrical insulation, medical equipment and sterile supplies, computers, vehicles, paints and biodegradable detergents. Chemicals has more than 1,300 major industrial customers across the world, with the 20 largest accounting for about 50% of our third-party sales proceeds. These key customers are major multinational organisations, including many household names, which buy large volumes from us, often across several product areas.
Downstream business activities with Iran
E T HY L E N E CAPA CITY – S HE L L AN D E QUI T Y- ACCO UN TE D I N V E S T ME N T S [A]
2009 Nominal capacity (thousand tonnes/year) Utilisation (%) 5,182 80
2008 5,827 87
2007 6,216 90
[A] Data includes our share of capacity entitlement (offtake rights) that may be different from nominal equity interest. With effect from 2008, we have excluded from our ethylene capacity certain US units which have been taken offline for a long-term or indefinite period. Nominal capacity is quoted as at December 31, 2009. Utilisation is based on the annual average capacity.
In 2009, Shell produced lubricants in Iran through an associate company and sold them through an Iranian joint venture. Through Shell’s trading activities, we purchased crude oil from Iran as part of the optimisation of feedstocks for our refining operations. We also purchased feedstock from Iran for the Nanhai petrochemical facility in China. We sold some refined products and petrochemicals to Iran. Since October 2009 there have been no gasoline sales to Iran. In addition we provided refinery and gas plant consulting advice and services.
OI L PRODUCTS – CRU DE O IL PROCE S S E D [A]
THOUSAND B/D
Europe Africa, Asia, Australia/Oceania USA Other Americas Total Shell share of equity-accounted investments
2009 1,251 523 721 288 2,783 360
2008 1,394 683 751 294 3,122 372
2007 1,644 765 789 299 3,497 392
[A] Including natural gas liquids; includes processing for others and excludes processing by others. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
42
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
RE F I N E RY PROCE S S IN G I N TAK E [A ]
THOUSAND B/D
O IL SA L E S [A]
THOUSAND B/D
Crude oil Feedstocks Total Europe Africa, Asia, Australia/Oceania USA Other Americas Total Metric equivalent (mpta)
2009 2,783 284 3,067 1,330 596 805 336 3,067 153
2008 3,123 265 3,388 1,481 729 826 352 3,388 167
2007 3,496 283 3,779 1,731 811 879 358 3,779 185
Product volumes Europe Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Africa, Asia, Australia/Oceania Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total USA Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Other Americas Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Export sales [C] Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Total product sales Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total
2009 415 198 766 113 145 1,637 394 168 453 101 147 1,263 802 164 183 61 117 1,327 277 78 232 51 58 696 183 133 397 278 242 1,233 2,071 741 2,031 604 709 6,156
2008 408 224 855 193 151 1,831 361 167 456 121 152 1,257 801 175 248 45 133 1,402 270 76 242 58 73 719 211 150 453 325 220 1,359 2,051 792 2,254 742 729 6,568
2007 501 205 834 178 168 1,886 368 168 455 141 151 1,283 851 166 257 39 174 1,487 260 71 242 63 36 672 198 146 507 283 163 1,297 2,178 756 2,295 704 692 6,625
[A] Including crude oil and natural gas liquids plus feedstocks processed in crude oil distillation units and in secondary conversion units. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
RE F I N E RY PROCE S S IN G O U T T U RN [ A]
THOUSAND B/D
Gasolines Kerosines Gas/Diesel oils Fuel oil Other Total
2009 1,179 341 1,025 279 432 3,256
2008 1,229 375 1,145 315 471 3,535
2007 1,363 366 1,190 348 593 3,860
[A] Excluding “own use” and products acquired for blending purposes. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
[A] Sales figures exclude deliveries to other companies under reciprocal sale and purchase arrangements, which are in the nature of exchanges. Sales of condensate and natural gas liquids are included. Certain contracts are held for trading purposes and reported net rather than gross. The effect in 2009 is a reduction in oil product sales of approximately 739,000 b/d, 698,000 b/d in 2008 and 805,000 b/d in 2007. [C] Export sales as a percentage of total oil sales amounts to 20.0% in 2009, 20.7% in 2008 and 19.6% in 2007.
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
43
CHE M ICA L S A L E S VOL U ME S B Y M A I N PRODU CT CATE G ORY [A]
OI L TA N K E RS [A] (AT D E CE MBE R 31) THOUSAND TONNES
Base chemicals First-line derivatives Other Total
2009 10,166 8,143 2 18,311
2008 11,573 8,746 8 20,327
2007 12,968 9,577 10 22,555
2009 Owned/demise-hired Large range (45,000 to 160,000 dwt) Medium range (25,000 to 45,000 dwt) General purpose/Specialist (10,000 to 25,000 dwt) Total Time-chartered [C] VLCCs (very large crude carriers over 160,000 dwt) [D] Large range (45,000 to 160,000 dwt) Medium range (25,000 to 45,000 dwt) General purpose/ Specialist (10,000 to 25,000 dwt) Total Total oil tankers Owned/demise-hired under construction or on order 6 1
number of ships 2008 2007 2009
million dwt 2008 2007
7 5
8 5
0.6 0.1
0.6 0.2
0.7 0.2
[A] Excluding volumes sold by equity-accounted investments, chemical feedstock trading and by-products.
CHE M ICA L S A L E S VOL U ME S B Y R E G IO N [A]
THOUSAND TONNES
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 7,386 4,831 5,833 261 18,311
2008 8,472 4,924 6,362 569 20,327
2007 8,908 5,466 7,469 712 22,555
3 10
4 16
4 17
– 0.7
0.1 0.9
0.1 1.0
13 37 7
8 32 13
7 31 14
3.9 2.9 0.3
2.4 2.5 0.5
2.1 2.6 0.5
[A] Excluding volumes sold by equity-accounted investments, chemical feedstock trading and by-products.
15 72 82
26 79 95
25 77 94
0.2 7.3 8.0
0.4 5.8 6.7
0.4 5.6 6.6
–
–
1
–
–
0.1
[A] Oil tankers and ocean going articulated tug barges of 10,000 dwt and above which are owned/chartered by subsidiaries where the equity shareholding is at least 50%. Time-chartered oil tankers include consecutive voyage charters. [C] Contracts of affreightment are not included. [D] Five of the VLCCs are directly manned and managed by subsidiaries.
L PG G A S CAR RI E RS [ A] ( AT D EC EMBER 3 1)
2009 Time-chartered (LPG) 2
number of ships thousand cubic metres 2008 2007 2009 2008 2007 5 3 154 399 212
[A] LPG gas carriers of 10,000 dwt and above which are owned/chartered by subsidiaries where the equity shareholding is at least 50%. See page 37 for LNG gas carriers.
44
Shell Annual Report and Form 20-F 2009 Business Review ? Corporate
CORPORATE
E A RN I N G S $ MILLION
Earnings 2009-2007
Segment earnings were $1,310 million, compared with a $69 million loss in 2008 and earnings of $1,387 million in 2007.
2009 2008 328 (650) 253 (69) 2007 875 205 307 1,387
Interest and investment income/(expense) Currency exchange gains/(losses) Other – including taxation Segment earnings/(losses)
360 644 306 1,310
Overview
The Corporate segment covers the non-operating activities supporting Shell. It includes Shell’s holdings and treasury organisation, its headquarters and central functions as well as its insurance companies. All finance expense and income as well as taxes on these items are included in the Corporate segment earnings rather than in the earnings of the business segments. The Corporate segment earnings also include insurance underwriting results and the functional and service-centre costs that have not been allocated to the other segments. The holdings and treasury organisation manages the financial assets and liabilities of Shell. As the point of contact between Shell and the external capital markets, it conducts a broad range of transactions from raising debt obligations to transacting foreign exchange. Treasury centres in London, Singapore and Rio de Janeiro support these activities. Headquarters and central functions provide business support in the areas of finance, human resources, legal services, corporate affairs, real estate and IT. They also provide support for the shareholder-related activities of the Company. The central functions have been increasingly supported by shared service centres located around the world. These centres process transactions, manage data and produce statutory reports, amongst other services. The majority of the headquarters and central-function costs are recovered from the business segments. Those costs that are not recovered are retained in Corporate. Shell insurance companies provide the worldwide insurance cover required by subsidiaries; cover is also offered to joint ventures in which Shell has an equity interest. The type and extent of the coverage is equal to what is otherwise commercially available. In the case of joint ventures, however, the amount of insurance offered is usually limited to Shell’s interest. During 2009, Shell’s self-insurance activities were consolidated within the corporate segment. As a result, the 2009 earnings before tax of the corporate segment were reduced by $422 million, with no impact on Shell’s income for the period.
Net interest and investment income increased by $32 million between 2008 and 2009. An increase in borrowings resulted in increased interest cost, despite lower interest rates. Capitalised interest consequently increased. Interest income was lower due to lower cash balances and lower interest rates. Between 2007 and 2009, net interest and investment income decreased by $515 million. The main reason for the decrease is that the 2007 earnings included the realisation of $404 million in gains on the sale of the equity portfolio held by the Shell insurance companies. Currency exchange gains of $644 million in 2009 were mainly driven by the depreciation of the US dollar against most other currencies on loan payable balances in operating units with a non-US dollar functional currency. Other earnings increased by $53 million in 2009 compared with 2008, mainly because of tax credits arising from settlement of prior-year tax returns.
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
45
LIQUIDITY AND CAPITAL RESOURCES
Overview
The most significant factors affecting year-to-year comparisons of cash flow provided by operating activities are: changes in realised prices for crude oil and natural gas; crude oil, natural gas, synthetic crude oil and bitumen production levels; refining and marketing margins. These factors also have the most significant influence on income. Acquisitions, divestments and other portfolio changes can affect the comparability of cash flows. Since the contribution of Upstream to earnings is larger than that of Downstream, changes affecting Upstream – particularly changes in realised crude oil and natural gas prices and production levels – have a significant impact on Shell’s cash flow. While Upstream benefits from higher realised crude oil and natural gas prices, the extent of such benefit (and the extent of a detriment from a decline in these prices) is dependent on the extent to which contractual arrangements are tied to market prices; the dynamics of production-sharing contracts; the existence of agreements with governments or national oil companies that have limited sensitivity to crude oil price; tax impacts; the extent to which changes in crude oil price flow through into operating costs; and the impact of natural gas prices. Changes, therefore, in benchmark prices for crude oil and natural gas only provide a broad indicator of changes in the earnings experienced in any particular period by Upstream. In Downstream, changes in any one of a range of factors derived from either within the industry or the broader economic environment can influence margins in the short or long term. The precise impact of any such change at a given point in time is dependent upon other prevailing conditions and the elasticity of the oil markets. The duration and impact of economic dynamics is a function of a number of factors that determine the market response, including whether a change in crude price affects the crude types or only a specific grade; regional and global crude oil and refined products inventory; and the collective speed of response of the industry refiners and product marketers in adjusting their operations. It should be noted that commonly agreed benchmarks for refinery and marketing margins do not exist in the way that Brent and WTI crude oil prices and Henry Hub natural gas prices in the USA serve as benchmarks in the Upstream. In the longer term, replacement of oil and gas reserves will affect the ability of Shell to continue to maintain or increase production levels in Upstream, which in turn will affect our cash flow provided by operating activities and income. We will need to take measures to maintain or increase production levels and cash flows in future periods, which may include developing new fields and mines, continuing to develop and apply new technologies and recovery processes to existing fields and mines, and making selective focused acquisitions. Our goal is to offset declines from production and increase reserves. However, reserves and/or production increases are subject to a variety of risks and other factors, including the uncertainties of exploration, operational interruptions, geology, frontier conditions, availability of new technology and engineering capacity, availability and cost of skilled or specialist resources, project delays and potential cost overruns as well as fiscal, regulatory and political changes. Shell has a diverse portfolio of development projects and exploration opportunities, which may mitigate political and technical risks of Upstream and the associated cash flow provided by operating activities.
It is our intention to continue to divest and, where appropriate, make selective acquisitions as part of active portfolio management. The number of companies or assets divested will depend on market opportunities.
Statement of cash flows
The net cash provided by operating activities amounted to $21.5 billion in 2009, compared with $43.9 billion in 2008 and $34.5 billion in 2007. Lower earnings and an increase in net working capital compared with a decrease in 2008, primarily in relation to our Downstream business, were the main drivers for the decreased net cash from operations in 2009. Net cash used in investing activities was $26.2 billion in 2009, a decrease from $28.9 billion in 2008. The decrease is mainly the result of $8.5 billion lower capital expenditure (investments in projects and acquisitions) while proceeds from sale of assets, equity-accounted investments and financial assets also decreased. In 2007, net cash used in investing activities was $14.6 billion, reflecting lower capital expenditure in combination with higher proceeds from the sale of assets relative to 2008. Net cash used in financing activities decreased to $0.8 billion in 2009 from $9.4 billion in 2008, primarily due to the increase in debt. The difference between the net cash used in financing in 2008 and 2007 relates primarily to the impact of the acquisition of the Shell Canada minority interest in 2007 (see Note 25 to the Consolidated Financial Statements) and the increase in current debt in 2008. Cash and cash equivalents were $9.7 billion at year end compared with $15.2 billion in 2008 and $9.7 billion in 2007.
EX TR ACT FR OM CASH F L OW S TATEMENT [ A] $ BILLION
Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Currency translation differences relating to cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year
2009 21.5 (26.2) (0.8) 0.1 (5.5) 15.2 9.7
2008 43.9 (28.9) (9.4) (0.1) 5.5 9.7 15.2
2007 34.5 (14.6) (19.4) 0.2 0.7 9.0 9.7
[A] For Consolidated Statement of Cash Flows see page 100.
Financial condition and liquidity
Shell’s financial position is strong. In 2009, we generated a ROACE of 8.0% (see page 48) with a year-end gearing ratio of 15.5% (2008: 5.9%) and returned $10.5 billion to our shareholders through dividends. The size and scope of our business requires a robust financial control framework and effective management of our various risk exposures. The international financial markets crisis, followed by the global economic slowdown in late 2008 and in 2009, put significant stress on the business environment in which we operate. As a result, certain risk exposure increased, requiring further financial control measures to be taken, particularly in the area of credit management. The credit crisis affected Shell’s activities most exposed to financial counterparty risk; that is, the credit exposure arising from Shell’s cash deposits, money market funds, foreign exchange and financial instrument trading with financial institutions. Exposure to failed financial counterparties was minimal in 2009 (see Note 23 to the Consolidated Financial Statements).
46
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
As a result of the decrease of the assets in our pension plans during 2008, Shell made significant cash contributions to the plans in 2009, in addition to the regular contributions of $1-2 billion per annum in recent years. In 2010, additional contributions are expected to be paid as well. Total contributions in 2009 amounted to $5.2 billion, while contributions in 2010 are expected to be around $2.1 billion. Additionally, the lower pension asset values at the beginning of 2009 are the main cause of the $2.8 billion increase in the pre-tax pension costs between 2008 and 2009. Note 3 to the Consolidated Financial Statements describes the principal assumptions and Note 18 provides further disclosure on retirement benefits. In all of our businesses – but particularly in chemicals – customers, suppliers, partners and counterparties show signs of financial stress. Entire industrial sectors and countries are under economic strains. Certain joint ventures and associated companies have faced constrained capital markets as well as an increased cost of bank debt. Limited bank and capital funding capacity for lower-rated companies, together with the global economic slowdown, may restrict Shell’s business opportunities, notably in the area of potential divestments. In response to the international credit environment, we continue to take a variety of measures to reduce and diversify risk exposure. These measures include intensified credit analysis and monitoring of trading partners, restricting large-volume trading activities to the highest-rated counterparties, shortening exposure duration, and taking collateral or other security. As Shell’s treasury and trading operations are highly centralised, these measures have proved reasonably effective in controlling credit exposures associated with managing Shell’s substantial cash, foreign exchange and commodity positions. 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. The measures include shortened payment terms, collateral or other security posting and vigorous collections. Cash and cash equivalents amounted to $9.7 billion at the end of 2009 (2008: $15.2 billion). Cash and cash equivalents are held in various currencies but primarily in US dollar, euro and sterling. Total current and non-current debt rose $11.8 billion in the year. Total debt at the end of 2009 amounted to $35.0 billion. The total debt outstanding (excluding leases) at December 31, 2009 will mature as follows: 13% in 2010, 11% in 2011, 10% in 2012, 12% in 2013 and 54% in 2014 and beyond. Shell believes its current working capital is sufficient for its present requirements. Shell currently satisfies its funding and working capital requirements from the cash generated within its business and through the issuance of external debt. Our external debt is principally financed from the international debt capital markets through debt instruments issued under two commercial paper programmes (CP programmes), a euro medium-term note programme (EMTN programme) and a US universal shelf registration (US shelf registration), each guaranteed by Royal Dutch Shell plc. The central debt programmes and facilities consist of: a $10 billion global CP programme, exempt from registration under section 3(a)(3) of the US Securities Act 1933, with maturities not exceeding 270 days; a $10 billion CP programme, exempt from registration under section 4(2) of the US Securities Act 1933, with maturities not exceeding 397 days;
a $25 billion EMTN programme; and an unlimited US shelf registration. Despite an uncertain start to 2009, public debt markets were favourable to high investment grade corporate issuers and Shell successfully accessed the commercial paper markets and issued $18 billion of long-term publicly traded debt during the course of the year comprised of $7.5 billion under the US shelf registration and $10.5 billion under the EMTN programme. All CP, EMTN and US shelf issuances were undertaken by Shell International Finance B.V. (SIF BV), and guaranteed by Royal Dutch Shell plc. Further disclosure on debt issued – including maturity profile and fixed/floating rate characteristics – is included in Note 16 to the Consolidated Financial Statements. Certain joint venture operations are separately financed. Shell currently maintains $2.5 billion of committed bank facilities which, together with internally available liquidity, provides back-up coverage for commercial paper maturing within 30 days. Aside from this facility and certain borrowing in local subsidiaries, Shell does not have committed bank facilities as this is not considered to be a necessary or cost-effective form of financing for Shell, given its size, credit rating and cash-generative nature. The maturity profile of Shell’s outstanding commercial paper is actively managed to ensure that the amount of commercial paper maturing within 30 days remains consistent with the level of supporting liquidity. The committed facilities, which are with a number of international banks, will expire in 2012. Shell expects to be able to renew or increase these facilities on commercially acceptable terms. While Shell is subject to restrictions (such as foreign withholding taxes) on the ability of subsidiaries to transfer funds in the form of cash dividends, loans or advances, such restrictions are not expected to have a material impact on the ability of Shell to meet its cash obligations. The following table sets forth the consolidated unaudited ratio of earnings to fixed charges of Royal Dutch Shell for the years ended December 31, 2005, 2006, 2007, 2008 and 2009.
R AT I O OF E A R N I N G S T O F I X E D CH A RG E S
2009 Ratio of earnings to fixed charges 9.28
2008 20.27
2007 21.43
2006 19.99
2005 23.33
For the purposes of this table, earnings consist of pre-tax income from continuing operations (before adjustment for minority interest and share of profit from equity-accounted investments) plus fixed charges (excluding capitalised interest) less undistributed earnings of equityaccounted investments plus distributed income from equity-accounted investments. Fixed charges consist of expensed and capitalised interest plus interest within rental expenses (for operating leases) plus preference security dividend requirements of subsidiaries. Please refer to Exhibit 7.1 for details concerning the calculation of the ratio of earnings to fixed charges.
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
47
CAPI TAL I SAT I ON TA BL E
$ MILLION
Dec 31, 2009 Equity attributable to Royal Dutch Shell plc shareholders Current debt Non-current debt [A] Total debt Total capitalisation 136,431 4,171 28,387 32,558 168,989
Dec 31, 2008 127,285 9,497 11,259 20,756 148,041
Guarantees and other off-balance sheet arrangements
Guarantees at December 31, 2009, were $3.3 billion (2008: $3.7 billion), of which $2.5 billion were guarantees of debt of equityaccounted investments (2008: $2.6 billion).
Financial framework
Shell manages its business to deliver strong cash flows to fund investment and growth based on cautious assumptions relating to crude oil prices.
[A] Non-current debt excludes $2.5 billion of certain tolling commitments (2008: $2.5 billion). As of December 31, 2009, Shell had outstanding guarantees of $3.3 billion (2008: $3.7 billion), of which $2.5 billion (2008: $2.6 billion) related to debt of equity-accounted investments. $30.0 billion (2008: $18.6 billion) of debt was unsecured and $5.0 billion (2008: $4.6 billion) was secured.
Share repurchases
During 2009, the Company did not purchase any of its common stock for cancellation. In 2008 101 million shares were purchased for cancellation at a gross cost of $3.6 billion. Share buyback plans will be reviewed periodically, and are subject to market conditions and the capital requirements of Shell. A resolution will be submitted to the 2010 AGM to seek shareholder approval for Shell to make such market purchases of its ordinary shares, together with an explanation that shares so repurchased may, at Shell’s discretion, be either held in treasury or cancelled.
Credit ratings
On September 3, 2009, Standard & Poor’s Ratings Services (S&P) lowered its corporate credit rating for Royal Dutch Shell plc and its related subsidiaries to AA stable outlook from AA+ stable outlook. On November 4, 2009, Moody’s Investors Services (Moody’s) affirmed the Aa1 long-term issuer rating of Royal Dutch Shell plc with stable outlook, as well as the guaranteed programmes/outstanding debt securities of its issuance subsidiary SIF BV. Short-term credit ratings of the CP programmes remain unchanged at Prime-1 and A-1+ from Moody’s and S&P respectively. All central debt programmes and facilities continue to operate under the guarantee of Royal Dutch Shell plc, with all debt issuance in 2009 undertaken by SIF BV.
Contractual obligations
The table below summarises Shell companies’ principal contractual obligations at December 31, 2009 by expected settlement period. The amounts presented have not been offset by any committed third-party revenues in relation to these obligations.
CON T RACTUAL OBL I G AT I ON S $ BILLION
Capital investments and dividends
After servicing outstanding debt, Shell’s first priority for applying its cash is payment of the dividend. Shell’s policy of growing the dividend in US dollar at least in line with inflation over time has changed beginning in 2010. Going forward, the policy will be to grow the dividend in US dollar over time in line with our view of the underlying earnings and cash flow of Shell. When setting the dividend, the Board looks at a range of factors, including the macro environment, the current balance sheet and future investment plans. In addition, Shell may choose to return cash to shareholders through share buybacks, subject to the capital requirements of Shell. Shell’s capital expenditure, exploration expense and new investments in equity-accounted investments decreased by $6.7 billion to $31.7 billion in 2009. Of the total capital investment, $24.0 billion (2008: $32.2 billion; 2007: $21.4 billion) related to Upstream. Downstream accounted for $7.5 billion (2008: $6.0 billion; 2007: $5.3 billion). Capital investment in Corporate was $0.2 billion (2008: $0.2 billion; 2007: $0.4 billion). In March 2007, Shell acquired all remaining shares of Shell Canada that were not already owned by Shell, at a total cost of some $7.1 billion. As from the second quarter 2007, Shell’s Consolidated Financial Statements include the fully consolidated results of Shell Canada with no minority interest impact. In April 2007, Shell completed the divestment to OAO Gazprom of 50% of its stake in the Sakhalin II project in Russia. Shell reduced its stake in the project from 55% to 27.5% for a total sale price of $4.1 billion. Shell’s Consolidated Financial Statements from the second quarter of 2007 include Sakhalin II on an equity-accounted basis, rather than as a subsidiary.
Debt [A] Finance leases Operating
Within 1 year
2/3 years
4/5 years
After 5 years
Total (2010) (2011/2012) (2013/2014) (2015 and after) 30.6 3.8 6.5 6.1 14.2 7.8 0.8 1.3 5.3 74.7 1.2 2.8 50.7 4.5 4.1 183.6
leases [C] 16.4 4.2 Purchase obligations [D] 440.5 131.5 Other long-term contractual liabilities [E] Total 0.8 496.1 140.3
0.4 88.2
0.2 61.0
0.2 206.6
[A] The amounts are the contractual repayments and exclude $4.3 billion of finance lease obligations. See Note 16 to the Consolidated Financial Statements. Includes interest. See Note 16 to the Consolidated Financial Statements. [C] See Note 16 to the Consolidated Financial Statements. [D] Includes all significant items, including fixed or minimum quantities to be purchased; fixed, minimum or any agreement to purchase goods and services that is enforceable, legally binding and specifies variable price provisions; and the approximate timing of the purchase. [E] Includes all obligations included in “Other non-current liabilities” on the Consolidated Balance Sheet that are contractually fixed as to timing and amount. In addition to these amounts, Shell has certain obligations that are not contractually fixed as to timing and amount, including contributions to defined benefit pension plans (see Note 18 to the Consolidated Financial Statements) and obligations associated with decommissioning and restoration (see Note 19 to the Consolidated Financial Statements).
48
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
The table above excludes interest expense related to debt estimated to be $1.3 billion in 2010, $2.2 billion in 2011/2012, $1.7 billion in 2013/2014 and $0.7 billion in 2015 and after (assuming interest rates with respect to variable interest rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table).
Return on average capital employed (ROACE)
ROACE measures the efficiency of Shell’s utilisation of the capital that it employs. In this calculation, ROACE is defined as income for the period adjusted for interest expense, after tax, as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt. The tax rate is derived from calculations at the published segment level.
CAL CU L AT I ON O F R E TU RN ON AVE RAG E CAPI TA L E MPL OY E D (R OAC E)
$ MILLION
Income for the period Interest expense after tax ROACE numerator Capital employed – opening Capital employed – closing Capital employed – average ROACE
2009 12,718 328 13,046 152,135 173,168 162,652 8.0%
2008 26,476 615 27,091 144,067 152,135 148,101 18.3%
2007 31,926 699 32,625 130,718 144,067 137,393 23.7%
Financial information relating to the Royal Dutch Shell Dividend Access Trust
The results of operations and financial position of the Dividend Access Trust are included in the consolidated results of operations and financial position of Royal Dutch Shell. Set out below is certain condensed financial information in respect of the Dividend Access Trust. Separate financial statements for the Dividend Access Trust are also included in this Report. For the years 2009, 2008 and 2007 the Dividend Access Trust recorded income before tax of £2,902 million, £2,277 million and £1,930 million respectively. In each period this reflected the amount of dividends received on the dividend access share. At December 31, 2009, the Dividend Access Trust had total equity of £ Nil (2008: £ Nil; 2007: £ Nil), reflecting cash of £525,602 (2008: £205,518; 2007: £444,639) and unclaimed dividends of £525,602 (2008: £205,518; 2007: £444,639). The Dividend Access Trust only records a liability for an unclaimed dividend, and a corresponding amount of cash, to the extent that cheques expire, which is one year after their issuance, or to the extent that they are returned unpresented.
Shell Annual Report and Form 20-F 2009 Business Review ? Our people
49
OUR PEOPLE
Shell employs around 101,000 people in over 90 countries worldwide. Our people ultimately put into practice Shell’s business strategy. They are recruited, trained and remunerated according to a People Strategy based on four priorities: assuring sources of talent now and in the future; strengthening leadership and professionalism; enhancing individual and organisational performance; improving systems and processes. In 2009 our People Strategy remained unchanged, but much of its execution focused on the “Transition 2009” programme, which began in the second quarter of that year.
Diversity and inclusion
Shell continues to promote the integration of diversity and inclusion into our operations and culture. Our intention is to provide equal opportunity in recruitment, career development, promotion, training and reward for all employees. Where existing employees become disabled, our policy is to provide continuing employment and training, wherever practicable. By the end of 2009, the proportion of women in senior positions had risen to 14.0%, compared with 13.6% in 2008. In 37% of the countries, local nationals filled more than half the senior positions, compared with 32% in 2008. Another outcome of our Shell People Survey is the D&I (diversity and inclusion) indicator, a global measure of workplace inclusion. We are pleased to report that we once again saw improvement in this indicator, from 67% in 2008 to 69% in 2009.
Transition 2009
Transition 2009 is intended to help improve our competitive position by building – from the top down – a simpler, leaner organisational structure with clearer accountabilities, enabling more customer focus and faster decision-making. The new top-level organisation structure enabled us to reduce the number of senior management positions by around 20% in July 2009. A broader reorganisation followed, requiring affected employees to re-apply for some 15,000 roles in the restructured businesses and corporate functions. Around 5,000 staff are leaving Shell as a result of this restructuring, mostly in management and non-operational positions. A framework of people principles ensured a consistency of approach towards resourcing the new organisation. The framework also ensured that due regard was given to those whom the reorganisation affected. Appropriate diversity checks were embedded into the Transition 2009 resourcing process to ensure we maintained our focus on gender, ethnicity and local hires throughout the process. Despite staff reductions in 2009, Shell has maintained external recruitment commitments in order to keep our capability to deliver our strategy and plans over time. We continue to transfer work to our growing business service centres around the world.
Employee share plans
There are a number of share-based compensation plans for Shell employees. The principal ones currently operating are discussed below. For information on the share-based compensation plans for Executive Directors, see the Directors’ Remuneration Report on pages 60-75. Under the Performance Share Plan awards are made to some 15,000 employees each year. Some 30,000 employees in 50 countries participate in the Global Employee Share Purchase Plan.
PERFORMANCE SHARE PLAN
Under the terms of the Performance Share Plan (PSP), conditional awards of the Company’s shares are made to employees as part of a long-term incentive plan, which was introduced in 2005. For the PSP awards made in 2005 and 2006, the extent to which the awards vested depended on the total shareholder return (TSR) of Shell compared with four of its main competitors over a three-year performance period. For the PSP awards made in 2007 until 2009, the extent to which the awards vest is determined by two performance conditions. For half of the award the number of shares that may vest depends on the relative TSR measure over the measurement period. The other half of the award will be linked to Shell’s declared Business Performance Factor. None of the awards will result in beneficial ownership until the shares are released. Any shares that vest will be increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date.
RESTRICTED SHARE PLAN
Employee communication and involvement
Two-way communication with our staff – either directly or via staff councils or recognised trade unions – is important to us. The Transition 2009 programme has been communicated via different channels and engagement sessions, including regular letters to staff from the Chief Executive Officer, webcasts, publications and face-to-face gatherings. One of the principal tools by which the effectiveness of our employee communications is assessed is the Shell People Survey. It provides valuable insights into employees’ views, and it has had a consistently high response rate. A key outcome from the Shell People Survey is the employee engagement index, which measures affiliation and commitment to Shell. The average index score in 2009 was 78%, which is an increase of 4 percentage points from the 2008 index score. We encourage safe and confidential reporting of views about our processes and practices. Our global telephone helpline and website enable employees to report breaches of our Code of Conduct and the Shell General Business Principles, confidentially and anonymously (see page 76).
Under the Restricted Share Plan (RSP), awards are made on a highly selective basis to senior staff. Shares are awarded subject to a threeyear retention period. Any shares that vest will be increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date.
GLOBAL EMPLOYEE SHARE PURCHASE PLAN
This plan enables eligible employees in participating countries to make contributions towards the purchase of the Company’s shares at a price which is the lower of the market price on the first trading day of the twelve-months savings cycle or the first trading day of the following cycle, reduced by 15%.
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Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
UK SHARESAVE SCHEME
Eligible employees of participating companies in the UK may participate in the UK Sharesave Scheme. Options are granted over the Company’s shares at prices not less than the market value on a date not normally more than 30 days before the grant date of the option. These options are normally exercisable after completion of a three-year or five-year contractual savings period. Please refer to Note 24 to the Consolidated Financial Statements for a further discussion of the principle Shell share plans.
ENVIRONMENT AND SOCIETY
Our success in business depends on our ability to meet a range of environmental and social challenges. We must show we can operate safely and manage the effect our activities can have on neighbouring communities and society as a whole. If we fail to do this, we may lose opportunities to do business and our reputation as a company may also be harmed. We have standards and processes, controls, incentives and a firm governance structure in place to make sure that our operations manage their impacts. The Shell General Business Principles include a commitment to sustainable development that involves integrating economic, environmental and social aspects into our business decisions. Detailed 2009 environmental and social performance data will be published in May 2010 the Shell’s Sustainability Report.
Employee data
See Note 6 to the Consolidated Financial Statements for employee data.
Safety
Maintaining the safety and reliability of our operations – such as refineries, chemicals plants, exploration and production projects – is critical to our ability to sustain a licence to operate and to form joint ventures with other companies, including national oil companies. We continued to invest in process safety during the economic downturn to maintain the safety of our operations. During 2009, we launched a set of 12 Life-Saving Rules across Shell to reinforce our drive towards zero fatalities and injuries by specifically addressing work activities posing the greatest risks to life.
Climate change
The need to manage carbon dioxide (CO2) emissions – the most significant greenhouse gas (GHG) – will become increasingly important as concerns over climate change lead to tighter environmental regulations. Governments at the UN conference on climate change in Copenhagen at the end of 2009 agreed to continue working towards deep cuts in the growth of GHG emissions. Shell already assesses potential costs associated with CO2 emissions in its evaluation of future projects. But in the years to come regulations may impose a price on CO2 emissions that all companies will have to incorporate in their investment plans and that may result in higher energy and product costs. Governments may also require companies to apply technical measures to reduce their CO 2 emissions into the atmosphere, which will add to project costs. Current proposed legislation in the USA, Europe and other regions is expected to increase the cost of doing business through such regulatory mechanisms. Shell, together with other energy companies, has been subject to litigation regarding climate change. We believe these lawsuits are without merit and not material to Shell. As easily accessible oil and gas resources decline, Shell is developing resources that take more energy and advanced technology to produce. We also plan to increase production from unconventional sources such as Canada’s oil sands which are more energy-intensive to develop. A 100 thousand b/d expansion of the Athabasca Oil Sands Project (Shell interest 60%) is under way. Also our Pearl GTL gas to liquids plant in Qatar is expected to increase our CO2 emissions when production begins. We are seeking cost-effective ways to manage CO2 and see potential business opportunities in developing such solutions. We are involved in a number of demonstration projects to develop carbon capture and storage technology, including the European Union’s CO2SINK project in Germany. The Canada and Alberta governments have pledged C$865 million to our proposed Quest project to capture and store underground over 1 million tonnes of CO2 a year from the Scotford
Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
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Upgrader, although we have not yet made a final investment decision (see page 19). There will be costs involved in developing the technologies needed to capture and store CO2 underground. We continue to urge governments to introduce incentives as soon as possible to make such technology commercially viable. We are offering our customers more efficient fuels. In 2009 we launched our most economical fuel to date, Shell FuelSave, in the Netherlands, Malaysia, Singapore, Hong Kong and Turkey. Shell FuelSave will be launched in more countries in 2010. It can save up to one litre of fuel for every 50-litre tankful, depending on driving habits and the condition of the car. We are working to improve energy efficiency and reduce GHGs across all our operations. Of our total GHGs in 2009, a small proportion came from the flaring or burning off of gas in our Upstream business. Most of our continuous flaring is in Nigeria. Since 2002 the Shell Petroleum Development Company-operated joint venture (Shell interest 30%) in Nigeria has spent over $3 billion to install gas-gathering equipment, reducing continuous flaring by more than 30%. But a further $3 billion at least is needed to complete this programme and the majority shareholder, the government, cannot readily fund its share of the programme. The security and funding situation has hindered progress. Our flaring in Nigeria also reduced partly because sabotage and theft have forced a temporary halt to production at some facilities.
Shell’s tailings pond at the Athabasca Oil Sands Project (AOSP) in Alberta, Canada, is around 12 km2. Tailings are toxic, so we continually assess and manage them to reduce their potential impact. This includes steps to prevent contamination of surface and ground water and measures to protect wildlife. A government-approved project is under way to manage the tailings from planned production expansions at the AOSP. The intent is to remove all water from the tailings and then treat the remaining solid tailings, to make reclamation of the land more effective. This land must be reclaimed – for example, through revegetation or reforestation – to a state that matches its pre-mined capability, as required by the Alberta government.
Water
Our industry is not as big a water user as some others, such as power generation. But some of the industry’s activities use quantities of water that can be significant. For example, refining processes and growing crops for biofuels are water intensive. Extracting one barrel of bitumen from oil sands takes two to three barrels of water. In 2009, Shell operations used around 198 million cubic metres of fresh water, compared with 224 cubic metres in 2008. We develop and use advanced technology so as to continue to reduce our need for fresh water. At our oil sands project in Canada we use far less than our water allocation from the Athabasca River, and we minimise the amount withdrawn during the winter months when the flow rate is low. We also recycle water from collection ponds for tailings. In 2009, we continued working on a pilot project testing new technology to extract more water from tailings to improve storage, treatment and recycling. Once operational, the Pearl GTL plant will take no fresh water from its arid surroundings. Instead, it will use and recycle water produced by the GTL manufacturing processes. At both the Schoonebeek oil field (Shell interest 50%) in the Netherlands and the SAPREF refinery (Shell interest 50%) in South Africa we have agreements with local water authorities that allow us to use household wastewater recycled for industrial purposes.
Spills
Large spills of oil and oil products can incur major clean-up costs. If they are operational spills, they can also affect our licence to operate and harm our reputation. In operations that we control we have clear requirements and procedures designed to prevent such spills. These can occur for reasons such as operational failure, accidents or corrosion. We continue to learn from such spills. In Nigeria, sabotage and theft are a significant cause of spills. In 2009, we had 264 oil spills over 100 kilograms from operations and 95 spills over 100 kilograms from sabotage. This is down from our 2008 totals of 275 from operations and 115 from sabotage. The 2008 total volume of spills from operations has been re-estimated at 8.8 thousand tonnes, an increase from that reported in the 2008 Annual Report. This increase was primarily the result of a single November 2008 spill in Nigeria, that was not yet included in our reported 2008 total as an agreement on the spill volume estimate from the investigation was still pending with the Nigerian authorities (as noted in the 2008 Annual Report, investigations can take several months to complete). As noted above detailed 2009 data, including spill volumes, will be published in May 2010 in Shell’s Sustainability Report.
Environmental costs
Shell operates in environments where the most advanced technologies are needed. We place a premium on developing effective technologies that are also safe for the environment. However, when operating at the cutting edge of technology, there is always the possibility of unknown and unforeseeable environmental impacts. While Shell takes all necessary precautions to limit these risks, we are subject to additional remedial environmental and litigation costs as a result of unknown and unforeseeable impacts to the environment from our operations. While these costs have not been material to the Company, no assurance can be made that this will continue to be the case, as we continue to develop advance technologies necessary to differentiate us from the competition and help meet energy demand. We are also subject to a variety of environmental laws, regulations and reporting requirements in the countries where we operate. Infringing any of these laws and requirements can harm our ability to do business in a country. The costs of environmental clean-up can be high. Our operating expenses include the costs of avoiding emissions into the air and water and the safe disposal and handling of waste. In November, 2009, Shell agreed to pay $19.5 million in a settlement accepted by the Superior Court of California, USA, following allegations by the state government concerning some of our
Oil-sands tailings
Mining oil sands to extract and process bitumen, an extra-heavy oil, in Canada’s Alberta province poses several environmental challenges. These include water use and CO2 emissions from the energy-intensive processing needed to turn the bitumen into a synthetic crude oil. Tailings are another environmental impact of mining oil sands. Tailings are the mix of sand, clay, water and heavy metals left over after bitumen has been removed from the mined ore. When a mine first opens, tailings are stored in an external pit, with a dam constructed of compacted low-grade ore. Once mining is completed in this area, dykes are constructed to hold future tailings in a tailings pond.
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Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
underground storage tanks. We did not admit liability but were pleased to agree to this settlement after working with the State of California since 2006 to resolve the matter. Many of the measures outlined in the settlement were steps Shell had already put in place to improve such operations. Shell can also be affected by third-party litigation against governments. For example, Shell’s 2007 drilling plan in the Beaufort and Chukchi seas off Alaska was delayed when non-governmental organisations took legal action against the US Department of Interior (DOI), challenging its approval of Shell’s plan of exploration. As a result of this action, we revised our 2010 drilling plans for that area. We intend to use only one rig in a smaller programme designed to limit our potential effects on the environment. A similar legal challenge was made in early 2010 to the DOI’s approval of these drilling plans.
our approach. These help to rule out the use of child or forced labour and avoid damage to protected areas, such as those rich in biodiversity, when biofuels crops are grown and processed. In 2009, Shell continued to work towards raising sustainability standards with industry, governments, intergovernmental agencies and policy-makers. We are exploring opportunities to invest in the production of ethanol from Brazilian sugar cane, which has the lowest CO2 footprint of today’s biofuels. We are also accelerating research, development and the demonstration of cellulosic ethanol and other advanced biofuels that will not compete with food crops for land, but these are not expected to become commercially viable for perhaps a decade.
Neighbouring communities Biofuels
Shell is a major distributor of biofuels. We sold 9 billion litres of biofuels in 2009, mainly to meet government mandates in the USA, Brazil and Europe. We see low-carbon biofuels as one of the most realistic commercially viable ways to reduce CO2 emissions from transport fuels in the coming 20 years and we continue to build capacity in current biofuels that meet our requirements for sustainability. Biofuels are the renewable that most closely fits our existing transport fuels business and our customers’ needs. Some biofuels pose sustainability challenges. These include CO2 emissions that vary according to the raw materials and production processes used as well as competition with food crops for available land. Shell has been working to raise sustainability standards in its biofuels supply chain for a number of years. Since 2007 we have followed a clear policy and have dedicated resources to help assess potential risks, implement controls and to monitor compliance. The inclusion of sustainability clauses in new and renewed supply contracts is central to Gaining the trust of local communities is essential to the success of our projects and operations. We engage with our neighbours at the earliest opportunity in a planned new development or if changes are being considered to existing operations. Our approach has developed as we have learned from experience; for example, in working with indigenous peoples as the Sakhalin II liquefied natural gas project was developed in Russia’s far east. In 2009 we adopted a new approach at a project in Alberta, Canada, that combined social, health, environmental, legal, and regulatory challenges, many of which were closely linked. We asked local people to contribute to key project decisions, including the siting of facilities. We also invited them to take part in environmental, social and health studies. As a result of this approach we were able to go ahead with three years of exploration activities. During 2009 we were able to use what we learned from this project at other new projects and existing operations across Canada, the USA and Latin America.
Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
53
THE BOARD OF ROYAL DUTCH SHELL PLC
Jorma Ollila
CHAIRMAN
Peter Voser
CHIEF EXECUTIVE OFFICER
Chairman of the Nomination and Succession Committee Born August 15, 1950. A Finnish national, appointed Chairman of the Company with effect from June 2006. He started his career at Citibank in London and Helsinki, before moving in 1985 to Nokia, where he became Vice President of International Operations of Nokia. In 1986 he was appointed Vice President Finance of Nokia. Between 1990 and 1992 he served as President of Nokia Mobile Phones. Between 1992 and 1999 he was President and Chief Executive Officer of Nokia and from 1999 to June 2006 he was Chairman and Chief Executive Officer. He is Chairman of the Board of Nokia.
Lord Kerr of Kinlochard GCMG
DEPUTY CHAIRMAN AND SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
Born August 29, 1958. A Swiss national, appointed Chief Executive Officer of the Company with effect from July 2009. Previously, Chief Financial Officer since October 2004. He first joined Shell in 1982 and held a variety of finance and business roles in Switzerland, the UK, Argentina and Chile, including Chief Financial Officer of Oil Products. In 2002 he joined the Asea Brown Boveri (ABB) Group of Companies, based in Switzerland as Chief Financial Officer and Member of the ABB Group Executive Committee. He returned to Shell in October 2004, when he became a Managing Director of Shell Transport and Chief Financial Officer of the Royal Dutch/Shell Group. He was a member of the Supervisory Board of Aegon N.V. from 2004 until April 2006. He is a member of the Supervisory Board of UBS AG [A] and a member of the Swiss Federal Auditor Oversight Authority.
[A] Peter Voser will not be standing for re-election to the Board of UBS AG at its AGM in April 2010.
Member of the Audit Committee, the Corporate and Social Responsibility Committee and the Nomination and Succession Committee Born February 22, 1942. A British national, appointed a Nonexecutive Director of the Company in October 2004. He was a Nonexecutive Director of Shell Transport from 2002 to 2005. A member of the UK Diplomatic Service from 1966 to 2002, he was UK Permanent Representative to the EU, British Ambassador to the USA and Foreign Office Permanent Under Secretary of State. He was Secretary-General of the European Convention (2002 – 2003), and in 2004 became an independent member of the House of Lords and sits on the EU Select Committee. He is a Non-executive Director of Rio Tinto plc, Scottish American Investment Company plc and Scottish Power, a BAE Systems Advisory Board member, Chairman of Imperial College and the Centre for European Reform and a Rhodes and Carnegie Trustee.
Simon Henry
CHIEF FINANCIAL OFFICER
Born July 13, 1961. A British national, appointed Chief Financial Officer of the Company with effect from May 2009. He joined Shell in 1982 as an engineer at the Stanlow refinery in the UK. After qualifying as a member of the Chartered Institute of Management Accountants in 1989, he held various Finance posts, including Finance Manager of Marketing in Egypt, Controller for the Upstream business in Egypt, Oil Products finance adviser for Asia Pacific, Finance Director for the Mekong Cluster and General Manager Finance for the South East Asian Retail business. He was appointed Head of Group Investor Relations in 2001 and Chief Financial Officer for Exploration & Production in 2004.
Malcolm Brinded CBE
EXECUTIVE DIRECTOR, UPSTREAM INTERNATIONAL
Born March 18, 1953. A British national, appointed an Executive Director of the Company in October 2004 responsible for global Exploration & Production, and from July 2009 for Upstream International. He was previously a Managing Director of Shell Transport from March 2004 and, prior to that, a Managing Director of Royal Dutch from 2002. He joined Shell in 1974 and has held various positions around the world including in Brunei, the Netherlands and Oman. He was also Country Chair for Shell in the UK. He is a member of the Nigerian Presidential Honorary International Investor Council, Chairman of the Shell Foundation and a Trustee of the Emirates Foundation and the International Business Leaders Forum.
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Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
Josef Ackermann
NON-EXECUTIVE DIRECTOR
Nick Land
NON-EXECUTIVE DIRECTOR
Member of the Remuneration Committee Born February 7, 1948. A Swiss national, appointed a Non-executive Director of the Company in May 2008. He is Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG. He was appointed to these positions in 2006 and 2002 respectively. He joined Deutsche Bank’s Management Board in 1996, with responsibility for the investment banking division. He started his professional career in 1977 at Schweizerische Kreditanstalt (SKA), where he held a variety of positions in Corporate Banking, Foreign Exchange/Money Markets, Treasury and Investment Banking. In 1990, he was appointed to SKA’s Executive Board, on which he served as President between 1993 and 1996. He is currently also a member of the Supervisory Board of Siemens AG.
Member of the Audit Committee and the Corporate and Social Responsibility Committee Born February 6, 1948. A British national, appointed a Non-executive Director of the Company with effect from July 2006. He qualified as an accountant in 1970 and was a partner of Ernst & Young LLP from 1978 until June 2006. He was Chairman of Ernst & Young LLP and a member of the Global Executive Board of Ernst & Young Global LLP from 1995 until June 2006. He is a Non-executive Director of BBA Aviation plc, Ashmore Group plc and Vodafone Group plc, Director of Alliance Boots GmbH, a member of the Finance and Audit Committees of the National Gallery and Advisor to Denton Wilde Sapte LLP.
Christine Morin-Postel
NON-EXECUTIVE DIRECTOR
Sir Peter Job KBE
NON-EXECUTIVE DIRECTOR
Chairman of the Audit Committee Born October 6, 1946. A French national, appointed a Non-executive Director of the Company in October 2004. She was a member of the Royal Dutch Supervisory Board from July 2004 and was a Board member of Royal Dutch until December 2005. Formerly she was Chief Executive of Société Générale de Belgique, Executive Vice-President and member of the Executive Committee of Suez S.A., Chairman and CEO of Credisuez plc from 1996 to 1998 and a Non-executive Director of Pilkington plc and Alcan Inc. She is a Non-executive Director of 3i Group plc, British American Tobacco PLC and EXOR S.p.A.
Member of the Remuneration Committee Born July 13, 1941. A British national, appointed a Non-executive Director of the Company in October 2004. He was a Non-executive Director of Shell Transport from 2001 to 2005. Previously he was Chief Executive of Reuters Group plc. He is a Non-executive Director of Schroders plc and TIBCO Software Inc. and a member of the Supervisory Board of Deutsche Bank AG.
Wim Kok
NON-EXECUTIVE DIRECTOR
Lawrence Ricciardi
Chairman of the Corporate and Social Responsibility Committee and Member of the Nomination and Succession Committee Born September 29, 1938. A Dutch national, appointed a Nonexecutive Director of the Company in October 2004. He was a member of the Royal Dutch Supervisory Board from 2003 to July 2005. He chaired the Confederation of Dutch Trade Unions (FNV) before becoming a member of the Lower House of Parliament and parliamentary leader of the Partij van de Arbeid (Labour Party). Appointed Minister of Finance in 1989 and Prime Minister in 1994, serving for two periods of government up to July 2002. Member of the Supervisory Boards of KLM N.V. and TNT N.V.
NON-EXECUTIVE DIRECTOR
Member of the Nomination and Succession Committee Born August 14, 1940. A US national, appointed a Non-executive Director of the Company in October 2004. He was appointed a member of the Royal Dutch Supervisory Board in 2001 and was a Board member of Royal Dutch until December 2005. Previously he was President of RJR Nabisco, Inc. and subsequently Senior Vice President and General Counsel of IBM. He is a Non-executive Director of Citigroup Inc., Senior Advisor to the IBM Corporation as well as to Jones Day and to Lazard Frères & Co and a Trustee of the Andrew W. Mellon Foundation and the Pierpoint Morgan Library.
Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
55
Jeroen van der Veer
NON-EXECUTIVE DIRECTOR
Member of the Corporate and Social Responsibility Committee Born October 27, 1947. A Dutch national, appointed a Non-executive Director of the Company with effect from July 2009. Previously, Chief Executive since October 2004. He was appointed President of Royal Dutch in 2000, having been a Managing Director since 1997, and was a Board member until December 2005. He was a Director of Shell Canada Limited from April 2003 until April 2005. He joined Shell in 1971 in refinery process design and held a number of senior management positions around the world. He is Vice-Chairman and Senior Independent Director of Unilever (which includes Unilever N.V. and Unilever plc), Vice-Chairman of ING Group, a member of the Supervisory Board of Royal Philips Electronics N.V. and Vice-Chairman of a NATO Expert Group.
Hans Wijers
NON-EXECUTIVE DIRECTOR
Chairman of the Remuneration Committee Born January 11, 1951. A Dutch national, appointed a Non-executive Director of the Company with effect from January 2009. He is Chief Executive Officer and Chairman of the Board of Management of Akzo Nobel N.V. He joined Akzo Nobel N.V. in 2002 as a Board member, and was appointed Chairman in May 2003. He obtained a PhD in Economics in 1982 while teaching at the Erasmus University Rotterdam. Later he became managing partner of The Boston Consulting Group. He served as Dutch Minister for Economic Affairs from 1994 to 1998, after which he returned to The Boston Consulting Group as senior partner until his appointment as a Board member of Akzo Nobel N.V. He is a trustee of various charities and a member of the European Roundtable of Industrialists.
Michiel Brandjes
COMPANY SECRETARY
Born December 14, 1954. A Dutch national, appointed as Company Secretary and General Counsel Corporate of the Company in February 2005. Previously he was Company Secretary of Royal Dutch. He joined Shell in 1980 as a Legal Adviser.
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Shell Annual Report and Form 20-F 2009 Senior Management
SENIOR MANAGEMENT
In addition to the Executive Directors listed on page 53, the Company has the following Senior Management, each of whom is a member of the Executive Committee (see page 78):
Matthias Bichsel
Born July 24, 1954. A Swiss national, appointed Projects & Technology Director with effect from July 1, 2009. Previously, he was Executive Vice President, Development and Technology, being responsible for delivering reserves and production from new upstream projects, as well as providing technology applications and research via Shell’s upstream technology organisation.
Beat Hess
Born July 6, 1949. A Swiss national, appointed Legal Director in June 2003. Previously he was General Counsel of ABB Group from 1988 to 2003. He is a Non-executive Board Director of Nestlé S.A.
Hugh Mitchell
Born February 13, 1957. A British national, appointed Chief Human Resources & Corporate Officer with effect from July 1, 2009. He joined Human Resources (HR) in Shell Exploration & Production in 1979 and was appointed to other HR and business roles across the UK and Brunei in both upstream and downstream businesses. In 1997 he became HR Vice President for the Global Oil Products business and in 2003 was appointed Director International, one of the Group’s Corporate Centre Directors. In 2005 he was appointed Human Resources Director of Royal Dutch Shell.
Marvin Odum
Born December 13, 1958. A US national, appointed Upstream Americas Director with effect from July 1, 2009. Previously he was Executive Vice President for the Americas for Shell Exploration & Production. He was appointed President of Shell Oil Company in 2008 having served as Executive Vice President since 2005 with responsibility for Shell’s exploration and production businesses in the western hemisphere. He was appointed Chairman of the Executive Committee of the Athabasca Oil Sands Project on July 1, 2009.
Mark Williams
Born November 9, 1951. A US national, appointed Downstream Director with effect from January 1, 2009. He has previously held the positions of Executive Vice President, Global Businesses, and Vice President of Strategy, Portfolio and Environment for Oil Products. In 2004, he was appointed Executive Vice President of Supply and Distribution in Shell Downstream Inc., a position he held until December 2008.
Shell Annual Report and Form 20-F 2009 Report of the Directors
57
REPORT OF THE DIRECTORS
Principal activities
Royal Dutch Shell plc (the Company) is a holding company which owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. Details of the Company’s subsidiaries can be found in Exhibit 8.
are paid by default in euros, although holders of Class A shares are able to elect to receive dividends in sterling. Dividends declared on Class B shares are paid by default in sterling, although holders of Class B shares are able to elect to receive dividends in euros. Dividends declared on ADRs are paid in US dollars. Eligible shareholders must make currency elections by the day before the declaration date. The Directors have proposed a fourth quarter interim dividend as set out in the table below, payable on March 17, 2010, to shareholders on the register of members at close of business on February 12, 2010.
Business Review
The information that fulfils the requirements of the Business Review can be found in the Chairman’s message on page 6, the Chief Executive Officer’s review on page 7 and also in the Business Review on pages 8-52, all of which are incorporated in this Report of the Directors by way of reference. Throughout this Report of the Directors, the Board aims to present a balanced and understandable assessment of the Company’s position and prospects in its financial reporting to shareholders and other interested parties.
Creditor payment policy and practice
Statutory regulations issued under the UK Companies Act 2006 (the Act) require a public company to make a statement of its policy and practice on the payment of trade creditors. As a holding company whose principal business is to hold shares in Shell companies, the Company has no trade creditors. Given the international nature of Shell’s operations there is no specific company-wide creditor payment policy. Relationships with suppliers are governed by Shell’s commitment to long-term relations, based on trust and mutually beneficial arrangements. Shell U.K. Limited, Shell’s most significant UK operating company, had approximately 33 days’ purchases outstanding at December 31, 2009, (2008: 38 days) based on the average daily amount invoiced by suppliers during the year. In February 2009, Shell U.K. Limited adopted the Prompt Payment Code. A copy is available from the Company Secretary.
Research and development
Shell research and development programmes are carried out in a worldwide network of Shell technology centres complemented by external partnerships. The main technology centres are in the Netherlands and the USA, with other centres in Canada, Germany, India, Norway, Oman, Qatar and the UK. Further details of research and development, including expenditure, can be found on page 18 of the Business Review as well as in the Consolidated Statement of Income.
Recent developments and post-balance sheet events
Recent developments and post-balance sheet events are given in Note 31 to the Consolidated Financial Statements.
Directors’ responsibilities in respect of the preparation of the financial statements
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. UK company law requires the Directors to prepare financial statements for each financial year. Under that law, 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. The financial statements also comply with IFRS as issued by the International Accounting Standards Board (IASB). The financial statements are required by law to give a true and fair view of the state of affairs of Shell and the parent company and of the profit or loss of Shell and parent company for that period.
Financial statements and dividends
The Consolidated Statement of Income and Consolidated Balance Sheet are available on pages 97 and 98. The table below sets out the dividends on each class of share and each class of American Depositary Receipt (ADR). Dividends are declared in US dollars and the Company announces the euro and sterling equivalent amounts at the same time, using an exchange rate from the day before the declaration date. Dividends declared on Class A shares
DIV IDEN DS
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
$ 0.42 0.42 0.42 0.42 1.68
¤ 0.3211 0.2987 0.2845 0.3018 1.2061 1.2068
Class A shares pence 28.65 25.59 25.65 26.36 106.25 107.86
$ 0.42 0.42 0.42 0.42 1.68
pence 28.65 25.59 25.65 26.36 106.25 107.86
Class B shares [A] Class A ADRs ¤ $ 0.3211 0.84 0.2987 0.84 0.2845 0.84 0.3018 1.2061 1.2068 0.84 3.36 3.32
Class B ADRs $ 0.84 0.84 0.84 0.84 3.36 3.32
[A] It is expected that holders of Class B ordinary shares will receive dividends through the dividend access mechanism applicable to such shares. The dividend access mechanism is described more fully on pages 83-84.
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Shell Annual Report and Form 20-F 2009 Report of the Directors
In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state that the financial statements comply with IFRS as adopted by the European Union and IFRS as issued by the IASB; prepare the financial statements on the going concern basis, unless it is inappropriate to assume that the Company or Shell will continue in business; and prepare a management report giving a fair review of the business and the principal risks and uncertainties. The Directors confirm that they have complied with the above requirements when preparing the financial statements and that the Business Review gives a fair review of the business and the principal risks and uncertainties. In addition, as far as each of the Directors are aware, there is no relevant audit information of which the auditors are unaware. Each Director has taken all the steps he or she ought to have taken in order to become aware of any relevant audit information and to establish that the auditors are aware of such information. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Shell and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Consolidated Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and Shell and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Financial risk management, objectives and policies
Descriptions of the use of financial instruments and Shell financial risk management objectives and policies are set out in the Business Review and on pages 81-82, and also in Note 23 to the Consolidated Financial Statements.
Qualifying third-party indemnities
The Company has entered into a deed of indemnity with each of the Directors. The terms of these deeds are identical and reflect the statutory provisions under UK law. Under the terms of each of these deeds, the Company has indemnified each of the Directors, to the widest extent permitted by the applicable laws of England and Wales, against any and all liability, howsoever caused (including by that Director’s own negligence), suffered or incurred in the course of acting as a Director or employee of the Company or certain other entities.
Directors’ interests
The interests (in shares or calculated equivalents) of the Directors in office at the end of the financial year, including any interests of a “connected person” (as defined in the Disclosure and Transparency Rules) of the Directors, are set out below:
DI RE CTOR S’ I N TE R E STS
Josef Ackermann Malcolm Brinded Simon Henry Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine Morin-Postel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer Peter Voser Hans Wijers
January 1, 2009 [A] Class A Class B 10,000 – 20,028 87,128 4,175 [C] 37,756 [C] – – 4,000 – 8,485 25,000 20,000 [D] 123,822 44,946 – 4,112 10,000 – 3,074 – – – – – –
December 31, 2009 Class A Class B 10,000 – 20,028 140,855 4,175 38,673 – – 4,000 – 8,485 25,000 30,000 [E] 190,195 90,694 5,000 4,690 15,000 – 3,074 – – – – – –
Board of Directors
The Directors during the year were Josef Ackermann, Maarten van den Bergh (retired with effect from May 19, 2009), Malcolm Brinded, Linda Cook (resigned on June 1, 2009), Simon Henry (appointed with effect from May 20, 2009), Sir Peter Job, Lord Kerr of Kinlochard, Wim Kok, Nick Land, Christine Morin-Postel, Jorma Ollila, Lawrence Ricciardi, Jeroen van der Veer, Peter Voser and Hans Wijers.
Appointment and re-appointment of Directors
All Directors will be retiring and seeking re-appointment at the 2010 AGM, except for Sir Peter Job and Lawrence Ricciardi, both of whom are standing down after having served nine years as Non-executive Directors. Shareholders will also be asked to vote on the appointment of Charles O. Holliday as a Director of the Company with effect from September 1, 2010. Going forward, it is intended that all Directors will retire at each AGM and, subject to the Articles of Association and their wish to continue as a Director of the Company, seek re-appointment by shareholders. The biographies of all Directors are given on pages 53-55 and, for those seeking appointment or re-appointment, also in the Notice of the AGM. Details of the Executive Directors’ contracts can be found on page 68 and copies are available for inspection from the Company Secretary. Furthermore, a copy of the form of these contracts has been filed with the US Securities and Exchange Commission as an exhibit. The terms and conditions of appointment of Non-executive Directors are set out in their letters of appointment with the Company which, in accordance with the 2008 Combined Code on Corporate Governance, are available for inspection from the Company Secretary. No Director is, or was, materially interested in any contract subsisting during or at the end of the year that was significant in relation to the Company’s business. See also “Related party transactions” on page 59.
[A] Excludes interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans as at January 1, 2009. Interests under these plans as at January 1, 2009 are set out on pages 71-73. Excludes interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans as at December 31, 2009. Interests under these plans as at December 31, 2009 are set out on pages 71-73. [C] At the date of appointment. [D] Held as 10,000 ADRs (RDS.A ADR). One RDS.A ADR represents two Class A ordinary shares. [E] Held as 15,000 ADRs (RDS.A ADR). One RDS.A ADR represents two Class A ordinary shares.
There were no changes in Directors’ share interests during the period from December 31, 2009 to March 10, 2010, except for in the case of Sir Peter Job whose interests increased by 2,131 Class B shares and for those changes in the interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans set out in the Directors’ Remuneration Report on pages 71-73. As at March 10, 2010, the Directors and Senior Management [A] of the Company beneficially owned individually and in aggregate (including shares under option) less than 1% of the total shares of each class of the Company shares outstanding.
[A] The Senior Management of the Company are given on page 56.
Shell Annual Report and Form 20-F 2009 Report of the Directors
59
Related party transactions
Other than disclosures given in Notes 6 and 10 to the Consolidated Financial Statements on pages 109 and 115 respectively, there were no transactions or proposed transactions that were material to either the Company or any related party. Nor were there any transactions that were unusual in their nature or conditions with any related party.
TRANSFER OF SECURITIES
There are no significant restrictions on the transfer of securities.
SHARE OWNERSHIP TRUSTS
Share repurchases
On May 19, 2009, shareholders approved an authority, expiring at the end of the next AGM, for the Company to repurchase its own shares up to a maximum of 10% of the issued share capital (excluding share purchases for employee share benefit plans). Whilst no share repurchases were made during 2009, the Board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the Company. A resolution will be proposed to the forthcoming AGM to renew the authority for the Company to purchase its own share capital up to specified limits for another year. More detail of this proposal is given in the Notice of the AGM.
Shell currently operates two primary employee share ownership trusts, a Dutch Stichting and a US Rabbi Trust. The shares in the Stichting are voted by the Stichting Board, and the shares in the Rabbi Trust are voted by the Voting Trustee, Evercore Trust Company, N.A. Both the Stichting Board and the Voting Trustee are independent of the Company. The Shell All Employee Share Ownership Plan (SAESOP) has a separate related share ownership trust. Shares held for the SAESOP are voted by its trustee, EES Corporate Trustees Limited, as directed by the participants. The Global Employee Share Purchase Plan (GESPP) had a separate related share ownership trust and shares held for the GESPP were voted by its trustee, Halifax EES International Limited. However, with effect from January 19, 2009, the GESPP trust ceased to hold any shares. All shares were transferred to a nominee account and the nominee will vote as directed by the participants.
SIGNIFICANT DIRECT AND INDIRECT SHAREHOLDINGS
Political and charitable contributions
No donations were made by any Shell company to political parties or organisations during the year. Shell Oil Company administers the nonpartisan Shell Oil Company Employees’ Political Awareness Committee (SEPAC), a political action committee registered with the US Federal Election Commission. Eligible employees may make voluntary personal contributions to SEPAC. Shell, through individual Shell companies, sponsors social investment programmes in many countries throughout the world. In the UK, Shell donated $24 million in 2009 to charitable causes. See Substantial shareholdings table below.
ARTICLES OF ASSOCIATION
Information concerning the Articles of Association is given on pages 82-86.
Substantial shareholdings
As at February 23, 2010, the Company had been notified by the following investors of their interests in 3% or more of the Company’s shares. These interests are notified to the Company pursuant to Disclosure and Transparency Rule 5.
I N V E S T OR
Diversity and inclusion
Detailed information can be found in the Business Review on page 49.
Employee communication and involvement
Detailed information can be found in the Business Review on page 49.
Legal & General Group plc The Capital Group Companies Inc
Class A shares 3.64% 4.52%
Class B shares 4.54% 6.45%
Corporate social responsibility
A summary of Shell’s approach to corporate social responsibility is contained in pages 51-52 of the Business Review. Further details will be available in Shell’s Sustainability Report 2009.
Auditors
PricewaterhouseCoopers LLP have signified their willingness to continue in office, and a resolution for their re-appointment will be submitted to the AGM.
Essential contracts and Takeovers Directive information
Shell does not have contracts or other arrangements which individually are essential to its business nor does it have any significant agreements that would take effect, alter or terminate upon a change of control of the Company following a takeover bid.
SHARE CAPITAL
Corporate governance
The Company’s statement on corporate governance is included in the Corporate Governance Report on pages 76-86.
Annual General Meeting
The AGM will take place on May 18, 2010, in the Circustheater, Circusstraat 4, The Hague, The Netherlands with a satellite link to The Barbican Centre, London, UK. An audio-visual link will permit active two-way participation by persons physically present in the UK and the Netherlands. Details of the business to be put to shareholders at the AGM can be found in the Notice of the Annual General Meeting. Signed on behalf of the Board
Michiel Brandjes
The Company’s authorised and issued share capital as at December 31, 2009, is set out in Note 10 to the Parent Company Financial Statements. The percentage of the total issued share capital represented by each class of share is given below. Other disclosure requirements pursuant to The Takeovers Directive can be found below and on pages 82-86.
SH ARE CA PITAL PER CENTAG E
Share Class Class A Class B Sterling deferred shares
% 56.8 43.2 de minimis
Company Secretary March 15, 2010
60
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
INDEX TO THE DIRECTORS’ REMUNERATION REPORT
60 Letter of the Chairman of REMCO 61 Overview 63 Executive Directors 63 The Remuneration Committee (REMCO) 63 How REMCO manages remuneration 63 Pay for performance and strategy alignment 65 65 65 66 66 66 66 67 67 67 67 67 68 68 Competitiveness Shareholding Consistency Compliance and risk assessment How REMCO managed remuneration in 2009 Base salary Annual bonus Other cash and non-cash earnings Long-term incentives Pension interests Benefits Former Executive Director – Jeroen van der Veer Former Executive Director – Linda Cook Executive Directors’ contracts
Dear Shareholders, As the new Chairman of the Remuneration Committee (REMCO), I am pleased to present to you the 2009 Directors’ Remuneration Report of Royal Dutch Shell plc. I hope you will find the new format transparent and easy to understand. Following the 2009 AGM we had an extensive dialogue with major shareholders and shareholder bodies on our Executive Directors’ pay. We took their views on board and made a number of changes, which are reflected in this report. A high level overview was presented in my letter to shareholders of February 16, 2010. In my view, the most significant of these changes are that we have committed not to use upward discretion on share awards without prior consultation with major shareholders, we have updated the metrics for the incentive plans and we have ended the practice of free matching shares in our deferred bonus plan. In respect of the changes to the incentive plan metrics, we introduced additional measures to better reflect key business priorities and concerns expressed by shareholders around the sole use of Total Shareholder Return (TSR). For the long-term incentive plans this means that from 2009 in addition to TSR, Executive Directors’ pay is now directly linked to Shell’s competitive performance in respect of net cash from operating activities, earnings per share and hydrocarbon production. And for our balanced scorecard, which drives the annual bonus payout, we will replace TSR with a project delivery target. This measure reinforces our focus on year-by-year delivery of major projects as part of our strategy. The success criteria for projects are: on time and on budget. Furthermore, we have sharpened the pay link to sustainable development on the scorecard by introducing the externally assessed Dow Jones Sustainability Index for the oil and gas sector. These changes come into effect from 2010. There can be no doubt that 2009 was a challenging year for the Company. However, despite the continued pressures posed by the global recession and changes internally, we stayed focused on delivering results. I look forward to meeting you at our AGM on May 18, 2010.
Hans Wijers
68 External appointments 69 Non-executive Directors 69 Remuneration policy 69 Pension interests 69 Compensation of Directors and Senior Management 70 Data tables
Chairman of the Remuneration Committee March 10, 2010
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Overview
61
OVERVIEW
At the 2009 Annual General Meeting (AGM) of Royal Dutch Shell plc (the Company), shareholders did not approve the Directors’ Remuneration Report. Since then we have undertaken an extensive dialogue with major shareholders and shareholder bodies. We received broad feedback during the summer of 2009, took external specialist input, developed a new way forward, and then consulted again with major shareholders during the fourth quarter of 2009. With that in mind, the Remuneration Committee made the changes presented in this report. We endeavoured to get better alignment between remuneration and individual accountability for the short-term delivery of our business
strategy, and to strengthen longer-term alignment with shareholder interests through increased executive shareholding. We also wish to demonstrate appropriate restraint in the current economic environment. We are committed to continuing our dialogue with major shareholders over remuneration. Following the publication of the Annual Report and Form 20-F 2009, we will again be meeting major shareholders to listen to their feedback. The following table provides an overview of the current Executive Directors’ remuneration and the changes implemented in 2009 and proposed for 2010.
Current policy Base Salary
Changes to the policy
Referenced to companies of comparable size, complexity and global scope. The current comparator group consists of BP, Chevron, ExxonMobil and Total as well as a selection of top European-based companies. Salary review date is July each year. Target levels (as % of base salary): Chief Executive Officer - 150% Other Executive Directors - 110% Maximum payout - 250% and 220%, respectively. Calculation of an Executive Director’s annual bonus: – Shell results at the end of the year are translated into a score between zero and two, by means of a predefined scorecard and REMCO’s judgement. – Bonus awards are based on this score multiplied by the target bonus levels. Award levels (as % of base salary): Chief Executive Officer - 300% Other Executive Directors - 240% Maximum payout 600% and 480%, respectively. Shareholding requirements - two times base salary over five years. The actual value delivered after three years depends on the relative performance of LTIP measures against other oil majors. Under the DBP, Executive Directors are required to invest no less than 25% and can choose to invest up to 50% of their annual bonus in deferred bonus shares. Half of these deferred bonus shares are matchable with additional performance-related shares which can be earned on the same basis as the LTIP vesting. One free share is awarded on the purchase of four deferred bonus shares.
No salary increase for 18 months. There were no increases in July 2009 and there will be no increases until January 2011, except for promotional adjustments. Move salary review date from July to January.
Annual Bonus
No change to target levels. No change to the calculation method. Added new performance measures for the 2010 annual bonus, being project delivery and a broader assessment of sustainable development. Introduced an individual performance component to the annual bonus to increase personal accountability for short-term results.
Long-term Incentive Plan (LTIP)
No upward discretion for LTIP vesting in 2010. Introduced requirement for all LTIP shares to be held for two years following vesting. Increased the shareholding requirement to three times salary for the Chief Executive Officer.
Deferred Bonus Plan (DBP)
Removed the free matching share awarded under the DBP to ensure all matching shares are tied to performance. No upward discretion for DBP vesting in 2010.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Overview
In addition, we took the following actions regarding our Executive Directors’ remuneration in 2009:
Base salary
Set the salary for Chief Executive Officer Peter Voser at ¤1.5 million on his promotion with effect from July 1, 2009. Set the salary for Chief Financial Officer Simon Henry at ¤850,000, with effect from May 1, 2009, the date of his promotion to the position. Applied restraint and used downward discretion on the Shell Scorecard result, setting it at 1.10 from the mathematical result of 1.28. Set the actual bonuses for 2009 at ¤1,864,000, ¤1,422,000, and ¤542,000 for Peter Voser, Malcolm Brinded and Simon Henry, respectively. Vested zero LTIP shares and zero performancerelated matching DBP shares in March 2010. Peter Voser, Malcolm Brinded and Simon Henry all elected to put 50% of their Annual Bonus into the DBP.
Annual bonus
Long-term incentives
Below is a table summarising 2009 compensation for Executive Directors. The amounts in the table reflect pro-rata adjustments according to the portion of the year in which Executive Directors were in office, where applicable. The earnings amount includes salary, bonus paid in 2010 for 2009 performance, and other cash and noncash remuneration. The amounts shown as value of released DBP awards represent the value of matching shares delivered at vesting on bonuses from 2006, less the original amount deferred.
S U MMA RY COM PE N S AT I ON ( UN AUD ITED ) ¤ THOUSANDS
Jeroen Peter Voser 3,157 690 – – 3,847 5,350 3,429 Malcolm Brinded 2,654 801 (36) – 3,419 4,755 3,048 Simon Henry 1,069 240 – – 1,309 1,820 1,167 van der Veer 3,505 1,373 (1) – 4,877 6,784 4,349 Linda Cook 6,542 687 – – 7,229 10,055 6,445
Earnings [A] Value of released LTIP awards Value of released DBP awards Value of exercised share options Total in euro Total in dollar Total in sterling
[A] More details can be found on page 70. Value of performance shares at release in March 2009, prior to Simon Henry’s appointment as an Executive Director.
The report follows the UK requirements of the Companies Act 2006, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Combined Code and the Listing Rules. It outlines the remuneration policies and individual remuneration details for Executive Directors and Non-executive Directors of the Company for the year ended December 31, 2009. The Board has approved this report and it will be presented to shareholders for approval at the AGM of the Company on May 18, 2010.
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
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EXECUTIVE DIRECTORS The Remuneration Committee (REMCO)
Following the 2009 AGM, REMCO engaged with major shareholders to understand their main concerns and get their input. The Committee engaged Deloitte LLP to provide an external perspective regarding remuneration policies and plans, their competitiveness, their alignment with corporate strategy, and their compliance with corporate governance requirements. External market data and plan valuations from Towers Watson supported our decision-making. REMCO’s key responsibilities in respect of Executive Directors include: Setting remuneration policy; Agreeing performance frameworks, setting targets and reviewing performance; Determining actual remuneration and benefits; and Determining contractual terms. REMCO’s Terms of Reference are reviewed regularly and updated, where necessary. You can find them on the Shell website www.shell.com/investor or you can ask the Company Secretary for copies. See inside back cover for details. REMCO is currently made up of three independent Non-executive Directors: Hans Wijers (Chairman); Sir Peter Job; and Josef Ackermann. Lord Kerr of Kinlochard stood down as a member of the Committee with effect from September 11, 2009. See their biographies on pages 54 and 55 and their committee meeting attendance on page 78. Changes to REMCO membership during 2009 are described in the Corporate Governance section on page 80. The following Board members were invited and attended REMCO meetings from time to time to provide their opinion on external advice and other remuneration issues: Jorma Ollila; and Lawrence Ricciardi. Advice on various subjects including the Shell Scorecard, the remuneration of senior management, and the performance of the other Executive Directors was sought within Shell from: Hugh Mitchell, Chief Human Resources & Corporate Officer and Secretary to the Committee; Michael Reiff, Executive Vice President Remuneration, Benefits & Services; Peter Voser and Jeroen van der Veer, Chief Executive Officer and former Chief Executive, respectively.
execution of the strategy, and REMCO ensures that Executive Directors’ performance-based reward reflects how successfully this is done. The Executive Director remuneration package is made up of a base salary, an annual bonus and a package of long-term incentives as well as a pension plan and other benefits. There are two main long-term incentive programmes currently in use: the Long-term Incentive Plan (LTIP) and the Deferred Bonus Plan (DBP). The Restricted Share Plan (RSP) is available for retention purposes.
20 09 PAY M IX FO R E XECU TI VE DIRECTORS
Base salary 20% Annual bonus 27% Longterm incentives 53%
REMCO considers the connection between an Executive Director’s pay and Shell’s business strategy as critical. Most of the compensation package is therefore linked to the achievement of stretch targets that are consistent with the execution of Shell’s strategy. The following remuneration policy principles explain how the long-term value of Executive Directors’ pay is tied to Shell’s future performance: Pay for Performance; Alignment with Shell’s strategy; Competitiveness; Long-term alignment with shareholder interests; Consistency; Compliance and Risk Assessment.
PAY FOR PERFORMANCE AND STRATEGY ALIGNMEN T
Over three-quarters of Executive Director compensation (excluding pension) is linked directly to the Company’s performance.
Annual bonus
REMCO uses the annual bonus to focus on the short-term targets that the Board sets each year as part of the Business Plan and individual performance against these targets. These are the steps that Shell needs to take every year as the pathway to long-term growth. They are a balance of financial, operational, project delivery and sustainable development targets, captured in a scorecard. The targets are stretching but realistic. The scorecard is set and approved by REMCO. The outcome of the performance year is usually known in February of the next year, and REMCO translates this into a score between zero and two. To better reflect Shell’s short-term priorities from 2010 onwards, REMCO replaced the short-term TSR measure with a measurement of Project Delivery (20% weight) – on time and on budget – and placed a greater emphasis on cash generation (from 25% to 30% weight). It also expanded the sustainable development targets to include the Sustainable Asset Management (SAM) external assessment used by the Dow Jones Sustainability Indexes (DJSI) for the oil and gas producers group. With these changes, the annual bonus performance metrics are more closely aligned with the year-by-year delivery of Shell’s business plans and the safeguarding of Shell’s licence to operate. REMCO exercises its judgement to make sure that the final annual bonus results for Executive Directors are in line with Shell’s performance.
How REMCO manages remuneration
Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. On an ongoing basis, its most senior managers are asked to make decisions affecting multi-billion-dollar assets and investments. The Board agrees on a strategy for Shell. The Chief Executive Officer and Executive Directors execute this strategy. The Board tracks the
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
AN NUAL BON U S S COR E CARD MEASUR ES FOR 2 010 EXECUTIVE D I RE CT ORS AN D S E N I OR M A N A G E ME N T
REMCO selected these measures because they underpin Shell’s business strategy in various ways:
L ON G - TE RM I N CE N T I V E ME A S U RE S
Measure Net cash from operating activities
Reason for the measure Cash generated from operations that factors in the impact of commodity price fluctuations as well as business performance so that Executive Directors, like shareholders, share the effects of both.
Weight 30%
Measure TSR growth EPS growth (on a CCS basis [A]) 30%
Reason for the measure Assessment of actual wealth created for shareholders. Indicator of the quality of revenue growth and cost management that underpins the TSR. Earnings on an estimated current cost of supplies basis takes into account the changes in the cost of supplies and thereby enables a consistent comparison with other oil majors.
Weight 30% 30%
Operational excellence
Indicator of the full and effective use of resources – both facilities and people – according to the relevant business: hydrocarbon production, LNG sales or refinery availability. Assessment of projects’ cost management and on-schedule delivery. Indicator of safety performance and sustainable development performance, as reflected by a DJSI broad-base comparison within the Oil & Gas Producers Group.
Project delivery Sustainable development
20% 20%
Net cash from operating activities growth Hydrocarbon production growth
Source of dividends and capital expenditure commitments which support sustainable growth based on portfolio and cost management. Overall indicator of success in locating and developing reserves.
20%
20%
REMCO has also decided to strengthen the Executive Directors’ individual accountability by increasing or decreasing their annual bonuses to take account of how well they have delivered against their own individual performance contract. To summarise, the calculation of an Executive Director’s annual bonus is: Annual bonus = base salary target bonus % scorecard result individual performance adjustment by REMCO.
AN NUAL BON U S L EVELS
[A] Earnings per share on a CCS basis is calculated in this way: the income attributable to shareholders is first adjusted to take into account the after-tax effect of oil-price changes on inventory before it is divided by the average number of shares outstanding. Without the adjustment, earnings per share is affected by changes in inventory caused simply by movements in the oil price.
Chief Executive Officer Other Executive Directors
Long-term incentives
Target award Maximum (as a % of salary) (as a % of salary) 150% 250% 110% 220%
These measures were introduced in 2009 to better reflect key business priorities and to address concerns by shareholders that a single TSRbased assessment was not appropriate. During 2009, REMCO discussed these measures further with major shareholders. REMCO therefore confirmed this broader assessment of competitive performance as the basis for long-term remuneration. For simplicity, we measure growth based on the data points at the beginning of the threeyear performance period relative to the data points at the end of the period, using unadjusted publicly reported data. REMCO always approves award dates in advance.
T I ME L IN E FO R 20 10 LT I P SH A RE AWA RD S
Performance Period LTIP Award Retention Period
Consistent with the long-term nature of Shell’s strategy, LTIP and DBP determine more than half of Executive Director remuneration. Both plans grant share-based awards linked to the future price and dividends of Royal Dutch Shell plc shares. Awards vest depending on performance against pre-defined measures and targets over a three year performance period. These plans focus on performance relative to the other oil majors: BP, Chevron, ExxonMobil and Total. They reward Executive Directors if Shell outperforms its peers on the basis of a combination of TSR, earnings per share (EPS) on the basis of current cost of supplies (CCS), net cash from operating activities and hydrocarbon production.
February Award
Vesting
Release
2010
2011
2012
2013
2014
2015
To increase shareholding further, REMCO decided in 2009 that for all future LTIP awards, Executive Directors should hold all vested shares (following payment of taxes) for a further two-year period after the three-year performance period.
LT I P AWA RD L E V E L S [ A]
Chief Executive Officer Other Executive Directors
Maximum Target award payout (as a % of salary) (as a % of salary) 300% 600% 240% 480%
[A] LTIP awards cannot exceed a target level of four times salary, as approved by shareholders.
Under the DBP, Executive Directors are required to invest no less than 25% and can choose to invest up to 50% of their annual bonus in deferred bonus shares. Half of these deferred bonus shares are matchable with additional performance-related shares which can be earned on the same basis as the LTIP vesting, see below.
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65
Under the old DBP one free share was awarded on the purchase of four deferred bonus shares to encourage share ownership. REMCO has now decided to stop this practice, and from 2010 all matching shares will be performance-based.
T IM E L I N E F O R 2 0 0 9 DE F E R RE D B O N U S AWARD
Performance Period for Annual Bonus Deferral Period
E U R OPE A N CO MPA RATO R G ROU P
Allianz Anglo American AstraZeneca AXA Barclays BHP Billiton Deutsche Bank
Diageo E.ON GlaxoSmithKline HSBC Nokia Novartis Philips
Rio Tinto Roche Siemens Unilever Vivendi Vodafone
February Award
Release
2009
2010
2011
2012
2013
The LTIP and DBP vest on the basis of relative performance rankings as follows:
RE L ATI VE PE RF OR MAN CE RA N K I N G S
In certain circumstances, awards may be made under the RSP for retention purposes. Under the RSP, shares are subject to a restriction period of three years and are released with the addition of dividend shares if the individual remains in continuous service during this period. REMCO will retain discretion to reduce the number of shares vesting should either business or individual performance warrant review. Due to the range of national social security and tax regimes involved, Executive Directors’ pensions are maintained in their base country, the same as for other employees working internationally. Contribution rates for Executive Directors are the same as for other employees under these plans. REMCO will agree on retirement schedules with Executive Directors in order to plan effective leadership succession, taking into account applicable regulations and the individual’s preferences.
SHAREHOLDING
Shell’s overall rank against peers, taking into account the weightings of the four performance measures 1st 2nd 3rd 4th or 5th Number of conditional performance shares ultimately awarded 2 x initial LTIP award 2 x half of the deferred bonus shares 1.5 x initial LTIP award 1.5 x half of the deferred bonus shares 0.8 x initial LTIP award 0.8 x half of the deferred bonus shares Nil
Ultimately, our objective must always be to safeguard returns to shareholders. Therefore, if the TSR ranking is below median, the level of award that can be vested on the basis of the three other measures will be capped at 50% of maximum payout for LTIP and half of the deferred bonus shares for DBP. To deliver shares under these plans, we use market purchased shares, when required, rather than issue new ones. To date, no shareholder dilution resulted from these plans, although the rules of the plans permit it.
Use of discretion
REMCO believes that Executive Directors should align their interests with those of shareholders by holding shares in Royal Dutch Shell plc. In a business where it can take many years to reach a final investment decision on a project and many further years of construction before a facility comes on-stream, long-term shareholding properly aligns executive interests with those of shareholders better than any long-term incentive plan. Executive Directors are therefore expected to build up shareholdings to the value of two times their base salary over five years. The Chief Executive Officer’s required shareholding has been increased to three times salary. REMCO periodically translates these guidelines into fixed shareholding targets. These numbers are currently set at 240,000 shares for the Chief Executive Officer and 100,000 shares for other Executive Directors. Details of all Executive Directors’ shareholdings are found on page 58. Until these targets are met, Executive Directors must (in the course of the relevant year) acquire shares to the value of at least 50% of the after-tax gain arising from any long-term incentive awards vesting from 2008 onwards. Once the targets have been met, they are required to hold the shares and maintain that level for the full period of their appointment as Executive Director.
CONSISTENCY
During the shareholder consultation process, REMCO confirmed that in future it would exercise upward discretion only after consulting major shareholders. In addition, REMCO confirmed upfront that, for awards vesting in March 2010, no upward discretion would be applied. REMCO further noted that, since the new approach is based on four publicly reported, relative performance measures, the need for discretionary adjustments would, in any case, be rarer in future.
COMPETITIVENESS
Sound leadership is essential for long-term success; therefore attracting and retaining talented individuals is necessary for the delivery of Shell’s strategy. REMCO determines remuneration levels by reference to companies of comparable size, complexity and global scope. The current key comparator group is BP, Chevron, ExxonMobil and Total as well as a selection of top European-based companies listed below. The spread provides a balanced mix across industries and geography.
The remuneration structure is generally consistent for Executive Directors and senior managers of Shell. This consistency builds a culture of alignment to Shell’s purposes and a common approach to sharing in Shell’s success. Executive Directors’ benefits are also established in line with those for other employees on the basis of local market practices. Personal loans or guarantees are not provided to Executive Directors. They are not eligible to participate in all-employee share plans. They are employed under local Dutch terms and conditions – except for their pensions. Their base salary levels are therefore set in euro.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
REMCO periodically monitors pay and employment conditions of other employees within Shell to ensure alignment and consistency with remuneration of senior managers and Shell’s remuneration objectives. Given the current economic circumstances, REMCO reviewed 2010 salary increase budgets for countries where Shell has the majority of its employees. The salary freeze applied to Executive Directors was not imposed in the wider organisation.
COMPLIANCE AND RISK ASSESSMENT
ANNUAL BONUS
Details of the 2009 Shell Scorecard outcomes can be seen in the Key Performance Indicators section on page 8.
2 009 SH E L L SCO RE CARD COM PON E N TS
Total shareholder return (TSR) against major integrated oil companies 25% Net cash from operating activities 25% Operational excellence 30% Sustainable development [A] 20%
REMCO takes its decisions in the context of the Shell General Business Principles. It also ensures compliance with applicable laws and corporate governance requirements when designing and implementing policies and plans. REMCO ensures the remuneration structures and rewards meet riskassessment tests to ensure that shareholder interests are safeguarded and that inappropriate actions are avoided. For example: Executive Directors’ expenses are audited internally and reviewed by REMCO on a regular basis. All performance-based payments made to Executive Directors are subject to a ‘claw-back’ provision. This means that all incentives paid within 12 months of the first public issuance of the financial statements that require restatement due to material noncompliance will be subject to claw-back. The use of multiple performance measures for the annual scorecard and the revised LTIP ensure that unintended financial and behavioural consequences are mitigated. The measures taken to increase executive shareholdings ensure that executives bear the consequences of management decisions.
[A] Primarily based on number of reported cases of work-related injury, but also taking into account other sustainable development measures, details of which can be found in Shell’s Sustainability Report 2009 to be published in May 2010.
2009 Assessment – Scorecard result set at 1.10
In assessing Shell’s 2009 performance, REMCO noted that: the TSR was at the median value, being in third place; net cash from operating activities was on target at $21 billion; operational excellence was above target, with hydrocarbon production at 3,142 thousand boe/d, LNG sales was at 13.4 mtpa and refinery availability at 93.3%; sustainable development was outstanding, with Total Recordable Case Frequency (TRCF) of 1.4 per million working hours being the lowest recorded level in Shell’s history. REMCO also noted that 20 people (1 employee, 19 contractors) sadly lost their lives while working for Shell; 2009 income was 52% lower than that of 2008 (although on target relative to the oil price over the year and above target relative to the gas price over the year); over 5,000 jobs were eliminated, including over 20% of senior jobs. Overall, REMCO felt that the scorecard results did not reflect the overall competitive position and the need for improvement. Taking both Shell’s overall performance as well as the external environment into account, REMCO sought to use restraint and lowered the scorecard result from 1.28 to 1.10.
Individual performance
How REMCO managed remuneration in 2009
BASE SALARY
Following the remuneration review in 2009, REMCO decided to review and adjust base salary levels with effect from January 1 each year; in previous years the adjustment date was July 1. Recognising the economic turmoil during the year, REMCO decided to freeze Executive Directors’ base salaries for 18 months until January 2011 this was ; supported by the Directors. The next salary review will be in January 2011.
BAS E S ALA RY OF CUR RE N T E XE CU TI VE DI RE CTOR S (UNA UDITED)
Peter Voser Malcolm Brinded Simon Henry
¤ 1,500,000 1,175,000 850,000
Effective date July 1, 2009 July 1, 2008 May 1, 2009
An Executive Director’s individual performance is also taken into account in determining his annual bonus. Individual performance is assessed against personal targets, and REMCO uses its judgement to reduce or increase the bonus as it deems appropriate to reflect how well the Executive Director met those targets. REMCO assessed the individual performance of each Executive Director serving during 2009 and determined to make no further adjustment to their individual annual bonus.
Simon Henry was on expatriate terms before he became Executive Director and for practical reasons REMCO decided to keep him on expatriate terms for the rest of 2009. As of January 2010 Simon Henry is employed on local terms, the same as other Executive Directors.
20 09 S HE L L S CORE CA RD F OR E XE C U TIVE DI RE CTOR S
Measures Total shareholder return Net cash from operating activities Operational excellence Production Sales of liquified natural gas Refinery and chemical plant availability Sustainable development Overall performance
Unit % $ billion thousand boe/d mtpa % TRCF+
Weight 25% 25% 30% 12% 6% 12% 20% 100%
Score
Below Threshold
Range On Target Above Outstanding
1.0 0.9 1.4 1.3 0.9 1.6 2.0 1.28
0.00 0.39 0.40 0.79 0.80 1.19 1.20 1.59 1.60 2.00
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
67
2009 Annual bonuses
Award
The target level of the 2009 bonuses was unchanged from 2008. Other than Malcolm Brinded, each Executive Director received a pro-rata bonus for the portion of the year they served as Executive Director. Hence, Chief Executive Officer Peter Voser received a bonus based on a target of 110% for the first six months and 150% for the last six months of 2009. Similarly, Chief Financial Officer Simon Henry received a bonus based on a target of 70% for the first four months and 110% for the last eight months of the year. Taking into account the 2009 Shell Scorecard result, individual performances and the pro-rata portions, REMCO determined the annual bonuses payable for 2009 as: ¤1,864,000 for the Chief Executive Officer, ¤1,422,000 for Executive Director Malcolm Brinded and ¤542,000 for the Chief Financial Officer.
OTHER CASH AND NON-CASH EARNINGS
Peter Voser, Malcolm Brinded and Simon Henry all elected to put 50% of their annual bonuses into the DBP on February 5, 2010, resulting in share awards as follows, half of which are matchable:
AWARDE D SH ARE S
Peter Voser [A] Malcolm Brinded Simon Henry [C] [A] Royal Dutch Shell plc Class A shares. Royal Dutch Shell plc Class B shares. [C] Simon Henry deferred 50% of his full year bonus.
Deferred shares awarded 47,121 37,474 17,607
For details of DBP awards and releases see the Deferred Bonus Plan table on page 72.
RESTRICTED SHARE PLAN
Executive Directors received: car allowances, representation allowances (which is a Dutch tax feature to simplify expenses related to business entertainment at home, amongst other things), transport to and from home and office, as well as employer contributions to insurance plans. Individuals who are not living in their base country received additional amounts for their children’s school fees. The Executive Directors’ 2009 Earnings table is on page 70.
LONG-TERM INCENTIVE PLAN Vesting
No RSP awards were made in 2009, nor did any outstanding awards vest. The award made to Linda Cook lapsed effective December 31, 2009. For details of outstanding awards, see the Restricted Share Plan table on page 72.
PENSION INTERESTS
In 2007 Executive Directors were granted a conditional award of performance shares under the LTIP. At the end of the performance period, which lasted from January 1, 2007 to December 31, 2009, Shell was ranked fifth amongst its peer group in terms of TSR. Therefore, zero shares were released under the LTIP.
Award
During 2009 Peter Voser, Malcolm Brinded, Simon Henry, Jeroen van der Veer and Linda Cook accrued retirement benefits under defined benefit plans. Linda Cook also accrued retirement benefits under defined contribution plans. In addition to the standard Swiss pension arrangements, Peter Voser has an unfunded pension arrangement that was created in 2006 when pensionable salaries in the standard arrangements were capped following a change in Swiss regulations. For details of accrued pension benefits see the Pensions table on page 74. The transfer values have been calculated in accordance with Actuarial Guidance Note GN11/UK.
BENEFITS
On February 2, 2010, REMCO determined to award the Chief Executive Officer a conditional award of performance shares under the LTIP with a face value of three times his base salary. For other Executive Directors the level of award was retained at 2.4 times base salary. On February 5, 2010, the following shares were awarded conditionally:
AWAR DE D S H ARE S
Peter Voser [A] Malcolm Brinded Simon Henry [A] Royal Dutch Shell plc Class A shares. Royal Dutch Shell plc Class B shares.
Total number of shares conditionally awarded 227,560 148,660 107,541
REMCO decided to discontinue the use of the representation allowance for Executive Directors’ expenses as of 2010. Instead, business expenses will be reimbursed on an itemised basis, consistent with the global process for other staff. The 2009 representation allowances are included in the Earnings table, within cash benefits.
FORMER EXECUTIVE DIRECTOR – JEROEN VAN DER VEER
Jeroen van der Veer had intended to retire on June 30, 2008, after he had turned 60. But in 2007 the Board asked him to stay on as Chief Executive for an extra year. He agreed with the Board that an extra year of service as Chief Executive would provide stability and continuity for the management of the company. Around the same time, Shell in the Netherlands introduced new pension plan rules, providing flexibility to retire between the ages of 55 and 65 but with an actuarial discount, along with lower accrual rates. Like other Dutch employees, he was required to accept the new regulations in order to remain in employment beyond his original retirement date. As Jeroen van der Veer was disadvantaged by this move, the Board agreed to a lump-sum payment of ¤843,000 to give him the same overall benefit that he would have accrued through to June 30, 2009 under the old regulations. This left him in the same position as if the pension regulations had not changed. In respect of his service as Chief Executive, Jeroen van der Veer also received a pro-rata annual bonus for the first six months of the year, January 1 to June 30, 2009, of ¤1,650,000.
For details of LTIP awards and releases see the Long-term Incentive Plan table on page 71.
DEFERRED BONUS PLAN Vesting
In 2007 Executive Directors were granted conditional awards of matching shares under the DBP. The performance period was January 1, 2007, to December 31, 2009. Given that the performance condition of the DBP is consistent with that of the 2007 LTIP, REMCO decided to release zero performance-related matching shares under the DBP.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
Jeroen van der Veer remains on the Board as a Non-executive Director, so his pension will be reported in future Directors’ Remuneration Reports.
FORMER EXECUTIVE DIRECTOR – LINDA COOK
REMCO will recommend terms and conditions for any situation that arises where a severance payment is appropriate, taking into consideration applicable law and corporate governance provisions.
External appointments
The Board considers external appointments to be valuable in broadening Executive Directors’ knowledge and experience. The number of outside directorships is generally limited to one, except when an Executive Director is within a year of retirement. The Board must explicitly approve such appointments. Executive Directors are allowed to retain any cash or share-based compensation they receive from such external board directorships.
E X T E RN A L A PPOI N T ME N T S
Linda Cook resigned as an Executive Director of the Company on June 1, 2009, following the changes in organisation and responsibilities of senior management referenced on page 11. Linda Cook had served Shell in various capacities for 29 years, of which the last six years as an Executive Director of the Company. As an Executive Director she had a contract of employment with Shell Expatriate Employment US Inc (SEEUS), governed by the laws of the Netherlands, where the Gas & Power business, which she led, was located. Dutch law makes provisions in certain areas that are different from those found in the UK. At the time of her resignation as Executive Director, Linda Cook agreed separation terms with SEEUS, as follows: Linda Cook returned to the United States where she was employed by Shell Oil Company to support transition, particularly in the Gas & Power business, until December 31, 2009, which was agreed as her last day of employment. For the period of her employment with Shell Oil Company, Linda Cook’s salary was set at $1,400,000 (¤1,035,000) per annum and she continued to participate in normal US benefits. Linda Cook received a performance bonus for 2009 in the amount of $1,540,000 (¤1,107,000). The separation agreement with Linda Cook provided for a severance payment of $7,600,000 (¤5,464,000). As Linda Cook’s contract of employment was governed by Dutch law, this severance payment was calculated on the basis of the Dutch courts’ formula, in line with prevailing Dutch employment law practice at the time the severance was agreed. The formula calculates compensation based on age, years of service and salary including bonus. Linda Cook’s grants under the Long-term Incentive Plan, Deferred Bonus Plan and Share Option Plan continue and vest consistent with the plan rules. The grant under the Restricted Share Plan lapsed on December 31, 2009.
Executive Director Peter Voser [A]
Appointee organisation UBS AG
Total fees rounded to the nearest thousand CHF 425,000 as cash or vested shares held for four years. ¤38,000 from the N.V. and £34,000 from the plc. $42,000 cash, $54,000 stock units, deferred until retirement from Boeing service.
Jeroen van der Veer Unilever N.V. and Unilever plc Linda Cook The Boeing Company
[A] Peter Voser will not be standing for re-election to the Board of UBS AG at its Annual General Meeting in April 2010. Fees are prorated according to the period Jeroen van der Veer (until June 30, 2009) and Linda Cook (until June 1, 2009) served as Executive Directors at Royal Dutch Shell plc.
Executive Directors’ contracts
Executive Directors’ contracts that have been entered into with the companies are set out in the table below. Contracts for Executive Directors are governed by Dutch law, consistent with those of other Netherlands-based senior managers and staff. The contracts end by notice of either party or automatically at retirement.
E X E CU TI V E DI RE CT OR S’ E M PL OY ME N T CO N T RA CT S
Executive Director Peter Voser Malcom Brinded Simon Henry Jeroen van der Veer Linda Cook
Employing Company Shell Petroleum N.V. Shell Petroleum N.V. Shell Petroleum N.V. Shell Petroleum N.V. Shell Expatriate Employment US Inc.
Contract date July 20, 2005 July 20, 2005 May 20, 2009 July 20, 2005 August 1, 2005
Contracts do not contain predetermined settlements for early termination. Under Dutch law, their contracts entitle them to the statutory notice period that applies for employees in the Netherlands. This is one month for an employee and up to a maximum of four months for the employer, depending on the duration of the employment contract concerned at the time of termination.
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NON-EXECUTIVE DIRECTORS Remuneration policy
The Board determines the fees payable to Non-executive Directors (NEDs) of the Company, within a limit specified by the Articles of Association of ¤4,000,000. In 2009 the total amount of fees payable to NEDs was ¤2,119,000. Whilst the Board reviews NED remuneration levels periodically to ensure they are aligned with other major listed companies, no such review was undertaken in 2009. A review of the fee level for the Chairman of the Board was undertaken during the year; however, taking into account the economic environment, it was decided that no adjustments would be made in 2009. The Chairman and the other NEDs do not participate in any incentive or performance-based remuneration plans, nor are there any pension arrangements. Also, personal loans or guarantees are not granted to Non-executive Directors. NEDs receive an additional fee of ¤4,500 for any Board meeting involving intercontinental travel – except for one meeting per year held in a location other than The Hague.
N ON -E X E CU T IVE DI RE CT OR S F E E S STRU CTU RE (UNAUDITE D )
The earnings of the NEDs in office during 2009 can be found on page 75.
Pension interests
NEDs do not accrue any retirement benefits as a result of their Nonexecutive Directorships with the Company. During their services as employees, Jeroen van der Veer and Maarten van den Bergh accrued retirement benefits, which are summarised on page 74.
COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
Shell paid and/or accrued a total amount of compensation of $48,895,000 [A] (2008: $57,985,000) for services in all capacities that Directors and Senior Management at Shell provided during the year ended December 31, 2009. In addition, Shell accrued a total amount of $19,027,000 (excluding inflation), to provide pension, retirement and similar benefits for Directors and Senior Management during the year ended December 31, 2009.
[A] Compensation includes gains realised from long-term incentive awards released and share options exercised during the year.
¤
Chairman of the Board NED Annual Fee Senior Independent Director Audit Committee Chairman [A] Member Remuneration Committee Chairman [A] Member Corporate and Social Responsibility Committee Chairman [A] Member Nomination and Succession Committee Chairman [A] Member Intercontinental Travel Fee
750,000 115,000 55,000 45,000 25,000 35,000 17,250 35,000 17,250 25,000 12,000 4,500
Biographies of the Directors and Senior Management are found on pages 53-56.
[A] The Chairman of a Committee does not receive an additional fee for membership in that Committee.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
DATA TABLES
E A RN I N G S O F E X E CU T I V E DI RE C TO RS I N O FF I CE D U R IN G 2 0 0 9 (AUDITED) ¤ THOUSANDS
Peter Voser 2009 2008 Salary Bonus [C] Cash benefits [D] Non-cash benefits [G] Total in euro Total in dollar Total in sterling 1,267 1,864 23 3 3,157 4,390 2,814 1,010 1,423 22 1 2,456 3,592 1,958
Malcolm Brinded 2009 2008 1,175 1,422 8 49 2,654 3,692 2,367 1,148 1,616 8 59 2,831 4,140 2,257
Simon Henry [A] 2009 2008 449 542 76 2 1,069 1,486 952 – – – – – – –
Jeroen van der Veer [A] 2009 2008 1,000 1,650 850 [E] 5 3,505 4,875 3,125 1,925 3,750 14 11 5,700 8,338 4,546
2009
Linda Cook [A] 2008 1,010 1,423 155 56 2,644 3,869 2,109
431 461 5,612 [F] 38 6,542 9,099 5,833
[A] Earnings for Simon Henry, Jeroen van der Veer and Linda Cook relate to their time as Executive Directors in 2009. In addition Linda Cook received a salary of ¤604,000 ($817,000) and a bonus of ¤646,000 ($898,000) for the remaining seven months of the year. Total base salary for the full year was ¤1,035,000 ($1,400,000), bonus ¤1,107,000 ($1,540,000). [C] The annual bonus figures are shown in the table in their related performance year and not in the following year in which they are paid (see also the DBP table on page 72). [D] Includes representation allowances, employer contributions to insurance plans, school fees, car allowances and tax compensation. [E] Jeroen van der Veer received a lump sum cash payment of ¤843,000 to offset a loss in pension benefits caused by deferring his retirement and extending his service to June 30, 2009 (see pages 67-68 “Former Executive Director – Jeroen van der Veer”). [F] Linda Cook’s severance payment of ¤5,464,000 ($7,600,000) is included in Cash benefits along with other cash benefits explained in [D] (see page 68 “Former Executive Director – Linda Cook”). [G] Comprises life and medical insurance and company-provided transport for home to office commuting.
The aggregate amount paid to or receivable by Executive Directors from Royal Dutch Shell plc and other Shell companies for services in all capacities during the fiscal year ended December 31, 2009 was ¤16,927,000 (2008: ¤17,163,000).
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Executive Directors’ long-term incentive interests
The following tables show the LTIP, the DBP, the RSP and the share option interests of the Executive Directors in office during 2009.
L O N G - T E RM I N CE N T IV E PL A N
Audited Number of shares under award as at January 1, 2009 [A] Additional Total number of shares Number of Dividend Dividend shares under Value of shares awarded/ shares Market shares award as at shares at released (lapsed) accrued price at accrued December 31, release during the during the date of during the in prior Original 2009 year (thousands) [C] year year years award award
Royal Dutch Shell plc Class A shares Peter Voser 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 Malcolm Brinded 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 2009 to 2011 2008 to 2010 2007 to 2009 Jeroen van der Veer 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 Linda Cook 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 64,971 49,058 39,378 34,798 2,386 3,474 4,476 49.23 71.66 68.02 64.89 4,116 3,259 2,715 726 – – 20,000 – – (20,000) – – 919 69,087 54,703 45,567 0 2,983 3,158 2,283 – 309,358 192,949 156,202 137,168 9,337 13,812 17,868 19.40 23.97 26.12 27.12 $ 19,945 13,042 10,962 2,742 – – 78,889 – – (78,889) – – 1,373 $ 329,303 215,328 180,976 0 5,603 4,153 3,478 – 7,496 6,176 4,793 – $ 153,855 114,201 91,730 81,191 26,000 26,000 26,000 950 1,978 5,433 7,977 10,363 16.58 17.58 17.07 19.33 15.40 20.15 18.57 ¤ 10,101 7,855 6,546 1,662 1,218 1,769 1,837 – – – – – – ¤ – – 46,608 – – (46,608) – – 717 163,956 127,489 106,253 0 27,218 28,719 29,815 2,384 1,801 1,335 – 389 531 500 ¤ 3,394 3,587 2,674 – 539 1,042 992 $ 128,074 98,623 78,751 68,952 4,772 6,963 8,982 19.40 23.97 26.12 27.12 £ 8,257 6,666 5,527 1,378 – – 39,656 – – (39,656) – – 690 £ 136,331 110,061 91,241 0 2,320 2,123 1,753 – £ 3,103 3,157 2,417 – $ ¤ ¤
Unaudited
Expected
Potential
gains as at value Decemof the ber 31, performance 2009 share award (thousands) [D] (thousands) [E]
¤ $ ¤ – 0 0 – £ – 0 0 – 0 379 386 ¤ – 0 0 – $ – 0 0 – $ – 0 0 – 0 546 556 $ – 0 0 – $ – 0 0 –
Royal Dutch Shell plc Class B shares
Simon Henry (Performance Share Plan Awards) [F]
Royal Dutch Shell plc Class A shares
Royal Dutch Shell plc Class A ADRs
[A] The 2009 award was made on January 30, 2009. Dividend shares are performance related and accumulate each year at an assumed notional LTIP award of 100% and a dividend payment of 100%. When an award vests, dividend shares will be awarded as if the vested shares were held from the original award date. [C] The vested awards were delivered on April 30, 2009 at a share price of ¤17.41 for Peter Voser and Jeroen van der Veer, £15.39 for Malcolm Brinded and $45.95 for Linda Cook. [D] The expected value of the 2009 awards is equal to 87.71% of the face value of the conditional awards. The expected value of the TSR-related conditional performance shares has been calculated on the basis of a Monte Carlo pricing model. Currently, the Monte Carlo model is considered the most appropriate way to value a plan with a relative market condition such as TSR. In respect of the three non-market measures, a statistical equal probability of ranking outcome has been used. The valuations were provided by Towers Watson after which a risk of forfeiture discount was applied. [E] Potential gains represent the value of the conditional shares awarded in previous years under the LTIP at the end of the financial year. This is calculated by multiplying the fair market value of the shares of Royal Dutch Shell plc, at December 31, 2009, by the number of shares under the LTIP that would vest based on the achievement of performance conditions as determined by TSR up to December 31, 2009. [F] All performance shares awarded to Simon Henry were awarded under the Performance Share Plan (PSP) prior to his appointment as an Executive Director. The expected values of the PSP awards have been calculated on the basis of a Monte Carlo pricing model, adjusted with PSP conditions. The 2009 PSP award date was March 10, 2009. The 2007 award vested at 61% on March 10, 2010. More information about the Performance Share Plan can be found on page 134.
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DE F E RRE D BO N U S PLA N (AUDITE D )
Number of shares under award as at January 1, 2009 Nonperformance related matching shares Dividend shares accrued in Dividend shares accrued Performance related matching shares released Dividend shares accrued Number of shares on the performance released/ (lapsed) related matching shares during the year Total number of shares under award as at
Number of shares
Market price at
Value of shares at
awarded at deferred from grant the bonus [C] Awards [A] Royal Dutch Shell plc Class A shares Peter Voser 2009 to 2011 36,687 9,171 2008 to 2010 14,690 2007 to 2009 21,477 2006 to 2008 9,722 Royal Dutch Shell plc Class B shares Malcolm Brinded 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 44,073 34,022 25,017 23,046 3,673 5,369 2,431
date of prior years [D] award ¤ 19.40 888 2,374 1,462 23.97 26.12 27.32 £ 16.58 17.58 17.07 19.54 ¤
during the year [D]
December 31, release 2009 (thousands) [E] ¤ 48,815
2,957 1,241 1,884 241 – – 1,215 – – 170 – – 15,241 – – 265 £
20,492 31,104 –
11,018 8,505 6,254 5,762
2,023 2,719 3,405
3,617 2,925 2,232 585
– – 2,881
– – 399
– – 36,078
– – 555 ¤
58,708 47,475 36,222 –
Royal Dutch Shell plc Class A shares Jeroen van der Veer 2009 to 2011 96,674 24,168 2008 to 2010 60,200 15,050 2007 to 2009 39,050 2006 to 2008 35,459 Royal Dutch Shell plc Class A ADRs Linda Cook 2009 to 2011 2008 to 2010 2007 to 2009 18,612 14,615 10,740 9,763 8,865
3,641 4,315 5,335
19.40 23.97 26.12 27.32 $ 49.23 71.66 68.02
7,791 5,086 3,427 878
– – 4,433
– – 621
– – 55,591
– – 968 $
128,633 83,977 56,554 –
4,652 3,654 2,685
888 1,184
1,473 1,213 926
– –
– –
– –
– –
24,737 20,370 15,535
[A] Awards made in 2007, 2008 and 2009 refer to the portion of the 2006, 2007 and 2008 annual bonus, respectively, which was deferred, and the related accrued dividends and matching shares. The 2009 award was made on January 30, 2009. [C] Representing the proportion of the annual bonus that has been deferred and converted into notional share entitlements (deferred bonus shares), in which there is no beneficial ownership. The value of the deferred bonus shares awarded for 2009 is also included in the annual bonus figures in the Earnings of Executive Directors table on page 70. [D] Representing dividends accumulated since the award on the number of shares equal to the deferred bonus shares awarded. [E] The vested awards were delivered on April 30, 2009 at a share price of ¤17.41 for Peter Voser and Jeroen van der Veer and £15.39 for Malcolm Brinded.
RE S T RI CT E D S HA RE PL A N (AUDITE D )
Number of shares under award as at January 1, 2009 [A] Number of Dividend shares accrued in prior years 1,264 1,413 645 Market price at date of award ¤22.56 £17.50 $70.12 Dividend shares accrued during the year 3,039 3,569 1,497 shares released/ (lapsed) during the year – – (25,131) Value of shares at release/ (lapse) (thousands) Total number of shares under award as at December 31, 2009 50,180 57,923 0 Value of shares as at December 31, 2009 (thousands) ¤1,059 £1,049 0
Original Peter Voser Malcolm Brinded Linda Cook Type of share RDSA RDSB RDS.A ADR award 45,877 52,941 22,989
$(1,511)
[A] Restricted share awards were made on August 1, 2008, following shareholder approval at the 2008 AGM. Consistent with the terms of her termination, the award made to Linda Cook lapsed on December 31, 2009.
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SH ARE O PTI ON S (A UDITED)
Number of options under award as at January 1, 2009 Royal Dutch Shell plc Class A shares Malcolm Brinded 50,000 230,000 Jeroen van der Veer 67,500 80,000 105,000 300,000 300,000 Linda Cook 212,600
Number of options exercised during the year – – – – – – – – – – – – – – – – – – – –
Number of options under award as at December 31, Exercisable 2009 Grant price [A] from date ¤ 50,000 31.05 21/03/05 230,000 67,500 80,000 105,000 300,000 300,000 212,600 229,866 52,797 4,022 39,968 229,866 12,872 16,694 22,728 32,583 43,750 35,000 70,500 18.41 29.77 31.30 31.05 18.41 20.65 21.34 £ 15.04 17.58 19.59 19.21 13.89 19.21 18.20 12.74 13.89 $ 60.75 54.35 40.64 19/03/06 23/03/03 26/03/04 21/03/05 19/03/06 07/05/07 05/11/07 05/11/07 23/03/03 13/11/03 26/03/04 07/05/07 26/03/04 21/03/05 19/03/06 07/05/07 08/03/02 21/03/03 19/03/04 Expiry date 20/03/12 18/03/13 22/03/10 25/03/11 20/03/12 18/03/13 06/05/14 04/11/14 04/11/14 22/03/10 12/11/10 25/03/11 06/05/14 25/03/11 20/03/12 18/03/13 06/05/14 07/03/11 20/03/12 18/03/13
Realisable gains as at December 31, 2009 (thousands) ¤ $ – – 620 – – – 809 137 – 893 – – – 1,165 197 –
Realised gains on options exercised during the year ¤ $ – – 0 – – – 0 0 – £ 0 0 – – 0 – – 0 0 0 – – – 0 0 – $ 0 0 – – 0 – – 0 0 $ – 0 0
Royal Dutch Shell plc Class B shares Peter Voser 229,866 Malcolm Brinded 52,797 4,022 39,968 229,866 Simon Henry [C] 12,872 16,694
£ $ 708 1,143 28 – – 972 – – 122 138 46 – – 1,569 – – 197 222 $ – 202 1,373
22,728 32,583 Royal Dutch Shell plc Class A ADRs Linda Cook [D] 43,750 35,000 70,500
[A] The grant price is the average of the opening and closing share prices over a period of five successive trading days prior to and including the day on which the options are granted (not at a discount). Represents the value of unexercised share options granted in previous years, calculated by taking the difference between the grant price of the option and the fair market value of the shares of Royal Dutch Shell plc at December 31, 2009, multiplied by the number of shares under option at December 31, 2009. The actual gain realised, if any, will depend on the market price of the Royal Dutch Shell plc shares at the time of exercise. [C] All stock options awarded to Simon Henry were awarded prior to his appointment as an Executive Director. [D] Prior to her appointment as an Executive Director, Linda Cook was awarded US dollar-based options.
Shell suspended share option grants in 2005 in favour of conditional share awards under the LTIP and the DBP. The share options listed above relate to Royal Dutch Shell plc shares and have a 10 year term. The price range of the Royal Dutch Shell plc Class A shares listed at the Euronext Exchange during the year was ¤15.27 to ¤21.46 and the market price at the year end was ¤21.10. The price range of the Royal Dutch Shell plc Class B shares listed at the London Stock Exchange
during the year was £13.15 to £18.97 and the market price at the year end was £18.12. The price range of the Royal Dutch Shell plc Class A ADRs listed at the NYSE during the year was $38.29 to $63.75 and the market price at year end was $60.11. During 2009 Executive Directors did not realise gains from exercised share options.
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PE N S I ON S (AUDITE D )
THOUSANDS
At December 31, 2009 CHF $ Peter Voser [A] Malcolm Brinded Simon Henry Jeroen van der Veer [C] Maarten van den Bergh [D] Linda Cook [E] 1,154 £ 568 304 ¤ 1,527 677 1,120 $ 917 490 $ 2,201 975 $ 1,753
Increase over the year CHF $ 388 £ 16 135 ¤ 195 4 377 $ 25 219 $ 281 5 $ 453
Accrued pension Increase over the year (excluding inflation) CHF $ 388 £ 14 135 ¤ 184 (2) 377 $ 22 218 $ 265 (2) $ 430
PE N S I ON S (AUDITE D )
THOUSANDS
Transfer values of accrued benefits Increase in accrued pension over the year (excluding inflation) less Director’s contribution CHF $ 4,402 £ 302 2,450 ¤ 1,739 (21) 4,272 $ 488 3,955 $ 2,506 (30) $ 6,091
At December 31, 2009 CHF $ Peter Voser [A] Malcolm Brinded Simon Henry Jeroen van der Veer [C] Maarten van den Bergh [D] Linda Cook [E] 13,308 £ 13,518 5,575 ¤ 23,742 9,770 12,915 $ 21,821 8,999 $ 34,218 14,080 $ 24,849
At December 31, 2008 CHF $ 8,490 £ 12,888 2,695 ¤ 20,301 9,590 8,041 $ 18,752 3,922 $ 28,605 13,512 $ 11,500
Increase over the year less Director’s contribution CHF $ 4,745 £ 602 2,849 ¤ 3,363 91 4,605 $ 972 4,600 $ 4,847 131 $ 13,350
[A] The pension values for Peter Voser include all pension benefits. This includes a capped defined benefit pension in the Swiss pension fund based on salary up to a cap of CHF 821,000 and benefits for salary in excess of this level in an individual savings account and an unfunded benefit promise. As at December 31, 2009, his capped defined benefit pension was CHF 389,000 and the transfer value in respect of this benefit is CHF 4,438,000. The individual savings account was CHF 2,386,000 at the end of the year. The balance of CHF 6,483,000 will be provided through an unfunded pension arrangement. Malcolm Brinded and Simon Henry elected to have their benefits in the Shell Contributory Pension Fund restricted to the applicable lifetime allowance with any excess provided from an unfunded defined benefit scheme (Shell Supplementary Pension Plan). This promise of delivery is contained in the aggregate values presented in the table, and therefore not disclosed separately. [C] The pension values for Jeroen van der Veer are based on a retirement date of June 30, 2009. The increase in his pension is partly due to an enhancement related to a change in his pension terms with regard to accrual up to January 1, 2006, and partly due to exchange of widower’s pension for additional member pension in line with pension fund plan regulations. The transfer value of his pension excludes pension payments made to Jeroen van der Veer during 2009, which amounted to approximately ¤765,000. [D] Maarten van den Bergh retired from the board as NED on May 19, 2009. The values relating to the Shell Petroleum Company Limited Managing Directors’ Pension Scheme are accrued in sterling and have been converted into euro at the rate of exchange on December 31, 2009. [E] Linda Cook’s pension and the transfer value of her pension increased significantly during the year as a result of: 1) achieving immediate pension eligibility, a standard provision of the plan for all employees when a certain age and service threshold is reached, which entitled Linda to draw her pension at age 60 instead of 65 without reduction for early payment; and at the same time 2) vesting in certain enhanced pension arrangements offered to Linda Cook upon her promotion to senior leadership on July 1, 1997. These arrangements, which have now been discontinued, were a normal provision of senior leadership remuneration in the US at the time and consist of: (i) five additional years of pensionable service; (ii) entitlement to draw her pension at age 55 instead of 60 without reduction for early payment; (iii) definition of final salary changed from a three year average of salary plus bonus to one year average of salary plus three year average of bonus. The greatest impact on the increase in transfer value of $13,350,000 relates to 1) and (ii) above. Because these early pension benefits only vested in 2009, they were not included in previously reported transfer values. In addition, the company contributed a total of $237,000 (from January 1 to June 1, 2009) to the Shell Provident Fund for US employees and the Senior Executive Group Deferral Plan, both of which are defined contribution plans.
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
75
E A RN IN G S OF N O N - E X E CU T I V E DIR E CTO RS I N O F F ICE D U R IN G 2 0 0 9 (AUDITE D )
THOUSANDS
Non-executive Directors Josef Ackermann Maarten van den Bergh [A] Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine Morin-Postel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer [C] Hans Wijers [D]
¤ 132 51 146 207 162 145 160 750 163 66 137
2009 $ 184 71 202 288 225 202 223 1,043 227 92 190
¤ 80 127 143 189 155 134 145 750 171 – –
2008 $ 117 186 208 277 226 196 213 1,097 250 – –
[A] Maarten van den Bergh retired from the board on May 19, 2009. Jorma Ollila receives no additional payments for chairing the Nomination and Succession Committee. He does have the use of an apartment when on business in The Hague. [C] Jeroen van der Veer was appointed on July 1, 2009. [D] Hans Wijers was appointed on January 1, 2009.
Additional statutory disclosure
PERFORMANCE GRAPHS
The graphs below compare, on the basis required by the UK Companies Act 2006, Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the TSR performance of Royal Dutch Shell plc over the past five financial years with that of the companies comprising the Euronext 100 share index and the FTSE 100 share index. The Board regards the Euronext 100 and the FTSE 100 share indices as appropriate broad market equity indices for comparison, as they are the leading market indices in Royal Dutch Shell plc home markets.
HISTORICAL TSR PERFORMANCE OF ROYAL DU TCH SHELL PLC CLA SS A SHARES HISTORICAL TSR PERFORMANCE OF ROYAL DUTCH SHELL PLC CLASS B SHARES
Growth in the value of a hypothetical ¤100 holding [A] over five years and since the Unification on July 20, 2005. Euronext 100 comparison based on 30 trading day average values.
RDS A VE RS U S E U RON E XT 100
Value of hypothetical £100 Holding 175 150 125 100 [A] 75 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Royal Dutch Shell plc Class A Euronext 100
Growth in the value of a hypothetical £100 holding [A] over five years and since the Unification on July 20, 2005. FTSE 100 comparison based on 30 trading day average values.
RDS B V E RS U S F TS E 1 0 0
Value of hypothetical £100 Holding £175 £150 £125 £100 [A] £75 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Royal Dutch Shell plc Class B FTSE 100
Signed on behalf of the Board
Michiel Brandjes
Company Secretary March 15, 2010
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Shell Annual Report and Form 20-F 2009 Corporate governance
CORPORATE GOVERNANCE
The Company is committed to the highest standards of corporate governance and believes that such standards are essential to business integrity and performance. This Corporate Governance Report sets out the policies and practices of the Company that have been applied during the year. The Board confirms that during the year the Company complied with the principles and provisions set out in Section 1 of the 2008 Combined Code on Corporate Governance (the Combined Code). In addition to complying with applicable corporate governance requirements in the UK, the Company must follow the rules of the Euronext Amsterdam Stock Exchange as well as the Dutch securities laws due to its listing on this exchange. The Company must also follow US securities laws and the New York Stock Exchange (NYSE) rules and regulations due to registration of its securities in the USA and the listing of its securities on the NYSE.
accordance with English law, the Company’s Audit Committee makes recommendations to the Board, for it to put to shareholders for approval in General Meeting, regarding the appointment, re-appointment and removal of independent auditors. Consequently, the Company’s Audit Committee is not directly responsible for the appointment of independent auditors.
SHAREHOLDER APPROVAL OF SHARE-BASED COMPENSATION PLANS
NYSE governance standards
In accordance with the NYSE rules for foreign private issuers, the Company follows home-country practice in relation to corporate governance. However, foreign private issuers are required to have an audit committee that satisfies the requirements of US Securities and Exchange Commission’s Rule 10A-3 and the Company’s Audit Committee satisfies such requirements. The NYSE also requires a foreign private issuer to provide certain written affirmations and notices to the NYSE as well as a summary of the ways in which its corporate governance practices significantly differ from those followed by domestic US companies under NYSE listing standards. The Company’s summary is given below and can also be found at www.shell.com/investor.
NON-EXECUTIVE DIRECTOR INDEPEN DENCE
The Company complies with the listing rules of the UK Listing Authority which require shareholder approval for the adoption of share-based compensation plans which are either long-term incentive schemes in which Directors can participate or schemes which may involve the issue of new shares. Under the UK Listing Authority rules, such plans cannot be changed to the advantage of participants without shareholder approval, except for certain minor amendments, for example to benefit the administration of the plan or to take account of tax benefits. The rules on the requirements to seek shareholder approval for share-based compensation plans, including those in respect of material revisions to such plans, may deviate from the NYSE listing standards.
CODE OF ETHICS
The NYSE listing standards require that listed companies adopt a code of business conduct and ethics for all directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. The Company has adopted the Shell General Business Principles (see below), which satisfy the NYSE requirements. The Company also has internal procedures in place by which any employee can raise in confidence accounting, internal accounting controls and auditing concerns. Additionally, any employee can report irregularities to management through a worldwide dedicated telephone line and website without jeopardising his or her position (see below).
The Board follows the provisions of the Combined Code in respect of Non-executive Director independence. The Combined Code states that at least half the Board, excluding the Chairman, should comprise Nonexecutive Directors determined by the Board to be independent. In the case of the Company, the Board has determined that a majority of Non-executive Directors are wholly independent (see page 77 for more information).
NOMINATING/ CORPORATE GOVERNANCE COMMITTEE AND COMPEN SATION COMMITTEE
Shell General Business Principles
The Shell General Business Principles define how Shell companies are expected to conduct their affairs. These principles include, among other things, Shell’s commitment to support fundamental human rights in line with the legitimate role of business and to contribute to sustainable development. They can be found at www.shell.com/sgbp.
Shell Code of Conduct
Directors and employees are required to comply with the Shell Code of Conduct, which is intended to help them put Shell’s business principles into practice through the basic rules and standards they are expected to follow and the behaviour expected of them. The Shell Code of Conduct is available online at www.shell.com/codeofconduct.
The NYSE listing standards require that a listed company maintain a Nominating/Corporate Governance Committee and a Compensation Committee, both composed entirely of independent directors and with certain specific responsibilities. The Company’s Nomination and Succession Committee and Remuneration Committee, respectively, comply with these requirements, except that the terms of reference of the Nomination and Succession Committee require only a majority of the committee members to be independent.
AUDIT COMMITTEE
Code of Ethics
Executive Directors and Senior Financial Officers of Shell must also comply with a Code of Ethics. The Code of Ethics is specifically intended to meet the requirements of Section 406 of the SarbanesOxley Act and the listing requirements of the NYSE (see above). The Code of Ethics can be found at www.shell.com/codeofethics.
As required by NYSE listing standards, the Company maintains an Audit Committee for the purpose of assisting the Board’s oversight of the financial statements, its internal audit function and its independent auditors. The Company’s Audit Committee is in full compliance with the US Securities and Exchange Commission’s Rule 10A-3 and Section 303A.06 of the NYSE Listed Company Manual. However, in
Shell Global Helpline
Shell employees may raise ethics and compliance concerns through the Shell Global Helpline. The Shell Global Helpline is a worldwide reporting mechanism, operated by an external third party, which is
Shell Annual Report and Form 20-F 2009 Corporate governance
77
open 24 hours a day, seven days a week through local telephone numbers and through the internet at www.shell.com or www.compliance-helpline.com/shell.
that role on June 30, 2009. The standard by which Directors’ independence is determined can be found online at www.shell.com/ investor within the terms of reference of the Nomination and Succession Committee.
Board structure and composition
For the period up to the 2009 Annual General Meeting (the AGM), the Board comprised the Chairman, Jorma Ollila, four Executive Directors including the Chief Executive, and nine Non-executive Directors, including the Deputy Chairman and Senior Independent Non-executive Director, Lord Kerr of Kinlochard. At the 2009 AGM, Simon Henry was appointed an Executive Director and Maarten van den Bergh retired as a Non-executive Director. Linda Cook resigned as an Executive Director on June 1, 2009 and Jeroen van der Veer became a Non-executive Director following his retirement as Chief Executive on June 30, 2009. Peter Voser succeeded Jeroen van der Veer as Chief Executive. As a result of these changes, the Board comprised the Chairman, three Executive Directors and nine Nonexecutive Directors. A list of current Directors, with their biographies, is given on pages 5355. The Board meets eight times a year and has a formal schedule of matters reserved to it. This includes overall strategy and management, corporate structure and capital structure, financial reporting and controls, internal controls, approval of the Annual Report and Form 20-F, approval of interim dividends, significant contracts, succession planning and new Board appointments. The full list of matters reserved to the Board for decision is available at www.shell.com/investor.
Conflicts of interest
Certain statutory duties with respect to directors’ conflicts of interest are in force under the Companies Act 2006 (the Act). In accordance with that Act and the Articles, the Board may authorise any matter that may otherwise involve the Directors breaching the duty to avoid conflicts of interest. The Board has adopted a procedure to address these requirements, which includes the Directors completing detailed conflicts of interest questionnaires. The matters disclosed in the questionnaires are reviewed by the Board and, if considered appropriate, authorised in accordance with the Act and the Articles. Conflicts of interest and gifts and hospitality received by and provided by Directors are kept under review by the Board.
Significant commitments of the Chairman
The Chairman’s other significant commitments are given in his biography on page 53.
Independent professional advice
All Directors may seek independent professional advice in connection with their role as a Director. All Directors have access to the advice and services of the Company Secretary. The Company has provided to the Directors indemnities and directors’ and officers’ insurance in connection with the performance of their responsibilities. Copies of these indemnities and the directors’ and officers’ insurance policies are open to inspection. Copies of these indemnities have been previously filed with the US Securities and Exchange Commission and are incorporated by reference as an exhibit to this Report.
Role of Directors
The roles of the Chairman, a non-executive role, and the Chief Executive Officer are separate, and the Board has agreed their respective responsibilities. The Chairman, Jorma Ollila, is responsible for the leadership and management of the Board and for ensuring that the Board and its committees function effectively. The Chief Executive Officer, Peter Voser, bears overall responsibility for the implementation of the strategy agreed by the Board, the operational management of the Company and the business enterprises connected with it. He is supported in this by the Executive Committee, which he chairs (see page 78).
Board activities during the year
The Board met eight times during the year, and each meeting was held in The Hague, the Netherlands. The agenda for each meeting comprises a number of regular items, including reports from each of the Board Committees and from the Chief Executive Officer, the Chief Financial Officer and the other members of the Executive Committee. At most meetings the Board also considered a number of investment, divestment and financing proposals. In accordance with matters specifically reserved for the Board, during the year the Board considered numerous strategic issues and approved each of the quarterly and full-year financial results and dividend announcements. The Board received regular reports from the various functions, including Corporate (which includes Human Resources, Health and Security), Legal and Finance (which includes Investor Relations).
Non-executive Directors
Non-executive Directors are appointed for specified terms of office, subject to the provisions of the Articles of Association (the Articles) regarding their appointment and re-appointment at the AGM. Appointments are subject to three months’ notice, and there is no compensation provision for early termination. The Non-executive Directors bring a wide range of skills and international business experience to Shell. They also bring independent judgement on issues of strategy, performance and risk through their contribution to Board meetings and to the Board’s committee meetings. The Chairman and the Non-executive Directors meet routinely without the Executive Directors to discuss, among other things, the performance of individual Directors. All the Non-executive Directors as at the end of 2009 are considered by the Board to be wholly independent, with the exception of Jeroen van der Veer who served as Chief Executive up until his retirement in
Induction and training
Following appointment to the Board, Directors receive a comprehensive induction tailored to their individual needs. This includes meetings with senior management to enable them to build up a detailed understanding of Shell’s business and strategy, and the key risks and issues with which they are faced. Throughout the year, regular updates on developments in legal matters, governance and accounting are provided to Directors. The Board regards site visits as an integral part of ongoing Director training. Additional training is available so that Directors can update their skills and knowledge as appropriate.
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Shell Annual Report and Form 20-F 2009 Corporate governance
Attendance at Board and Board Committee Meetings
Attendance during the year for all Board and Board Committee meetings are given in the table below.
AT TE N DAN CE AT BOAR D A N D BOA RD COMMI T T E E ME E T IN G S [ A]
On May 27, 2009 the Company announced changes to senior management roles and responsibilities which took effect from July 1, 2009. With effect from this date and for the remainder of the year the Executive Committee comprised:
E X E CU T I V E COMMI T T E E FR OM J U LY 1, 20 09
Corporate and Nomination and Social Audit Responsibility Succession Remuneration Josef Ackermann Maarten van den Bergh Malcolm Brinded Linda Cook Simon Henry Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine MorinPostel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer Peter Voser Hans Wijers Board Committee 7/8 0/2 8/8 3/3 6/6 6/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 7/8 4/5 2/2 3/3 3/3 1/1 6/6 6/6 7/7 2/2 1/1 4/4 1/1 7/7 7/7 Committee Committee Committee 4/9
Peter Voser Matthias Bichsel Malcolm Brinded Simon Henry Beat Hess Hugh Mitchell Marvin Odum Mark Williams
– Chief Executive Officer [F][G] – Projects & Technology Director [G] – Executive Director Upstream International [F][G] – Chief Financial Officer [F][G] – Legal Director [G] – Chief Human Resources & Corporate Officer [G] – Upstream Americas Director [G] – Downstream Director [G]
0/2
9/9 6/6
[A] Jeroen van der Veer retired as Chief Executive on June 30, 2009 and now serves as a Non-executive Director of the Company. Linda Cook resigned as an Executive Director on June 1, 2009. [C] Roxanne Decyk stepped down from the Executive Committee with effect from July 1, 2009. She now heads Shell’s Government Affairs department based in Washington DC reporting to the Chief Executive Officer. [D] Simon Henry was appointed Chief Financial Officer with effect from May 1, 2009 and a Director of the Company with effect from May 20, 2009. [E] Peter Voser was appointed Chief Executive Officer with effect from July 1, 2009. [F] Director of the Company. [G] Designated an Executive Officer pursuant to US Exchange Act Rule 3b-7. Beneficially owns less than 1% of outstanding classes of securities.
Board committees
There are four Board committees made up of Non-executive Directors. These are the: Audit Committee; Corporate and Social Responsibility Committee; Nomination and Succession Committee; and Remuneration Committee. A copy of each committee’s terms of reference is available from the Company Secretary and can be found online at www.shell.com/investor.
A UDIT COMMITTEE
[A] The first figure represents attendance and the second figure the possible number of meetings. For example, 6/8 signifies attendance at six out of eight possible meetings. Where a Director stepped down from the Board or a Board Committee during the year, or was appointed during the year, only meetings before stepping down or after the date of appointment are shown.
Executive Committee
The Executive Committee operates under the direction of the Chief Executive Officer and supports him with his responsibility for the executive management of the Company’s overall business and affairs. The Chief Executive Officer has final authority in all matters of management that are not within the duties and authorities of the Board or of the shareholders’ general meeting. During the period up until July 1, 2009 the Executive Committee comprised:
E X E CU TI V E CO MMI T TE E U N T IL JU LY 1, 2 0 0 9
Jeroen van der Veer Malcolm Brinded Linda Cook Roxanne Decyk Simon Henry Beat Hess Hugh Mitchell Peter Voser Mark Williams
– Chief Executive [A] – Executive Director Exploration & Production – Executive Director Gas & Power, Shell Trading, Global Solutions and Technology – Corporate Affairs and Sustainable Development Director [C] – Chief Financial Officer [D] – Legal Director – Human Resources Director – Chief Executive Officer (Designate) [E] – Downstream Director
The current members of the Audit Committee are Christine Morin-Postel (chairman of the Committee), Nick Land and Lord Kerr, all of whom are financially literate, independent, Non-executive Directors. For the purposes of the 2008 Combined Code, Christine Morin-Postel qualifies as a person with “recent and relevant financial experience” and for the purposes of US securities laws is an “audit committee financial expert”. Lawrence Ricciardi stepped down as a member of the Committee with effect from September 11, 2009 and was succeeded by Lord Kerr. The Committee met six times during the year and Committee Members’ attendances are shown above. The key responsibilities of the Committee are to assist the Board in fulfilling its oversight responsibilities in relation to internal control and financial reporting, the effectiveness of the risk management and internal control system, compliance with applicable external legal and regulatory requirements, monitoring the qualifications, expertise, resources and independence of both the internal and external auditors and assessing each year the auditors’ performance and effectiveness. The Committee keeps the Board informed of the Committee’s activities and recommendations. Where the Committee is not satisfied with or wherever it considers action or improvement is required concerning any aspect of risk management and internal control, financial reporting
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or audit-related activities, it promptly reports these concerns to the Board. It invites the external auditors, the Chief Financial Officer, the Chief Internal Auditor, the Executive Vice President Controller and the Vice President Accounting and Reporting to attend each meeting and other members of management attend as and when requested. The Committee holds private sessions with the external auditors and the Chief Internal Auditor without members of management present. Each year the Committee also considers the re-appointment of the external auditors and makes a recommendation to the Board. There are no contractual obligations that restrict the Committee’s ability to make such a recommendation. The last competitive audit tender was in 2005. During the year a new lead partner from the external audit firm replaced the former lead partner who had completed five years in this role. The Committee has adopted guidelines allowing audit, audit-related and non-audit services to be contracted with the external auditors without pre-approval so long as the fee value for each contract does not exceed $500,000. The scope of the permitted non-audit services contracted with the external auditors in 2009 consisted of tax compliance work, tax advice on proposed transactions and regulatory compliance work. Any other services must be specifically preapproved. Under the guidelines, permitted services must not present a conflict of interest nor compromise the independence of the external auditor. The Committee has reviewed quarterly all engagements with the external auditors. The following table sets out the aggregate fees paid by the Company to the external auditors, all of which have been approved by the Committee:
SH E L L AU DI T F E E [ A] $ MILLION
The Committee also reviewed the Internal Audit Department’s annual audit plan and the performance assessment of the Internal Audit function, the latter including a review of a report on the effectiveness of the Internal Audit function by an external firm. Finally the Committee conducted an annual evaluation of its performance and concluded that it was effective and able to fulfill its role in accordance with its Terms of Reference.
CORPORATE AND SOCIAL RESPONSIBILITY COMMITTEE
The members of the Corporate and Social Responsibility Committee are Wim Kok (chairman of the Committee), Lord Kerr of Kinlochard, Nick Land and Jeroen van der Veer. Maarten van den Berg stood down as a member of the Committee with effect from May 19, 2009 and was succeeded by Jeroen van der Veer with effect from July 1, 2009. Hans Wijers stood down as a member of the Committee with effect from September 11, 2009 and was succeeded by Lord Kerr and Nick Land. The Committee met four times during the year and Committee Members’ attendances are shown on page 78. The aim of the Committee is to maintain a thorough overview of the broad scope and variety of topics that fall within its remit, which include responsibilities for Health, Safety & Environment, Shell General Business Principles, Sustainable Development and the Code of Conduct. It reports on areas of focus and on its own conclusions and recommendations to executive management and the Board. In this regard, the Committee fulfills its responsibilities by receiving reports and reviewing with management Shell’s overall health, safety, environment and social performance, Shell’s annual performance against the Code of Conduct, the management of social and environmental impacts at major projects and operations and emerging social and environmental issues. It also provides input on and reviews Shell’s Sustainability Report, including meeting face-to-face with the report’s External Review Committee. In addition to regular formal meetings the Committee also visits Shell locations, meeting with local staff and external stakeholders in order to observe how Shell’s standards are being implemented in practice and where in its judgement there might be areas for increased focus. During 2009 the Committee visited Qatar to review Shell’s activities in regards to Health, Safety, Environment, and Sustainable Development. A scheduled 2009 visit to the Pernis Refinery in the Netherlands was rescheduled to early 2010.
NOMINATION AND SUCCESSION COMMITTEE
Audit fees Audit-related services Taxation services [C] Other services [E] Total
2009 57 2 1 [D] 60
2008 54 2 [D] 1 57
2007 48 3 [D] 1 52
2006 52 5 1 1 59
[A] Note 29 to the Consolidated Financial Statements on page 139 provides additional detail on Shell audit fee. Fees for other audit-related services and other services provided pursuant to legislation. [C] Fees primarily for tax compliance. [D] Less than US$1 million. [E] Other fees primarily relate to the subscription to a knowledge database.
During the year the Committee received comprehensive reports from management and the internal and external auditors. In particular it reviewed quarterly reports on risks, controls and assurance, monitored the effectiveness of the procedures for internal control over financial reporting, reviewed the Company’s evaluation of the internal control systems as required under Section 404 of the Sarbanes-Oxley Act and discussed the Company’s annual accounts and quarterly unaudited financial statements with management and the external auditors. It also discussed with the Chief Financial Officer, the Executive Vice President Controller and the external auditors issues that arose on accounting policies, practices and reporting and received reports regarding the receipt, retention, investigation and treatment of complaints regarding accounting, internal accounting controls, auditing and other matters. The Committee received reports on the changes to the SEC reserves reporting requirements. The Committee has furthermore requested reports on such matters or topics that it deemed appropriate including on relevant developments concerning the financial crisis and volatility in financial markets. The Committee conducted a site visit during the year.
The members of the Nomination and Succession Committee are Jorma Ollila (chairman of the Committee), Lord Kerr of Kinlochard, Wim Kok and Lawrence Ricciardi. Lawrence Ricciardi was appointed a member of the Committee with effect from September 11, 2009. The Committee met seven times during the year and Committee Members’ attendances are shown on page 78. The Committee keeps under review the leadership needs of the Company. It identifies and nominates suitable candidates for the Board’s approval to fill vacancies as and when they arise. The Committee also makes recommendations on who should be appointed chairman of the Audit Committee, the Corporate and Social Responsibility Committee and the Remuneration Committee and, in consultation with the relevant chairman, on the appointment of committee members. It makes recommendations on corporate governance guidelines, monitors compliance with corporate governance requirements and makes recommendations on disclosures connected to corporate governance and its appointment processes. During the year, the Committee dealt with director search, succession and nomination issues, Board committee membership rotation matters
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Shell Annual Report and Form 20-F 2009 Corporate governance
and the executive management structure. It also considered the Walker Review of Corporate Governance of UK Banking Industry and the Financial Reporting Council 2009 Review of the Combined Code. Finally, the Committee dealt with the Board evaluation process and considered any potential conflicts of interest and the independence of the Non-executive Directors.
REMUNERATION COMMITTEE
E VA L U AT I ON
Body to be evaluated Board as a whole Board Committees
Process Chairman to interview each Director Deputy Chairman to interview Chairman Committee Chairman to interview each Committee Member
The members of the Remuneration Committee are Hans Wijers (chairman of the Committee with effect from October 1, 2009), Josef Ackermann and Sir Peter Job (chairman of the Committee up until October 1, 2009). Lord Kerr of Kinlochard stood down as a member of the Committee with effect from September 11, 2009. The Committee met nine times during the year and Committee Members’ attendances are shown on page 78. The Committee determines and agrees with the Board the remuneration policy for the Chief Executive Officer and Executive Directors and, within the terms of this policy, determines the individual remuneration package for the Chief Executive Officer and the Executive Directors. The Committee also considers and advises on the terms of any contract to be offered to an Executive Director. It monitors the remuneration for other senior executives and makes recommendations. Since the 2009 AGM when shareholders did not approve the Directors’ Remuneration Report (DRR), the Committee has undertaken an extensive dialogue with major shareholders and shareholder bodies. It received broad feedback during the summer of 2009, took external specialist input, developed a new way forward, and then consulted again with major shareholders during the fourth quarter of 2009. With that in mind, the Committee has made the changes presented in the 2009 DRR (see pages 60-75). Following the publication of the Annual Report and Form 20-F 2009, the Committee will again be meeting major shareholders to listen to their feedback. Further information on the work of the Committee and details of the remuneration of all the Directors for the year ended December 31, 2009, are set out in the DRR.
Individual Director to be evaluated Process Chairman Each Director to complete questionnaire Directors for review by the Deputy Chairman Chairman to interview each Director
Shareholder communications
The Board recognises the importance of two-way communication with the Company’s shareholders. As well as giving a balanced report of results and progress at each AGM, the Company meets with institutional and retail shareholders to respond to their questions. Shell’s corporate website at www.shell.com/investor has information for institutional and retail shareholders alike. Shareholders have an opportunity to ask questions in person at the AGM, and are free to contact the Company directly at any time of the year. Shareholders can contact Shell directly via dedicated shareholder email addresses or via dedicated shareholder telephone numbers as given on the inside back cover. The Company’s Registrar, Equiniti, operates an internet access facility for shareholders, providing details of their shareholdings at www.shareview.co.uk. Facilities are also provided for shareholders to lodge proxy appointments electronically. The Company’s Corporate Nominee provides a facility for investors to hold their shares in the Company in paperless form.
Results presentations and analysts meetings
The quarterly and annual results presentations and all major analysts meetings are announced in advance on the Shell website and through a regulatory release. These presentations can be followed live via webcasting or tele-conference. Other meetings with analysts or investors are not normally announced in advance, nor can they be followed by webcast or any other means. Discussions in such meetings are always limited to information already in the public domain. Presentations in such meetings are available at www.shell.com. This is in line with the requirement to ensure that all shareholders and other parties in the financial market have equal and simultaneous access to information that may influence the price of the Company’s securities. The Chairman, the Deputy Chairman, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President Investor Relations report regularly to the Directors on the views of major shareholders.
Board evaluation
The Board carried out a performance evaluation of the Board, the Board Committees, the Chairman and each of the Directors. As in previous years, this was an internal exercise led by the Nomination and Succession Committee. The Board agreed to conduct the exercise by a combination of questionnaire and structured one-to-one interviews (see table below). This was followed by a discussion by the full Board of the results of the evaluation of the Board and Board Committees, while the results of the evaluation of the Chief Executive Officer and the other Executive Directors were discussed by the Chairman and the Non-executive Directors. The evaluation of the Chairman was discussed by the full Board in the Chairman’s absence. The performance evaluation provided feedback on what in the view of both individual Directors and the Board went well and what could be improved further. Directors were generally positive about the meetings of the Board and its processes and operations and a number of new initiatives implemented since the summer by the Chairman and the new Chief Executive Officer, including the greater interface of the Board with the whole of the Executive Committee and the new format of the involvement of the Board in strategy formulation and the strategy day, were well received. In 2010 the Board was planning to devote particular attention to the system of risk reporting and contingency planning.
Responsibility for preparing accounts
See the Report of the Directors in this Report.
Going concern
The Directors consider that, taking into account the assets and income of Shell, the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors adopt the going concern basis for the Financial Statements contained in this Report.
Controls and procedures
The Board is responsible for Shell’s system of internal control and for reviewing its effectiveness and has delegated authority to the Audit Committee to assist it in fulfilling its responsibilities in relation to internal control and financial reporting.
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A single overall control framework is in place that is designed to manage rather than eliminate the risk of failure to achieve business objectives. It therefore only provides a reasonable and not an absolute assurance against material misstatement or loss. In general, the Shell Control Framework applies to all wholly-owned Shell companies and to those ventures and other companies where the Company, directly or indirectly, has a controlling interest. The following diagram illustrates the Control Framework’s key components, Foundations, Organisation and Processes. In ‘Foundations’ the objectives, principles and rules that underpin and establish boundaries for Shell’s activities are stated. ‘Organisation’ sets out how the various legal entities involved relate to each other and how their business activities are organised and managed. ‘Processes’ concerns the more material processes, including how authority is delegated and how strategy, planning, appraisal and assurance are used to improve performance. All control activities relate to one or more of these components.
For further information regarding the judgement applied in these assumptions and the relation to the financial position and performance of Shell, see Notes 3 and 18 to the Consolidated Financial Statements. Shell has a number of responses to address key pensions risks. Principal amongst these is the Pensions Forum, a joint Finance/Human Resources body, chaired by the Chief Financial Officer, which provides guidance on Shell input to pension strategy, policy and operation. It also reviews the results of assurance processes that have been established with respect to pension plan investments, liabilities and funding as well as pension reporting (see “Risk factors” on pages 13-15).
Treasury and trading
In the normal course of business, Shell uses financial instruments of various kinds for the purposes of managing exposure to interest rate, currency and commodity price movements. Shell has treasury standards 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 derivative instruments, as well as the treasury control framework. Wherever possible, treasury operations are carried out through specialist Shell group regional organisations without removing from each subsidiary the responsibility to formulate and implement appropriate treasury policies. Most of Shell’s debt is raised from central borrowing programmes. The financing of most subsidiaries is also structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged. Each company has treasury policies in place that are designed to measure and manage their foreign exchange exposures by reference to their functional currency. Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream companies and those with significant cross-border business is the dollar. For Downstream companies, the local currency is typically also the functional currency. Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most subsidiaries is not permitted by their treasury policy. Certain subsidiaries have a mandate to trade natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products, and to use commodity swaps, options and futures as a means of managing price and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are contained within authorised limits. Shell uses risk management systems for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Shell’s exposure to significant trading losses is therefore considered limited. Shell utilises VAR techniques based on variance/covariance or Monte Carlo simulation models and makes a statistical assessment of the
External Regulatory and Legal Environment, External Stakeholders Shell General Business Principles Royal Dutch Shell plc Board, Chief Executive Officer and Executive Committee Statement on Risk Management Standards, Manuals and Guides Delegation of Authority Code of Conduct Strategy, Planning and Appraisal
Compliance and Assurance Businesses, Functions Legal Entities
Foundations
Organisation
Processes
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by Shell, which has been in place throughout the year and up to the date of this Report, is regularly reviewed by the Board and accords with the guidance for directors, known as the Turnbull Guidance. Shell has a variety of processes for obtaining assurance on the adequacy of risk management and internal control. It has a structured process to identify and review risks to the achievement of Shell’s objectives. The Executive Committee and the Audit Committee regularly consider group-level risks and associated control mechanisms. The Board has conducted its annual review of the effectiveness of Shell’s system of risk management and internal controls which cover financial, operational and compliance controls.
Pension funds
In general, local trustees manage the pension funds and set the required contributions from subsidiaries in accordance with local regulations and on the basis of independent actuarial valuation rather than the International Financial Reporting Standards (IFRS) measures. The actuarial valuations are sensitive to changes in the assumptions made regarding future outcomes, the principal ones being in respect of the discount rate used to convert future cash flows to present values, the long-term return on plan assets, increases in remuneration and pension benefits and demography (including mortality). Substantial judgement is required in determining the assumptions.
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market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair value movements to ensure model integrity is maintained. Other than in exceptional cases, the use of external derivative instruments is confined to specialist oil and gas trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems. Information on derivatives and other financial instruments and derivative commodity instruments is provided in Note 23 of the Consolidated Financial Statements on pages 128-134 of this Report.
Management’s evaluation of disclosure controls and procedures of Shell
The Trustee’s and Management’s Evaluation of disclosure controls and procedures for the Royal Dutch Shell Dividend Access Trust
The Trustee and Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures in respect of the Dividend Access Trust as at December 31, 2009. On the basis of this evaluation, these officers have concluded that the disclosure controls and procedures of the Trust are effective.
Changes in internal control over financial reporting
As indicated in the certifications in Exhibits 12.1 and 12.2 of this Report, Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Shell’s disclosure controls and procedures as at December 31, 2009. On the basis of that evaluation, these officers have concluded that Shell’s disclosure controls and procedures are effective.
Management’s Report on internal control over financial reporting of Shell
There has not been any change in the internal controls over financial reporting of Shell or the Dividend Access Trust that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting. The daily operations of the Dividend Access Trust are administered on behalf of Shell by Lloyds TSB Offshore Trust Company Limited, an established trustee services company. Material financial information of the Dividend Access Trust is included in the Consolidated Financial Statements of Shell and is therefore subject to the same disclosure controls and procedures of Shell. See below and the Royal Dutch Shell Dividend Access Trust Financial Statements for additional information.
Memorandum and Articles of Association
The following summarises certain provisions of the Company’s Memorandum and Articles of Association [A] and of the applicable laws of England and Wales. This summary is qualified in its entirety by reference to the Act and the Memorandum and Articles of Association.
[A] Copies of the Company’s Memorandum and Articles of Association have been previously filed with the SEC and are incorporated by reference as exhibits to this Report. They are available on the Company’s website at www.shell.com.
Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over Shell’s financial reporting and the production of the Consolidated Financial Statements. It conducted an evaluation of the effectiveness of internal control over financial reporting and the production of the Consolidated Financial Statements with respect to Shell based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting and the production of the Consolidated Financial Statements with respect to Shell was effective as at December 31, 2009. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Company’s internal control over financial reporting, as stated in their report on page 95.
The Trustee’s and Management’s Report on internal control over financial reporting of the Royal Dutch Shell Dividend Access Trust
Management and Directors
The Articles of Association (the Articles) provide that the Company’s Board of Directors must consist of not less than three members nor more than 20 members at any time. The Company has a single tier Board of Directors headed by a Chairman, with management led by a Chief Executive Officer. See ‘‘Board structure and composition’’ section. At every AGM any Director who was in office at the time of the two previous AGMs and who did not retire at either of them must retire. At the AGM at which a Director retires, shareholders can pass an ordinary resolution to re-appoint the Director or to appoint another eligible person in his or her place. A Director who would not otherwise be required to retire must retire if he or she has been in office, other than as a Director holding an executive position, for a continuous period of nine years or more at the date of the meeting. Any such Director will be eligible to stand for re-appointment. Under the Articles: a Director may not vote or be counted in the quorum in respect of any matter in which he or she is materially interested including any matter related to his own compensation; the Directors may exercise the Company’s power to borrow money provided that the borrowings of Shell shall not, without the consent of an ordinary resolution of the Company’s shareholders, exceed two times the Company’s adjusted capital and reserves (these powers relating to borrowing may only be varied by special resolution of shareholders);
The Trustee of the Royal Dutch Shell Dividend Access Trust is responsible for establishing and maintaining adequate internal control over the Trust’s financial reporting. The Trustee and the Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. On the basis of this evaluation, the Trustee and management concluded that the Trust’s internal control over financial reporting was effective as at December 31, 2009. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Trustee’s and management’s internal control over financial reporting, as stated in their report on page 169.
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Directors are not required to hold shares of the Company to qualify as a director; and Directors are appointed in accordance with the Articles and need to stand for re-election at least every third annual general meeting.
Rights attaching to shares
Dividend rights and rights to share in the company’s profit
Dividend access mechanism for Class B ordinary shares
General
Class A ordinary shares and Class B ordinary shares are identical, except for the dividend access mechanism, which will only apply to the Class B ordinary shares. Dividends paid on Class A ordinary 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 Class B ordinary shares will receive dividends through the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for UK and Dutch tax purposes. There will be no Dutch withholding tax on such dividends and certain holders (not including US holders of Class B ordinary shares or Class B American Depositary Receipts (ADRs)) will be entitled to a UK tax credit in respect of their proportional shares of such dividends. For further details regarding the tax treatment of dividends paid on the Class A and Class B ordinary shares and ADRs, please refer to “Taxation” on pages 91-92.
Description of dividend access mechanism
Under the applicable laws of England and Wales, dividends are payable on Class A ordinary shares and Class B ordinary shares only out of profits available for distribution, as determined in accordance with the Act and under IFRS. Subject to the Act, if the Directors consider that the Company’s financial position justifies the declaration of a dividend, the Company can pay an interim dividend. Shareholders can declare dividends by passing an ordinary resolution. Dividends cannot exceed the amount recommended by the Company’s Directors. It is the intention that dividends will be declared and paid quarterly. Dividends are payable to persons registered as shareholders on the record date relating to the relevant dividend. All dividends will be divided and paid in proportions based on the amounts paid up on the Company’s shares during any period for which that dividend is paid. Any dividend or other money payable in cash relating to a share can be paid by sending a cheque, warrant or similar financial instrument payable to the shareholder entitled to the dividend by post addressed to the shareholder’s registered address or it can be made payable to someone else named in a written instruction from the shareholder (or all joint shareholders) and sent by post to the address specified in that instruction. A dividend can also be paid by inter-bank transfer or by other electronic means (including payment through CREST) directly to an account with a bank or other financial institution (or other organisation operating deposit accounts if allowed by the Company) named in a written instruction from the person entitled to receive the payment under the Articles. Such account must be an account in the UK unless the share on which the payment is to be made is held by Euroclear Nederland and to which the Securities Giro Act (Wet giraal effectenverkeer) applies. Alternatively, a dividend can be paid in some other way requested in writing by a shareholder (or all joint shareholders) and agreed to by the Company. The Company will not be responsible for a payment which is lost or delayed. Where any dividends or other amounts payable on a share have not been claimed, the Directors can invest them or use them in any other way for the Company’s benefit until they are claimed. The Company will not be a trustee of the money and will not be liable to pay interest on it. If a dividend or other money has not been claimed for 12 years after being declared or becoming due for payment, it will be forfeited and go back to the Company, unless the Directors decide otherwise. The Company expects that dividends on outstanding Class B ordinary shares will be paid under the dividend access mechanism described below. The Articles provide that if any amount is paid by the issuer of the dividend access share by way of dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B ordinary shares, the dividend that the Company would otherwise pay to such holder of Class B ordinary shares will be reduced by an amount equal to the amount paid to such holder of Class B ordinary shares by the dividend access trustee.
A dividend access share has been issued by The Shell Transport and Trading Company Limited (Shell Transport) to Lloyds TSB Offshore Trust Company Limited (formerly Hill Samuel Offshore Trust Company Limited) as dividend access trustee (the Trustee). Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of Class B ordinary shares on occasion and will arrange for prompt disbursement of such dividends to holders of Class B ordinary shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends which are unclaimed after 12 years will revert to Shell Transport. Holders of Class B ordinary shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend access share. The only assets held on trust for the benefit of the holders of Class B ordinary shares will be dividends paid to the dividend access trustee in respect of the dividend access share. The declaration and payment of dividends on the dividend access share will require board action by Shell Transport and will be subject to any applicable limitations in law or in the Shell Transport articles of association in effect from time to time. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate of the dividend declared by the board of the Company on the Class B ordinary shares in respect of the same period.
Operation of the dividend access mechanism
If, in connection with the declaration of a dividend by the Company on the Class B ordinary shares, the board of Shell Transport elects to declare and pay a dividend on the dividend access share to the dividend access trustee, the holders of the Class B ordinary shares will be beneficially entitled to receive their share of that dividend 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 by way of a dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B ordinary shares, the dividend which the Company would otherwise pay on the Class B ordinary shares will be reduced by an amount equal to the amount paid to such holders of Class B ordinary shares by the dividend access trustee.
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The Company will have a full and unconditional obligation, in the event that the dividend access trustee does not pay an amount to holders of Class B ordinary shares on a cash dividend payment date (even if that amount has been paid to the dividend access trustee), to pay immediately the dividend declared on the Class B ordinary shares. The right of holders of Class B ordinary shares to receive distributions from the dividend access 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 Class B ordinary shares. Any payment by the Company will be subject to Dutch withholding tax (unless in any particular case an exemption is obtained under Dutch law or the provisions of an applicable tax treaty). If for any reason no dividend is paid on the dividend access share, holders of Class B ordinary shares will only receive dividends from the Company directly. The dividend access mechanism has been approved by the Dutch Revenue Service pursuant to 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. The agreement states, among other things, that dividend distributions on the dividend access share by Shell Transport will not be subject to Dutch dividend 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 Class B ordinary shares without the approval of the Dutch Revenue Service. Accordingly, the Company would not expect to issue additional Class B ordinary shares unless that approval was obtained or the Company determined that the continued operation of the dividend access mechanism was unnecessary. Any further issue of Class B ordinary 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, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. The daily operations of the Dividend Access Trust are administered on behalf of Shell by the Trustee. Material financial information of the Dividend Access Trust is included in the Consolidated Financial Statements of Shell and is therefore, subject to the same disclosure controls and procedures of Shell. On February 5, 2010 (Completion), the Trustee entered in to an agreement with ESS Trustee International Limited (the New Trustee) whereby the benefit of certain clients of the Trustee, including the Trust, would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust and Fund Business Administration Agreement between the Trustee and the New Trustee.
Disputes between a shareholder or ADR holder and Royal Dutch Shell, any subsidiary, Director or professional service provider
Directors; (iii) between a shareholder in such capacity and the Company’s professional service providers (which could include the Company’s auditors, legal counsel, bankers and ADR depositaries); and (iv) between the Company and its professional service providers arising in connection with any claim within the scope of (iii) above, shall be exclusively and finally resolved by arbitration in The Hague, the Netherlands under the Rules of Arbitration of the International Chamber of Commerce (ICC), as amended from time to time. This would include all disputes arising under UK, Dutch or US law (including securities laws), or under any other law, between parties covered by the arbitration provision. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions, and the ability of shareholders to obtain monetary or other relief may therefore be limited and/or their cost of seeking and obtaining recoveries in a dispute increased. The tribunal shall consist of three arbitrators to be appointed in accordance with the ICC rules. The chairman of the tribunal must have at least 20 years’ experience as a lawyer qualified to practise in a common law jurisdiction which is within the Commonwealth (as constituted on May 12, 2005) and each other arbitrator must have at least 20 years’ experience as a qualified lawyer. Pursuant to the exclusive jurisdiction provision in the Articles if a court or other competent authority in any jurisdiction determines that the arbitration requirement described above is invalid or unenforceable in relation to any particular dispute in that jurisdiction, that dispute may only be brought in the courts of England and Wales, as is the case with any derivative claim bought under the Act. The governing law of the Articles is the substantive law of England. Disputes relating to the Company’s failure or alleged failure to pay all or part of a dividend which has been declared and which has fallen due for payment will not be subject to the arbitration and exclusive jurisdiction provisions of the Articles. Any derivative claim bought under the Act will not be the subject to the arbitration provisions of the Articles. Pursuant to the relevant Depositary agreement, each holder of ADRs is bound by the arbitration and exclusive jurisdiction provisions of the Articles as described in this section as if that holder were a shareholder.
Voting rights and General Meetings of shareholders
Shareholders meetings
Under the applicable laws of England and Wales, the Company is required in each year to hold an AGM of shareholders in addition to any other meeting of shareholders that may be held. Not more than 15 months may elapse between the date of one AGM of shareholders and that of the next. Additionally, shareholders may submit resolutions in accordance with section 338 of the Act. Directors have the power to convene a general meeting of shareholders at any time. In addition, Directors must convene a meeting upon the request of shareholders holding not less than 5% of the Company’s paid-up capital carrying voting rights at general meetings of shareholders pursuant to section 303 of the Act. A request for a general meeting of shareholders must state the general nature of the business to be dealt with at the meeting, and must be signed by the requesting shareholders and deposited at the Company’s registered office. If Directors fail to give notice of such meeting to shareholders within 21 days from receipt of notice, the shareholders that requested the general meeting, or any of them representing more than one-half of the total voting rights of all shareholders that requested the meeting, may
The Articles generally require that, except as noted below, all disputes (i) between a shareholder in such capacity and the Company and/or its Directors, arising out of or in connection with the Articles or otherwise; (ii) so far as permitted by law, between the Company and any of its Directors in their capacities as such or as the Company’s employees, including all claims made by the Company or on its behalf against
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themselves convene a meeting which must be called within three months. Any such meeting must be convened in the same manner, as readily as possible, as that in which meetings are to be convened by Directors. The Company is required to give at least 21 days’ notice of any AGM, any general meeting where a special resolution is to be voted upon, or to pass a resolution of which special notice under the Act has been given. “Special resolutions” generally involve proposals to: change the name of a company; alter a company’s capital structure; change or amend the rights of shareholders; permit a company to issue new shares for cash without applying shareholders’ pre-emptive rights; amend a company’s objects clause in its Memorandum of Association; amend a company’s Articles of Association; and carry out other matters for which a company’s Articles of Association or the Act as may be applicable prescribe that a “special resolution” is required. At least 14 days’ notice is required for all other general meetings. The Articles require that in addition to any requirements under the legislation, the notice for any general meeting must state where the meeting is to be held (the principal meeting place) and the location of any satellite meeting place, which shall be identified as such in the notice. At the same time that notice is given for any general meeting, an announcement of the date, time and place of that meeting will, if practicable, be published in a national newspaper in the Netherlands. The listing rules (the Listing Rules) of the UK Listing Authority, the Euronext Amsterdam rules and the rules of the New York Stock Exchange require the Company to inform holders of its securities of the holding of meetings which they are entitled to attend. A shareholder is entitled to appoint a proxy (which is not required to be another shareholder) to represent and vote on behalf of the shareholder at any general meeting of shareholders, including the AGM. Business may not be transacted at any general meeting, including the AGM, unless a quorum is present. A quorum is two people who are entitled to vote at that general meeting. They can be shareholders who are personally present or proxies for shareholders entitled to vote at that general meeting or a combination of both. If a quorum is not present within five minutes of the time fixed for a general meeting to start or within any longer period not exceeding one hour which the chairman of the meeting can decide and if the meeting was called by shareholders, it will be cancelled. Any other meeting will be adjourned to any day (being not less than three nor more than 28 days later), time and place stated in the notice of the meeting. If the notice does not provide for this, the meeting shall be adjourned to a day, time and place decided upon by the chairman of the meeting. One shareholder present in person or by proxy and entitled to vote will constitute a quorum at any adjourned general meeting.
Record dates
Voting rights
The Class A ordinary shares and Class B ordinary shares have identical voting rights and vote together as a single class on all matters including the election of directors unless a matter affects the rights of one class as a separate class. If a resolution affects the rights attached to either class of shares as a separate class, it must be approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount, excluding any shares of that class held as treasury shares, or by special resolution passed at a separate meeting of the registered holders of the relevant class of shares. It is the intention that all voting at general meetings will take place on a poll. A poll is voting by means of a ballot where the number of shares held by each voting shareholder is counted, as opposed to voting by way of a show of hands where the actual number of shares held by voting shareholders is not taken into account. Under the Act, if a poll is demanded, the resolution conducted on a poll must be approved by holders of at least a majority of the votes cast at the meeting. Special resolutions require the affirmative vote of at least 75% of the votes cast at the meeting to be approved. On a poll, every holder of Class A ordinary shares or Class B ordinary shares present in person or by proxy has one vote for every share he or she holds. This is subject to any rights or restrictions which are given to any class of shares. No shareholder is entitled to vote if he or she has been served with a restriction notice after failure to provide the Company with information concerning interests in his or her shares required to be provided under section 793 of the Act. Major shareholders have no differing voting rights.
Rights in a winding up
If the Company is voluntarily wound up the liquidator can distribute to shareholders any assets remaining after the liquidator’s fees and expenses have been paid and all sums due to prior ranking creditors (as defined under the laws of England and Wales) have been paid. Under the Articles, the holders of the sterling deferred shares would be entitled (such entitlement ranking in priority to the rights of holders of ordinary shares) to receive an amount equal to the aggregate of the capital paid up or credited as paid up on each sterling deferred share but would not be entitled to participate further in the profits or assets of the Company. Any assets remaining after the entitlements of the holders of sterling deferred shares are satisfied would be distributed to the holders of Class A and Class B ordinary shares pro rata to their shareholdings.
Redemption provisions
Ordinary shares are not subject to any redemption provisions.
Sinking fund provisions
Ordinary shares are not subject to any sinking fund provision under the Memorandum and Articles of Association or as a matter of the laws of England and Wales.
Liability to further calls
No holder of the Company’s ordinary shares is currently liable to make additional contributions of capital in respect of the Company’s ordinary shares in the future.
Discriminating provisions
Entitlement to attend and vote at the AGM is determined by reference to the Company’s Register of Members. In order to attend and vote at the AGM, a member must be entered on the Register of Members or the register of the Royal Dutch Shell Corporate Nominee no later than the record date. The record date will not be more than 48 hours before the meeting, not taking account of any part of a day that is not a working day.
There are no provisions discriminating against a shareholder because of his or her ownership of a particular number of shares.
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Variation of rights
The Act does not give Directors authority to amend the Memorandum and Articles of Association without shareholder approval. Under the Act, shareholders have the power to amend the objects clause and any provision of the Articles, in each case by special resolution, subject to the rights of dissenting shareholders available under the Act. The Articles provide that, if permitted by legislation, the rights attached to any class of shares can be changed if this is approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount (excluding any shares of that class held as treasury shares) or by a special resolution passed at a separate meeting of the holders of the relevant class of shares. At each such separate meeting, all of the provisions of the Articles relating to proceedings at a general meeting apply, except that: (i) a quorum will be present if at least one shareholder who is entitled to vote is present in person or by proxy who owns at least one-third in amount of the issued shares of the class; (ii) any shareholder who is present in person or by proxy and entitled to vote can demand a poll; (iii) on a poll every shareholder who is present in person or by proxy and entitled to vote is entitled to one vote for every share he or she has of the class (subject to any special rights or restrictions which are attached to any class of shares); and (iv) at an adjourned meeting, one person entitled to vote and who holds shares of the class, or his or her proxy, will be a quorum. These provisions are not more restrictive than required by law in England.
Limitations on rights to own shares
the following further restrictions: (i) Directors can withhold any dividend or part of a dividend or other money otherwise payable in respect of the identified shares without any liability to pay interest when such money is finally paid to the shareholder; and (ii) Directors can refuse to register a transfer of any of the identified shares which are certificated shares unless Directors are satisfied that they have been sold outright to an independent third party. Once a restriction notice has been given, Directors are free to cancel it or exclude any shares from it at any time they think fit. In addition, they must cancel the restriction notice within seven days of being satisfied that all information requested in the statutory notice has been given. Also, where any of the identified shares are sold and Directors are satisfied that they were sold outright to an independent third party, they must cancel the restriction notice within seven days of receipt of the notification of the sale. The Articles do not restrict in any way the provision of the legislation which apply to failures to comply with notices under the legislation. The UK City Code on Takeovers and Mergers (the Takeover Code) imposes rigorous disclosure requirements affecting parties to a proposed takeover, their “associates” and persons acting “in concert” in relation to the shares of a company. These requirements also extend to dealings by persons who directly or indirectly own or control (either before or as a result of the dealing) 1% or more of the equity shares in an offeror or offeree company or of any other class of shares relevant to the offer in question [A].
[A] Certain changes to the disclosure regime under the Takeover Code are expected to take effect on April 19, 2010.
There are no limitations imposed by the applicable laws of England and Wales or the Memorandum and Articles of Association on the rights to own shares, including the right of non-residents or foreign persons to hold or vote the Company’s shares, other than limitations that would generally apply to all shareholders.
Change of control
Rule 13d-1 of the US Securities Exchange Act of 1934 requires that a person or group acquiring beneficial ownership of more than 5% of equity securities registered under the US Securities Exchange Act discloses such information to the SEC within 10 days after the acquisition.
Capital changes
There are no provisions in the Memorandum and Articles of Association or of corporate legislation in England and Wales that would delay, defer or prevent a change of control.
Threshold for disclosure of share ownership
The conditions imposed by the Memorandum and Articles of Association for changes in capital are not more stringent than required by the applicable laws of England and Wales.
Further information
The following information is available on the Shell website at www.shell.com/investor: the terms of reference of the Audit Committee, Corporate and Social Responsibility Committee, Nomination and Succession Committee and Remuneration Committee explaining their roles and the authority the Board delegates to them; the full list of matters reserved to the Board for decision; Shell General Business Principles; Shell Code of Conduct; Code of Ethics for Executive Directors and Senior Financial Officers; and Memorandum and Articles of Association. Signed on behalf of the Board
Michiel Brandjes
The UK Financial Services Authority and Disclosure and Transparency Rules impose an obligation upon a person who acquires or ceases to have notifiable interest in the relevant share capital of a public company to notify the company of that fact within two days (excluding weekends and bank holidays) of his or her knowing of its occurrence. The disclosure threshold is 3%. The law provides that a public company may ascertain the persons who are or have within the last three years been interested in its relevant share capital and the nature of such interests. The Articles provide that in any statutory notice under the relevant legislation, the Company will ask for details of those who have an interest and the extent of their interest in a particular holding. The Articles also provide that when a person receives a statutory notice, he or she has 14 days to comply with it. If he or she does not do so or if he or she makes a statement in response to the notice which is false or inadequate in some important way, the Company may restrict the rights relating to the identified shares, following notice. The restriction notice will state that the identified shares no longer give the shareholder any right to attend or vote either personally or by proxy at a shareholders’ meeting or to exercise any right in relation to the shareholders’ meetings. Where the identified shares make up 0.25% or more (in amount or in number) of the existing shares of a class at the date of delivery of the restriction notice, the restriction notice can also contain
Company Secretary March 15, 2010
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ADDITIONAL SHAREHOLDER INFORMATION
The Company was incorporated in England and Wales on February 5, 2002, as a private company under the Companies Act of England and Wales 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 the Chamber of Commerce, The Hague, under company number 34179503. The Company is resident in the Netherlands for Dutch and UK tax purposes and its Memorandum of Association provides that 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. As at February 23, 2010, interests of more than 3% of the issued Class A and Class B ordinary share capital of the Company can be found on page 59. The business address for all of the Directors is: Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands.
Exchange [A]. The depositary receipts are issued, cancelled and exchanged at the office of The Bank of New York Mellon, 101 Barclay Street, New York, NY 10286, as depositary (the Depositary) under a deposit agreement between the Company, the Depositary and the holders of ADRs. Each ADR represents two ¤0.07 shares of Royal Dutch Shell plc deposited under the agreement. More information relating to ADRs is given on pages 90-91.
[A] At February 23, 2010, there were outstanding 360,360,720 Class A ADRs and 146,494,500 Class B ADRs representing approximately 20.32% and 10.86% of the respective share capital class, held by 8,103 and 1,089 holders of record with an address in the USA, respectively. In addition to holders of ADRs, as at February 23, 2010, there were 59,693 Class A shares and 801,580 Class B shares of ¤0.07 each representing 0.06% and 0.79% of the respective share capital class, held by 14 and 878 holders of record registered with an address in the USA, respectively.
L IS T I N G IN F ORMATI ON
Ticker symbol London Ticker symbol Amsterdam Ticker symbol New York (ADR [A]) ISIN Code CUSIP SEDOL Number London SEDOL Number Euronext Weighting on FTSE as at 31/12/09 Weighting on AEX as at 31/12/09
Class A shares RDSA RDSA RDS.A GB00B03MLX29 G7690A100 B03MLX2 B09CBL4 4.79% 12.21%
Class B shares RDSB RDSB RDS.B GB00B03MM408 G7690A118 B03MM40 B09CBN6 3.53% not included
Nature of trading market
The Company has two classes of ordinary shares, Class A shares and Class B shares. The principal trading market for the Class A ordinary shares is Euronext Amsterdam and the principal trading market for the Class B ordinary shares is the London Stock Exchange. Ordinary shares are traded in registered form. American Depositary Receipts (ADRs) representing Class A ADRs and Class B ADRs outstanding are listed on the New York Stock
[A] One Class A ADR represents two Class A ordinary shares of ¤0.07 each. One Class B ADR represents two Class B ordinary shares of ¤0.07 each.
Share capital
The authorised, issued and fully paid share capital of the Company as at February 23, 2010, was as follows:
SH ARE CA PITAL
Class A ordinary shares of ¤0.07 each Class B ordinary shares of ¤0.07 each Sterling deferred shares of £1 each Unclassified shares of ¤0.07 each
Authorised (number) 4,077,359,886 2,759,360,000 50,000 3,163,280,114
Authorised (amount) ¤285,415,192 ¤193,155,200 £50,000 ¤221,429,608
Issued (number) 3,545,663,973 2,695,808,103 50,000 Nil
Issued (amount) ¤248,196,478 ¤188,706,567 £50,000 Nil
The following is a summary of the material terms of the Company’s ordinary shares, including brief descriptions of the provisions contained in the Memorandum and Articles of Association and applicable laws of England in effect on the date of this document. This summary does not purport to include complete statements of these provisions. The unclassified shares can be issued as Class A ordinary shares or Class B ordinary shares at the discretion of the Directors. Upon issuance, Class A ordinary shares and Class B ordinary 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 Class A ordinary shares and Class B ordinary shares rank equally for all dividends and distributions on ordinary share capital declared. Class A ordinary shares and Class B ordinary 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. Class A ordinary shares and Class B ordinary shares are also admitted to listing on Eurolist by Euronext Amsterdam. Class A ADRs and Class B ADRs are listed at the New York Stock Exchange. As at December 31, 2009, trusts and trust-like entities holding shares for the benefit of employee plans of Shell held (directly and indirectly)
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119.2 million shares of the Company with an aggregate carrying amount of $3,569 million and an aggregate nominal amount of approximately ¤8.3 million.
CL AS S B S HA RE S [ A]
PENCE
Dividends
The following tables show the dividends on each class of share and each class of ADR for the years 2005–2009.
CL ASS A AN D B SH ARES $
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
2009 28.65 25.59 25.65 26.36 106.25 107.86
2008 20.05 20.21 24.54 27.97 92.77 82.91
2007 18.09 17.56 17.59 18.11 71.35 69.84
2006 17.13 17.08 16.77 16.60 67.58 66.62
2005 15.84 15.89 15.64 15.64 63.01 84.61
Q1 Q2 Q3 Q4 Total
2009 0.42 0.42 0.42 0.42 1.68
2008 0.40 0.40 0.40 0.40 1.60
2007 0.36 0.36 0.36 0.36 1.44
2006 – – – – –
2005 – – – – –
[A] Sterling equivalent. Historical data converted to Royal Dutch Shell equivalents.
CL AS S A A DRs
$
Q1
CL ASS A SHAR ES ¤
2009 0.84 0.84 0.84 0.84 3.36 3.32
2008 0.80 0.80 0.80 0.80 3.20 3.12
2007 0.72 0.72 0.72 0.72 2.88 2.81
2006 0.63 0.63 0.63 0.65 2.54 2.45
2005 0.59 [A] 0.55 0.56 0.56 2.26 3.04
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
2009 [A] 2008 [A] 2007 [A] 0.32 0.26 0.26 0.30 0.26 0.26 0.28 0.31 0.25 0.30 0.30 0.24 1.21 1.21 1.13 1.07 1.02 1.03
2006 0.25 0.25 0.25 0.25 1.00 0.98
2005 0.23 0.23 0.23 0.23 0.92 1.21
Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
[A] Historical data converted to Royal Dutch Shell equivalents.
[A] Euro equivalent, rounded to the nearest euro cent. Historical data converted to Royal Dutch Shell equivalents.
CL AS S B A DRs
$
2009 Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year 0.84 0.84 0.84 0.84 3.36 3.32
2008 0.80 0.80 0.80 0.80 3.20 3.12
2007 0.72 0.72 0.72 0.72 2.88 2.81
2006 0.63 0.63 0.63 0.65 2.54 2.45
2005 0.57 [A] 0.55 0.56 0.56 2.24 3.10
[A] Historical data converted to Royal Dutch Shell equivalents.
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High, low and year-end share prices
The following table shows the high, low and year-end prices for the Company’s registered ordinary shares on the principal trading markets: of ¤0.07 nominal value on the London Stock Exchange; of ¤0.07 nominal value on Euronext Amsterdam; and of the ADRs on the New York Stock Exchange for the periods specified (ADRs do not have a nominal value).
ANN U AL SH ARE PRICES
Euronext Amsterdam [A] High ¤ Royal Dutch ordinary shares/ Royal Dutch New York Shares 2005 (Jan 1 – Sep 30) RDSA/RDS Class A ADRs 2005 (Jul 20 – Dec 31) 2006 2007 2008 2009 Low ¤ Year-end ¤ High pence
London Stock Exchange Low pence Year-end pence High $
New York Stock Exchange [C] Low $ Year-end $
28.38 27.67 28.53 31.35 29.63 21.46
20.92 24.12 24.32 23.72 16.25 15.27
25.80 25.78 26.72 28.75 18.75 21.10 1,894 1,974 2,152 2,278 1,944 1,633 1,661 1,611 1,276 1,362 1,771 1,785 2,111 1,805 1,882
67.45[D] 68.08 72.38 88.31 88.73 63.75
55.37[D] 57.79 60.17 62.71 41.62 38.29
62.80[D] 61.49 70.79 84.20 52.94 60.11
Euronext Amsterdam High ¤ Shell Transport Ordinary Shares/ Shell Transport ADRs 2005 (Jan 1 – July 19) RDSB/RDS Class B ADRs 2005 (Jul 20 – Dec 31) 2006 2007 2008 2009 28.90 30.04 32.20 29.16 20.99 25.41 25.18 23.64 15.84 14.90 27.08 26.66 28.46 18.50 20.30 Low ¤ Year-end ¤ High pence
London Stock Exchange [E] Low pence Year-end pence High $
New York Stock Exchange [F] Low $ Year-end $
1,991 1,968 2,071 2,173 2,245 1,897
1,528 1,717 1,686 1,600 1,223 1,315
1,838 1,858 1,790 2,090 1,726 1,812
69.86 70.94 74.93 87.94 87.54 62.26
57.75 60.69 62.75 62.20 41.41 37.16
64.56 64.53 71.15 83.00 51.43 58.13
[A] Pursuant to the terms of the Unification, holders of Royal Dutch ordinary shares received two Royal Dutch Shell plc Class A ordinary shares for each Royal Dutch ordinary share. To assist comparison, the historical prices of the Royal Dutch ordinary shares have been divided by 2 to reflect such exchange ratio. Royal Dutch ordinary shares continued to trade on Euronext Amsterdam following the completion of the Unification until such shares were delisted on September 30, 2005. [C] Pursuant to the terms of the Unification, holders of Royal Dutch New York Shares received one Royal Dutch Shell plc Class A ADR for each Royal Dutch New York Share. Each Royal Dutch Shell plc Class A ADR represents two Royal Dutch Shell plc Class A ordinary shares. [D] The New York Stock Exchange halted trading in the Royal Dutch New York Shares on October 3, 2005, following delisting in Amsterdam, and resumed trading in the Royal Dutch New York Shares on October 31, 2005, following the joint public announcement by Royal Dutch Shell plc and Royal Dutch of the definitive terms of the legal merger between Royal Dutch and its wholly-owned subsidiary Shell Petroleum N.V., in which all outstanding Royal Dutch shares were exchanged for ¤52.21 (or the equivalent in loan notes). The table excludes trading in Royal Dutch New York Shares for the period from October 3, 2005, through their delisting on November 21, 2005. [E] Pursuant to the terms of the Unification, holders of Shell Transport Ordinary Shares (including Shell Transport Ordinary Shares to which holders of Shell Transport bearer warrants were entitled) received 0.287333066 Royal Dutch Shell plc Class B ordinary shares for each Shell Transport Ordinary Share. To assist comparison, the historical prices of the Shell Transport Ordinary Shares have been divided by 0.287333066 to reflect such exchange ratio. [F] Pursuant to the terms of the Unification, holders of Shell Transport ADRs received 0.861999198 Royal Dutch Shell plc Class B ADRs for each Shell Transport ADR. To assist comparison, the historical prices of the Shell Transport ADRs have been divided by 0.861999198 to reflect such exchange ratio. Each Royal Dutch Shell plc Class B ADR represents two Royal Dutch Shell plc Class B ordinary shares.
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QU ART E RLY S HA RE PRI CE S
Euronext Amsterdam Class A shares High Low ¤ 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 29.63 28.45 26.02 23.15 20.95 19.97 20.20 21.46 ¤ 21.04 21.68 19.50 16.25 15.27 15.93 16.56 18.92
London Stock Exchange Class B shares High Low pence 2,178 2,245 2,023 1,851 1,854 1,755 1,783 1,897 pence 1,598 1,670 1,500 1,223 1,315 1,368 1,424 1,679
New York Stock Exchange Class A ADRs High Low $ 86.41 88.73 81.14 60.11 56.07 56.12 59.75 63.75 $ 64.89 68.29 56.11 41.62 38.29 41.42 46.20 55.22
New York Stock Exchange Class B ADRs High Low $ 85.30 87.54 79.81 60.00 54.77 57.63 58.15 62.26 $ 63.42 66.55 54.58 41.41 37.16 40.80 46.40 53.73
MON THLY S HA RE PRI CE S
Euronext Amsterdam Class A shares High Low ¤ 2009 September October November December 2010 January February 20.20 21.46 21.30 21.37 21.77 20.59 ¤ 18.98 18.92 19.73 19.92 20.10 19.53
London Stock Exchange Class B shares High Low pence 1,783 1,897 1,848 1,849 1,887 1,741 pence 1,633 1,679 1,723 1,719 1,663 1,632
New York Stock Exchange Class A ADRs High Low $ 59.75 63.75 63.40 62.13 62.69 57.39 $ 54.19 55.22 58.77 57.73 55.28 53.23
New York Stock Exchange Class B ADRs High Low $ 58.15 62.26 61.81 59.95 60.71 55.41 $ 53.16 53.73 57.17 55.53 53.23 51.32
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 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 a Class A or a Class B ADR with the Depositary.
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 ADRs. The Depositary will notify holders of ADRs of shareholders’ meetings of the Company and will arrange to deliver voting materials to such holders of ADRs if requested by the Company. Upon request by a holder, the Depositary will endeavour to appoint such holder as proxy in respect of such holders’ deposited shares entitling such holder to attend and vote at shareholders’ meetings. Holders of ADRs 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, (a) shareholders may deposit their shares with the Depositary and receive the corresponding class and amount of ADRs and (b) holders of ADRs may surrender their ADRs 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 ADRs and withdraw their underlying shares or have the corresponding class and amount of shares credited to their account. The Depositary may also deliver ADRs prior to deposit of the underlying securities subject to certain conditions, including, without limitation, that such pre-released ADRs are fully collateralised and that the underlying securities are assigned to and held for the account of the Depositary.
American Depositary Receipts (ADRs)
The Depositary is the registered shareholder of the shares underlying the Class A or Class B ADRs and enjoys the rights of a shareholder under the Memorandum and Articles of Association. Holders of ADRs will not have shareholder rights. The rights of the holder of a Class A ADR or Class B ADR 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 ADRs and, where possible and on a reasonable basis, will distribute such dividends and distributions to holders of ADRs. Rights to purchase additional shares will also be made available to the Depositary who may make such rights available to holders of ADRs. 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
Shell Annual Report and Form 20-F 2009 Additional shareholder information
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FEES PAID BY HOLDERS OF ADRs
The Depositary collects its fees for delivery and surrender of ADRs directly from investors depositing shares or surrendering ADRs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by
PE RS ON S DE POS ITI N G OR W I TH DRAWI N G S HAR E S MU ST PAY:
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.
FOR:
$5.00 per 100 ADRs (or portion of 100 ADRs)
Issuance of ADRs, including issuances resulting from a distribution of shares or rights or other property; Cancellation of ADRs for the purpose of withdrawal, including if the deposit agreement terminates. Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADR registered holders. Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when they deposit or withdraw shares. Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); Converting foreign currency to US dollars. As necessary
Registration or transfer fees Expenses of the Depositary
Taxes and other governmental charges the Depositary or the custodian has to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes
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 ADR program. The Depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The Depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or 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, 2009 to February 23, 2010, the Company received $1,089,369 from the Depositary.
first-time investors and a DRIP for the Class B ADRs available to registered ADR holders. Tax consequences of participation in any plan may vary depending upon the tax residence of the shareholder and the class of shares held. Holders of Class A ordinary shares should note that it is the net dividend that will be reinvested. To participate in one of these DRIPs, or for further information, shareholders should call their bank or broker if their shareholding is through Euroclear Nederland or The Bank of New York Mellon if enquiries relate to ADRs. Otherwise Equiniti should be contacted. The contact details of Equiniti and the Bank of New York Mellon are given on the inside back cover.
Exchange controls and other limitations affecting security holders
There is no legislative or other legal provision currently in force in England, the Netherlands or arising under the Company’s Memorandum or Articles of Association restricting remittances to nonresident holders of the Company’s ordinary shares or affecting the import or export of capital for use by the Company.
Dividend Reinvestment Plan (DRIP)
A DRIP is offered on both classes of shares and, depending on how an investor holds shares, is offered by either Equiniti or ABN AMRO trading under the name RBS (RBS). DRIPs for ADRs traded on the NYSE are offered by The Bank of New York Mellon.
EQUINITI
Taxation
GENERAL
The DRIP operated by Equiniti is available to investors in respect of shares held directly in the Royal Dutch Shell Nominee or on the Royal Dutch Shell plc share register. Shareholders will be liable for tax on dividends reinvested on the same basis as if shareholders had received the cash and arranged the purchase of shares themselves.
RBS
The DRIP operated by RBS is available to shareholders who hold their shares via Euroclear Nederland through an admitted institution of Euroclear Nederland and are expecting to receive the dividend in the default currency for Class A and Class B ordinary shares.
THE BANK OF NEW YORK MELLON
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 ADRs, subject to the provisions of any applicable tax convention or domestic law. The following sets forth the operation of the provisions on dividends on the Company’s various ordinary shares and ADRs to US and UK holders, as well as certain other tax rules pertinent to holders. Each holder should consult their tax adviser.
DIVIDENDS PAID ON THE DIVIDEND ACCESS SHARE
The Bank of New York Mellon maintains a Global BuyDIRECTSM plan for the Royal Dutch Shell Class A ADRs, available to registered holders and
There is no Dutch withholding tax on dividends on Class B ordinary shares or Class B ADRs provided that such dividends are paid on the dividend access share pursuant to the dividend access mechanism (see “Dividend access mechanism for Class B ordinary shares” on pages 83-84). Dividends paid on the dividend access share are treated
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as UK-source for tax purposes and there is no UK withholding tax on them. Also, under UK law, individual shareholders resident in the UK are entitled to a UK tax credit with dividends paid on the dividend access share. The amount of the UK tax credit is 10/90ths of the cash dividend and the credit is not repayable when it exceeds the individual’s UK tax liability. In 2009 all dividends with respect to Class B ordinary shares and Class B ADRs were paid on the dividend access share pursuant to the dividend access mechanism.
DUTCH WITHHOLDING TAX
DUTCH SUCCESSION DUTY AND GIFT TAX ES
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 unless the shares are part of the business property of a permanent establishment situated in the Netherlands. A gift of shares of a Dutch tax-resident company by an individual, who is not a resident or deemed resident of the Netherlands, is generally not subject to Dutch gift tax.
U K STAMP DUTY AND STAMP DUTY RESERVE TAX ( SDRT)
When Dutch withholding tax applies on dividends paid to a US holder (that is, dividends on Class A ordinary shares or Class A ADRs; or on Class B ordinary shares or Class B ADRs that are not paid on the dividend access share pursuant to the dividend access mechanism), the US holder will be subject to Dutch withholding tax at the rate of 15%. A US holder who is entitled to the benefits of the 1992 Double Taxation Convention between the USA and the Netherlands and as amended by the protocol signed March 8, 2004 (the Convention) 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. 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-resident holders (that is, dividends on Class A ordinary shares or Class A ADRs, or on Class B ordinary shares or Class B ADRs that are not paid on the dividend access share pursuant to the dividend access mechanism), the dividend will typically be subject to withholding tax at a rate of 15%. Such UK holder will be entitled to a credit (not repayable) for withholding tax against their UK tax liability. However, from July 1, 2009 certain corporate shareholders are, subject to conditions, exempt from UK tax on dividends. Withholding tax suffered cannot be offset against such exempt dividends. Pension funds, meeting certain defined criteria, can however, claim a full refund of the dividend tax withheld. Also, resident corporate shareholders holding at least a 5% shareholding and meeting other defined criteria are exempted at source from dividend tax. For shareholders who are 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 shareholder’s residence.
DUTCH CAPITAL GAINS TAXATION
Sales or transfers of the Company’s ordinary shares within a clearance service (such as Euroclear Nederland) or of the Company’s ADRs within the ADR depositary receipts system will not give rise to a 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 receipts (such as ADRs) 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 amount of the consideration, normally paid by the purchaser.
CAPITAL GA INS TAX
For the purposes of UK capital gains tax, the market values of the company’s shares were:
H I STOR ICA L I N F ORM ATI ON R E L ATI N G TO : £
March 31, 1982 Royal Dutch Petroleum Company (N.V. Koninklijke Nederlandsche Petroleum Maatschappij) which ceased to exist on December 21, 2005 Share prices have been restated where necessary to reflect all capitalisation issues since the relevant date. This includes the change in the capital structure following the Unification of Royal Dutch and Shell Transport where one Royal Dutch share was exchanged for two Royal Dutch Shell plc Class A ordinary shares The “Shell” Transport and Trading Company, p.l.c which delisted on July 19, 2005 Share prices have been restated where necessary to reflect all capitalisation issues since the relevant date. This includes the change in the capital structure following the Unification of Royal Dutch and Shell Transport where one Shell Transport share was exchanged for 0.287333066 Royal Dutch Shell plc Class B ordinary shares
July 20, 2005
1.1349
17.6625
1.4502
Not applicable
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 shareholder 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.
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FIN ANCIAL CAL ENDAR
Financial year ends Announcements Full year results for 2009 First quarter results for 2010 Second quarter results for 2010 Third quarter results for 2010 Dividend timetable [A] 2009 Fourth quarter interim Announced Ex-dividend date Record date Payment date 2010 First quarter interim Announced Ex-dividend date Record date Payment date 2010 Second quarter interim Announced Ex-dividend date Record date Payment date 2010 Third quarter interim Announced Ex-dividend date Record date Payment date Annual General Meeting
December 31, 2009
February 4, 2010 April 28, 2010 July 29, 2010 October 28, 2010
February 4, 2010 February 10, 2010 February 12, 2010 March 17, 2010
April 28, 2010 May 5, 2010 May 7, 2010 June 9, 2010
July 29, 2010 August 4, 2010 August 6, 2010 September 8, 2010
October 28, 2010 November 3, 2010 November 5, 2010 December 8, 2010 May 18, 2010
[A] This timetable is the intended timetable as announced on October 29, 2009. The Directors do not propose to recommend any further distribution in respect of 2009.
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REPORT ON THE ANNUAL REPORT AND ACCOUNTS
Independent auditors’ report to the members of Royal Dutch Shell plc
We have audited the Consolidated Financial Statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively, the Group) for the year ended December 31, 2009, which comprise the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
In our opinion the Consolidated Financial Statements comply with IFRSs as issued by the IASB.
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES A CT 2006
In our opinion: the information given in the Report of the Directors for the financial year for which the Consolidated Financial Statements are prepared is consistent with the Consolidated Financial Statements; and the information given in the Corporate Governance Statement set out on pages 76-86 with respect to internal control and risk management systems and about share capital structures is consistent with the Consolidated Financial Statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: 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; or a corporate governance statement has not been prepared by the Parent Company. Under the Listing Rules we are required to review: the Directors’ statement, set out on page 80, in relation to going concern; and the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the 2008 Combined Code specified for our review.
OTHER MATTER
As explained more fully in the Report of the Directors set out on pages 57-58, the Directors are responsible for the preparation of the Consolidated Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Consolidated Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the Consolidated Financial Statements sufficient to give reasonable assurance that the Consolidated Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Consolidated Financial Statements.
OPIN ION ON FIN ANCIAL STATEMENTS
We have reported separately on the Parent Company Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2009, and on the information in the Directors’ Remuneration Report that is described as having been audited.
Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
London March 15, 2010
[A] The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com ) is 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 Consolidated Financial Statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
In our opinion the Consolidated Financial Statements: give a true and fair view of the state of the Group’s affairs as at December 31, 2009, and of its income and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.
SEPARATE OPINION IN RELATION TO IFRSs AS ISSUED BY THE IASB
As explained in Note 1 to the Consolidated Financial Statements, the Group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
Shell Annual Report and Form 20-F 2009 Report on the Annual Report on Form 20-F
95
REPORT ON THE ANNUAL REPORT ON FORM 20-F
Report of independent registered public accounting firm
TO THE BOARD OF DIRECTORS AN D ROYAL DU TCH SHELL PLC SHA REHOLDERS
In our opinion, the accompanying Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes to the Consolidated Financial Statements present fairly, in all material respects, the financial position of Royal Dutch Shell plc (the Company) and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2009, 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. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these Consolidated Financial Statements, 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 Corporate Governance Statement as set out on pages 76-86. Our responsibility is to express opinions on these Consolidated Financial Statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Consolidated Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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 Consolidated 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.
PricewaterhouseCoopers LLP
London March 15, 2010 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 2009 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2009.
96
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
97 97 98 99 100 101 101 101 106 108 109 109 110 111 112 115 116 117 117 117 118 118 122 123 126 127 128 128 128 134 136 136 138 138 139 139 139 Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Key accounting estimates and judgements Note 4 Interest and other income Note 5 Interest expense Note 6 Employees, Directors and Senior Management Note 7 Segment information Note 8 Intangible assets Note 9 Property, plant and equipment Note 10 Associated companies and joint ventures Note 11 Investments in securities Note 12 Other non-current assets Note 13 Inventories Note 14 Accounts receivable Note 15 Cash and cash equivalents Note 16 Debt and lease arrangements Note 17 Taxation Note 18 Retirement benefits Note 19 Other provisions Note 20 Other non-current liabilities Note 21 Accounts payable and accrued liabilities Note 22 Ordinary share capital Note 23 Financial instruments and other derivative contracts Note 24 Share-based compensation plans and treasury shares Note 25 Minority interest Note 26 Other reserves Note 27 Dividends Note 28 Legal proceedings Note 29 Audit fee Note 30 Earnings per share Note 31 Post-balance sheet events
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
97
CON S OL I D ATE D S TATE M E N T OF IN COME
$ MILLION
NOTES Revenue Share of profit of equity-accounted investments Interest and other income Total revenue and other income Purchases Production and manufacturing expenses Selling, distribution and administrative expenses Research and development Exploration Depreciation, depletion and amortisation Interest expense Income before taxation Taxation Income for the period Income attributable to minority interest Income attributable to Royal Dutch Shell plc shareholders All results are from continuing activities. 10 4
2009 278,188 4,976 1,965 285,129 203,075 25,301 17,430 1,125 2,178 14,458 542 21,020 8,302 12,718 200 12,518
2008 458,361 7,446 5,133 470,940 359,587 25,565 16,906 1,230 1,995 13,656 1,181 50,820 24,344 26,476 199 26,277
2007 355,782 8,234 5,760 369,776 262,255 23,219 16,449 1,167 1,822 13,180 1,108 50,576 18,650 31,926 595 31,331
5 17
E ARN IN G S PE R S HA RE
$
Basic earnings per share Diluted earnings per share
NOTES 30 30
2009 2.04 2.04
2008 4.27 4.26
2007 5.00 4.99
CON S OL I D AT E D S TATE M E N T OF COMPR E HE N S I V E IN COME
$ MILLION
NOTES Income for the period Other comprehensive income, net of tax: Currency translation differences Unrealised (losses)/gains on securities Cash flow hedging gains/(losses) Share of other comprehensive income/(loss) of equity-accounted investments Other comprehensive income/(loss) for the period Comprehensive income for the period Comprehensive income/(loss) attributable to minority interest Comprehensive income attributable to Royal Dutch Shell plc shareholders 26
2009 12,718 6,490 (143) 324 4 6,675 19,393 252 19,141
2008 26,476 (12,087) 706 (7) (2) (11,390) 15,086 (142) 15,228
2007 31,926 5,403 (279) (108) (56) 4,960 36,886 622 36,264
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
98
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
CON SO L I D ATE D B A L A N CE SH E E T
$ MILLION
NOTES Assets Non-current assets Intangible assets Property, plant and equipment Equity-accounted investments Investments in securities Deferred tax Pre-paid pension costs Other Current assets Inventories Accounts receivable Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Deferred tax Retirement benefit obligations Other provisions Other Current liabilities Debt Accounts payable and accrued liabilities Taxes payable Retirement benefit obligations Other provisions Total liabilities Equity Ordinary share capital Treasury shares Other reserves Retained earnings Equity attributable to Royal Dutch Shell plc shareholders Minority interest Total equity Total liabilities and equity
Dec 31, 2009
Dec 31, 2008
8 9 10 11 17 18 12
5,356 131,619 31,175 3,874 4,533 10,009 9,158 195,724 27,410 59,328 9,719 96,457 292,181
5,021 112,038 28,327 4,065 3,418 6,198 6,764 165,831 19,342 82,040 15,188 116,570 282,401
13 14 15
16 17 18 19 20
30,862 13,838 5,923 14,048 4,586 69,257 4,171 67,161 9,189 461 3,807 84,789 154,046
13,772 12,518 5,469 12,570 3,677 48,006 9,497 85,091 8,107 383 2,451 105,529 153,535 527 (1,867) 3,178 125,447 127,285 1,581 128,866 282,401
16 21 17 18 19
22 24 26
527 (1,711) 9,982 127,633 136,431 1,704 138,135 292,181
/s/
Simon Henry
Simon Henry
Chief Financial Officer, for and on behalf of the Board of Directors March 15, 2010
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
99
CON S OL I D ATE D S TATE M E N T OF CHAN G E S I N E QU IT Y
$ MILLION
Equity attributable to Royal Dutch Shell plc shareholders Ordinary share capital (see Note 22) 527 – – – – – 527 536 – – – (9) – – 527 545 – – – – (9) – – 536 Treasury shares (see Note 24) (1,867) – – – 156 – (1,711) (2,392) – – – – 525 – (1,867) (3,316) – – – – – 924 – (2,392) Other reserves (see Note 26) 3,178 6,623 – – – 181 9,982 14,148 (11,049) – – 9 – 70 3,178 8,820 4,933 – – – 9 – 386 14,148 Retained earnings 125,447 12,518 3 (10,526) – 191 127,633 111,668 26,277 58 (9,516) (3,082) – 42 125,447 99,677 31,331 – (5,473) (9,001) (4,866) – – 111,668 Total 127,285 19,141 3 (10,526) 156 372 136,431 123,960 15,228 58 (9,516) (3,082) 525 112 127,285 105,726 36,264 – (5,473) (9,001) (4,866) 924 386 123,960 Minority interest 1,581 252 62 (191) – – 1,704 2,008 (142) 40 (325) – – – 1,581 9,219 622 748 (8,378) (203) – – – 2,008 Total equity 128,866 19,393 65 (10,717) 156 372 138,135 125,968 15,086 98 (9,841) (3,082) 525 112 128,866 114,945 36,886 748 (13,851) (9,204) (4,866) 924 386 125,968
At January 1, 2009 Comprehensive income for the period Capital contributions from minority shareholders and other changes in minority interest Dividends paid (see Note 27) Treasury shares: net sales and dividends received Share-based compensation At December 31, 2009 At January 1, 2008 Comprehensive income/(loss) for the period Capital contributions from minority shareholders and other changes in minority interest Dividends paid (see Note 27) Repurchases of shares Treasury shares: net sales and dividends received Share-based compensation At December 31, 2008 At January 1, 2007 Comprehensive income for the period Capital contributions from minority shareholders Transactions with minority shareholders (see Note 25) Dividends paid (see Note 27) Repurchases of shares Treasury shares: net sales and dividends received Share-based compensation At December 31, 2007
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
100
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
CON SO L I D AT E D S TAT E ME N T OF CA S H F L OWS
$ MILLION
2009 Cash flow from operating activities Income for the period Adjustment for: Current taxation Interest expense Depreciation, depletion and amortisation Net gains on sale of assets (Increase)/decrease in inventories Decrease/(increase) in accounts receivable (Decrease)/increase in accounts payable and accrued liabilities Share of profit of equity-accounted investments Dividends received from equity-accounted investments Deferred taxation and other provisions Other Net cash from operating activities (pre-tax) Taxation paid Net cash from operating activities Cash flow from investing activities Capital expenditure Investments in equity-accounted investments Proceeds from sale of assets Proceeds from sale of equity-accounted investments (Additions to)/proceeds from sale of securities Interest received Net cash used in investing activities Cash flow from financing activities Net (decrease)/increase in debt with maturity period within three months Other debt: New borrowings Repayments Interest paid Change in minority interest (see Note 25) Dividends paid to: Royal Dutch Shell plc shareholders Minority interest Repurchases of shares Treasury shares: net sales and dividends received Net cash used in financing activities Currency translation differences relating to cash and cash equivalents (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 12,718 9,297 1,247 14,458 (781) (7,138) 23,679 (18,872) (4,976) 4,903 (1,925) (1,879) 30,731 (9,243) 21,488 (26,516) (2,955) 1,325 1,633 (105) 384 (26,234) (6,507) 19,742 (2,534) (902) 62 (10,526) (191) – 27 (829) 106 (5,469) 15,188 9,719
2008 26,476 24,452 1,039 13,656 (4,071) 8,025 (11,160) 11,070 (7,446) 9,325 (1,030) (549) 69,787 (25,869) 43,918 (35,065) (1,885) 4,737 2,062 224 1,012 (28,915) 4,161 3,555 (2,890) (1,371) 40 (9,516) (325) (3,573) 525 (9,394) (77) 5,532 9,656 15,188
2007 31,926 20,076 550 13,180 (3,349) (7,038) (12,876) 13,708 (8,234) 6,955 (773) (801) 53,324 (18,863) 34,461 (24,576) (1,852) 8,566 1,012 1,055 1,225 (14,570) (455) 4,565 (2,796) (1,235) (6,757) (9,001) (203) (4,387) 876 (19,393) 156 654 9,002 9,656
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
101
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 known as “Shell”) have been prepared in accordance with the provisions of the Companies Act 2006, Article 4 of the International Accounting Standards (IAS) Regulation and 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. The presentation of the Consolidated Statement of Income has been changed to provide additional information in relation to costs and more alignment with industry practice. The main changes are the disclosure of purchases, production and manufacturing expenses and research and development separately (previously disclosed within cost of sales). Depreciation, depletion and amortisation charges previously included in cost of sales, selling, distribution and administrative expenses and exploration are now disclosed separately. Net gains on sale of assets are now included in interest and other income. Purchases reflect all costs related to the acquisition of inventories, the effects of the changes therein, and include supplies used for conversion into finished or intermediary 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. The accounting policies set out in Note 2 below have been consistently applied in all periods presented. Certain pronouncements were adopted for the first time in 2009 and others have been issued but are not yet required to be adopted; Note 2 discusses pronouncements that have been adopted in 2009 and any that may have a future impact on these policies but have not yet been adopted. The Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities and other derivative contracts. The preparation of financial information in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying Shell’s accounting policies. The key accounting estimates and judgements are explained in Note 3 below. Actual results could differ from those estimates. The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on March 15, 2010.
2 ACCOUNTING POLICIES Nature of the Consolidated Financial Statements
The Consolidated Financial Statements are presented in US dollars (dollars) and include the financial statements of the Company and its subsidiaries, being those companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. 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. Minority interest represents the portion of income, other comprehensive income and net assets in subsidiaries that is not held by Shell.
Nature of operations and segmental reporting
Shell is engaged worldwide in the principal aspects of the oil and gas industry, and also has interests in chemicals and other energy-related businesses. These activities are conducted in over 90 countries. Segmental reporting has been changed with effect from 2009, in line with the change in the way Shell’s businesses are managed. Shell now reports its business through three (previously six) reporting segments, Upstream (previously Exploration & Production, Gas & Power and Oil Sands), Downstream (previously Oil Products and Chemicals) and Corporate. Upstream is the aggregation of two operating segments, Upstream International and Upstream Americas, which have similar economic characteristics. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shell’s insurance operations. Comparative segment information is reclassified. Sales between segments are based on prices generally equivalent to commercially available prices.
Revenue recognition
Revenue from sales of oil, natural gas, chemicals and all 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 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. For wholesale sales of oil products and chemicals it is either at the point of delivery or the point of receipt, depending on contractual conditions.
102
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 2 continued] Revenue resulting from the production of oil and natural gas properties in which Shell has an interest with other producers is recognised on the basis of Shell’s working interest (entitlement method). 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 feedstock utilised in Shell’s refinery operations are shown net in the Consolidated Statement of Income.
Property, plant and equipment and intangible assets
A – RECOGNITION IN THE CONSOLIDATED BALANCE SHEET
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 “Derivative contracts”) as applicable. The accounting for exploration costs is described separately below (see “Exploration costs”). Intangible assets include goodwill, capitalised 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).
B – DEPRECIATION, DEPLETION AND AMORTISATION
Property, plant and equipment related to hydrocarbon production activities are depreciated on a unit-of-production basis over the proved developed reserves of the field concerned (proven and probable minable reserves in respect of oil sands extraction facilities), except in the case of assets whose useful life is shorter than the lifetime of the field, in which case the straight-line method is applied. Rights and concessions 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 amortised based on factors such as the average concession term and past experience of recognising proved reserves. Other property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, which is generally 30 years for upgraders, 20 years for refineries and chemical plants and 15 years for retail service station facilities, and major inspection costs are amortised over the estimated period before the next planned major inspection (three to five years). Property, plant and equipment held under finance leases are depreciated over the lease term. Goodwill is not amortised. Other intangible assets are amortised on a straight-line basis over their estimated useful lives (for periods up to 40 years).
C – IMPA IRMENT
Other than properties with no proved reserves (where the basis for carrying costs in the Consolidated Balance Sheet is explained under “Exploration costs”), the carrying amounts of goodwill and major property, plant and equipment are reviewed for possible impairment annually, while all assets are reviewed whenever events or changes in circumstances indicate that the carrying amounts for those assets may not be recoverable. 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 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 cashgenerating 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 oil and gas properties, expected production volumes. The latter takes into account assessments of field and reservoir performance and includes expectations about proved and unproved volumes, which are risk-weighted utilising geological, production, recovery and economic projections. Cash flow estimates are risk-adjusted to reflect local conditions as appropriate and discounted at a rate based on Shell’s marginal cost of debt. Impairments, except those related to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. Impairment charges and reversals are reported within depreciation, depletion and amortisation. On reclassification as held for sale, the carrying amounts of intangible assets and property, plant and equipment are also reviewed and, where appropriate, written down to their fair value less costs to sell. No further provision for depreciation, depletion or amortisation is charged.
Exploration costs
Shell follows the successful efforts method of accounting for oil and natural gas exploration costs. Exploration costs are recognised in income when incurred, except that exploratory drilling costs 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.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
103
[Note 2 continued]
Associated companies and joint ventures
Investments in companies over which Shell has the right to exercise significant influence but not control are classified as associated companies and are accounted for using the equity method. Under the equity method, the investment is initially recognised at cost and subsequently adjusted for the Shell share of post-acquisition income less dividends received, together with any loans of a long-term investment nature. Shell has joint venture interests in jointly controlled entities and jointly controlled assets. Interests in jointly controlled entities are also recognised using the equity method. Interests in jointly controlled assets are recognised by including the Shell share of assets, liabilities, income and expenses on a line-by-line basis. Where necessary, adjustments are made to the financial statements of associated companies and joint ventures to bring the accounting policies used into line with those of Shell. Unrealised gains on transactions between Shell and its associated companies and joint ventures are eliminated to the extent of Shell’s interest in them. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Inventories
Inventories are stated at cost to Shell or net realisable value, whichever is lower. Cost comprises direct purchase costs (including transportation), cost of production and manufacturing and taxes, and is determined using the first-in first-out (FIFO) method for oil and chemicals and by the weighted average cost method for materials.
Income taxes
The charge for current tax is calculated based on the income for the period 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 taxation 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. Deferred tax assets and liabilities are calculated using the enacted or substantively enacted rates that are expected to apply when the asset or liability is recovered. They are not recognised where they arise on the initial recognition 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 taxes on possible future distributions of retained earnings of subsidiaries and equity-accounted investments where the timing of the distribution can be controlled by Shell and it is probable that the retained earnings will be reinvested by the companies concerned. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences 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 also 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 set-off within fiscal jurisdictions.
Employee benefits
A – EMPLOYEE RETIREMENT PLANS (PENSIONS)
Retirement plans to which employees contribute and many non-contributory plans are generally funded by payments to independent trusts. Where, due to local conditions, a plan is not funded, a provision is made. Valuations of both funded and unfunded plans are carried out annually by independent actuaries. For plans that define the amount of pension benefit to be provided, pension cost primarily represents the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets. Actuarial gains and losses are accounted for using the corridor method. Under this method, to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognised in income over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised. For plans where benefits depend solely on the amount contributed to the employee’s account and the returns earned on investment of these contributions, pension cost is the amount of contributions payable by subsidiaries for the period.
B – RETIREMENT BENEFITS OTHER THAN PENSIONS
Some subsidiaries provide certain retirement healthcare and life insurance benefits to retirees, the entitlement to which is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. These plans are not funded and a provision is made. Valuations of benefits are carried out by independent actuaries. The expected costs of retirement benefits other than pensions are accrued over the periods employees render service to Shell. Actuarial gains and losses are accounted for using the corridor method, as described above.
104
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 2 continued]
C – SHARE-BASED COMPENSATION PLANS
The fair value of share-based compensation for the Performance Share Plan (the main equity-settled plan) is estimated using a Monte Carlo pricing model and is recognised in income from the date of grant over the vesting period with a corresponding increase directly in equity. The periodic change in the fair value of share-based compensation for cash-settled plans (which are those with stock appreciation rights and which is measured by reference to the Company’s share price) is recognised in income with a corresponding change in liabilities.
Leases
Agreements under which subsidiaries make payments 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 recorded as operating leases and the costs are recognised in income on a straight-line basis.
Financial instruments and other derivative contracts
A – FINAN CIAL 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. Net gains and losses arising on maturity or disposal 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 bank overdrafts, short-term bank deposits and money market funds and similar instruments that mainly have a maturity of three months or less at date of acquisition.
Receivables
Receivables are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost less any impairment.
B – FINAN CIAL LIABILITIES
Debt and accounts payable are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost, except for fixed rate debt subject to fair value hedging, which is re-measured for the hedged risk (see “Derivative contracts”). Interest expense on debt is accounted for using the effective interest method and, other than interest capitalised, is recognised in income.
C – DERIVATIVE CONTRACTS
Shell uses derivatives in the management of interest rate risk, foreign currency risk and commodity price risk, and in the management of foreign currency cash balances. These derivative contracts are recognised at fair value. Those derivatives qualifying and designated as hedges are either: (i) a “fair value” hedge of the change in fair value of a recognised asset or liability or an unrecognised firm commitment, or (ii) 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 forecasted 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 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 other comprehensive income is transferred to the initial carrying amount of the asset or liability, and for other hedged items the amount in other comprehensive income is recognised in income when the hedged transaction affects income. Subsidiaries document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking hedge transactions. The effectiveness of a hedge is also continually assessed and, when it ceases, hedge accounting is discontinued. Gains and losses on derivatives 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. Contracts to sell or purchase non-financial items that do not meet expected own use requirements, including contracts to sell or purchase commodities that can be net settled or that contain written options, are required to be recognised at fair value; associated gains and losses are recognised in income.
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[Note 2 continued] Derivatives embedded within contracts that are not already required to be recognised at fair value, and that are not closely related to the host contract in terms of economic characteristics and risks, are separated from their host contract and recognised at fair value; associated gains and losses are recognised in income.
Fair value measurements
Fair value measurements are estimates of the amounts for which assets or liabilities (generally financial instruments and other derivative contracts) could be exchanged at the measurement date, based on the assumption that such exchanges take place between knowledgeable, unrelated parties in unforced transactions. 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. Where publicly available information is not available, 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 and share-based compensation plans, 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.
Provisions
Provisions are recognised at the balance sheet date at Shell’s best estimate, using risk-adjusted future cash flows, of the present value of the expenditure required to settle the present obligation. Non-current amounts are discounted using the risk-free rate. Specific details for decommissioning and restoration costs and environmental remediation are described below. The carrying amounts of provisions are regularly reviewed and adjusted for new facts or changes in law or technology. Provisions for decommissioning and restoration costs, which are primarily in respect of hydrocarbon production facilities, are measured based on current requirements, technology and price levels and 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, by adjustment to the carrying amount of the related property, plant and equipment. Provisions for environmental remediation resulting from ongoing or past operations or events are recognised 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. Recognition of any joint and several liability is based upon Shell’s best estimate of the final pro rata share of the liability. Provisions are determined independently of expected insurance recoveries. Recoveries are recognised and reported as separate events and brought into account when virtually certain of realisation.
Treasury shares
Shares in the Company held by Shell employee share ownership trusts are not included in assets but, after deducting dividends received, are reflected at cost as a deduction from equity as treasury shares.
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, with the exception of that on buildings and major items of equipment that have alternative use.
Business combinations
Assets acquired and liabilities assumed on a business combination 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.
Acquisitions of minority interest and disposals while retaining control
Acquisitions of minority interest in subsidiaries and disposals of shares in subsidiaries while retaining control are accounted for as transactions within equity. The difference between the purchase price/disposal proceeds and the relevant proportion of the minority interest is reported in retained earnings as a movement in the Shell share of equity.
Currency translation
The dollar equivalents of exchange gains and losses arising as a result of foreign currency transactions (including those in respect of inter-company balances unless related to transactions of a long-term investment nature) are recognised in income, within interest and other income or within purchases where not related to financing. On consolidation, assets and liabilities of non-dollar subsidiaries 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 divestment or liquidation of an entity, cumulative currency translation differences related to that entity are recognised in income.
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[Note 2 continued]
Accounting standards and interpretations adopted in 2009 or not yet adopted
A – ADOPTED IN 2009
Certain accounting standards were adopted in 2009 that have an impact on the presentation of the Consolidated Financial Statements and Notes. The main change as a result of the implementation in 2009 of the revised IAS 1 Presentation of Financial Statements is the presentation of a Statement of Comprehensive Income. The main change as a result of the implementation in 2009 of revised IFRS 7 Improving Disclosures about Financial Instruments is additional disclosure about financial instruments and other derivative contracts measured at fair value using predominantly unobservable inputs.
B – NOT YET ADOPTED
Revised IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements will be implemented from January 1, 2010 with prospective effect. The revised standards apply some changes to the accounting for the acquisition of a business or for certain types of transactions involving an additional investment or a partial disposal, requiring for example the recognition in income of certain transaction costs, the recognition at fair value of contingent consideration payable and the re-measurement of existing interests held or retained. The exact impact will depend on the individual transaction concerned, with potentially different amounts being recognised in the Consolidated Financial Statements than would previously have been the case. IFRS 9 Financial Instruments, the first phase of the IASB’s project to revise the accounting for financial instruments, was issued in November 2009 and is required to be adopted by 2013. Shell’s assessment of IFRS 9 is at an early stage, but the Standard’s impact is mainly limited to its investments in securities. The full impact of the changes in accounting for financial instruments will not be known until the IASB’s project has been completed.
3 KEY ACCOUNTING ESTIMATES AND JUDGEMENTS
In order to prepare the Consolidated Financial Statements in conformity with IFRS, management of Shell has to make estimates and judgements. The matters described below are considered to be the most important in understanding the judgements that are involved in preparing these statements and the uncertainties that could impact the amounts reported in the results of operations, financial condition and cash flows. Shell’s accounting policies are described in Note 2.
Estimation of oil and gas reserves
Unit-of-production depreciation, depletion and amortisation charges are principally measured based on Shell’s estimates of proved developed oil and gas reserves. Estimates of proved reserves are also used in the determination of impairment charges and reversals. 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. Information about the carrying amounts of oil and gas properties and the depreciation, depletion and amortisation charged is given in Note 9. Estimates of oil and gas 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 Shell’s estimates of proved developed reserves affect prospectively the amounts of depreciation, depletion and amortisation charged and, consequently, the carrying amounts of oil and gas properties. It is expected, however, that in the normal course of business the diversity of the Shell portfolio will limit the effect of such revisions.
Exploration costs
Capitalised exploration drilling costs 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. In making decisions about whether to continue to capitalise exploration drilling costs for a period longer than 12 months, it is necessary to make judgements about the satisfaction of each of these conditions. If there is a change in one of these judgements in a subsequent period, then the related capitalised exploration drilling costs would be recognised in income in that period. Information on such costs is given in Note 9.
Impairment of assets
For the purposes of determining whether impairment of assets has occurred, and the extent of any impairment or its reversal, the key assumptions Shell uses in estimating future cash flows for value-in-use measures are future oil prices, expected production volumes and refining margins. These assumptions and the judgements of management that are based on them are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Future price assumptions tend to be stable because Shell does not consider short-term increases or decreases in prices as being indicative of longterm levels, but are nonetheless subject to change. Expected production volumes, which include both proved reserves as well as volumes that are
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[Note 3 continued] expected to constitute proved reserves in the future, are used for impairment testing because Shell believes this to be the most appropriate indicator of expected future cash flows. As discussed in “Estimation of oil and gas reserves”, reserves estimates are inherently imprecise. In particular, projections about unproved reserves 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 not practicable to estimate the likelihood or extent of impairments under different sets of assumptions. The discount rate applied is reviewed annually, although it has been stable in recent years. The discount rate applied in 2009 was 6% (2008: 6%). Changes in assumptions could affect the carrying amounts of assets, and impairment charges and reversal will affect income. Amounts are given in Notes 8 and 9.
Taxation
Tax provisions are recognised when it is considered probable (more likely than not) that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/or in the expected amount to be settled would be recognised in income in the period in which the change occurs. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax 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 the amounts recognised in income in the period in which the change occurs. Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognised in income both in the period of change, which would include any impact on cumulative provisions, and in future periods. Note 17 contains information on tax charges, on the deferred tax assets that are recognised, including periodic movements, and on the losses on which deferred tax is not currently recognised.
Employee retirement plans
Retirement plans are provided for employees of all major subsidiaries and generally provide defined benefits based on employees’ years of service and average/final pensionable remuneration. The plans are typically structured as separate legal entities managed by trustees. The amounts reported for Shell’s employee retirement plans are disclosed in Note 18 and are calculated in accordance with IFRS. Plan assets and benefit obligations are subject to significant volatility as market values and actuarial assumptions change. Under the IFRS methodology adopted by Shell (see Note 2 under “Employee benefits”), volatility in the amounts recognised in the Consolidated Financial Statements is reduced as the methodology provides for unexpected changes in the amount of plan assets and benefit obligations (actuarial gains and losses) to be amortised over the average remaining employee work life rather than being recognised immediately in the Consolidated Financial Statements. Local trustees manage the pension funds and set the required contributions from subsidiaries based on independent actuarial valuation rather than the IFRS measures. Pension benefit cost reported by Shell primarily represents the change in actuarial present value of the obligation for benefits based on employee service during the year and the interest on the obligation in respect of employee service in previous years, net of the expected return on plan assets. The calculations are sensitive to changes in the assumptions made regarding future outcomes. Substantial judgement is required in determining the assumptions, which vary for the different plans but are determined under a common process in consultation with independent actuaries and in the light of local conditions. The principal assumptions and their bases are as follows: rates of increase in pensionable salaries: historical outturns and management’s long-term expectation; mortality rates: the latest available standard mortality tables for the individual countries concerned. The assumptions for each country are reviewed each year and are adjusted where necessary to reflect changes in fund experience and actuarial recommendations; discount rates used to convert future cash flows to current values: prevailing long-term AA corporate bond yields, which can be volatile, chosen to match the duration of the relevant obligations; expected rates of return on plan assets: a projection of real long-term bond yields and an equity risk premium, which are combined with local inflation assumptions and applied to the actual asset mix of each plan. The amount of the expected return on plan assets is calculated using the expected rate of return for the year and the fair value of assets at the beginning of the year. The weighted average values applicable for the principal plans in Shell are given in Note 18, together with information on sensitivities. The assumptions are reviewed annually.
Provisions
Provisions are recognised for the future decommissioning and restoration of hydrocarbon production facilities and pipelines at the end of their economic lives. The estimated cost is recognised in income over the life of the proved developed reserves on a unit-of-production basis. Changes in
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 3 continued] the estimates of costs to be incurred, proved developed reserves or in the rate of production will therefore impact income, over the remaining economic life of oil and gas assets. Other provisions are recognised in the period when it becomes probable that there will be a future outflow of funds resulting from past operations or events that can be reasonably estimated. The timing of recognition requires the application of judgement to existing facts and circumstances, which can be subject to change. Estimates of the amounts of provisions recognised are based on current legal and constructive requirements, technology and price levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take account of such changes. In relation to decommissioning and restoration costs, the estimated interest rate used in discounting the risk-adjusted cash flows is reviewed at least annually. The interest rate used to determine the balance sheet obligation at December 31, 2009, was 6% (2008: 6%). Information on provisions is given in Note 19. As further described in Note 28, Shell is subject to claims and actions. The facts and circumstances relating to particular cases are evaluated in determining whether it is more likely than not that there will be a future outflow of funds and, once established, whether a provision relating to a specific litigation is sufficient. Accordingly, significant management judgement relating to contingent liabilities is required since the outcome of litigation is difficult to predict. Notwithstanding the possibility of outcomes outside expected ranges, in recent years Shell’s experience has been that estimates used in determining the appropriate levels of provisions have been materially adequate in anticipating actual outcomes. Actual payments related to litigation during the three years ended December 31, 2009, have not been material to Shell’s financial condition or results of operations. A change in estimate of a recognised provision would be recognised in income in the period in which the change occurs (with the exception of decommissioning and restoration costs as described above).
Fair value measurements
Certain financial instruments and other derivative contracts, including those that contain embedded derivatives, are required to be recognised at fair value, as described in Note 2. For those items required to be carried at fair value at each balance sheet date, changes in their carrying amounts are recognised in income or in other comprehensive income. In addition, comparisons of the carrying amounts of other financial assets and financial liabilities with their fair values and the fair values of pension assets are required to be disclosed. Fair value measurements are estimated based on the amounts for which the assets and liabilities could be exchanged at the balance sheet date or for which contracts could be settled at the balance sheet date, and are therefore not necessarily reflective of the likely cash flows on their actual settlement or expiry. Where fair value measurements cannot be derived from publicly available information, they are estimated using models and other valuation methods. To the extent possible, the assumptions and inputs used take into account market pricing information and expectations. However, such information is by its nature subject to uncertainty, particularly where markets are not active, and changes arising as new information becomes available impact the amounts recognised in income and in other comprehensive income, as well as amounts disclosed. Information about key assumptions used in fair value estimates is given in Notes 11 and 23.
4 INTEREST AND OTHER INCOME
$ MILLION
Interest income Dividend income (from investments in securities) Net gains on sale of assets Other Total
2009 384 270 781 530 1,965
2008 1,012 495 4,071 (445) 5,133
2007 1,225 211 3,349 975 5,760
Net gains on sale of assets arise primarily from divestments of interests in operations including, in 2009, Downstream interests in Singapore, in 2008, Upstream interests in Germany, the UK, the USA and Nigeria and Downstream interests in France and in 2007, Upstream interests in Norway and Russia (see Note 25) and Downstream interests in the USA. Also, in 2007, gains of $952 million were reclassified from accumulated other comprehensive income following the sale of securities (see Note 26). Included in other in 2009 are net foreign exchange gains on financing activities of $440 million (2008: $699 million losses; 2007: $154 million gains). Other net foreign exchange gains of $74 million (2008: $612 million losses; 2007: $291 million gains) are included in purchases.
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5 INTEREST EXPENSE
$ MILLION
Interest incurred Accretion expense (see Note 19) Less: interest capitalised Total
2009 902 728 (1,088) 542
2008 1,371 680 (870) 1,181
2007 1,235 540 (667) 1,108
The interest rate applied in determining the amount of interest capitalised in 2009 was approximately 4% (2008: 5%; 2007: 5%). Interest incurred is stated after the impact of gains and losses on fair value hedges of debt (see Note 23). Not all of these gains and losses are eligible costs for the purposes of capitalising interest.
6 EMPLOYEES, DIRECTORS AND SENIOR MANAGEMENT A – Employee costs
$ MILLION
Remuneration Social law taxes Retirement benefits (see Note 18) Share-based compensation (see Note 24) Total
2009 10,608 818 2,679 642 14,747
2008 10,581 890 (302) 241 11,410
2007 10,021 854 98 589 11,562
In addition to the above costs, there were redundancy costs in 2009 of $1,535 million (2008: $85 million; 2007: $397 million). See also Note 19.
B – Average employee numbers
THOUSANDS
Upstream Downstream Corporate Total
2009 23 62 16 101
2008 22 64 16 102
2007 22 69 13 104
Employees working in business service centres are included in the Corporate segment.
C – Remuneration of Directors and Senior Management
$ MILLION
Short-term benefits Retirement benefits Share-based compensation Realised gains on exercise of share options
2009 31.1 3.4 32.7 0.5
2008 32.6 3.0 23.9 1.7
2007 27.6 3.1 23.3 3.5
Short-term benefits comprise salaries and fees, annual bonuses (recognised in the period for which performance is assessed) and cash, car and other benefits. Share-based compensation in 2009 includes exceptional costs recognised in respect of Executive Directors who retired or resigned during the year. In addition to the amounts presented above are termination benefits of $7.6 million awarded to an Executive Director who resigned during the year, and short-term and retirement benefits of $2.0 million in respect of the Director’s employment in the period from the date of resignation to December 31, 2009. There were five members of Senior Management at December 31, 2009 (2008: five; 2007: five).
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7 SEGMENT INFORMATION
Reflecting the change in segmentation (see Note 2), with effect from 2009 Upstream includes the previous Exploration & Production, Gas & Power and Oil Sands segments. Downstream includes the previous Oil Products and Chemicals segments, and alternative energy, with the exception of wind, which is included in Upstream. Comparative information is reclassified.
A – Information by business segment
20 09 $ MILLION
Upstream Revenue Third party Inter-segment Share of profit of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 27,996 27,144 3,852 652 9,875 792 432 (645) (8,942) 8,354 157,108 19,075 21,275
Downstream 250,104 258 1,110 480 4,399 1,616 151 (84) (195) 3,054 121,571 12,014 6,046
Corporate 88 – 14 833 184 10 – 187 835 1,310 13,502 86 273
Total 278,188 4,976 1,965 14,458 2,418 583 (542) (8,302) 12,718 292,181 31,175 27,594
During 2009, Shell’s self-insurance activities were consolidated within the Corporate segment. As a result, the 2009 earnings before tax of the Corporate segment were reduced by $422 million, with no impact on Shell’s income for the period.
20 08
$ MILLION
Upstream Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income/(loss) for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 45,975 42,333 7,521 4,124 9,906 270 – (586) (25,163) 26,506 153,208 17,745 28,958
Downstream 412,347 466 17 643 3,574 666 50 (93) 316 39 109,820 10,515 5,913
Corporate 39 – (92) 366 176 – – (502) 503 (69) 19,373 67 241
Total 458,361 7,446 5,133 13,656 936 50 (1,181) (24,344) 26,476 282,401 28,327 35,112
20 07
$ MILLION
Upstream Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 32,014 35,264 5,446 3,038 9,913 575 120 (471) (15,707) 18,094 125,979 17,150 18,605
Downstream 323,711 569 2,904 819 3,106 173 5 (68) (3,495) 12,445 130,875 11,936 5,086
Corporate 57 – (116) 1,903 161 (3) – (569) 552 1,387 12,616 67 414
Total 355,782 8,234 5,760 13,180 745 125 (1,108) (18,650) 31,926 269,470 29,153 24,105
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[Note 7 continued]
B – Information by geographical area
200 9 $ MILLION
Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 103,424 33,404
Africa, Asia, Australia/ Oceania 80,398 67,822
USA 60,721 32,082
Other Americas 33,645 34,842
Total 278,188 168,150
200 8
$ MILLION
Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 184,809 30,929
Africa, Asia, Australia/ Oceania 120,889 56,123
USA 100,818 29,821
Other Americas 51,845 28,513
Total 458,361 145,386
200 7
$ MILLION
Third party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 138,089 36,673
Africa, Asia, Australia/ Oceania 90,141 49,911
USA 87,548 27,606
Other Americas 40,004 21,850
Total 355,782 136,040
With effect from 2009 the reporting of third-party revenue by geographical area has been changed to reflect better the location of certain business activities. Comparative information is reclassified.
8 INTANGIBLE ASSETS
200 9 $ MILLION
Goodwill Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 3,311 10 1 114 3,436 329 24 (65) 8 296 3,140
Other 4,060 438 1 155 4,654 2,021 281 53 83 2,438 2,216
Total 7,371 448 2 269 8,090 2,350 305 (12) 91 2,734 5,356
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[Note 8 continued]
20 08 $ MILLION
Goodwill Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 3,181 349 (37) (182) 3,311 18 311 – – 329 2,982
Other 4,299 296 (117) (418) 4,060 2,096 270 (160) (185) 2,021 2,039
Total 7,480 645 (154) (600) 7,371 2,114 581 (160) (185) 2,350 5,021
The goodwill impairment charge in 2008 of $311 million related primarily to Pennzoil-Quaker State, a lubricants business in the Downstream segment. The carrying amount of this goodwill at December 31, 2009, is $1,842 million. The recoverable amounts of the cash-generating units to which goodwill is allocated are determined at least annually by reference to their values in use. Cash flow projections used in value-in-use estimates are based on past experience and future expectations of volumes, margins and costs for an initial five-year period, as approved by management, and extrapolated for a further 15 years based on average long-term growth rates for the sector, which in the case of lubricants is assumed to be equal to the average expected inflation rate for the USA (2.3% per annum). Projections are adjusted for a variety of risks, in particular volume and margin deterioration, and discounted to their net present value using a nominal pre-tax discount rate of 6%.
9 PROPERTY, PLANT AND EQUIPMENT
20 09 $ MILLION
Oil and gas properties Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 156,075 20,888 (1,517) 10,780 186,226 79,111 9,616 (1,155) 4,903 92,475 93,751
Manufacturing and processing 44,741 4,457 (341) 2,134 50,991 24,485 2,996 (115) 1,335 28,701 22,290
Transportation and storage 4,463 31 (357) 445 4,582 2,064 153 (285) 180 2,112 2,470
Marketing and other 28,033 1,770 (2,355) 1,569 29,017 15,614 1,388 (1,953) 860 15,909 13,108
Total 233,312 27,146 (4,570) 14,928 270,816 121,274 14,153 (3,508) 7,278 139,197 131,619
20 08
$ MILLION
Oil and gas properties Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 150,740 28,235 (3,904) (18,996) 156,075 86,014 9,567 (5,654) (10,816) 79,111 76,964
Manufacturing and processing 48,473 4,114 (4,425) (3,421) 44,741 28,398 2,042 (3,858) (2,097) 24,485 20,256
Transportation and storage 5,123 76 (337) (399) 4,463 2,431 95 (202) (260) 2,064 2,399
Marketing and other 30,942 2,042 (1,862) (3,089) 28,033 16,913 1,371 (1,072) (1,598) 15,614 12,419
Total 235,278 34,467 (10,528) (25,905) 233,312 133,756 13,075 (10,786) (14,771) 121,274 112,038
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[Note 9 continued] The net book amount at December 31, 2009, includes $45,113 million (2008: $31,998 million) of assets in the course of construction. This amount excludes exploration and evaluation assets, information about which is provided below. Oil and gas properties at December 31, 2009, include rights and concessions of $20,790 million (2008: $19,495 million). The minimum contractual commitments for capital expenditure at December 31, 2009, amounted to $3.0 billion (2008: $5.3 billion). In 2008, Shell acquired 100% of the equity of Duvernay Oil Corp. (Duvernay) for a total consideration of $5,013 million, plus the assumption of debt of $528 million. Duvernay undertakes oil and gas exploration and production activities in Canada and is in the Upstream segment. Duvernay’s assets comprise primarily oil and gas properties and, as a result of the acquisition, property, plant and equipment increased by $6,925 million. Goodwill of $330 million (see Note 8) and deferred tax of $1,563 million (see Note 17) and sundry other assets and liabilities were also recognised following the acquisition. The depreciation, depletion and amortisation charge for the year includes:
200 9 $ MILLION
Impairment losses Impairment reversals
Oil and gas properties 777 432
Manufacturing and processing 1,422 151
Transportation and storage 44 –
Marketing and other 144 –
Total 2,387 583
200 8
$ MILLION
Impairment losses Impairment reversals
Oil and gas properties 202 –
Manufacturing and processing 353 49
Transportation and storage 69 –
Marketing and other – 1
Total 624 50
200 7
$ MILLION
Impairment losses Impairment reversals
Oil and gas properties 577 117
Manufacturing and processing 142 4
Transportation and storage – –
Marketing and other 22 3
Total 741 124
Impairment losses and reversals have been recognised in the year in respect of a number of Shell’s cash-generating units, although no single instance is individually significant. Impairment charges in the year were driven generally by lower margins on refining and chemical products and changes in development plans. Information on the segments affected is given in Note 7. The net book amounts at December 31 include assets held under finance leases of:
$ MILLION
Oil and gas properties Manufacturing and processing Transportation and storage Marketing and other Total
2009 2,649 181 136 532 3,498
2008 2,243 228 141 420 3,032
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 9 continued] Exploration and evaluation assets, which mainly comprise unproved properties (rights and concessions) and capitalised exploration drilling costs, included within the amounts shown above for oil and gas properties are as follows:
$ MILLION
2009 Cost At January 1 Capital expenditure Sales, retirements, currency translation differences and other movements At December 31 Depreciation, depletion and amortisation At January 1 Charge for the year Sales, retirements, currency translation differences and other movements At December 31 Net book amount at December 31 18,486 3,288 (1,349) 20,425 1,476 1,051 (628) 1,899 18,526
2008 11,480 9,293 (2,287) 18,486 1,678 430 (632) 1,476 17,010
Capitalised drilling costs are as follows:
$ MILLION
2009 At January 1 Capital expenditure (additions pending determination of proved reserves) Amounts charged to expense Reclassifications to productive wells on determination of proved reserves Other movements, including acquisitions, disposals and currency translation differences At December 31 3,247 2,041 (350) (931) (393) 3,614
2008 2,500 1,808 (190) (624) (247) 3,247
2007 1,708 1,606 (222) (593) 1 2,500
Exploration drilling costs capitalised for periods greater than one year and representing 187 wells amounted to $1,572 million at December 31, 2009. Information by year of expenditure is as follows:
2000 2001 2002 2003 2004 2005 2006 2007 2008 Total
$ million 15 23 60 54 45 106 168 519 582 1,572
Number of wells 1 2 6 4 4 8 44 55 63 187
Exploration activity often involves drilling multiple wells, over a number of years, to fully evaluate a project. A decision on the recognition of proved reserves in some cases may not occur for several years. These costs remain capitalised for more than one year because, for the related projects, either (a) a final investment decision has been taken but until proved reserves are booked the wells remain capitalised as exploration wells rather than development wells, or (b) drilling of additional exploratory wells in the field is underway or firmly planned for the near future, and/or (c) it can otherwise be demonstrated that progress is being made on the assessment of the economic and operating viability of the reserves. Indicators that demonstrate that progress is being made on the assessment of the economic and operating viability of unproved reserves include: formation of a dedicated project team to continue the project’s development plan; sales agreements with customers for the oil and/or gas reserves are in place or are being actively negotiated; agreements with governments, lenders and/or venture partners are in place or are being actively negotiated; proposals or requests for the development of any related facilities are awaiting approval; contractual arrangements that will permit future development are in progress; and/or firm plans are in place to carry out seismic activities (i.e. acquisition and/or (re)processing) to further appraise the discovered area.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
115
10 ASSOCIATED COMPANIES AND JOINT VENTURES A – Information on the Shell share of equity-accounted investments
$ MILLION
2009 Associated companies Revenue Income for the period 23,136 1,397 Jointly controlled entities 36,456 3,579 Associated companies 31,843 2,994 Jointly controlled entities 52,571 4,452
2008 Associated companies 26,638 2,485 Jointly controlled entities 43,971 5,749
2007
Total 59,592 4,976
Total 84,414 7,446
Total 70,609 8,234
$ MILLION
Dec 31, 2009 Associated companies 6,281 26,562 32,843 5,803 12,253 18,056 14,787 13,513 1,274 Jointly controlled entities 9,972 20,812 30,784 7,095 7,301 14,396 16,388 16,165 223 Associated companies 6,408 24,137 30,545 6,525 9,470 15,995 14,550 13,102 1,448 Jointly controlled entities 8,185 18,462 26,647 6,334 6,536 12,870 13,777 13,764 13
Dec 31, 2008
Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total assets less total liabilities Represented by: Interests in equity Loans (of a long-term investment nature)
Total 16,253 47,374 63,627 12,898 19,554 32,452 31,175 29,678 1,497
Total 14,593 42,599 57,192 12,859 16,006 28,865 28,327 26,866 1,461
Income for 2008 for jointly controlled entities included gains of $1,395 million from the disposal of certain operations in Germany. At December 31, 2009, Shell had capital commitments, being amounts contracted for with external parties, of $2.5 billion (2008: $2.4 billion) in respect of its joint ventures.
B – Major investments in associated companies and joint ventures
DECEMBER 31, 2009
Fair value Segment Upstream Name Aera Brunei LNG Brunei Shell NAM Nigeria LNG Oman LNG Qatargas 4 LNG Sakhalin Energy Woodside Downstream CNOOC and Shell Petrochemicals (Nanhai) Deer Park Infineum Motiva Saudi Arabia Refinery Saudi Petrochemical Showa Shell Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Associated company China USA The Netherlands USA Saudi Arabia Saudi Arabia Japan 50% 50% 50% 50% 50% 50% 35% 1,082 Description Jointly controlled entity Associated company Jointly controlled entity Jointly controlled entity Associated company Associated company Associated company Associated company Associated company Country of incorporation USA Brunei Brunei The Netherlands Nigeria Oman Qatar Bermuda Australia Shell interest 52% 25% 50% 50% 26% 30% 30% 28% 34% 10,892 ($ million)
All shareholdings in the above entities are in ordinary shares or the equivalent and are stated to the nearest percentage point. Fair value information is stated for those associated companies for which there are published price quotations, and represent the relevant share price on December 31, 2009 multiplied by the number of shares held. Although Shell has a 52% investment in Aera, the governing agreements and constitutive documents for this entity do not allow Shell to control this entity as voting control is either split 50:50 between the shareholders or requires unanimous approval of the shareholders or their representatives. Consequently this entity has not been consolidated.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 10 continued] Shell has other major Upstream joint venture activities that operate as jointly controlled assets.
C – Transactions between subsidiaries and equity-accounted investments
Transactions with equity-accounted investments mainly comprise sales and purchases of goods and services in the ordinary course of business and in total amounted to:
$ MILLION
Charges to equity-accounted investments Charges from equity-accounted investments
2009 28,399 27,494
2008 40,401 41,151
2007 30,974 28,244
Balances outstanding at December 31, 2009, and 2008 in respect of the above transactions are shown in Notes 14 and 21. Guarantees issued in respect of equity-accounted investments were $2.5 billion at December 31, 2009, (2008: $2.6 billion), mainly relating to project finance debt.
11 INVESTMENTS IN SECURITIES
Investments in securities comprise equity securities of $2,902 million (2008: $3,149 million) and debt securities of $972 million (2008: $916 million). Equity securities comprise primarily Shell’s 15% interests in each of the Malaysia LNG Dua Sendirian Berhad and Malaysia LNG Tiga Sendirian Berhad projects. Debt securities comprise a portfolio required to be held by Shell’s insurance companies as security for their activities. Equity and debt securities carried at fair value totalled $3,823 million at December 31, 2009, comprising $1,153 million that is measured by reference to prices in active markets for identical assets and $2,670 million that is measured by reference to predominantly unobservable inputs. Movements during 2009 in the carrying amounts of investments in securities measured using predominantly unobservable inputs are as follows:
$ MILLION
At January 1, 2009 Losses recognised in other comprehensive income Purchases Sales Currency translation differences At December 31, 2009
2,871 (277) 69 (2) 9 2,670
Investments in securities valued by reference to predominantly unobservable inputs are all equity securities. Valuations are based on expected dividend flows, adjusted for country and other risks as appropriate and discounted to their present value. At December 31, 2009, debt securities held for purposes other than trading, which include certain cash equivalents, are analysed by maturity below.
20 09 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2015 and Fixed rate dollar debt securities Average interest rate Fixed rate euro debt securities Average interest rate Fixed rate sterling debt securities Average interest rate Other fixed rate debt securities Average interest rate Variable rate debt securities Average interest rate Total 2010 54 3.9% – – 2 4.7% 123 4.5% 5 2.0% 184 2011 116 3.4% 45 4.6% – – – – – – 161 2012 145 3.9% 58 4.0% 9 4.6% – – – – 212 2013 33 3.8% 9 4.1% – – – – 1 7.8% 43 2014 34 3.5% 28 3.7% 9 4.5% 1 6.2% 2 2.4% 74 after 162 4.6% 172 4.4% 43 4.9% 39 4.5% 14 5.1% 430 Total 544 312 63 163 22 1,104
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 11 continued]
200 8 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2009 Fixed rate dollar debt securities Average interest rate Fixed rate euro debt securities Average interest rate Fixed rate sterling debt securities Average interest rate Other fixed rate debt securities Average interest rate Variable rate debt securities Average interest rate Total 130 4.1% 5 3.3% 2 5.9% 8 4.3% 28 15.4% 173
2010 53 4.2% 23 4.9% 2 4.7% 3 8.7% – – 81
2011 94 3.5% 28 4.6% – – 4 5.5% – – 126
2012 56 4.8% 48 4.0% 4 4.5% 5 5.9% – – 113
2013 2 9.8% 8 4.3% – – 1 7.9% – – 11
2014 and after 135 4.8% 197 4.4% 43 4.5% 36 5.8% 37 6.1% 448
Total 470 309 51 57 65 952
At December 31, 2009, equity securities held for purposes other than trading amounted to $4,613 million (2008: $5,013 million), comprising equity securities and shares of the Company of $1,711 million (2008: $1,867 million), held in connection with share-based compensation plans (see Note 24).
12 OTHER NON-CURRENT ASSETS
$ MILLION
Loans to equity-accounted investments Derivative contracts (see Note 23) Prepayments and deferred charges Other Total
Dec 31, 2009 1,833 2,206 1,767 3,352 9,158
Dec 31, 2008 1,545 901 1,649 2,669 6,764
The fair value of financial assets included above approximates the carrying amount. Other comprises sundry items, including sub-lease receivables (see Note 16) and investment-related deposits and receivables, none of which is individually significant.
13 INVENTORIES
$ MILLION
Oil and chemicals Materials Total
Dec 31, 2009 25,946 1,464 27,410
Dec 31, 2008 18,160 1,182 19,342
The cost of inventories recognised in income includes net write-downs and reversals of write-downs, which are driven primarily by fluctuations in oil prices. In 2009, net reversals were $1,535 million (2008: $1,770 million net write-downs; 2007: $261 million net reversals).
14 ACCOUNTS RECEIVABLE
$ MILLION
Trade receivables Amounts owed by equity-accounted investments Derivative contracts (see Note 23) Prepayments and deferred charges Other Total
Dec 31, 2009 29,872 2,098 18,250 3,010 6,098 59,328
Dec 31, 2008 30,813 1,805 39,722 4,178 5,522 82,040
The fair value of financial assets included above approximates the carrying amount. Other comprises sundry items, including tax recoverable (see Note 17) and investment-related receivables, none of which is individually significant.
118
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 14 continued] Provisions for impairments deducted from accounts receivable amounted to $692 million at December 31, 2009 (2008: $675 million). The ageing of trade receivables at December 31 is as follows:
$ MILLION
Not overdue Overdue 1-30 days Overdue 31-60 days Overdue 61-90 days Overdue 91-180 days Overdue more than 180 days Total
2009 26,515 1,825 381 101 462 588 29,872
2008 26,173 2,423 670 468 588 491 30,813
Information about credit risk is provided in Note 23.
15 CASH AND CASH EQUIVALENTS
$ MILLION
Dec 31, 2009 Cash Short-term bank deposits Money market funds and similar instruments Total 3,268 1,813 4,638 9,719
Dec 31, 2008 3,203 8,493 3,492 15,188
Included in cash and cash equivalents at December 31, 2009 are amounts totalling $439 million (2008: $367 million) that are subject to currency controls and other legal restrictions.
16 DEBT AND LEASE ARRANGEMENTS A – Debt
$ MILLION
Dec 31, 2009 Debt (excluding finance lease obligations) 1,490 2,331 3,821 26,922 30,743 Debt (excluding finance Total 1,490 2,681 4,171 30,862 35,033 lease obligations) 7,879 1,314 9,193 10,061 19,254
Dec 31, 2008
Finance lease obligations – 350 350 3,940 4,290
Finance lease obligations – 304 304 3,711 4,015 Total 7,879 1,618 9,497 13,772 23,269
Short-term debt Long-term debt due within one year Current debt Non-current debt Total
The fair value of debt approximates the carrying amount. As at December 31, 2009, debt issued by Shell International Finance B.V., a 100%-owned subsidiary of the Company, and underwritten by guarantees issued by the Company amounted to $28,120 million (2008: $16,200 million), with the remainder raised by other subsidiaries with no recourse beyond the immediate borrower and/or the local assets.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 16 continued] Shell has access to international debt capital markets via two commercial paper programmes (CP programmes), a euro medium-term note programme (EMTN programme) and a US universal shelf registration (US shelf registration). Issuances under the CP programmes are supported by a committed bank facility and cash. These arrangements and undrawn facilities at December 31, are summarised below:
$ MILLION
2009 CP programmes EMTN programme US shelf registration Committed bank facility 20,000 25,000 unrestricted 2,500
Facility 2008 20,000 15,000 unrestricted 2,500
2009 20,000 10,368 n/a 2,500
Amount undrawn 2008 13,675 9,976 n/a 2,500
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 annually, most recently in June 2009. During 2009, debt totalling $10,524 million was issued under this programme. 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 at the last update in November 2008 was upgraded to unrestricted, reflecting Shell’s status as a “well-known seasoned issuer”. During 2009, debt totalling $7,500 million was issued under the registration. The committed bank facility is available on same-day terms, at pre-agreed margins and is due to expire in 2012. The terms and availability are not conditional on Shell’s financial ratios or its financial credit ratings. In addition, other subsidiaries have access to short-term bank facilities totalling $3,571 million at December 31, 2009 (2008: $3,175 million).
B – Debt (excluding finance lease obligations)
In accordance with risk management policy, Shell has entered into interest rate swaps against most of the fixed rate debt due to mature after more than one year, affecting the effective interest rate on these balances (see Note 23). The following tables compare contractual cash flows for debt (excluding finance lease obligations) owed at December 31, by year of maturity, with the carrying amount in the Consolidated Balance Sheet. Contractual amounts reflect the effects of changes in currency exchange rates; differences from carrying amounts reflect the effects of discounting, premiums and, where hedge accounting is applied, fair value adjustments.
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contractual repayments (excluding interest) 2015 and Fixed rate dollar debt Average interest rate Variable rate dollar debt Average interest rate Fixed rate euro debt Average interest rate Fixed rate sterling debt Average interest rate Other fixed rate debt Average interest rate Other variable rate debt Average interest rate Total 2010 624 4.7% 775 1.3% 473 3.7% 809 5.2% 204 9.7% 936 6.9% 3,821 2011 2,525 4.3% 500 0.3% 1 4.5% – – 280 2.3% 139 5.5% 3,445 2012 503 5.0% – – 2,521 3.4% – – – – 12 4.8% 3,036 2013 1 7.3% – – 3,603 3.0% – – – – 1 8.4% 3,605 2014 2,501 4.0% – – – – – – – – – – 2,501 after 6,539 5.7% 123 0.0% 7,568 4.5% – – – – – – 14,230 Total 12,693 1,398 14,166 809 484 1,088 30,638
Difference from carrying amount 28 – 66 – 11 – 105
Carrying amount 12,721 1,398 14,232 809 495 1,088 30,743
The table above excludes interest estimated to be $1,342 million in 2010, $1,158 million in 2011, $1,033 million in 2012, $923 million in 2013, $814 million in 2014 and $714 million in 2015 and after (assuming interest rates with respect to variable rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table). Other variable rate debt expected to mature in 2010 includes $130 million of Philippine peso debt with an average interest rate of 3.9%, $292 million of South African rand debt with an average interest rate of 7.7% and $131 million of Canadian dollar debt with an average interest rate of 1.8%.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 16 continued]
20 08 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contractual repayments (excluding interest) 2014 2009 6,821 2.6% 521 1.8% 530 3.0% 94 2.4% – – 18 1.2% 464 17.1% 745 8.5% 9,193 2010 506 5.2% 156 3.8% 423 4.0% – – 723 5.3% – – – – 33 11.5% 1,841 2011 1,001 5.6% 5 6.3% 1 3.1% – – – – – – 286 2.1% 143 7.8% 1,436 2012 503 5.0% – – – – – – – – – – – – 14 4.8% 517 2013 1 7.3% – – – – – – – – – – 1 12.4% – – 2 and after 3,539 5.4% 122 0.0% 2,117 4.6% – – – – – – – – – – 5,778 Total 12,371 804 3,071 94 723 18 751 935 18,767
Difference from carrying amount 290 – 163 – 23 – 11 – 487 Carrying amount 12,661 804 3,234 94 746 18 762 935 19,254
Fixed rate dollar debt Average interest rate Variable rate dollar debt Average interest rate Fixed rate euro debt Average interest rate Variable rate euro debt Average interest rate Fixed rate sterling debt Average interest rate Variable rate sterling debt Average interest rate Other fixed rate debt Average interest rate Other variable rate debt Average interest rate Total
The table above excludes interest estimated to be $827 million in 2009, $480 million in 2010, $389 million in 2011, $316 million in 2012, $290 million in 2013 and $290 million in 2014 and after (assuming interest rates with respect to variable rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table). At December 31, 2009, short-term debt excluding the current portion of long-term debt comprises borrowings arranged by other subsidiaries. The weighted average interest rate was 7% (2008: 4%).
C – Lease arrangements
The future minimum lease payments for finance and operating leases and the present value of minimum finance lease payments at December 31, by payment date are as follows:
20 09 $ MILLION
Total future minimum finance lease payments 2010 2011 – 2014 2015 and after Total 811 2,483 4,514 7,808
Interest 461 1,336 1,721 3,518
Present value of minimum finance lease payments 350 1,147 2,793 4,290
Total future minimum operating lease payments 4,180 8,157 4,051 16,388
20 08
$ MILLION
Total future minimum finance lease payments 608 2,008 4,076 6,692 Interest 304 1,094 1,279 2,677
Present value of minimum finance lease payments 304 914 2,797 4,015
Total future minimum operating lease payments 4,648 9,905 4,712 19,265
2009 2010 – 2013 2014 and after Total
Operating lease expenses were as follows:
$ MILLION
Minimum lease payments Contingent rentals Sub-lease income Total
2009 3,513 14 (152) 3,375
2008 3,339 68 (161) 3,246
2007 3,091 63 (138) 3,016
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
121
[Note 16 continued] Future minimum lease payments are stated before deduction of expected rental income from non-cancellable sub-leases of $666 million (2008: $53 million) in respect of finance leases and $427 million (2008: $397 million) in respect of operating leases. Finance lease obligations include obligations under certain power generation contracts (“tolling agreements”). The present value of the future minimum lease payments under these contracts is $2,475 million at December 31, 2009 (2008: $2,513 million), of which $449 million (2008: $403 million) is denominated in Canadian dollars and the remainder in dollars. The carrying amount of related assets, which are recognised as property, plant and equipment, is $1,700 million at December 31, 2009, (2008: $1,609 million). The leases mature between 2021 and 2024 and the average interest rate is 8%. Shell leases offshore production and storage equipment for use in the Parque das Conchas (BC10), in respect of which the present value of the future minimum lease payments at December 31, 2009, included within finance lease obligations, is $792 million (2008: $420 million). The leases mature in 2039 and the average interest rate is 21%.
D – Gearing and net debt
The gearing ratio at December 31 was as follows:
$ MIL L ION, E XC EP T W HE R E OTH ER W ISE IN DI CATED
Non-current debt Current debt Total debt Cash and cash equivalents Net debt Total equity Total capital Gearing ratio (net debt as percentage of total capital)
2009 30,862 4,171 35,033 9,719 25,314 138,135 163,449 15.5%
2008 13,772 9,497 23,269 15,188 8,081 128,866 136,947 5.9%
The movement in Shell’s net debt is as follows:
$ MILLION
At January 1, 2009 Cash flow Other movements Currency translation differences At December 31, 2009 At January 1, 2008 Cash flow Other movements Currency translation differences At December 31, 2008
Non-current debt (13,772) (18,231) 1,186 (45) (30,862) (12,363) (1,418) (130) 139 (13,772)
Current debt (9,497) 7,634 (2,249) (59) (4,171) (5,736) (4,009) (214) 462 (9,497)
Cash and cash equivalents 15,188 (5,575) – 106 9,719 9,656 5,609 – (77) 15,188
Net debt (8,081) (16,172) (1,063) 2 (25,314) (8,443) 182 (344) 524 (8,081)
Net debt excludes the following items:
$ MILLION
2009 Net present value of operating lease obligations [A] Under-funded retirement benefit obligations Fair value hedges related to debt [C] Cash required for operational requirements Net debt, as reported Adjusted net debt 14,798 7,118 (1,418) 2,000 22,498 25,314 47,812
2008 16,445 11,834 (481) 2,300 30,098 8,081 38,179
[A] Total future minimum operating lease payments at December 31 (see Note 16) discounted at 3% in 2009 (2008: 5%). The excess of pension and other retirement obligations over related plan assets of $3,293 million (2008: $8,340 million) and $3,825 million (2008: $3,494 million) respectively (see Note 18). [C] The fair value of hedging derivatives in designated fair value hedges, net of related accrued interest.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
17 TAXATION A – Taxation charge for the period
$ MILLION
Charge in respect of current period Adjustment in respect of prior periods Current taxation Relating to the origination and reversal of temporary differences Relating to changes in tax rates Adjustment in respect of prior periods Deferred taxation Taxation charge
2009 10,912 (1,615) 9,297 (1,079) (86) 170 (995) 8,302
2008 24,841 (389) 24,452 (342) 96 138 (108) 24,344
2007 19,960 116 20,076 (717) (746) 37 (1,426) 18,650
Reconciliations of the expected tax charge to the actual tax charge are as follows:
$ MILLION
Income before taxation Less: Share of profit of equity-accounted investments Income before taxation and share of profit from equity-accounted investments Applicable tax charge at statutory tax rates Adjustment in respect of prior periods Recognition/(derecognition) of tax losses Income not subject to tax Expenses not deductible for tax purposes Taxable items deductible not expensed Taxable income not recognised Other reconciling items, including amounts relating to changes in tax rate Taxation charge
2009 21,020 (4,976) 16,044 9,634 (1,445) 21 (747) 1,263 (521) 214 (117) 8,302
2008 50,820 (7,446) 43,374 23,673 (251) 32 (1,568) 2,461 (658) 498 157 24,344
2007 50,576 (8,234) 42,342 20,323 153 (116) (1,994) 1,602 (768) 321 (871) 18,650
The weighted average of statutory tax rates was 60.0% in 2009 (2008: 54.6%; 2007: 48.0%). The increase from 2008 to 2009 was due to a change in the geographical mix of income, with a greater proportion of Upstream income in 2009 arising in jurisdictions subject to relatively higher tax rates. The increase from 2007 to 2008 was due to a higher proportion of income arising in the Upstream segment, which is subject to relatively higher tax rates than other segments. The taxation charge includes not only those of general application but also taxes at special rates levied on income from certain Upstream activities and various other taxes to which these activities are subjected. The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. The amount in 2009 relates primarily to adjustments following final settlement of multiple prior period tax returns in various jurisdictions.
B – Taxes payable
$ MILLION
Income taxes Sales taxes, excise duties and similar levies and social law taxes Total
Dec 31, 2009 5,385 3,804 9,189
Dec 31, 2008 4,917 3,190 8,107
Included in other receivables (see Note 14) is current tax receivable of $548 million (2008: $1,000 million).
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
123
[Note 17 continued]
C – Deferred taxation
Movements in deferred tax liabilities and assets during the year, taking into consideration the offsetting balances within the same tax jurisdiction, are as follows:
D E F E RRE D TA X L I A B IL I TI E S $ MILLION
Property, plant and equipment 16,022 641 (304) 1,409 17,768 17,527 (293) 1,019 (2,231) 16,022 Retirement benefits 1,382 (360) 109 126 1,257 340 1,290 89 (337) 1,382 Other provisions (4,494) (433) 64 (322) (5,185) (6,093) 66 843 690 (4,494) Other (392) (196) 594 (8) (2) 1,265 (964) (625) (68) (392) Total 12,518 (348) 463 1,205 13,838 13,039 99 1,326 (1,946) 12,518
At January 1, 2009 Charged/(credited) to income Other movements Currency translation differences At December 31, 2009 At January 1, 2008 (Credited)/charged to income Other movements Currency translation differences At December 31, 2008
DE F E RRE D TA X AS SE TS
$ MILLION
At January 1, 2009 Credited to income Other movements Currency translation differences At December 31, 2009 At January 1, 2008 (Charged)/credited to income Other movements Currency translation differences At December 31, 2008
Losses carried forward 881 224 200 55 1,360 1,146 (77) (119) (69) 881
Retirement benefits 371 14 (9) 7 383 464 (34) (30) (29) 371
Other provisions 1,145 307 53 101 1,606 541 94 781 (271) 1,145
Other 1,021 102 75 (14) 1,184 1,102 224 (394) 89 1,021
Total 3,418 647 319 149 4,533 3,253 207 238 (280) 3,418
Other movements in deferred tax assets and liabilities relate mainly to acquisitions, reclassifications between assets and liabilities and amounts recognised in other comprehensive income and directly in equity (see Note 26). Where the realisation of deferred tax assets is dependent on future profits, losses carried forward are recognised only to the extent that business forecasts predict that such profits will be available. At December 31, 2009, recognised losses carried forward amounted to $14,012 million (2008: $8,815 million). Unrecognised losses amount to $2,875 million at December 31, 2009 (2008: $2,952 million) and expire as follows:
$ MILLION
In 1 year In 2 years In 3 years In 4 years In 5 years and after, including with no expiry
2009 8 10 16 19 2,822
2008 45 6 24 31 2,846
Earnings retained by subsidiaries and equity-accounted investments amounted to $122,646 million at December 31, 2009 (2008: $120,734 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.
18 RETIREMENT BENEFITS
Retirement plans are provided for employees of all major subsidiaries. The nature of such plans varies according to the legal and fiscal requirements and economic conditions of the country in which the employees are engaged. Generally, the plans provide defined benefits based on employees’ years of service and average/final pensionable remuneration.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 18 continued] Some subsidiaries have established unfunded defined benefit plans to provide certain other retirement healthcare and life insurance benefits (other benefits) to their retirees. Entitlement to these other benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period.
$ MILLION
Pension benefits 2009 2008 Change in defined benefit obligation Obligations for benefits based on employee service to date at January 1 Increase in present value of the obligation for benefits based on employee service during the year Interest on the obligation for benefits in respect of employee service in previous years Benefit payments made Actuarial losses/(gains) Other movements Currency translation differences Obligations for benefits based on employee service to date at December 31 Change in plan assets Plan assets held in trust at fair value at January 1 Expected return on plan assets Actuarial gains/(losses) Employer contributions Plan participants’ contributions Benefit payments made Other movements Currency translation differences Plan assets held in trust at fair value at December 31 Plan assets in excess of/(less than) the present value of obligations for benefits at December 31 Unrecognised net actuarial losses since adoption of IFRS Unrecognised past service cost/(credit) Net amount recognised 52,639 965 3,131 (2,862) 5,472 281 3,092 62,718 44,299 3,142 6,256 5,216 88 (2,862) 25 3,261 59,425 (3,293) 10,640 12 7,359 62,523 1,202 3,337 (2,963) (3,698) (151) (7,611) 52,639 76,198 4,974 (27,061) 1,636 75 (2,963) 80 (8,640) 44,299 (8,340) 12,085 12 3,757
2009 3,494 57 222 (138) (28) 177 41 3,825
Other benefits 2008 3,179 59 187 (134) 269 (6) (60) 3,494
(3,825) 43 48 (3,734)
(3,494) 69 14 (3,411)
$ MILLION
2009 Amounts recognised in the Consolidated Balance Sheet: Pre-paid pension costs Retirement benefit obligations: Non-current Current Net amount recognised 10,009 (5,923) (461) 3,625
Total 2008 6,198 (5,469) (383) 346
Pension benefits 2009 2008 10,009 (2,387) (263) 7,359 6,198 (2,241) (200) 3,757
2009
Other benefits 2008
(3,536) (198) (3,734)
(3,228) (183) (3,411)
ADDITIO N AL IN FORMAT ION
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2009 Pension benefits Obligation for pension benefits in respect of unfunded plans Obligation for pension benefits in respect of funded plans Total defined benefit obligation Experience adjustments as a percentage of the total benefit obligation Plan assets Experience adjustments as a percentage of plan assets Plan (deficit)/surplus Actual return on plan assets Other benefits Total benefit obligation (unfunded) Experience adjustments as a percentage of the total benefit obligation 3,087 59,631 62,718 (0.5)% 59,425 10.5% (3,293) 9,398 3,825 (1.9)%
2008 2,684 49,955 52,639 1.0% 44,299 (61.1)% (8,340) (22,087) 3,494 0.6%
2007 2,505 60,018 62,523 0.7% 76,198 1.3% 13,675 5,846 3,179 6.0%
2006 1,931 58,327 60,258 0.7% 67,479 6.1% 7,221 8,133 3,163 0.7%
2005 1,904 53,773 55,677 0.2% 54,650 10.8% (1,027) 9,290 3,143 0.0%
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 18 continued] Employer contributions to defined benefit pension plans during 2010 are estimated to be $2.1 billion.
B E N E F I T CO S TS $ MILLION
Service cost Interest cost Expected return on plan assets Other components Cost/(income) of defined benefit plans Payments to defined contribution plans Total
2009 965 3,131 (3,142) 1,033 1,987 269 2,256
Pension benefits 2008 2007 1,202 1,188 3,337 3,051 (4,974) (383) (818) 263 (555) (4,821) 158 (424) 233 (191)
2009 57 222 144 423 423
2008 59 187 7 253 253
Other benefits 2007 50 171 68 289 289
Benefit costs are reported principally within production and manufacturing expenses in the Consolidated Statement of Income. Weighted average plan asset allocations by asset category for the principal pension plans in Shell are:
Target allocation at Dec 31, 2009 Equities Debt securities Real estate Other Total 47% 43% 6% 4% 100%
Percentage of plan assets at Dec 31, 2009 2008 53% 40% 2% 5% 100% 49% 48% 2% 1% 100%
Long-term investment strategies of plans are generally determined by the responsible pension fund trustees using a structured asset liability modelling approach to determine the asset mix that best meets the objectives of optimising investment returns within agreed risk levels while maintaining adequate funding levels.
Assumptions and sensitivities
DEFINED BENEFIT PENSION PLANS
The weighted averages for the principal assumptions applicable for the principal defined benefit pension plans in Shell are:
2009 Assumptions used to determine benefit obligations at December 31 Expected rates of increase in pensionable salaries Discount rates Assumptions used to determine benefit costs for year ended December 31 Expected rates of increase in pensionable salaries Discount rates Expected rates of return on plan assets 5.5% 5.5% 4.4% 6.0% 6.7%
2008 4.4% 6.0% 4.0% 5.7% 6.9%
2007 4.0% 5.7% 3.9% 5.0% 7.1%
Demographic (including mortality) assumptions are determined in the light of local conditions. Mortality assumptions are reviewed annually and are based on the latest available standard mortality tables for individual countries concerned, adjusted where appropriate to reflect the experience of Shell. In 2009, new mortality tables were adopted for some countries, notably the UK. At December 31, 2009, the average total life expectancy for males and females currently aged 60 years is 86 years and 88 years respectively (2008: 85 years and 87 years respectively). The long-term assumptions for pensionable salary increases, used to determine benefit obligations at December 31, 2009, were increased by 0.75% in respect of UK plans (2008: 0.50% decrease) and by 0.25% in respect of US plans (2008: no change), reflecting market-related changes in the underlying inflation assumption for these plans. The assumptions for discount rates reflected decreases of AA rated corporate bond yields of 0.70% in the Eurozone (2008: 0.40% increase), of 0.30% in the UK (2008: 0.20% increase) and of 0.30% in the USA (2008: 0.20% increase).
126
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 18 continued] For pension benefits, the sensitivity at December 31, 2009, to a change of one percentage point in certain principal assumptions is as follows:
$ MILLION
One-percentage point Increase Decrease Expected rates of increase in pensionable salaries Change in defined benefit obligation Change in annual pension benefit cost (pre-tax) Discount rates Change in defined benefit obligation Change in annual pension benefit cost (pre-tax) Expected rates of return on plan assets Change in annual pension benefit cost (pre-tax) 2,069 241 (7,783) (127) (588) (1,837) (211) 9,762 134 588
The effect of an increase/(decrease) of one year in life expectancy would be to increase/(decrease) the defined benefit obligation by approximately $1,893 million/($1,965 million). The impact on the retirement benefit obligation reflected in Shell’s Consolidated Balance Sheet and on Shell’s annual pension benefit cost of changes in assumptions described above excludes the effects of any amortisation of actuarial gains and losses resulting from such changes. The amortisation would vary from year to year by fund depending on whether or not the cumulative unrecognised actuarial gains and losses exceed the corridor (see Note 2). Any amounts outside the corridor would be recognised in income over the expected average remaining employee working lives for the relevant fund, the average of which across all funds at December 31, 2009, is 12 years (2008: 13 years).
Other defined benefit plans
The weighted averages for the discount rate and healthcare cost trend rates applicable for the principal other benefit plans in Shell are:
Discount rates (used to determine benefit obligations) Healthcare cost trend rate in year after reporting year Ultimate healthcare cost trend rate Year ultimate healthcare cost trend rate is applicable
2009 5.9% 7.9% 4.3% 2027
2008 6.3% 8.2% 4.2% 2027
2007 6.0% 8.1% 4.6% 2013
The effect of a one percentage point increase/(decrease) at December 31, 2009, in the annual rate of increase in the assumed healthcare cost trend rates would be to increase/(decrease) the defined benefit obligation by approximately $479 million/($394 million) and the annual benefit cost (pre-tax) by approximately $34 million/($28 million).
19 OTHER PROVISIONS
$ MILLION
Decommissioning and restoration Environmental Redundancy Litigation Other Total
2009 653 365 1,492 201 1,096 3,807
Current 2008 514 321 203 249 1,164 2,451
2009 11,633 891 157 499 868 14,048
Non-current 2008 9,982 842 107 709 930 12,570
2009 12,286 1,256 1,649 700 1,964 17,855
Total 2008 10,496 1,163 310 958 2,094 15,021
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
127
[Note 19 continued] Movements in provisions are as follows:
$ MILLION
At January 1, 2009 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2009 At January 1, 2008 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2008
Decommissioning and restoration 10,496 265 (424) 638 488 823 12,286 11,226 198 (147) 609 456 (1,846) 10,496
Environmental 1,163 192 (189) 26 13 51 1,256 1,212 245 (240) 35 (5) (84) 1,163
Redundancy 310 1,535 (171) – (27) 2 1,649 561 85 (305) – (12) (19) 310
Litigation 958 196 (489) 9 8 18 700 1,116 149 (293) 6 13 (33) 958
Other 2,094 680 (776) 55 (155) 66 1,964 2,335 271 (397) 30 16 (161) 2,094
Total 15,021 2,868 (2,049) 728 327 960 17,855 16,450 948 (1,382) 680 468 (2,143) 15,021
The timing and amounts settled in respect of these provisions are uncertain and dependent on various factors that are not always within management’s control. Of the decommissioning and restoration provision at December 31, 2009, an estimated $3 billion is expected to be utilised within one to five years, $4 billion within six to ten years, and the remainder in later periods. Reviews of estimated decommissioning and restoration costs are carried out annually, which in 2009 resulted in an increase of $477 million (2008: $1,520 million) in both the provision, reported within “Reclassifications and other movements”, and the corresponding property, plant and equipment assets reported within “Sales, retirements and other movements” in Note 9. Offsetting this increase in 2008 was a reduction resulting from disposals of assets, primarily in the UK and USA, of $1,032 million. Provisions for environmental remediation costs relate to a number of events in different locations, none of which is individually significant. The additional provisions for redundancy in 2009 of $1,535 million mainly relate to around 5,000 staff who are leaving Shell as a result of a restructuring programme. Provisions for litigation costs at December 31, 2009 relate to a number of cases, none of which is individually significant. Further information is given in Note 28. In 2009, Shell concluded the settlement of claims arising from the 2004 recategorisation of certain hydrocarbon reserves. Included in other provisions at December 31, 2009, are $750 million (2008: $656 million) relating to employee end-of-service benefits.
20 OTHER NON-CURRENT LIABILITIES
$ MILLION
Dec 31, 2009 Advance payments received under long-term supply contracts Customer deposits Liabilities under employee benefit plans Derivative contracts (see Note 23) Deferred income Other Total 508 122 451 987 800 1,718 4,586
Dec 31, 2008 548 123 400 595 676 1,335 3,677
The fair value of financial liabilities included above approximates the carrying amount. Other comprises sundry items, none of which is individually significant.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
21 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
$ MILLION
Trade payables Amounts due to equity-accounted investments Derivative contracts (see Note 23) Accruals and deferred income Other Total
Dec 31, 2009 29,379 3,412 17,755 12,540 4,075 67,161
Dec 31, 2008 25,705 3,879 38,277 13,408 3,822 85,091
The fair value of financial liabilities included above approximates the carrying amount. Other comprises sundry items, none of which is individually significant.
22 ORDINARY SHARE CAPITAL
AU TH ORISED NUMBER OF SHARES
Class A shares of ¤0.07 each Class B shares of ¤0.07 each Unclassified shares of ¤0.07 each Sterling deferred shares of £1 each
Dec 31, 2009 4,077,359,886 2,759,360,000 3,163,280,114 50,000
Dec 31, 2008 4,077,359,886 2,759,360,000 3,163,280,114 50,000
I SS U E D A N D F U LLY PAI D
NUMBER OF SHARES
shares of ¤0.07 each At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008 Class A 3,545,663,973 3,583,505,000 (37,841,027) 3,545,663,973 Class B 2,695,808,103 2,759,360,000 (63,551,897) 2,695,808,103
shares of £1 each Sterling deferred 50,000 50,000 – 50,000
N O MI N A L VA L U E
$ MILLION
shares of ¤0.07 each At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008 Class A 300 303 (3) 300 Class B 227 233 (6) 227 Total 527 536 (9) 527
The total nominal value of sterling deferred shares is less than $1 million.
23 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial instruments and other derivative contracts in the Consolidated Balance Sheet comprise investments in securities (see Note 11), cash and cash equivalents (see Note 15), debt (see Note 16) and certain amounts (including derivatives) reported within other non-current assets (see Note 12), accounts receivable (see Note 14), other non-current liabilities (see Note 20) and accounts payable and accrued liabilities (see Note 21).
A – Risks
In the normal course of business, Shell uses financial instruments of various kinds for the purposes of managing exposure to interest rate, currency and commodity price movements. Shell has treasury standards 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 derivative instruments, as well as the treasury control framework. 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 financial instruments by most subsidiaries is not permitted by their treasury policy.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 23 continued] Other than in exceptional cases, the use of external derivative instruments is confined to specialist oil and gas 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:
MARKET RISK
Market risk is the possibility that changes in interest rates, currency exchange rates or the prices of natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products will adversely affect the value of Shell’s assets, liabilities or expected future cash flows.
Interest rate risk
Most of Shell’s debt is raised from central borrowing programmes. Shell has entered into interest rate swaps and currency swaps to effectively convert most centrally issued debt to floating rate dollar LIBOR (London Inter-Bank Offer Rate), reflecting its policy to have debt mainly denominated in dollars and to maintain a largely floating interest rate exposure profile. Consequently Shell is exposed predominantly to dollar LIBOR interest rate movements. The financing of most subsidiaries is also 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, 2009, and assuming no other changes occur (such as changes in currency exchange rates) and that no further interest rate management action is taken, an increase/decrease in interest rates of 1% would increase/decrease pre-tax net interest expense by $163 million (2008: $18 million).
Foreign exchange risk
Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream companies and those with significant cross-border business is the dollar. For Downstream companies, the local currency is typically also the functional currency. Consequently, Shell is exposed to varying levels of foreign exchange risk when it enters into transactions that are not denominated in the companies’ functional currencies, when foreign currency monetary assets and liabilities are translated at the reporting date and as a result of holding net investments in operations that are not dollar-functional. The main currencies to which Shell is exposed are sterling, the Canadian dollar, euro and Australian dollar. Each company has treasury policies in place that are designed to measure and manage their foreign exchange exposures by reference to their functional currency. Fluctuations in exchange rates can have a significant effect on income; however, the total impact is not separately quantifiable because some effects are absorbed into individual companies’ earnings as they feed through into the price of products and/or their cost base. Exchange rate 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 individual companies’ functional currency. Currency 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. Shell does not generally undertake hedging of net investments in foreign operations or of income that arises in foreign operations that are nondollar functional. Foreign exchange gains and losses arising from foreign currency transactions included in income are presented in Note 4.
Price risk
Certain subsidiaries have a mandate to trade natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products, and to use commodity swaps, options and futures as a means of managing price and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are contained within authorised limits. Shell uses risk management systems for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Shell’s exposure to significant trading losses is therefore considered limited. Shell utilises VAR techniques based on variance/covariance or Monte Carlo simulation models and makes a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair value movements to ensure model integrity is maintained.
VAL U E - AT- RI SK ( PR E - TA X ) $ MILLION
Oil and chemicals Gas and power
High 52 20
Low 8 5
Average 17 10
2009 Year end 14 12
High 33 28
Low 5 6
Average 17 17
2008 Year end 28 15
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 23 continued]
CREDIT RISK
Shell has policies in place to ensure that wholesale sales of products are made to customers with appropriate creditworthiness. In addition, Shell has policies that limit the amount of credit exposure to any individual financial institution. There has been no significant level of counterparty default. In commodity trading, counterparty credit risk is managed within a framework of individual credit limits with utilisation being regularly reviewed. 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. In the prevailing international credit environment, Shell applies a variety of measures to reduce and diversify risk exposure. These measures include detailed credit analysis and monitoring of trading partners, restricting large-volume trading activities to the highest-rated counterparties, shortening exposure duration, and taking collateral or other security. As Shell’s treasury and trading operations are highly centralised, these measures have proved reasonably effective in controlling credit exposures associated with managing Shell’s substantial cash and cash equivalents, foreign exchange and commodity positions. 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.
LIQUIDITY RISK
Liquidity risk is the risk that suitable sources of funding for Shell’s business activities may not be available. Shell believes that it has access to sufficient debt funding sources (capital markets), and to undrawn committed borrowing facilities to meet currently foreseeable requirements. Information about Shell’s borrowing facilities is presented in Note 16. Shell’s long-term debt ratings, assigned by Moody’s Investors Services and Standard and Poor’s Ratings Services respectively, are Aa1 and AA, and its short-term commercial paper programmes are rated Prime-1 and A-1+. Shell has access to a wide range of funding alternatives at competitive rates. Surplus cash is invested in a range of short-dated money market instruments, including commercial paper, time deposits and money market funds, which seek to ensure the security and liquidity of investments while optimising yield. In all cases investments are only permitted in high credit quality institutions/funds, with diversification of investment supported by maintaining counterparty credit limits.
B – Derivative contracts
The following tables provide a summary of the carrying amounts of derivative contracts held at December 31 and a reconciliation to Shell’s Consolidated Balance Sheet.
$ MILLION
Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity swaps, options, futures and forwards Other contracts Total Included within: Accounts receivable (Note 14) Accounts payable and accrued liabilities (Note 21) Other non-current assets (Note 12) Other non-current liabilities (Note 20) Total
Asset 226 235 1,830 17,842 323 20,456 18,250
Liability (5) (258) (313) (17,349) (817) (18,742)
2009 Net 221 (23) 1,517 493 (494) 1,714
Asset 367 1,228 669 38,144 215 40,623 39,722
Liability – (594) (354) (37,475) (449) (38,872)
2008 Net 367 634 315 669 (234) 1,751
(17,755) 2,206 (987) 20,456 (18,742) 40,623 901
(38,277) (595) (38,872)
The maximum exposure to credit risk is the fair value of the derivative assets.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
131
[Note 23 continued] The carrying amounts of derivative contracts held at December 31, 2009, categorised according to the predominant source and nature of inputs used in determining the fair value of each contract, are as follows:
$ MILLION
Prices in active markets for identical Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity swaps, options, futures and forwards Other contracts Total assets/liabilities – – – (182) 1 (181)
Other observable inputs 221 (23) 1,517 1,289 156 3,160
Unobservable inputs – – – (614) (651) (1,265) Total 221 (23) 1,517 493 (494) 1,714
Financial instruments are used mainly as hedging instruments, although hedge accounting is not always applied. Consequently, movements in the carrying amounts of hedging instruments that are recognised in income are generally offset by movements in the underlying hedged items. In the case of currency hedges, gains and losses are offset by translation differences recognised in respect of the related transactions; in the case of commodity price hedges, gains and losses are offset by movements in the carrying amounts of the related forward contracts. Net losses before tax on these contracts, excluding realised commodity forward contracts and those accounted for as hedges, are $3,505 million in 2009 (2008: $505 million gains; 2007: $1,674 million losses). Shell has designated certain derivatives as fair value hedges which were mainly entered into to mitigate interest rate risk on certain fixed rate debt and price risk on a fixed price commodity purchase contract. Net losses on the hedged items in 2009 are $1,098 million (2008: $778 million; 2007: $216 million); net gains on the hedging instruments in 2009 are $985 million (2008: $789 million; 2007: $212 million). During 2009, accumulated losses on cash flow hedges of $318 million, previously recognised in other comprehensive income, were recognised in revenue (2008: $1 million; 2007: $201 million), as a result of previously forecast transactions that are no longer expected to occur. Movements during 2009 in the carrying amounts of derivative contracts measured using predominantly unobservable inputs are as follows:
$ MILLION
At January 1, 2009 Net losses recognised in revenue Purchases Sales Settlements Recategorisations (net) Currency translation differences At December 31, 2009
(909) (245) 1,213 (1,228) 48 (91) (53) (1,265)
Included in net losses recognised in revenue for 2009 are unrealised net losses totalling $819 million relating to assets and liabilities held at December 31, 2009.
INTEREST RATE SWAPS
Interest rate swaps held at December 31 by expected year of maturity are as follows. The variable interest rate component of contracts is generally linked to inter-bank offer rates. Interest is generally settled on a net basis.
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Dollar Contract/notional amount Average pay rate Average receive rate
2010 500 0.9% 5.1%
2011 2,500 0.8% 4.4%
2012 500 0.9% 5.0%
2013 – – –
2014 2,500 2.2% 4.0%
2015 and after 1,750 0.9% 4.7%
Contract/ notional amount 7,750
Carrying amount 221
132
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 23 continued]
20 08 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2014 and Dollar Contract/notional amount Average pay rate Average receive rate 2009 500 3.9% 4.8% 2010 500 3.4% 5.1% 2011 1,000 3.1% 5.6% 2012 500 3.0% 5.0% 2013 – – – after 750 3.2% 5.2%
Contract/ notional amount 3,250
Carrying amount 367
FORWARD FOREIGN EXCHANGE CONTRACTS AND CURRENCY SWAPS
Forward foreign exchange contracts and currency swaps held at December 31, by expected year of maturity, are as follows. All of these are entered into in order to manage foreign exchange risk exposure; however, hedge accounting has not been applied to the majority of them. Cash flows exchanged for currency swaps are generally the gross amount of interest on the contract/notional amount. Average contractual exchange rates in the tables that follow are expressed as the number of units of the currency being sold for one unit of the currency being bought.
20 09 (C ONTR A CTS MAINLY MATUR E IN 201 0) $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Buy sterling/sell dollar Buy dollar/sell Canadian dollar Buy euro/sell dollar Buy dollar/sell Norwegian krone Buy dollar/sell Australian dollar Buy Canadian dollar/sell dollar Buy dollar/sell Danish krone Buy dollar/ sell sterling Buy dollar/sell euros Buy New Zealand dollar/sell dollar Buy Singapore dollar/sell dollar Buy Norwegian krone/sell dollar Buy dollar/Sell Singapore dollar Buy Qatar riyal/sell dollar Other contracts with contract/notional amount less than $500 million each Total
Average contractual exchange rate 1.62 1.05 1.47 5.74 1.11 0.95 5.03 0.62 0.69 0.71 0.71 0.17 1.40 0.27
Contract/ notional amount 7,130 6,875 3,406 2,452 1,824 1,446 1,320 1,267 894 655 650 615 599 588 2,892 32,613
Carrying amount (26) (17) (70) 17 6 8 34 (7) 5 11 – 2 – – 14 (23)
20 08 (C ONTR A CTS MAINLY MATUR E IN 200 9)
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Buy euro/sell dollar Buy sterling/sell dollar Buy dollar/sell Canadian dollar Buy dollar/sell Norwegian krone Buy dollar/sell euro Buy dollar/sell Danish krone Buy dollar/sell Australian dollar Buy Singapore dollar/sell dollar Buy Danish krone/sell dollar Buy Canadian dollar/sell dollar Buy dollar/sell Singapore dollar Buy Qatar riyal/sell dollar Buy dollar/sell sterling Other contracts with contract/notional amount less than $500 million each Total
Average contractual exchange rate 1.31 1.53 1.14 6.39 0.73 5.48 1.45 0.69 0.19 0.82 1.45 0.27 0.66
Contract/ notional amount 7,838 4,690 4,454 2,111 1,923 1,466 1,056 650 626 617 585 542 533 3,621 30,712
Carrying amount 515 (275) 281 189 (41) (47) 4 5 2 7 (5) 1 24 (26) 634
Of the total contract/notional amount at December 31, 2009, $28.1 billion (2008: $25.2 billion) relates to the outstanding forward leg of contracts in place to manage foreign currency cash balances.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
133
[Note 23 continued]
Currency swaps
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contract/notional amount Average contractual exchange rate Fixed to floating interest rates: Buy dollar/sell euro Buy dollar/sell Canadian dollar Buy dollar/sell sterling Buy Canadian dollar/sell dollar Buy dollar/sell Swiss franc Buy sterling/sell dollar Floating to floating Interest Rates Buy Malaysian ringgit /sell dollars Buy Australian dollar/sell dollar Buy dollar/sell Brazilian real Buy dollar/sell Thai baht Other contracts Total 0.76 1.14 0.52 0.86 1.30 1.85
2010 432 539 807 94 – –
2011 – 261 – 72 291 –
2012 2,522 153 – – – –
2013 3,603 132 – – – –
2014 – – – – – –
2015 and after 7,566 – – – – 153
Total 14,123 1,085 807 166 291 153
Carrying amount 1,724 (192) (106) 128 70 (19)
3.45 0.78 1.88 32.93
140 – 13 – 12 2,037
– 391 – – 3 1,018
245 – – 169 7 3,096
210 – – – – 3,945
– – 206 – – 206
– – – – – 7,719
595 391 219 169 22 18,021
– (64) (18) (5) (1) 1,517
200 8
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contract/notional amount Average contractual exchange rate Fixed to floating interest rates: Buy dollar/sell euro Buy dollar/sell Canadian dollar Buy dollar/sell sterling Buy dollar/sell Brazilian real Buy Canadian dollar/sell dollar Buy dollar/sell Swiss franc Buy sterling/sell dollar Other contracts Floating to floating interest rates: Buy euro/sell dollar Buy Malaysian ringgit/sell dollar Buy Australian dollar/sell dollar Buy dollar/sell Thai baht Other contracts Total 0.76 1.17 0.52 2.27 0.85 1.30 1.86
2009 493 628 – 216 240 – – 26 1,071 93 – 66 – 2,833
2010 423 304 723 – 5 – – – – 140 – – 14 1,609
2011 – 184 – – 40 284 – – – – 391 – 6 905
2012 – 95 – – – – – 90 – 139 – 162 – 486
2013 – 86 – – – – – – – 36 – – – 122
2014 and after 2,114 – – 154 – – 107 – – – – – – 2,375
Total 3,030 1,297 723 370 285 284 107 116 1,071 408 391 228 20 8,330
Carrying amount 406 77 (183) (79) (3) 60 (30) 6 8 4 47 3 (1) 315
1.42 3.48 0.72 33.89
COMMODITY SWAPS, OPTIONS, FUTURES AND FORWARDS
Shell enters into derivative contracts to supply or acquire physical volumes of commodities at future dates in the course of its trading operations. Financial derivative instruments are used to manage the resultant price exposures. The fair value of the assets and liabilities arising will therefore tend to equate, irrespective of price movements, because for most contracts held for trading there are offsetting physical or financial derivative contracts to mitigate price exposure. Shell manages the liquidity risk associated with these contracts on a fair value basis. As such, the maximum exposure to liquidity risk is the undiscounted fair value of the physical and financial derivative liabilities. Commodity swaps, options and futures held at December 31, 2009, carried a total undiscounted liability of $11,158 million (2008: $27,059 million) and forward sale and purchase contracts carried a total undiscounted liability of $6,390 million (2008: $10,802 million). These contracts are generally held for trading with the majority maturing within one year. For a minority of commodity derivatives, 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 and option spread models, with assumptions developed internally based on observable market activity. Commodity derivatives are generally economically hedged as a portfolio. As such, gains and losses associated with instruments that are measured using unobservable inputs are not reflective of trends occurring in the underlying business, and are typically offset by gains and losses associated with similar instruments that are measured using quoted market prices or other observable inputs.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 23 continued]
OTHER CONTRACTS
Other contracts include certain contracts that are held to sell or purchase commodities, and other contracts containing embedded derivatives, which are required to be recognised at fair value because of pricing or delivery conditions, even though they are only entered into to meet operational requirements. At December 31, 2009, the total contract/notional amount of these contracts, which are mainly contracts for the delivery of gas, was $5,472 million (2008: $5,332 million), and their fair value was $494 million (liability) (2008: $234 million (liability)). These contracts are expected to mature between 2010 and 2025, with certain contracts having early termination rights (for either party). Valuations are derived from quoted market prices for the next two years; thereafter, from forward gas price curve formulae used in similar contracts, estimated by reference to equivalent oil prices, which are also adjusted for credit risk. Future oil price assumptions are the most significant input to this model, such that a decrease of $10 per barrel in the projected oil price would decrease the fair value of the liability estimate, and increase pre-tax income, by $380 million.
COLLATERA L
The carrying amount of financial assets pledged as collateral for liabilities or contingent liabilities at December 31, 2009, and presented within accounts receivable (see Note 14), was $311 million (2008: $739 million). The carrying amount of collateral held at December 31, 2009, and presented within accounts payable and accrued liabilities (see Note 21), was $512 million (2008: $1,985 million).
24 SHARE-BASED COMPENSATION PLANS AND TREASURY SHARES A – Share-based compensation plans
There are a number of share-based compensation plans for employees of Shell, principally the Performance Share Plan, the UK Sharesave Scheme, plans containing stock appreciation rights and share options plans (replaced by the Performance Share Plan from 2005). The total expense for share-based compensation plans was $642 million (2008: $241 million; 2007: $589 million), comprising $504 million relating to equity-settled plans (2008: $405 million; 2007: $373 million) and $138 million relating to cash-settled plans (2008: $(164) million; 2007: $216 million). The fair value of share-based compensation awarded in 2009 was $386 million (2008: $632 million; 2007: $472 million). The total liability for cash-settled plans at December 31, 2009, is $350 million (2008: $217 million). The intrinsic value of all vested cash-settled plans at December 31, 2009, is $141 million (2008: $108 million). Information on the principal plans is given below.
PERFORMANCE SHARE PLAN
Conditional awards of the Company’s shares are made under an amended long-term incentive plan that is called the Performance Share Plan when making awards to employees who are not Executive Directors. The actual amount of shares that may vest, ranging from 0-200% of the conditional awards, depends on the measurement of the prescribed performance conditions over a three-year period beginning on January 1 of the award year. For awards made in 2005 and 2006 the extent to which the awards vest depends on the total shareholder return of Shell compared with four of its main competitors (“relative TSR”) over the measurement period. For the awards made from 2007 to 2009, the extent to which the awards vest will be determined by two performance conditions. The relative TSR measure over the measurement period will be used to determine the vesting of half the award and the other half of the award will be linked to the Shell scorecard results. The following table shows, for 2008 and 2009, shares granted, vested and expired or forfeited:
PE RF OR MAN C E S H ARE PL A N
Number of Royal Dutch Shell plc shares Weighted average remaining Class A (thousands) 19,078 8,700 (2,168) (2,499) 23,111 15,305 8,498 (2,815) (1,910) 19,078 Class B (thousands) 8,781 3,558 (1,283) (1,376) 9,680 7,981 3,525 (1,670) (1,055) 8,781 Class A ADRs (thousands) 6,358 2,800 (871) (939) 7,348 5,361 2,838 (1,044) (797) 6,358 contractual life (years) 1.2
At January 1, 2009 Granted Vested Expired/forfeited At December 31, 2009 At January 1, 2008 Granted Vested Expired/forfeited At December 31, 2008
1.1 1.1
1.2
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
135
[Note 24 continued]
OTHER PRIN CIPAL PLANS
Employees of participating companies in the UK may participate in the UK Sharesave Scheme. Share options are granted over the Company’s Class B shares at a price set at the date specified in the invitation. Options are granted on a date not normally more than 30 days after the option price is determined and are normally exercisable after a three-year or five-year contractual savings period. There are 2.0 million shares under option at December 31, 2009 (2008: 2.9 million). Certain subsidiaries have other plans containing stock appreciation rights linked to the value of the Company’s Class A ADRs. There are 0.5 million rights outstanding at December 31, 2009 (2008: 1.1 million).
SHARE OPTION PLANS (CLOSED)
Shell offered eligible employees options over shares of the Company, at a price not less than the fair market value of the shares at the date the options were granted. The options are mainly exercisable three years from grant date. The options lapse 10 years after grant or, if earlier, on resignation from Shell employment (subject to certain exceptions). The following table shows, for 2008 and 2009, in respect of the option plans, the number of shares under option at the beginning of the year, the number of options exercised and expired/forfeited during the year and the number of shares under option at the end of the year, together with the weighted average exercise price translated at the respective year-end exchange rates. Since 2005 no further grants have been made under these plans.
SH ARE O PTI ON PLAN
Royal Dutch Shell plc Class A shares Weighted average exercise price ($) 33.06 23.09 39.44 33.77 34.40 22.68 38.36 33.06
Royal Dutch Shell plc Class B shares Weighted average exercise price ($) 23.89 22.88 30.21 26.71 32.73 22.14 26.13 23.89
Royal Dutch Shell plc Class A ADRs Weighted average exercise price ($) 50.74 50.80 51.34 50.74 50.95 52.79 53.86 50.74
Number (thousands) Under option at January 1, 2009 Exercised Expired/forfeited Under option at December 31, 2009 Under option at January 1, 2008 Exercised Expired/forfeited Under option at December 31, 2008 58,992 (1,372) (3,840) 53,780 64,171 (2,426) (2,753) 58,992
Number (thousands) 23,476 (1,174) (1,054) 21,248 28,318 (4,069) (773) 23,476
Number (thousands) 11,849 (374) (6) 11,469 13,221 (1,351) (21) 11,849
The underlying weighted average exercise prices for the Company’s Class A and B shares under option at December 31, 2009 were ¤23.43 (2008: ¤23.50) and £16.55 (2008: £16.53) respectively.
VALUATION ASSUMPTIONS
A Monte Carlo option pricing model is used to estimate the fair value of the share-based compensation expense arising from the Performance Share Plan. The model projects and averages the results for a range of potential outcomes for the vesting conditions described above, 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 ten years. The assumptions applicable to Shell are as follows:
2009 Share price volatility three-year ten-year Dividend yield three-year ten-year 32.5% 27.9% 4.2% 3.8%
2008 22.9% 25.7% 3.5% 3.5%
2007 19.2% 27.0% 4.1% 3.6%
The outcomes derived using this model are discounted to their present value using the risk-free interest rate of 1.4% (2008: 2.4%; 2007: 4.6%).
B – Treasury shares
Shell employee share ownership trusts purchase the Company’s shares in the open market to meet future obligations arising from share-based compensation granted to employees. At December 31, 2009, they held 55.9 million Class A shares (2008: 54.9 million), 28.2 million Class B shares (2008: 29.9 million) and 17.5 million Class A ADRs (2008: 17.5 million). The total carrying amount of the Company’s shares, which are all held in connection with the share-based compensation plans, at December 31, 2009, is $1,711 million (2008: $1,867 million).
136
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
25 MINORITY INTEREST
TRAN SAC TION S WITH MI NORI TY SH AREHOLDERS IN 20 07 $ MILLION
Equity attributable to Royal Dutch Shell plc shareholders Retained earnings (5,445) – (28) (5,473) Minority interest (1,639) (6,711) (28) (8,378) Total equity (7,084) (6,711) (56) (13,851)
Acquisition of Shell Canada Partial divestment of Sakhalin Other changes in minority interest Total
In March 2007, Shell acquired the minority interest in Shell Canada for a cash consideration of $7.1 billion. This was reflected in the Consolidated Statement of Changes in Equity as a decrease in minority interest and in retained earnings of $1,639 million and $5,445 million respectively. In April 2007, Shell sold half of its interest in Sakhalin II, reducing its interest from 55% to 27.5%, for a sales price of $4.1 billion. As a result of this transaction, Sakhalin II has been accounted for as an associated company rather than as a subsidiary with effect from April 2007. The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest, and an increase in equity-accounted investments of $3.7 billion.
26 OTHER RESERVES
$ MILLION
Merger reserve At January 1, 2009 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Share-based compensation At December 31, 2009 At January 1, 2008 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Repurchases of shares Share-based compensation At December 31, 2008 At January 1, 2007 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Repurchases of shares Share-based compensation At December 31, 2007 3,444 – – 3,444 3,444 – – – 3,444 3,444 – – – 3,444
Share premium reserve 154 – – 154 154 – – – 154 154 – – – 154
Capital redemption reserve 57 – – 57 48 – 9 – 57 39 – 9 – 48
Share plan reserve 1,192 – 181 1,373 1,122 – – 70 1,192 736 – – 386 1,122
Accumulated other comprehensive income (1,669) 6,623 – 4,954 9,380 (11,049) – – (1,669) 4,447 4,933 – – 9,380
Total 3,178 6,623 181 9,982 14,148 (11,049) 9 70 3,178 8,820 4,933 9 386 14,148
The merger reserve and share premium reserves were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and of The Shell Transport and Trading Company Limited in 2005. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is maintained in respect of equity-settled share-based compensation plans (see Note 24), and includes related deferred taxation recognised directly in equity of $22 million in 2009 (2008: $68 million; 2007: $55 million).
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
137
[Note 26 continued] Accumulated other comprehensive income comprises the following:
$ MILLION
Jan 1, 2009 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total Pre-tax 6,698 (44) 6,654 (101) (27) (128) (37) 318 281 6,807 Tax (164) – (164) (16) 1 (15) (1) 44 43 (136)
Recognised in 2009 Share of equityaccounted After tax 6,534 (44) 6,490 (117) (26) (143) (38) 362 324 6,671 investments
Minority interest
Attributable to Royal Dutch Shell plc shareholders
Dec 31, 2009
(3,984)
74
(52)
6,512
2,528
2,679
(72)
–
(215)
2,464
(364) (1,669)
2 4
– (52)
326 6,623
(38) 4,954
$ MILLION
Recognised in 2008 Share of Jan 1, 2008 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total (11,988) (386) (12,374) 772 1,955 (117) 655 (8) (356) 9,380 1 (7) (11,726) 287 – 287 45 6 51 – – – 338 (11,701) (386) (12,087) 817 (111) 706 (8) 1 (7) (11,388) (1) (2) – 341 18 – equityaccounted investments
Attributable to Royal Dutch Shell plc Minority interest shareholders Dec 31, 2008
Pre-tax
Tax
After tax
7,781
(19)
341
(11,765)
(3,984)
724
2,679
(8) (11,049)
(364) (1,669)
$ MILLION
Recognised in 2007 Share of equityJan 1, 2007 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total 2,392 Pre-tax 6,058 (324) 5,734 626 (1,065) 2,295 (439) (133) 201 68 5,363 Tax (331) – (331) (54) 214 160 (153) (23) (176) (347) After tax 5,727 (324) 5,403 572 (851) (279) (286) 178 (108) 5,016 (62) 1 14 (28) accounted investments
Attributable to Royal Dutch Shell plc Minority interest shareholders Dec 31, 2007
5,389
7,781
(340)
1,955
(240) 4,447
(8) (56)
– (27)
(116) 4,933
(356) 9,380
138
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 26 continued] Unrealised gains on securities reclassified to income in 2007 includes $952 million relating to the sale of the equity portfolio held by Shell’s insurance companies and Shell’s interest in Enterprise Product Partners (see Note 4).
27 DIVIDENDS
$ MILLION
Interim dividends paid: $1.66 per Class A share (2008: $1.56; 2007: $1.405) Interim dividends paid: $1.66 per Class B share (2008: $1.56; 2007: $1.405) Total
2009 5,969 4,557 10,526
2008 5,458 4,058 9,516
2007 5,154 3,847 9,001
On February 4, 2010, the Directors proposed a further interim dividend in respect of 2009 of $0.42 per Class A share and $0.42 per Class B share, payable on March 17, 2010, which will absorb an estimated $2,621 million of shareholders’ funds. Dividends declared on Class A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends declared on Class B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends declared on American Depository Receipts (“ADRs”) are paid in dollars.
28 LEGAL PROCEEDINGS
GROUNDWATER CONTAMINATION
Shell Oil Company (including subsidiaries and affiliates, referred to collectively as SOC), along with numerous other defendants, have been sued by public and quasi-public water purveyors, as well as governmental entities, alleging responsibility for groundwater contamination caused by releases of gasoline-containing oxygenate additives. Most of these suits assert various theories of liability, including product liability, and seek to recover actual damages, including clean-up costs. Some assert claims for punitive damages. Fewer than 50 of these cases remain. Based on court rulings in SOC’s favor in certain cases claiming damages from threats of contamination, the claims asserted in remaining matters, and Shell’s track record with regard to amounts paid to resolve varying claims, management of Shell does not currently believe that the outcome of the remaining oxygenate-related litigation pending, as at December 31, 2009, will have a material impact on Shell.
RECATEGORISATION OF HYDROCARBON RESERVES
In 2007, Shell reached a settlement of asserted and unasserted claims arising from the 2004 recategorisation of certain hydrocarbon reserves with representatives of purchasers who both resided and purchased shares outside of the USA during the period April 8, 1999 to March 18, 2004 (Non-US Settlement). The parties to the Non-US Settlement include a shareholders’ foundation, certain of Shell’s institutional investors, and other shareholders’ rights organisations. The terms of the Non-US Settlement agreement principally include settlement relief of $352.6 million to be distributed to the non-US purchasers pursuant to a plan of distribution proposed in the Non-US Settlement, along with certain other relief. The NonUS Settlement agreement (and an amendment to it executed on February 27, 2008) was declared binding by the Amsterdam Court of Appeals on May 29, 2009. Notices informing shareholders that they may elect to opt out of the settlement and submit a claim were sent in November 2009. Funds comprising the settlement relief have been escrowed. In 2008, a consolidated shareholder class action pending in the US District Court in New Jersey alleging losses related to the 2004 recategorisations of certain hydrocarbon reserves was settled (US Settlement) and finally approved by the court. Among other things, the US Settlement provides to all persons and entities who purchased Shell shares on US markets and all US persons and entities who purchased Shell shares on non-US markets during the Relevant Period the following relief: (i) settlement relief of $82.8 million to be distributed to US purchasers pursuant to the plan of distribution; (ii) interest on settlement amounts from April 1, 2008 (and providing the same relief to participants in the NonUS Settlement); and (iii) the US purchasers and participants in the Non-US Settlement collectively will receive an additional payment of $35 million, divided in accordance with proportions determined in the two proposed settlements. Shell has paid US class counsel’s fees and expenses, will pay the costs of administering the US settlement, and has escrowed the settlement funds. Distribution of settlement funds is expected in 2010. Provisions were recognised in 2007 and 2008 for the settlement payments and attorneys fees (see Note 19).
OTHER
Shell subsidiaries are subject to a number of other loss contingencies arising from litigation and claims brought by governmental and private parties, which are handled in the ordinary course of business. 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, including for example, Nigeria. The industries in which Shell subsidiaries are engaged are also subject to physical risks of various types. The nature and frequency of these developments and events, not all of which are covered by insurance, as well as their effect on future operations and earnings, are unpredictable.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
139
29 AUDIT FEE A – Remuneration of auditors
$ MILLION
2009 Remuneration in respect of the audit of the Parent Company and Consolidated Financial Statements, including the audit of Shell consolidation returns Other audit fees, primarily in respect of audits of accounts of subsidiaries Total audit fees Total audit-related services (other services provided pursuant to legislation) Taxation services (primarily for tax compliance) Other services Total 4 53 57 2 1 – 60
2008 5 49 54 2 – 1 57
2007 4 44 48 3 – 1 52
B – Remuneration for supply of services in relation to retirement benefit plans for employees of subsidiaries
PricewaterhouseCoopers provides audit services to retirement benefit plans for employees of subsidiaries. Remuneration amounted to $1 million in 2009 (2008: $1 million; 2007: $1 million).
30 EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the income attributable to Royal Dutch Shell plc shareholders for the year by the weighted average number of Class A and B shares outstanding during the year. Diluted earnings per share are based on the same income figures. The weighted average number of shares outstanding during the year is adjusted for the number of shares related to share option schemes. Earnings per share are identical for Class A and Class B shares.
2009 2008 2007
Income attributable to Royal Dutch Shell plc shareholders ($ million) 12,518 26,277 31,331
Basic weighted average number of Class A and B shares 6,124,906,119 6,159,102,114 6,263,762,972
Diluted weighted average number of Class A and B shares 6,128,921,813 6,171,489,652 6,283,759,171
31 POST-BALANCE SHEET EVENTS
A consortium in which Shell has a 45% interest signed a 20-year agreement with the Iraqi Ministry of Oil to lead the development of the Majnoon oilfield. Another consortium in which Shell has a 15% interest signed an agreement with the Ministry to develop and expand the West Qurna-1 field in southern Iraq. The Shell Petroleum Development Company of Nigeria Limited agreed, subject to regulatory approval, to sell its interests in three production licences and related equipment in the Niger Delta. Shell and Cosan S.A. signed a non-binding memorandum of understanding, expressing the intention to form a circa $12 billion joint venture in Brazil for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels. Under the terms of the memorandum, both companies would contribute certain existing assets to the joint venture. In addition, Shell would contribute a total of $1.6 billion in cash, payable over two years. A company jointly owned by Shell and PetroChina placed a non-binding indicative offer to acquire 100% of Arrow Energy Limited (Arrow), excluding its international assets. Arrow is a company listed in Australia that supplies coal seam gas to eastern Australia. The offer comprises consideration of approximately $3 billion.
140
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas
SUPPLEMENTARY INFORMATION — OIL AND GAS [A]
Adoption of revised reserves reporting standards
As a company with significant oil and gas operations, Shell is required to present certain supplementary disclosures regarding those operations and its proved oil and gas reserves in accordance with the rules of the SEC and the Financial Accounting Standards Board (FASB). On December 28, 2008, the SEC adopted revised rules for the modernisation of oil and gas reporting requirements. In January 2010, the FASB adopted a revised standard for oil and gas reserves estimation and disclosures. Both of those revised standards are effective for annual periods ending on or after December 31, 2009. Retroactive adoption is not permitted and accordingly: all reserves disclosures for the years 2008 and 2007 are reported in accordance with the disclosure standards in effect during such periods; all reserves disclosures as at December 31, 2009, including the standardised measure of discounted future cash flows, are calculated on the basis of the revised SEC and FASB standards referred to above; and in order to show the changes effected by the revised disclosure rules for 2009, (i) the reserves balances at the beginning of the year 2009 are shown on the basis of the previous rules and (ii) the changes effected by the rules changes are included in revisions and reclassifications for previously booked proved reserves or extensions and discoveries for new proved reserves for 2009. In accordance with the revised SEC rules proved oil and gas reserves quantities at December 31, 2009 are based on a 12-month unweighted arithmetic average sales price, calculated on a first day of the month basis compared to the year-end prices used in 2008 and 2007. The tables for the current reporting period and the 2008 and 2007 historical data have been aligned to the updated SEC requirement for geographic area disclosure. Following the issuing by the SEC, on December 28, 2008, of the new rules Modernization of Oil and Gas Reporting, the proved reserves associated with synthetic crude oil are included in the quantities of oil and gas at the end of 2009. Furthermore, for the first time we included proved reserves associated with future production that will be consumed in operations. Proved reserves are shown net of any quantities of crude oil or natural gas that are expected to be taken by others as royalties in kind but do not exclude quantities related to royalties expected to be paid in cash (except in North America and in other situations in which the royalty quantities are owned by others) or those related to fixed margin contracts. Proved reserves include certain quantities of crude oil or natural gas that will be produced under arrangements that involve Shell companies in risks and rewards but do not transfer title of the product to those companies. Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgement (see Risk factors on pages 1315). These estimates remain subject to revision and are unaudited supplementary information.
[A] Reserves, reserves volumes and reserves related information and disclosure are referred to as “unaudited” as a means of clarifying that this information is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Consolidated Financial Statements or the Parent Company Financial Statements.
Reserves
Net quantities (which are unaudited) of proved oil and gas reserves are shown in the tables on pages 142-149. Proved reserves are those quantities of crude oil, natural gas, natural gas liquids, synthetic crude oil and bitumen, and sales products of other non-renewable natural resources which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible in future years from known reservoirs, and under existing economic conditions, operating methods and government regulations. Proved developed oil and gas reserves are reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods or through installed extraction equipment and infrastructure if the extraction is by means not involving a well. The unaudited proved reserves volumes reported exclude volumes attributable to oil and gas discoveries that are not at present considered proved. Such volumes will be included when technical, fiscal and other conditions allow them to be economically developed and produced.
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil, natural gas liquids, synthetic crude oil and bitumen
141
CRUDE OIL, NATURAL GAS LIQUIDS, SYNTHETIC CRUDE OIL AND BITUMEN
Shell subsidiaries’ estimated net proved reserves of crude oil, natural gas liquids, synthetic crude oil and bitumen at the end of the year, their share of the net proved reserves of equity-accounted investments at the end of the year, and the changes in such reserves during the year are set out below. Significant changes in crude oil, natural gas liquids, synthetic crude oil and bitumen proved developed and undeveloped reserves are discussed below.
The 54 million barrels of bitumen in revisions and reclassifications for bitumen is related primarily to the improved economics due to a higher commodity price for bitumen in 2009.
SHELL SHARE OF EQU ITY- ACCOUNTED INVESTMENTS Asia
The upward net revision of 200 million barrels is attributed to revisions and reclassifications in Abu Dhabi, Brunei, Russia and Qatar. These revisions are primarily related to licence agreement extensions, the positive results of new well information and better than expected well performance related to ongoing development activity and study work.
North America – USA
2009 Compared with 2008
SHELL SUBSIDIARIES
The upward revision of 73 million barrels is related to improved field performance, study activity and the improved economics due to a higher commodity price.
2008 Compared with 2007
Europe
The upward net revision of 123 million barrels in revisions and reclassifications is the result of better reservoir performance from waterfloods, development activity supported by study activity and improved economics. The increase in commodity prices resulted in the rebooking of some 49 million barrels de-booked in 2008.
Asia
SHELL SUBSIDIARIES Asia
The upward net revision of 210 million barrels is due to revisions and reclassifications in Oman, Kazakhstan and Malaysia related to on going development activity, study activity, improved performance data and improved economic conditions related to changes in commodity prices. Some 60 million barrels of the additions in Asia are estimated to be the result of applying the revised SEC rules and are related to the use of analogues in the aggregate.
Africa
The upward net revision of 174 million barrels is due to better results from development drilling in Kashagan offsetting negative tail end cutoff effects as a result of the low year end price, and re-evaluation in a number of fields in Oman following the acquisition of new performance data.
Africa
The upward net revision of 108 million barrels in revisions and reclassifications was primarily due to re-evaluations in a number of fields following the acquisition of new performance data.
North America – Canada
The addition of 241 million barrels is the result of upward net revision of 189 million barrels in revisions and reclassifications that are mainly located in Nigeria and related to ongoing development and study activity, improved economics and changes in commercial agreements and an impairment reversal in Nigeria; the 51 million barrels of extensions and discoveries are mainly associated with new bookings in fields in Nigeria.
North America – USA
The downward net revision of 58 million barrels is mainly due to economics in a number of fields in Canada as a result of the low yearend price.
In the USA the net upward revision of 146 million barrels is made up from 92 million barrels in revisions and reclassifications associated with performance improvements including waterfloods, study activity and improved economics related to the higher commodity prices. A further 54 million barrels are related to extensions and discoveries from new bookings.
North America – Canada
The total of 1,630 million barrels of additions to synthetic crude oil are made up of 1,207 million barrels in revisions and reclassifications of which 997 million barrels of proven minable oil sands. This includes the conversion of proven minable oil sands reserves to synthetic crude oil reserves that were previously included in our proven minable reserves in accordance with the revised SEC and FASB rules. Additional upward revisions are the result of completed geoscience and engineering study work as well as a further increase of 65 million barrels due to the addition of consumed in operations volumes. 423 million barrels are also related to extensions and discoveries from new mine extensions.
142
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil, natural gas liquids, synthetic crude oil and bitumen
Crude oil and natural gas liquids, synthetic crude oil and bitumen
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 009 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil Bitumen All products South America Total MILLION BARRELS
Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Minority interest in reserves of Shell subsidiaries At December 31 – – – 10 – – – – – 10 – – 10 10 22 – – – – (2) 30 526 493 200 2 18 – – (114) 599 1,830 59 12 – – – – (13) 58 135 – – – – – – – – 735 241 73 – 3 – – (29) 288 710 – – – – – – – – 38 – – – – – – – – 1,599 – – – – – – – – 57 20 1 – – – – (2) 19 57 823 308 2 21 – – (160) 994 4,031 – – – – – – – – 1,599 – – – – – – – – 57 823 308 2 21 – – (160) 994 5,687 481 123 – 7 – (1) (114) 496 1,069 210 39 15 – – (102) 1,231 65 4 – 19 – – (11) 77 598 189 1 51 – – (104) 735 347 92 – 54 – – (71) 422 40 4 – 1 – – (7) 38 – 1,207 – 423 – – (31) 1,599 8 54 – 2 – – (7) 57 12 11 – 24 – – (9) 38 2,612 633 40 171 – (1) (418) 3,037 – 1,207 – 423 – – (31) 1,599 8 54 – 2 – – (7) 57 2,620 1,894 40 596 – (1) (456) 4,693
[A] Includes 2 million barrels consumed in operations.
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 9 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil South America
MILLION BARRELS Total All Bitumen products
Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 8 9 375 420 49 39 – – 189 216 – – – – – – 19 17 640 701 – – – – 640 701 376 384 307 341 55 40 300 379 175 249 26 23 – 691 8 29 10 35 1,249 1,451 – 691 8 29 1,257 2,171
PRO V E D U N D E V E L OPE D RE S E RV E S 2 0 0 9 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil South America
MILLION BARRELS Total All Bitumen products
Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 2 21 118 179 10 19 – – 52 72 – – – – – – 1 2 183 293 – – – – 183 293 105 112 762 890 10 37 298 356 172 173 14 15 – 908 – 28 2 3 1,363 1,586 – 908 – 28 1,363 2,522
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil and natural gas liquids
143
Crude oil and natural gas liquids
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 008 MILLION BARRELS
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 615 13 – 9 – (21) (135) 481 26 (14) – – – – (2) 10 – Asia 996 174 23 15 – (36) (103) 1,069 609 (17) – 10 – – (109) 493 – Oceania 63 11 – 4 – (2) (11) 65 63 11 – – – (1) (14) 59 – Africa 574 108 31 5 – (4) (116) 598 – – – – – – – – 8 USA 375 35 – 7 – (1) (69) 347 297 (27) – 1 – – (30) 241 – South Canada [A] America 119 (58) – – 4 – (17) 48 – – – – – – – – – 9 12 – – – – (9) 12 30 (6) – – – – (4) 20 – Total 2,751 295 54 40 4 (64) (460) 2,620 1,025 (53) – 11 – (1) (159) 823 8
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 8
MILLION BARRELS
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 [A] Includes bitumen reserves. 470 376 7 8 Asia 329 307 442 375 Australia/ Oceania 39 55 52 49 Africa 352 300 – – USA 185 175 238 189 South Canada [A] America 74 34 – – 7 10 25 19 Total 1,456 1,257 764 640
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Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil and natural gas liquids
Crude oil and natural gas liquids
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 007 MILLION BARRELS
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 711 42 – 29 – (15) (152) 615 12 (1) 18 – – (1) (2) 26 – Asia 1,171 35 – 85 – (189) (106) 996 546 102 – 66 – – (105) 609 1 Oceania 58 18 – 2 – – (15) 63 24 50 – 1 – – (12) 63 – Africa 784 (132) 33 13 – – (124) 574 – – – – – – – – 12 USA 398 51 – 13 – – (87) 375 312 9 8 – – (1) (31) 297 – South Canada [A] America 139 (18) – 15 – – (17) 119 – – – – – – – – – 9 8 – 1 – – (9) 9 33 – – – – – (3) 30 – Total 3,270 4 33 158 – (204) (510) 2,751 927 160 26 67 – (2) (153) 1,025 13
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 7
MILLION BARRELS
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 [A] Includes bitumen reserves. 533 470 11 7 Asia 443 329 469 442 Australia/ Oceania 31 39 13 52 Africa 378 352 – – USA 204 185 256 238 South Canada [A] America 79 74 – – 9 7 24 25 Total 1,677 1,456 773 764
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
145
NATURAL GAS
Shell subsidiaries’ estimated net proved reserves of natural gas at the end of the year, their share of the net proved reserves of equityaccounted investments at the end of the year, and the changes in such reserves during the year are set out below. The volumes in the table below have not been adjusted to standard heat content. Apart from the GTL project, volumes of gas are reported on an “as-sold” basis. The price used to calculate future revenues and cash flows from proved gas reserves is the contract price or the 12 month average on “as-sold” volumes. Volumes associated with the GTL project are those measured at a designated transfer point between the upstream and downstream portions of the integrated project and reflect the composition of the gas stream at this point. Significant changes in natural gas proved developed and undeveloped reserves are discussed below.
SHELL SHARE OF EQU ITY- ACCOUNTED INVESTMENTS Europe
The net increase of 594 thousand million scf in revisions and reclassifications predominantly from fields in the Netherlands and is related to re-evaluations of reservoir performance and the inclusion of future production related to own use consumed in operations. The effect of including future production that will be consumed in operations on proved reserves was 271 thousand million scf.
Asia
The net increase of 1,008 thousand million scf in revisions and reclassifications is the combined result of additional development drilling, better performance results and study activity in Russia and Brunei, this also includes an increase of 600 thousand million scf of proved reserves volumes that will be consumed in operations.
Australia/Oceania
2009 Compared with 2008
SHELL SUBSIDIARIES
The upward revision of 862 thousand million scf was primarily due to related development and study activities in Australia and the addition of proved reserves volumes that will be consumed in operations.
2008 Compared with 2007
Europe
The net increase of 751 thousand million scf contained in revisions and reclassifications results from improved performance data, ongoing development and study activity and the inclusion of consumed in operations volumes in Denmark, Germany, Norway and the UK; this increase has been partially offset by the negative impact of lower gas prices. This includes the proved reserves associated with future production that will be consumed in operations of 226 thousand million scf.
Asia
SHELL SUBSIDIARIES Europe
The net increase of 356 thousand million scf in revisions and reclassifications is related to re-evaluations in a number of fields mainly in the UK, Germany and Denmark following the acquisition of new performance data, which more than offset the negative tail end and economic effects in some fields due to the low year-end price.
Asia
The net increase of 580 thousand million scf in revisions and reclassifications is primarily the result of additional development drilling, better performance results and rebookings in Malaysia due to higher commodity prices and further development activity in Qatar. These increases were partially offset by the negative PSC effects related to the higher product prices, predominantly in Qatar. The effect of including future production that will be consumed in operations was 603 thousand million scf.
Australia/Oceania
The net increase of 3,326 thousand million scf results mainly from development activity in Qatar GTL and positive PSC effects related to the low year-end price.
Australia/Oceania
The net increase of 273 thousand million scf in revisions and reclassifications is due to the re-evaluation in a number of fields following the acquisition of new performance data and re-evaluation of existing data. These more than offset the negative effects in the tail-end cut off and economics of some fields.
Africa
The 2,880 thousand million scf in extensions and discoveries are primarily related to new bookings offshore Australia and include future production that will be consumed in operations of 360 thousand million scf.
Africa
The combined upward revision of 1,460 thousand million scf is primarily the result of new bookings from field extensions, upward revisions as the result of development and study activity in a number of fields in Nigeria.
North America – USA
The combined net positive changes of 273 thousand million scf consisting of 143 thousand million scf in revisions and reclassifications and 130 thousand million scf relating to extensions are mainly the result of improved gas recovery factors and additions to the proved areas in a number of fields in Nigeria, more than offsetting negative year-end price effects.
North America – USA
The increase of 229 thousand million scf in extensions and discoveries is primarily due to new bookings resulting from ongoing development activity both onshore and offshore the USA. Proved reserves associated with future production that will be consumed in operations were 99 thousand million scf; this was significantly impacted by negative revisions related to lower gas prices in 2009.
The combined net positive changes of 313 thousand million scf consist of 178 thousand million scf in revisions and reclassifications and 135 thousand million scf of extensions which were the result of infill drilling and better than anticipated performance with some additions to the proved areas in a number of fields.
North America – Canada
The net increase of 408 thousand million scf in purchases is associated with the acquisition of Duvernay.
146
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
SHELL SHARE OF EQUITY- ACCOUNTED IN VESTMEN TS Asia
The net reduction of 569 thousand million scf in revisions and reclassifications is mainly the result of new reservoir data gathered from wells drilled in the Sakhalin II project in Russia and in the Qatar LNG project. The increase of 330 thousand million scf in extensions and discoveries was primarily related to the extension of the proved area of the Qatar LNG project in Qatar.
Australia/Oceania
The net increase of 330 thousand million scf in revisions and reclassifications is primarily related to the evaluation of existing and new data in a number of Australian fields.
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
147
Natural gas
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 009 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Minority interest in reserves of Shell subsidiaries At December 31 4,641 751 – 30 – – (700) 4,722 11,091 594 – 29 – – (601) 11,113 15,835 – Asia 13,556 580 – 198 – – (601) 13,733 5,256 1,008 1 71 – – (257) 6,079 19,812 15 Oceania 2,045 94 – 2,880 16 – (235) 4,800 1,055 862 – – – – (85) 1,832 6,632 – Africa 1,759 740 – 720 – – (181) 3,038 – – – – – – – – 3,038 5 USA 2,392 36 – 229 – – (399) 2,258 10 63 – 1 – – (9) 65 2,323 – Canada 1,231 (4) – 160 – – (215) 1,172 – – – – – – – – 1,172 – South America 303 (41) – 8 – – (32) 238 – 5 – – – – – 5 243 – Total 25,927 2,156 – 4,225 16 – (2,363) 29,961 17,412 2,532 1 101 – – (952) 19,094 49,055 20
[A] Includes 188 thousand million standard cubic feet consumed in operations. Includes 30 thousand million standard cubic feet consumed in operations.
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 9
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,371 3,574 9,131 8,732 Asia 2,021 2,418 852 1,973 Australia/ Oceania 1,501 1,046 575 354 Africa 593 957 – – USA 1,194 1,248 8 56 Canada 747 754 – – South America 144 173 – 5 Total 9,571 10,170 10,566 11,120
PROVE D U N D E V E L O PE D RE SE RV E S 20 09
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 1,270 1,148 1,960 2,381 Asia 11,535 11,315 4,404 4,106 Australia/ Oceania 544 3,754 480 1,478 Africa 1,166 2,081 – – USA 1,198 1,010 2 9 Canada 484 418 – – South America 159 65 – – Total 16,356 19,791 6,846 7,974
148
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
Natural gas
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 008 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 4,903 356 – 93 – (1) (710) 4,641 11,578 144 – 17 – (11) (637) 11,091 – Asia 10,572 3,326 – 156 – – (498) 13,556 5,678 (569) – 330 – – (183) 5,256 21 Oceania 1,884 273 – 55 40 – (207) 2,045 802 330 – – – – (77) 1,055 – Africa 1,741 143 – 130 – – (255) 1,759 – – – – – – – – – USA 2,468 178 – 135 – (7) (382) 2,392 12 1 – – – – (3) 10 – Canada 923 (3) – 52 408 – (149) 1,231 – – – – – – – – – South America 334 5 – – – – (36) 303 – – – – – – – – – Total 22,825 4,278 – 621 448 (8) (2,237) 25,927 18,070 (94) – 347 – (11) (900) 17,412 21
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 8
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,185 3,371 9,543 9,131 Asia 1,311 2,021 960 852 Australia/ Oceania 983 1,501 373 575 Africa 703 593 – – USA 1,319 1,194 8 8 Canada 687 747 – – South America 170 144 – – Total 8,358 9,571 10,884 10,566
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
149
Natural gas
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 007 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 4,951 227 – 537 – (150) (662) 4,903 11,902 244 – 22 – (29) (561) 11,578 – Asia 17,071 (1,218) – 207 – (5,046) (442) 10,572 1,419 1,888 – 2,556 – – (185) 5,678 26 Oceania 1,813 256 – 22 – – (207) 1,884 757 114 – 5 – – (74) 802 – Africa 2,272 (326) – 69 – – (274) 1,741 – – – – – – – – – USA 2,629 138 – 162 – (50) (411) 2,468 5 7 1 – – – (1) 12 – Canada 1,093 (52) – 28 1 – (147) 923 – – – – – – – – – South America 229 111 – 28 – – (34) 334 1 (1) – – – – – – – Total 30,058 (864) – 1,053 1 (5,246) (2,177) 22,825 14,084 2,252 1 2,583 – (29) (821) 18,070 26
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 7
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,224 3,185 9,827 9,543 Asia 1,627 1,311 1,045 960 Australia/ Oceania 691 983 215 373 Africa 680 703 – – USA 1,504 1,319 4 8 Canada 689 687 – – South America 182 170 1 – Total 8,597 8,358 11,092 10,884
150
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Standardised measure of discounted future cash flows
STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS
United States accounting principles require the disclosure of a standardised measure of discounted future cash flows, relating to proved oil and gas 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. For
20 09 – S HEL L SUBSIDIAR IES
the 2008 and 2007 periods, the price and costs were those at year end. 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.
$ MILLION
North America Europe 61,836 23,116 11,724 14,496 12,500 3,010 9,490 – Asia 87,327 18,367 18,429 21,254 29,277 19,848 9,429 5 Australia/ Oceania 29,353 9,169 12,977 2,955 4,252 5,319 (1,067) – Africa 48,742 18,697 5,975 10,929 13,141 3,649 9,492 105 USA 32,766 16,964 6,131 3,496 6,175 1,517 4,658 – Canada 91,855 62,287 20,303 2,969 6,296 5,306 990 – South America 2,481 1,268 444 313 456 53 403 – Total 354,360 149,868 75,983 56,412 72,097 38,702 33,395 110
Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Minority interest included
20 09 – S HEL L SHAR E O F E Q U ITY- ACCO UNTED I NVESTM ENTS
$ MILLION
North America Europe Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows are estimated. 84,784 58,794 2,624 9,105 14,261 6,530 7,731 Asia 54,598 24,105 5,679 10,576 14,238 5,485 8,753 Australia/ Oceania [A] 29,412 13,549 4,700 4,658 6,505 3,020 3,485 Africa – – – – – – – USA 15,778 7,565 2,488 2,073 3,652 1,443 2,209 Canada – – – – – – – South America 1,001 459 54 286 202 34 168 Total 185,573 104,472 15,545 26,698 38,858 16,512 22,346
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the numbers
20 08
$ MILLION
North America Europe Shell subsidiaries: Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Shell share of equity-accounted investments Minority interests included [A] Excludes synthetic crude oil. 46,960 17,007 9,848 11,188 8,917 2,186 6,731 9,921 – Asia 56,134 15,923 15,463 10,103 14,645 10,940 3,705 2,834 1 Australia/ Oceania 6,621 2,805 1,023 861 1,932 754 1,178 396 – Africa 24,059 11,107 5,727 2,360 4,865 1,078 3,787 – (19) USA 25,939 13,737 8,683 1,419 2,100 338 1,762 783 – Canada [A] 7,973 5,246 1,849 325 553 (61) 614 – – South America 1,107 429 153 170 355 137 218 66 – Total 168,793 66,254 42,746 26,426 33,367 15,372 17,995 14,000 (18)
Supplementary information (unaudited)
Shell Annual Report and Form 20-F 2009 Standardised measure of discounted future cash flows
151
200 7
$ MILLION
North America Europe Shell subsidiaries: Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Shell share of equity-accounted investments Minority interest included [A] Excludes synthetic crude oil. 107,607 28,937 14,600 40,317 23,753 7,192 108,559 20,556 20,442 31,829 35,732 23,938 11,770 3,530 1,986 1,912 4,342 1,473 55,639 16,197 5,089 20,295 14,058 3,600 48,696 19,163 6,190 8,170 15,173 4,938 12,429 7,377 1,474 1,009 2,569 660 1,611 561 117 214 719 186 346,311 96,321 49,898 103,746 96,346 41,987 Asia Australia/ Oceania Africa USA Canada [A] South America Total
16,561 10,023 –
11,794 7,470 10
2,869 2,000 –
10,458 – 245
10,235 6,434 –
1,909 – –
533 802 –
54,359 26,729 255
Change in standardised measure of discounted future net cash flows relating to proved oil and gas reserves
200 9 $ MILLION
Shell share of equityShell subsidiaries 17,995 35,269 17,898 (23) 18,267 (28,834) (27,443) 14,569 2,901 (17,204) 33,395 accounted investments 14,000 15,067 2,328 – 7,045 (6,071) (12,829) 3,861 2,994 (4,049) 22,346 Total 31,995 50,336 20,226 (23) 25,312 (34,905) (40,272) 18,430 5,895 (21,253) 55,741
At January 1 Net changes in prices and production costs Extensions, discoveries and improved recovery Purchases and sales of minerals in place Revisions of previous reserves estimates Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31
Sub si di arie s
$ MILLION
At January 1 Net changes in prices and production costs Extensions, discoveries and improved recovery Revisions of previous reserves estimates Purchases and sales of minerals in place Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31
2008 54,359 (69,345) 3,640 12,718 (759) (3,275) (48,503) 10,669 10,362 48,129 17,995
2007 43,045 59,064 9,258 5,781 (9,257) (14,601) (37,263) 10,447 6,862 (18,977) 54,359
Additional information concerning proved reserves
Proved reserves can be either developed or undeveloped. Subsidiaries’ proved reserves at December 31, 2009 were divided into 40% developed and 60% undeveloped on a barrel of oil equivalent basis. For the Shell share of equity-accounted investments the proved reserves were divided into 61% developed and 39% undeveloped. Proved reserves are recognised under various forms of contractual agreements. Shell’s proved reserves volumes present in agreements such as PSCs or other forms of economic entitlement contracts at December 31, 2009 where the Shell share of reserves can vary with commodity prices are approximately 1,318 million barrels of crude oil and natural gas liquids, and 16,035 thousand million scf of gas.
152
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities capitalised costs
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES CAPITALISED COSTS
The aggregate amount of property, plant and equipment and intangible assets 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
2009 Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. Includes synthetic crude oil activities’ net capitalised costs of $12,029 million at December 31, 2009. 151,303 20,787 5,778 177,868 88,226 1,899 2,687 92,812 85,056
2008 116,365 18,526 4,859 139,750 73,786 1,476 2,394 77,656 62,094
Shell share of equity-accounted investments
$ MILLION
2009 Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. The Shell share of equity-accounted investments’ net capitalised costs was $17,077 million at December 31, 2008. 20,552 62 1,676 22,290 22,147 40,555 891 2,991 44,437
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities costs incurred
153
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 table below. Development costs exclude costs of acquiring support equipment and facilities, but include depreciation thereon. Included in exploration costs in 2009 are $611 million (2008: $805 million; 2007: $594 million) of mainly drilling costs associated with maturing fields for which Shell has taken a final investment decision but for which no proved reserves have yet been recorded.
Shell subsidiaries
200 9 $ MILLION
North America Australia/ Europe Acquisition of properties Proved Unproved Exploration Development [A] 10 – 485 2,378 Asia 531 2 355 3,669 Oceania 99 163 385 533 Africa – 163 376 1,768 USA – 224 1,632 2,315 Canada 3 43 373 4,002 South America – 7 267 296 Total 643 602 3,873 14,961
[A] Includes capitalised asset decommissioning and restoration costs. Includes synthetic crude oil activities of $3,110 million.
200 8
$ MILLION
North America Europe Acquisition of properties Proved Unproved Exploration Development [A] 1 – 573 3,009 Asia 115 – 355 4,113 Australia/ Oceania 60 176 252 239 Africa 16 11 616 710 USA – 2,567 980 2,877 Canada 661 4,608 425 1,324 South America – – 418 193 Total 853 7,362 3,619 12,465
[A] Includes capitalised asset decommissioning and restoration costs.
200 7
$ MILLION
North America Europe Acquisition of properties Proved Unproved Exploration Development [A] – – 479 3,285 Asia – 2 315 3,573 Australia/ Oceania – 5 300 155 Africa – 124 627 2,182 USA – 611 1,065 2,315 Canada 3 65 325 922 South America – – 98 93 Total 3 807 3,209 12,525
[A] Includes capitalised asset decommissioning and restoration costs.
154
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities costs incurred
Shell share of equity-accounted investments
20 09 $ MILLION
North America Australia/ Europe Acquisition of properties Proved Unproved Exploration Development [A] – – 9 440 Asia 31 – 364 2,377 Oceania – – 109 1,720 Africa – – – – USA – – 1 316 Canada – – – – South America – – – 54 Total 31 – 483 4,907
[A] Includes capitalised asset decommissioning and restoration costs.
20 08
$ MILLION
North America Australia/ Costs incurred Europe 321 Asia 2,734 Oceania 1,208 Africa – USA 297 Canada – South America 177 Total 4,737
20 07
$ MILLION
North America Europe 308 Asia 2,217 Australia/ Oceania 1,456 Africa – USA 245 Canada – South America 91 Total 4,317
Costs incurred
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities earnings
155
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES EARNINGS
Shell subsidiaries
200 9 [A ] $ MILLION
North America Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 2,945 8,271 11,216 2,729 322 273 2,730 (1,064) 4,098 2,886 1,212 Asia 2,449 8,170 10,619 1,113 185 208 937 (2,458) 5,718 4,744 974 Australia/ Oceania 1,001 877 1,878 177 172 196 307 (463) 563 69 494 Africa 1,613 5,524 7,137 1,285 465 532 1,233 (444) 3,178 2,370 808 USA 3,055 2,774 5,829 1,666 56 610 2,440 (653) 404 (458) 862 Canada 348 3,334 3,682 1,963 – 177 1,999 (1,075) (1,532) (572) (960) South America 119 486 605 184 68 182 124 (72) (25) (126) 101 Total 11,530 29,436 40,966 9,117 1,268 2,178 9,770 (6,229) 12,404 8,913 3,491
[A] Includes synthetic crude oil activities of earnings after taxation $249 million. Includes cash paid royalties to governments outside North America.
200 8
$ MILLION
North America Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 6,210 13,771 19,981 2,383 501 414 3,102 (440) 13,141 8,391 4,750 3,764 13,001 16,765 1,331 639 131 1,299 (2,107) 11,258 9,098 2,160 170 1,440 1,610 157 258 143 220 8 840 205 635 3,104 8,429 11,533 1,207 882 300 1,595 (20) 7,529 4,505 3,024 5,219 5,235 10,454 1,294 101 680 2,166 (76) 6,137 2,044 4,093 1,131 1,573 2,704 750 – 180 880 (330) 564 11 553 479 371 850 161 90 147 74 (41) 337 287 50 20,077 43,820 63,897 7,283 2,471 1,995 9,336 (3,006) 39,806 24,541 15,265 Asia Australia/ Oceania Africa USA Canada South America Total
[A] Includes cash paid royalties to governments outside North America.
200 7
$ MILLION
North America Australia/ Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 3,750 11,654 15,404 2,433 401 178 3,311 107 9,188 4,961 4,227 Asia 2,961 9,097 12,058 1,313 342 141 893 (1,529) 7,840 6,499 1,341 Oceania 226 1,352 1,578 131 165 183 350 90 839 139 700 Africa 1,108 8,955 10,063 1,312 829 345 2,168 (1,670) 3,739 2,332 1,407 USA 3,099 5,765 8,864 1,242 74 675 2,183 (398) 4,292 1,488 2,804 Canada 1,322 1,021 2,343 655 – 246 514 (708) 220 (66) 286 South America 192 501 693 158 67 54 13 (44) 357 19 338 Total 12,658 38,345 51,003 7,214 1,878 1,822 9,432 (4,152) 26,475 15,372 11,103
[A] Includes cash paid royalties to governments outside North America.
156
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities earnings
Shell share of equity-accounted investments
20 09 $ MILLION
North America Australia/ Third party revenue Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation Europe 4,965 4,965 334 2,201 13 300 332 2,449 940 1,509 Asia 4,962 4,962 843 1,446 126 964 (76) 1,507 955 552 Oceania 1,053 1,053 148 72 92 294 30 477 194 283 Africa – – – – – – – – – – USA 1,613 1,613 454 3 1 293 342 1,204 437 767 Canada – – – – – – – – – – South America 192 192 42 9 – 297 (36) (192) 11 (203) Total 12,785 12,785 1,821 3,731 232 2,148 592 5,445 2,537 2,908
[A] Includes cash paid royalties to governments outside North America. Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the numbers are estimated.
20 08
$ MILLION
North America Europe Earnings after taxation 2,519 Asia 467 Australia/ Oceania 535 Africa – USA 1,281 Canada 3 South America 165 Total 4,970
20 07
$ MILLION
North America Europe 1,667 Asia 597 Australia/ Oceania 238 Africa – USA 929 Canada 7 South America 145 Total 3,583
Earnings after taxation
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements ? Independent auditors’ report to the members of Royal Dutch Shell plc
157
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ROYAL DUTCH SHELL PLC
We have audited the Parent Company Financial Statements of Royal Dutch Shell plc (the Company) for the year ended December 31, 2009, which comprise the Parent Company Statement of Income, the Parent Company Statement of Comprehensive Income, the Parent Company Balance Sheet, the Parent Company Statement of Changes in Equity, the Parent Company Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AN D AUDITORS
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPA NIES 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 the information given in the Report of the Directors for the financial year for which the Parent Company Financial Statements are prepared is consistent with the Parent Company Financial Statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters where 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.
OTHER MATTER
As explained more fully in the Report of the Directors set out on pages 57-58, the Directors are responsible for the preparation of the Parent Company Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent Company Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMEN TS
We have reported separately on the Consolidated Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2009.
Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
London March 15, 2010
[A] The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) is 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. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Financial Statements.
OPINION ON FINANCIAL STATEMENTS
In our opinion the Parent Company Financial Statements: give a true and fair view of the state of the Company’s affairs as at December 31, 2009, and of its income and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006.
158
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
INDEX TO THE 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). 159 159 159 160 160 161 161 161 162 162 162 163 163 164 164 164 165 166 166 166 167 167 167 167 167 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Parent Company Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Finance income/(expense) Note 4 Remuneration of Directors and Senior Management Note 5 Taxation Note 6 Accounts receivable Note 7 Cash and cash equivalents Note 8 Financial instruments and other derivative contracts Note 9 Accounts payable and accrued liabilities Note 10 Ordinary share capital Note 11 Other reserves Note 12 Dividends Note 13 Earnings per share Note 14 Related party transactions Note 15 Legal proceedings Note 16 Associated companies and jointly controlled entities Note 17 Subsidiaries Note 18 Audit fee Note 19 Post-balance sheet events
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
159
STATE ME N T O F IN COME
$ MILLION
NOTES Dividend income Finance income Administrative expenses Finance expense Income before taxation Taxation Income for the period All results are from continuing activities. 3 3 5
2009 10,556 344 (37) (22) 10,841 43 10,884
2008 11,558 304 (62) (823) 10,977 (46) 10,931
STATE ME N T O F COMPRE H E N S I V E I N COME
$ MILLION
Income for the period Comprehensive income for the period
2009 10,884 10,884
2008 10,931 10,931
B A L AN CE S HE E T
$ MILLION
NOTES Assets Non-current assets Investments in subsidiaries Deferred tax Current assets Accounts receivable Cash and cash equivalents Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Total liabilities Equity Ordinary share capital Other reserves Retained earnings Total equity Total liabilities and equity 10 11 9 6 7
Dec 31, 2009
Dec 31, 2008
5
201,824 159 201,983 142 6,650 6,792 208,775
200,613 18 200,631 7,487 67 7,554 208,185
580 580 580 527 201,448 6,220 208,195 208,775
916 916 916 527 201,324 5,418 207,269 208,185
/s/
Simon Henry
Simon Henry
Chief Financial Officer, for and on behalf of the Board of Directors March 15, 2010
The Notes on pages 161 to 167 are an integral part of these Parent Company Financial Statements.
160
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
S TATE M E N T OF CHA N G E S I N E QU IT Y
$ MILLION
NOTES At January 1, 2009 Comprehensive income for the period Dividends paid Share-based compensation Shares repurchased for cancellation At December 31, 2009 At January 1, 2008 Comprehensive income for the period Dividends paid Share-based compensation Shares repurchased for cancellation At December 31, 2008 12 11 10
Share capital 527 – – – – 527 536 – – – (9) 527
Other reserves 201,324 – – 124 – 201,448 201,180 – – 135 9 201,324
Retained earnings 5,418 10,884 (10,526) 444 – 6,220 6,886 10,931 (9,516) 198 (3,081) 5,418
Total equity 207,269 10,884 (10,526) 568 – 208,195 208,602 10,931 (9,516) 333 (3,081) 207,269
12 11 10
S TATE M E N T OF CA S H F L O WS
$ MILLION
NOTES Cash flow from operating activities Income for the period Adjustment for: Dividend income Taxation Unrealised currency exchange (gain)/loss Interest income Interest expense Decrease in net working capital Net cash from operating activities (pre-tax) Taxation refunded/(paid) Net cash from operating activities Cash flow from investing activities Dividends received Interest received Net cash from investing activities Cash flow from financing activities Dividends paid Repurchases of share capital, including expenses Interest paid Net cash used in financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 7 7
2009 10,884 (10,556) (43) (303) (32) 22 49 21 422 443 16,656 32 16,688
2008 10,931 (11,558) 46 787 (304) 109 27 38 (619) (581) 12,872 304 13,176 (9,516) (3,560) (109) (13,185) (590) 657 67
12
(10,526) – (22) (10,548) 6,583 67 6,650
The Notes on pages 161 to 167 are an integral part of these Parent Company Financial Statements.
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
161
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 International Accounting Standards (IAS) Regulation and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Company, there are no material differences with 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 accounting policies set out in Note 2 below have been consistently applied in all periods presented. The Financial Statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities and other derivative contracts. The preparation of financial information 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 could differ from those estimates. The financial results of the Company are included in the Consolidated Financial Statements on pages 97-139. The financial results of the Company incorporate the results of the Dividend Access Trust, the financial statements for which are presented on pages 171-174. The Company’s principal activity is being the parent company for Shell, as described in Note 1 to the Consolidated Financial Statements. It conducts itself wholly within the Corporate business segment (see Note 7 to the Consolidated Financial Statements). The Financial Statements were approved and authorised for issue by the Board of Directors on March 15, 2010.
2 ACCOUNTING POLICIES
The Company’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. Key accounting estimates and judgements affecting the assessment and measurement of impairment follow those set out in Note 3 to the Consolidated Financial Statements. The following are the principal accounting policies of the Company.
Presentation currency
The Company’s presentation and functional currency is US dollars (dollars).
Currency translation
Income and expense items denominated in currencies other than the functional currency are translated into the functional currency at the rate ruling on their transaction date. Monetary assets and liabilities recorded in currencies other than the functional currency are expressed in the functional currency at the rates of exchange ruling at the respective balance sheet dates. Differences on translation are included in the Statement of Income. Share capital issued in currencies other than in the functional currency is translated into the functional currency at the exchange rate as at the date of issue.
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. Shell Petroleum N.V. (Shell Petroleum) and its fiscal unit subsidiaries are part of the fiscal unit of which the Company is the parent, and the Company recognises in its financial statements the resulting current tax payable or receivable for the fiscal unit. The tax charge or credit is recognised in the Statement of Income calculated at the statutory tax rate prevailing in the Netherlands.
Investments
Investments in subsidiaries are stated at cost, net of pre-acquisition dividends receivable and any impairment. The original cost of the Company’s investment in Royal Dutch Petroleum Company (Royal Dutch) was based on the fair value of the Royal Dutch shares, transferred to the Company by the former shareholders of Royal Dutch in exchange for Class A shares in the Company during the public exchange offer (the Royal Dutch Offer). For shares of Royal Dutch tendered in the acceptance period, the fair value was calculated based on the closing price of Royal Dutch’s shares on July 19, 2005. For shares of Royal Dutch tendered in the subsequent acceptance period, the fair value was calculated based on the quoted bid price of the Company’s Class A shares on the specified date.
162
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
[Note 2 continued] The original cost of the Company’s investment in The Shell Transport and Trading Company Limited (Shell Transport) was the fair value of the Shell Transport shares held by the former shareholders of Shell Transport, which were transferred in consideration for the issuance of Class B shares as part of the Scheme of Arrangement. The fair value was calculated based on the closing price of Shell Transport’s shares on July 19, 2005. As a result of the Unification (see Note 26 to the Consolidated Financial Statements), the Company’s investments in Royal Dutch and Shell Transport now represent an investment in Shell Petroleum. This had no impact on the cost of investments in subsidiaries.
Share-based compensation plans
The fair value of share-based compensation (IFRS 2 charge) for equity-settled plans granted to subsidiary employees under the Company’s schemes is recognised as an investment in subsidiaries from the date of grant over the vesting period with a corresponding increase in equity. The fair value of these plans is estimated using a Monte Carlo pricing model. At the moment of vesting of a plan, the costs for the actual deliveries is recharged to the relevant employing subsidiaries. This is recognised as a repayment of the investment originally booked. If the actual vesting costs are higher than the originally estimated IFRS 2 charge, the difference is accounted for as a gain in the Statement of Income. Information on the principal plans, including vesting conditions and shares granted, vested and expired or forfeited during the year, is set out in Note 24 to the Consolidated Financial Statements.
Dividend income
Interim dividends declared are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport or of Shell Petroleum, in which case income is recognised on declaration date.
3 FINANCE INCOME/(EXPENSE)
$ MILLION
2009 Finance income Interest income Currency exchange gains Total Finance expense Interest expense Currency exchange losses Total 32 312 344 (22) – (22)
2008 304 – 304 (109) (714) (823)
4 REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT
The Directors and Senior Management are remunerated for their services to Shell. Remuneration of the Directors and Senior Management is paid by subsidiaries. The Company has received a recharge of $8.8 million (2008: $10.5 million) for the services of Directors and Senior Management. Remuneration of Directors and Senior Management, detailing short-term benefits, retirement benefits, share-based compensation and gains realised on the exercise of share options, is set out in Note 6 to the Consolidated Financial Statements.
5 TAXATION A – Taxation (credit)/charge for the period
$ MILLION
2009 (Credit)/charge in respect of current period Adjustment in respect of prior periods Current taxation Relating to the origination and reversal of temporary differences Deferred taxation Taxation (credit)/charge (61) – (61) 18 18 (43)
2008 38 8 46 – – 46
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
163
[Note 5 continued] Reconciliations of the expected tax charge to the actual tax charge are as follows:
$ MILLION
Income before taxation Applicable tax charge at statutory tax rate of 25.5% (2008: 25.5%) Income not subject to tax Adjustment in respect of prior periods Other tax items Taxation (credit)/charge
2009 10,841 2,764 (2,771) – (36) (43)
2008 10,977 2,799 (2,762) 8 – 46
The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. Other tax items comprise net interest of $14 million received from the tax authorities relating to overpaid taxes in prior years and $22 million relating to a tax credit received on withholding tax deductions on dividends received by entities within the Dutch Fiscal Unit.
B – Taxes receivable
$ MILLION
2009 Income taxes receivable Total 137 137
2008 501 501
Taxes receivable are reported within accounts receivable; taxes payable are reported within accounts payable and accrued liabilities. In 2009, current tax recoverable of $nil (2008: $4 million) in connection with stamp duties and commission fees relating to shares repurchased for cancellation has been recognised in equity.
C – Deferred tax assets
$ MILLION
At January 1 Recognised in income Additions during the year At December 31
2009 18 (18) 159 159
2008 18 – – 18
Prior year tax losses brought forward were utilised during the year, with the related deferred tax asset of $18 million recognised in income. The tax losses of 2009 have been partly carried back to 2008. A deferred tax asset has been recognised for the remaining losses as it is probable that these will be recovered, based on projected future available profits. The tax losses can be carried forward for relief during the next nine years ending December 31, 2018.
6 ACCOUNTS RECEIVABLE
$ MILLION
Dec 31, 2009 Amounts due from subsidiaries (see Note 14) Other receivables Total 4 138 142
Dec 31, 2008 6,986 501 7,487
Included in other receivables is $137 million (2008: $501 million) related to current tax receivables (see Note 5).
7 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise call deposits with a subsidiary (see Note 14).
164
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
8 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial assets and liabilities in the Company’s Balance Sheet comprise cash and cash equivalents (see Note 7), accounts receivable (see Note 6) and certain amounts reported within accounts payable and accrued liabilities (see Note 9). Foreign exchange derivatives are used by the Company to manage foreign exchange risk. Foreign exchange risk arises when certain transactions are denominated in a currency that is not the Company’s functional currency. There are no derivative financial instruments held at year end. The fair value of financial assets and liabilities at December 31, 2009 and 2008 approximates their carrying amount. All financial assets and liabilities fall due within 12 months.
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
$ MILLION
Amounts owed to subsidiaries (see Note 14) Withholding tax payable Accruals Unclaimed dividends Total
2009 345 228 6 1 580
2008 611 290 14 1 916
10 ORDINARY SHARE CAPITAL
AU TH ORISED NUMBER OF SHARES
Class A shares of ¤0.07 each Class B shares of ¤0.07 each Unclassified shares of ¤0.07 each Sterling deferred shares of £1 each
I SS U E D A N D F U LLY PAI D
Dec 31, 2009 4,077,359,886 2,759,360,000 3,163,280,114 50,000
Dec 31, 2008 4,077,359,886 2,759,360,000 3,163,280,114 50,000
NUMBER OF SHARES
At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008
N O MI N A L VA L U E
Class A 3,545,663,973 3,583,505,000 (37,841,027) 3,545,663,973
shares of ¤0.07 each Class B 2,695,808,103 2,759,360,000 (63,551,897) 2,695,808,103
shares of £1 each Sterling deferred 50,000 50,000 – 50,000
$ MILLION
At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008
Class A 300 303 (3) 300
shares of ¤0.07 each Class B 227 233 (6) 227
Total 527 536 (9) 527
The total nominal value of sterling deferred shares is less than $1 million. In the period from January 2, 2008 to November 7, 2008 37,841,027 Class A shares and 63,551,897 Class B shares were repurchased under the Company’s share buyback programme and cancelled. The Company did not repurchase any shares for cancellation in 2009. The Class B shares rank pari passu in all respects with the Class A shares except for the dividend access mechanism described below. The Company and Shell Transport can procure the termination of the dividend access mechanism at any time. Upon such termination, the Class B shares will form one class with the Class A shares ranking pari passu in all respects and the Class A shares and Class B shares will be known as ordinary shares without further distinction. The sterling deferred shares are redeemable only at the discretion of the Company at £1 for all sterling deferred shares redeemed at any one time, 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 the Class A and Class B shares. For information on the number of shares in the Company held by Shell employee share ownership trusts and in connection with share-based compensation plans, refer to Note 24 of the Consolidated Financial Statements.
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
165
[Note 10 continued]
Dividend access mechanism for Class B shares
GENERAL
Dividends paid on Class 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 Class B shares will receive dividends via the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for Dutch and UK tax purposes; there will be no UK or Dutch withholding tax on such dividends and certain holders (not including US holders) of Class B shares or Class B ADRs will be entitled to a UK tax credit in respect of their proportional share of such dividends.
DESCRIPTION OF DIVIDEN D ACCESS MECHANISM
A dividend access share has been issued by Shell Transport to Lloyds TSB Offshore Trust Company Limited as dividend access trustee (the Trustee). Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of Class B shares from time to time and will arrange for prompt disbursement of such dividends to holders of Class B shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends that are unclaimed after 12 years will revert to Shell Transport. Holders of Class B shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend access share. The only assets held on trust for the benefit of the holders of Class B shares will be dividends paid to the dividend access trustee in respect of the dividend access share. The declaration and payment of dividends on the dividend access share will require Board action by Shell Transport and will be subject to any applicable legal or articles limitations in effect from time to time. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate amount of the dividend declared by the Company’s Board on the Class B shares in respect of the same period.
OPERATION OF THE DIVIDEND ACCESS MECHANISM
If, in connection with the declaration of a dividend by the Company on the Class B shares, the board of Shell Transport elects to declare and pay a dividend on the dividend access share to the dividend access trustee, the holders of the Class B shares will be beneficially entitled to receive their share of that dividend 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 by way of a dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B shares, the dividend which the Company would otherwise pay on the Class B shares will be reduced by an amount equal to the amount paid to such holders of Class B shares by the dividend access trustee. The Company will have a full and unconditional obligation, in the event that the dividend access trustee does not pay an amount to holders of Class B shares on a cash dividend payment date (even if that amount has been paid to the dividend access trustee), to pay immediately the dividend declared on the Class B shares. The right of holders of Class B shares to receive distributions from the dividend access 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 Class B shares. The dividend access mechanism may be suspended or terminated at any time by the Company’s Directors or the Directors of Shell Transport, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. On February 5, 2010 (Completion) the Trustee entered in to an agreement with EES Trustees International Limited (the ‘New Trustee’) whereby the benefit of certain clients of the Trustee including the Trust would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and the replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement between the Trustee and the New Trustee.
11 OTHER RESERVES
AN A LY S IS OF OTHE R RE SE RVE S $ MILLION
Share premium At January 1, 2009 Share-based compensation At December 31, 2009 At January 1, 2008 Share-based compensation Shares repurchased for cancellation At December 31, 2008 reserve 154 – 154 154 – – 154
Capital redemption reserve 57 – 57 48 – 9 57
Share plan reserve 736 124 860 601 135 – 736
Other reserve 200,377 – 200,377 200,377 – – 200,377 Total 201,324 124 201,448 201,180 135 9 201,324
166
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
[Note 11 continued]
Share premium reserve
On January 6, 2006 loan notes were converted into 4,827,974 Class A shares. The difference between the value of the loan notes and the value of the new shares issued was credited to the share premium reserve.
Capital redemption reserve
As required by the Companies Act 2006, the equivalent of the nominal value of shares cancelled is transferred to a capital redemption reserve.
Share plan reserve
The share plan reserve represents the fair value of share-based compensation granted to employees under the Company’s equity-settled schemes.
Other reserve
The other reserve was created as a result of the Unification and represents the difference between the cost of the investment in Shell Transport and Royal Dutch 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.
12 DIVIDENDS
DIVIDE N DS PAID $ MILLION
Interim paid on March 11, 2009: Interim paid on March 11, 2009: Interim paid on June 10, 2009: Interim paid on June 10, 2009: Interim paid on September 9, 2009: Interim paid on September 9, 2009: Interim paid on December 9, 2009: Interim paid on December 9, 2009: Total paid in 2009 Interim paid on March 12, 2008: Interim paid on March 12, 2008: Interim paid on June 11, 2008: Interim paid on June 11, 2008: Interim paid on September 10, 2008: Interim paid on September 10, 2008: Interim paid on December 10, 2008: Interim paid on December 10, 2008: Total paid in 2008
$0.40 per Class A share $0.40 per Class B share $0.42 per Class A share $0.42 per Class B share $0.42 per Class A share $0.42 per Class B share $0.42 per Class A share $0.42 per Class B share $0.36 per Class A share $0.36 per Class B share $0.40 per Class A share $0.40 per Class B share $0.40 per Class A share $0.40 per Class B share $0.40 per Class A share $0.40 per Class B share
1,369 1,037 1,597 1,254 1,517 1,138 1,486 1,128 10,526 1,323 1,006 1,409 1,077 1,312 980 1,414 995 9,516
In addition, on February 4, 2010, the Directors proposed a further interim dividend in respect of 2009 of $0.42 per Class A share and $0.42 per Class B share, payable on March 17, 2010, which will absorb an estimated $2,621 million of shareholders’ funds. The dividends on the Class B shares are paid via the Dividend Access Trust (see Note 10). Dividends declared on Class A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends declared on Class B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends declared on American Depository Receipts (“ADRs”) are paid in dollars.
13 EARNINGS PER SHARE
Please refer to Note 30 to the Consolidated Financial Statements.
14 RELATED PARTY TRANSACTIONS
The Company deposited cash balances with Shell Treasury Centre Limited, a subsidiary. The Company earned interest on these balances of $2 million in 2009 (2008: $16 million). At December 31, 2009 the balance deposited was $6,649 million (2008: $67 million), consisting of sterling, euro and dollar balances. These balances are presented within cash and cash equivalents. Interest on euro balances is calculated at EONIA less 0.4% (2008: EONIA less 0.0625%), on sterling balances at LIBOR and on dollar balances at US LIBOR less 0.6% (2008: US LIBOR less 0.125%). At December 31, 2009 the Company has a net payable due to Shell Treasury Luxembourg Sarl, a subsidiary, of $296 million (2008: $611 million), presented within amounts owed to subsidiaries. The net payable comprises an interest-bearing receivable at December 31, 2009 of ¤4,416 million (2008: ¤4,237 million) and an interest-bearing payable of $6,660 million (2008: $6,581 million). Interest on euro balances is
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
167
[Note 14 continued] calculated at EONIA less 0.4% (2008: EONIA less 0.0625%), on sterling balances at LIBOR and on dollar balances at US LIBOR. Net interest income on these balances in 2009 is $5 million (2008: $89 million). Dividend income in 2009 was $10,556 million (2008: $11,558 million). At December 31, 2009, amounts due from subsidiaries in respect of dividends were $nil (2008: $6,100 million). The main movement in investment in subsidiaries relates to the IFRS 2 charge of $501 million on equity-settled plans in 2009 (2008: $401 million), disclosed in the Consolidated Financial Statements. The Company recharged $84 million (2008: $171 million) to subsidiaries related to vested share-based compensation that was delivered to employees in 2009 on performance share plan awards that were granted in 2006 and previous years. In 2009, the Company settled balances of $255 million (2008: $nil) with Shell Petroleum. In 2009, the Company settled balances with several subsidiaries amounting to $26 million (2008: $30 million) relating to the Company’s employee costs. At December 31, 2009 a balance of $nil was owing to subsidiaries (2008: $15 million) with respect to these transactions. The Company was recharged certain administrative expenses from subsidiaries, which amounted to $26 million in 2009 (2008: $25 million). The Company recharged certain administrative expenses to subsidiaries, which amounted to $3 million in 2009 (2008: $4 million). Invoices from third-party suppliers were paid by Shell International B.V., a subsidiary, on behalf of the Company amounting to $3 million (2008: $8 million). The Company enters into forward and spot foreign exchange contracts with Treasury companies, which are subsidiaries. At December 31, 2009 there were no open contracts with these companies in respect of foreign exchange contracts. The Company settles general and administrative expenses of the Trust including the audit fees. The Company has guaranteed listed debt issued by subsidiaries amounting to $27,132 million (2008: $16,233 million).
15 LEGAL PROCEEDINGS
Please refer to Note 28 to the Consolidated Financial Statements.
16 ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
The Company has no direct interest in associated companies and jointly controlled entities. Shell’s major investments in associated companies and jointly controlled entities at December 31, 2009, and Shell’s percentage interest, are set out in Note 10 to the Consolidated Financial Statements. A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
17 SUBSIDIARIES
The significant subsidiary undertakings of Shell at December 31, 2009, and Shell’s percentage interest (to the nearest whole number) are set out in Exhibit 8. All of these subsidiaries have been included in Shell’s Consolidated Financial Statements. Those held directly by the Company are marked with an asterisk (*). A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
18 AUDIT FEE
Auditors’ remuneration for audit services during the year was $117,950 (2008: $160,000).
19 POST-BALANCE SHEET EVENTS
There are no post balance sheet events with an impact on the Company’s financial statements other than as disclosed in Note 12.
168
Shell Annual Report and Form 20-F 2009 Independent auditors’ report to Lloyds TSB Offshore Trust Company Limited, trustee of the Royal Dutch Shell dividend access trust
INDEPENDENT AUDITORS’ REPORT TO LLOYDS TSB OFFSHORE TRUST COMPANY LIMITED, TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST
We have audited the Financial Statements of the Royal Dutch Shell Dividend Access Trust (the Trust) for the year ended December 31, 2009 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. These Financial Statements have been prepared under the accounting policies set out therein.
RESPECTIVE RESPONSIBILITIES OF TRU STEE AND A UDITORS
We read the other information contained in the Royal Dutch Shell plc Annual Report, and consider whether it is consistent with the audited Financial Statements. This other information comprises the other sections of the Royal Dutch Shell plc Annual Report and Accounts and Annual Report on Form 20-F. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Financial Statements. Our responsibilities do not extend to any other information.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements. It also includes an assessment of the significant estimates and judgments made by the Trustee in the preparation of the Financial Statements, and of whether the accounting policies are in accordance with the requirements of the Trust Deed, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Financial Statements.
OPINION
The Trustee is responsible for preparing the Financial Statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Our responsibility is to audit the Financial Statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for the Trustee and the Royal Dutch Shell plc Class B shareholders as a group in accordance with clause 9.4 of the Trust Deed, and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Financial Statements give a true and fair view. We also report to you if, in our opinion, the Trust has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit.
In our opinion the financial statements: give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Trust’s affairs as at 31 December 2009 and of its result and cash flows for the year then ended.
PricewaterhouseCoopers LLP
Chartered Accountants London March 15, 2010
Shell Annual Report and Form 20-F 2009 Report of independent registered public accounting firm
169
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Lloyds TSB Offshore Trust Company Limited, 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, Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity, Statement of Cash Flows and the related Notes present fairly, in all material respects, the financial position of Royal Dutch Shell Dividend Access Trust (the Trust) at December 31, 2009 and December 31, 2008, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2009, 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. Also, in our opinion the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The trustee and the management of Royal Dutch Shell plc are responsible for these Financial Statements, 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 Corporate Governance Statement as set out on pages 76-86. Our responsibility is to express opinions on these Financial Statements and on the Trust’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Financial Statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
PricewaterhouseCoopers LLP
London March 15, 2010
170
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
INDEX TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS
171 171 171 172 172 173 173 173 173 174 174 174 174 174 174 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements Note 1 The Trust Note 2 Basis of preparation Note 3 Accounting policies Note 4 Other liabilities Note 5 Capital account Note 6 Distributions made Note 7 Audit fee Note 8 Financial instruments Note 9 Related party transactions
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
171
STATE ME N T O F IN COME
£ MILLION
Dividend income Income before and after taxation and for the period
2009 2,902 2,902
2008 2,277 2,277
2007 1,930 1,930
All results are from continuing activities.
STATE ME N T O F COMPRE H E N S I V E I N COME £ MILLION
2009 Income for the period Comprehensive income for the period 2,902 2,902
2008 2,277 2,277
2007 1,930 1,930
B A L AN CE S HE E T
£ MILLION
NOTES Assets Current assets Cash and cash equivalents Total assets Liabilities Current liabilities Other liabilities Total liabilities Equity Capital account Revenue account Total equity Total liabilities and equity
Dec 31, 2009
Dec 31, 2008
1 1
– –
4
1 1 – – – 1
– – – – – –
5
/s/
Davinia Smith
/s/
Heidi Wilson
Davinia Smith
Heidi Wilson
Signed for and on behalf of EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited (as trustee of the Royal Dutch Shell Dividend Access Trust) as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustees International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010. March 15, 2010
Signed for and on behalf of EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited (as trustee of the Royal Dutch Shell Dividend Access Trust) as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustees International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010.
The Notes on pages 173 to 174 are an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements.
172
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
S TATE M E N T OF CHA N G E S I N E QU IT Y
£ MILLION
NOTES At January 1, 2009 Comprehensive income for the period Distributions made At December 31, 2009 At January 1, 2008 Comprehensive income for the period Distributions made At December 31, 2008 At January 1, 2007 Comprehensive income for the period Distributions made At December 31, 2007
6
Capital account – – – – – – – – – – – –
Revenue account – 2,902 (2,902) – – 2,277 (2,277) – – 1,930 (1,930) –
Total equity – 2,902 (2,902) – – 2,277 (2,277) – – 1,930 (1,930) –
6
6
S TATE M E N T OF CA S H F L O WS
£ MILLION
2009 Cash flow from operating activities Income for the period Adjustment for: Dividends received Increase in net working capital Net cash from operating activities Cash flow from investing activities Dividends received Net cash from investing activities Cash flow from financing activities Distributions made Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 2,902 (2,902) 1 1 2,902 2,902 (2,902) (2,902) 1 – 1
2008 2,277 (2,277) – – 2,277 2,277 (2,277) (2,277) – – –
2007 1,930 (1,930) – – 1,930 1,930 (1,930) (1,930) – – –
The Notes on pages 173 to 174 are an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements.
Royal Dutch Shell Dividend Access Trust Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
173
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 Limited (previously known as The “Shell” Transport and Trading Company, plc (Shell Transport)) and Royal Dutch Shell plc (the Company). The Trust is governed by the applicable laws of England and Wales and is resident in Jersey. The Trustee of the Trust is Lloyds TSB Offshore Trust Company Limited (registration number 7748) (Trustee), PO Box 160, 25 New Street, St Helier, Jersey, JE4 8RG. The Trust was established as part of a dividend access mechanism. A Dividend Access Share was issued by Shell Transport to the Trustee. Following the declaration of a dividend by the Company on the Class B shares, Shell Transport may declare a dividend on the Dividend Access Share. The primary purposes of the Trust are to receive, on behalf of the Class B shareholders of the Company and in accordance with their respective holdings of Class B shares in the Company, any amounts paid by way of dividend on the Dividend Access Share and to pay such amounts to the Class B shareholders on the same pro rata basis. 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. On February 5, 2010 (Completion) the Trustee entered in to an agreement with EES Trustees International Limited (the New Trustee) whereby the benefit of certain clients of the Trustee, including the Trust, would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and the replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement between the Trustee and the New Trustee.
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 Royal Dutch Shell Dividend Access Trust, there are no material differences with IFRS as issued by the International Accounting Standards Board, therefore the Financial Statements have been prepared in accordance with IFRS as issued by the IASB. The accounting policies set out in Note 3 below have been consistently applied in all periods presented. The Financial Statements have been prepared under the historical cost convention. 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 Trust’s accounting policies. Actual results may differ from these estimates. The financial results of the Trust are included in the Consolidated and Parent Company Financial Statements on pages 97-139 and pages 159-167 respectively. The Financial Statements were approved and authorised for issue on March 15, 2010 by EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustee International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010.
3 ACCOUNTING POLICIES
The Trust’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. The following are the principal accounting policies of the Trust.
Functional currency
The functional currency of the Trust is sterling. The Trust dividend income and dividends paid are principally in sterling.
Foreign currency translation
Income and expense items denominated in currencies other than the functional currency are translated into the functional currency at the rate ruling on their transaction date. Monetary assets and liabilities recorded in currencies other than the functional currency are expressed in the functional currency at the rates of exchange ruling at the respective balance sheet dates. Differences on translation are included in the Statement of Income.
Taxation
The Trust is not subject to taxation.
174
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
[Note 3 continued]
Dividend income
Interim dividends declared on the Dividend Access Share are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport, in which case income is recognised based on the record date of the dividend by the Company on its Class B shares.
4 OTHER LIABILITIES
Other liabilities include £525,602 (2008: £205,528) relating to unclaimed dividends.
5 CAPITAL ACCOUNT
The capital account is represented by the Dividend Access Share of 25 pence settled in the Trust by Shell Transport.
6 DISTRIBUTIONS MADE
Distributions are made to the Class B shareholders of the Company in accordance with the Trust Deed. Refer to Note 12 of the Parent Company Financial Statements for information about dividends per share. Unclaimed dividends amounted to £525,602 as at December 31, 2009 (2008: £205,528), which are not included in distributions made. Amounts are recorded as distributed once a wire transfer or cheque is issued. All cheques are valid for one year from the date of issue. Any wire transfers that are not completed are replaced by cheques. To the extent that cheques expire or are returned unpresented, the Trust records a liability for unclaimed dividends and a corresponding amount of cash.
7 AUDIT FEE
Auditors’ remuneration for audit services during the year was £37,250 (2008: £37,250; 2007: £35,000).
8 FINANCIAL INSTRUMENTS
The Trust, in its normal course of business, is not subject to market risk, credit risk or liquidity risk. The Trustees do not consider that any foreign exchange exposures will materially affect the operations of the Trust.
9 RELATED PARTY TRANSACTIONS
Shell Transport, a signatory to the Trust Deed, issued a Dividend Access Share to the Trustee of the Trust. The Trust received dividend income of £2,902 million (2008: £2,277 million; 2007: £1,930 million) in respect of the Dividend Access Share. The Trust made distributions of £2,902 million (2008: £2,277 million; 2007: £1,930 million) to the Class B shareholders of the Company, a signatory to the Trust Deed. The Company pays the general and administrative expenses of the Trust including the audit fees.
Shell Annual Report and Form 20-F 2009 Cross Reference to Form 20-F
175
CROSS REFERENCE TO FORM 20-F
PART I PAGES
Item 1. Item 2. Item 3.
Identity of Directors, Senior Management and Advisers Offer Statistics and Expected Timetable Key Information A. Selected financial data B. Capitalisation and indebtedness C. Reasons for the offer and use of proceeds D. Risk factors Information on the Company A. History and development of the company B. Business overview C. Organisational structure D. Property, plant and equipment Unresolved Staff Comments Operating and Financial Review and Prospects A. Operating results B. Liquidity and capital resources C. Research and development, patents and licences, etc. D. Trend information E. Off-balance sheet arrangements F. Tabular disclosure of contractual obligations G. Safe harbour Directors, Senior Management and Employees A. Directors and senior management B. Compensation C. Board practices D. Employees E. Share ownership Major Shareholders and Related Party Transactions A. Major shareholders B. Related party transactions C. Interests of experts and counsel Financial Information A. Consolidated Statements and Other Financial Information B. Significant Changes The Offer and Listing A. Offer and listing details B. Plan of distribution C. Markets D. Selling shareholders E. Dilution F. Expenses of the issue Additional Information A. Share capital B. Memorandum and articles of association C. Material contracts D. Exchange controls E. Taxation F. Dividends and paying agents G. Statement by experts H. Documents on display I. Subsidiary Information
N/A N/A 10, 88 N/A N/A 13-15 10-12, 16-17, 19-28, 38-41, 87 8-9, 11-12, 16-44, 49-52, 140-149 11, E2-E5 16-43, 50-52 N/A 8-10, 12, 16-44 45-48 18, 57, 105 8-9, 11-12, 16-21, 38-43 47 47 N/A 53-56, 77 61-75 57-59, 76-86 49-50, 109 49-50, 58-59, 63-73, 87, 104, 134-135 59, 86 59, 103, 115-116, 166-167, 174 N/A 45, 95-139, 157-174 57, 139, 167 87-90 N/A 87 N/A N/A N/A N/A 82-86 59 91 91-92 N/A N/A 2 N/A 80-82, 101-108, 116-117, 128-134, 164, 174 91
Item 4.
Item 4A. Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11. Item 12.
Quantitative and Qualitative Disclosures About Market Risk Description of Securities Other than Equity Securities
176
Shell Annual Report and Form 20-F 2009 Cross Reference to Form 20-F
PART II
PAGES
Item 13. Item 14. Item 15. Item 16. Item 16A. Item 16B. Item 16C. Item 16D. Item 16E. Item 16F. Item 16G.
PART III
Defaults, Dividend Arrearages and Delinquencies Material Modifications to the Rights of Security Holders and Use of Proceeds Controls and Procedures [Reserved] Audit committee financial expert Code of Ethics Principal Accountant Fees and Services Exemptions from the Listing Standards for Audit Committees Purchases of Equity Securities by the Issuer and Affiliated Purchasers Change in Registrant’s Certifying Accountant Corporate Governance
N/A N/A 80-82 76, 78-79 76 79, 139, 167, 174 76 47 N/A 76
Item 17. Item 18. Item 19.
Financial Statements Financial Statements Exhibits
N/A 95-139, 169-174 177
Shell Annual Report and Form 20-F 2009 Exhibits
177
INDEX TO THE EXHIBITS
Exhibit No. Description PAGE
1.1 1.2 2 4.2
Memorandum of Association of Royal Dutch Shell plc (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-4 (Registration No. 333-125037) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on May 18, 2005). Articles of Association of Royal Dutch Shell plc (incorporated by reference to Exhibit 99.3) to the Report on Form 6-K of Royal Dutch Shell plc furnished to the Securities and Exchange Commission on November 5, 2008. Dividend Access Trust Deed (incorporated by reference to Exhibit 2 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 Securities and Exchange Commission on March 13, 2007). Shell Provident Fund Regulations and Trust Agreement (incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment to Registration Statement on Form S-8 (Registration No. 333-126715) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on June 18, 2007). 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 Securities and Exchange Commission on March 13, 2006). 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 4.1 to the Registration Statement on Form F-3 (Registration No. 333-126726) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on July 20, 2005, amended from then to be dated as of June 27, 2006, and with the parties signatures). Form of Directors Letter of appointments (incorporated by reference to Exhibits 4.5 – 4.11 to the Annual Report for fiscal year ended December 31, 2006, on Form 20-F (File No. 001-325751) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on March 13, 2007). Calculation of Ratio of Earnings to Fixed Charges. Calculation of Return on Average Capital Employed (ROACE) (incorporated by reference to page 47 herein). Calculation of gearing ratio (incorporated by reference to page 9 and Note 16 to the Consolidated Financial Statements on page 121 herein). Significant Shell subsidiaries as at December 31, 2009. Section 302 Certification of Royal Dutch Shell plc. Section 302 Certification of Royal Dutch Shell plc. Section 906 Certification of Royal Dutch Shell plc. Consent of PricewaterhouseCoopers LLP, London. Consent of PricewaterhouseCoopers LLP, London relating to the Royal Dutch Shell Dividend Access Trust.
4.3 4.4
4.5
7.1 7.2 7.3 8 12.1 12.2 13.1 99.1 99.2
E1
E2 E6 E7 E8 E9 E10
178
Shell Annual Report and Form 20-F 2009 Exhibits
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 this Annual Report on Form 20-F on its behalf. Royal Dutch Shell plc
/s/
Peter Voser
Peter Voser
Chief Executive Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E1
EXHIBIT 7.1
CAL CU L AT I ON OF RAT I O OF E A R N I N G S T O F I X E D CH A RG E S $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Pre-tax income from continuing operations before income from equity investees Total fixed charges Distributed income from equity investees Less: interest capitalised Less: preference security dividend requirements of consolidated subsidiaries Total earnings Interest expensed and capitalised Interest within rental expense Less: preference security dividend requirements of consolidated subsidiaries Total fixed charges Ratio earnings/fixed charges
2009 16,044 2,397 4,903 1,088 – 22,256 1,630 767 – 2,397 9.28
2008 43,374 2,689 9,325 870 – 54,518 2,051 638 – 2,689 20.27
2007 42,342 2,380 6,955 667 – 51,010 1,775 605 – 2,380 21.43
2006 37,957 2,258 5,488 564 – 45,139 1,713 545 – 2,258 19.99
2005 37,444 1,958 6,709 427 7 45,677 1,494 457 7 1,958 23.33
E2
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 8
Significant subsidiaries
Significant subsidiaries at December 31, 2009, and Shell’s percentage of share capital (to the nearest whole number) are set out below. All of these subsidiaries have been included in the Consolidated Financial Statements of Shell on pages 97-139. Those held directly by the Company are marked with an asterisk(*). A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
Company name Shell Development (Australia) Proprietary Ltd Shell Energy Holdings Australia Ltd Shell China Holding Gmbh Qatar Shell Gtl Ltd Shell Deepwater Borneo Ltd Shell International Trading Middle East Ltd Shell Oman Trading Ltd Shell South Syria Exploration Ltd 3095381 Nova Scotia Company BlackRock Ventures Inc. Shell Canada Energy Shell Canada Ltd Shell Canada Upstream Shell Olie-OG Gasudvinding Danmark Pipelines Aps Shell Gabon Ferngasbeteiligungsgesellschaft Mbh Shell Energy Deutschland Gmbh Shell Erdgas Beteiligungsgesellschaft Mbh Shell Erdoel Und Erdgas Exploration Gmbh Shell Exploration and Production Libya Gmbh Shell Verwaltungsgesellschaft Fur Erdgasbeteiligungen Mbh Hazira Gas Private Ltd Shell E&P Ireland Ltd Shell Italia E&P SpA Sarawak Shell Berhad Shell MDS (Malaysia) Sendirian Berhad Shell Energy Asia Ltd Shell Nigeria E & P Company Ltd Shell Nigeria Exploration Properties Alpha Ltd Shell Nigeria Ultra Deep Ltd The Shell Petroleum Development Company Of Nigeria Ltd A/S Norske Shell Enterprise Oil Norge As Shell Tankers (Singapore) Private Ltd B.V. Dordtsche Petroleum Maatschappij Kirthar Pakistan B.V. Shell ABU Dhabi B.V. Shell Azerbaijan Exploration and Production B.V. Shell Caspian B.V. Shell E and P Offshore Services B.V. Shell Egypt Deepwater B.V. Shell Egypt N.V. Shell Energy Europe B.V. Shell EP Middle East Holdings B.V. Shell EP Wells Equipment Services B.V. Shell Exploration and Production Investments B.V. Shell Exploration B.V. Shell Gas B.V. Shell Generating (Holding) B.V. Shell International Exploration and Production B.V. Shell Kazakhstan Development B.V.
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 74 100 100 100 72 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation Australia Australia Austria Bermuda Bermuda Bermuda Bermuda Bermuda Canada Canada Canada Canada Canada Denmark Gabon Germany Germany Germany Germany Germany Germany India Ireland Italy Malaysia Malaysia New Zealand Nigeria Nigeria Nigeria Nigeria Norway Norway Singapore the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands
Principal activities Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Redeemable, Non-Redeemable
Shell Annual Report and Form 20-F 2009 Exhibits
E3
Company name Shell Olie – OG Gasudvinding Danmark B.V. Shell Philippines Exploration B.V. Shell Technology Ventures B.V. Shell Western LNG B.V. Syria Shell Petroleum Development B.V. Enterprise Oil Ltd Enterprise Oil Middle East Ltd Enterprise Oil U.K. Ltd Saxon Oil Miller Ltd Shell China Exploration and Production Company Ltd Shell Energy Europe Ltd Shell EP Offshore Ventures Ltd Shell Exploration and Production Oman Ltd Shell Gas Direct Ltd Shell Property Company Ltd Shell U.K. Ltd Shell Ventures New Zealand Ltd Pecten Cameroon Company LLC SCOGI, L.P. Shell Deepwater Royalties Inc. Shell Energy North America (US), L.P. Shell Exploration & Production Company Shell Frontier Oil & Gas Inc. Shell Gulf Of Mexico Inc. Shell Offshore Inc. Shell Oil Company Shell Onshore Ventures Inc. Shell Trading North America Company Shell Windenergy Inc SWEPI LP Shell Venezuela S.A. Shell Compania Argentina De Petroleo S.A. Shell Australia Ltd The Shell Company Of Australia Ltd Shell Western Supply & Trading Ltd Belgian Shell S.A. Shell Saudi Arabia (Refining) Ltd Shell Brasil Ltda Pennzoil-Quaker State Canada Incorporated Shell Canada Products Shell Chemicals Canada Ltd Shell Chile Sociedad Anonima Comercial E Industrial Shell Tongyi (Beijing) Petroleum Chemical Co. Ltd. Shell Tongyi (Xianyang) Petroleum Chemical Co. Ltd Shell Czech Republic Akciova Spolecnost Butagaz Sas J.P. Industrie Sas Ste D’ Exploitation De Stations-Service D’Autoroutes Ste Des Petroles Shell Sas Deutsche Shell Gmbh Deutsche Shell Holding Gmbh Shell Deutschland Oil Gmbh Shell Erneuerbare Energien Gmbh Shell Hellas A.E. Shell Hong Kong Ltd Asiatic Petroleum Company (Dublin) Ltd Shell Aviation Ireland Ltd Kenya Shell Ltd
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 75 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America Venezuela Argentina Australia Australia Barbados Belgium Bermuda Brazil Canada Canada Canada Chile China China Czech Republic France France France France Germany Germany Germany Germany Greece Hong Kong Ireland Ireland Kenya
Principal activities Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream
Class of shares held Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ltd Partnership, Partnership Capital Ordinary Partnership Capital Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Partnership Capital Ordinary Nominative Ordinary Ordinary Ordinary Ordinary Ordinary Quotas Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Nominative Ordinary Ordinary Ordinary Ordinary
E4
Shell Annual Report and Form 20-F 2009 Exhibits
Company name Shell Luxembourgeoise Sarl Shell Malaysia Trading Sendirian Berhad Shell Refining Co (Federation Of Malaya) Berhad Societe Shell Du Maroc Shell New Zealand Holding Company Ltd Shell New Zealand Ltd Shell Pakistan Ltd Pilipinas Shell Petroleum Corporation Shell Polska Sp. Z O.O. Shell Chemicals Seraya Pte. Ltd. Shell Eastern Petroleum (Pte) Ltd Shell Eastern Trading (Pte) Ltd Shell Seraya Pioneer (Pte) Ltd Shell South Africa Energy (Pty) Ltd Shell South Africa Holdings (Pty) Ltd Shell South Africa Marketing (Pty) Ltd AB Svenska Shell Shell Brands International AG Shell Chemicals Europe B.V. Shell Chemicals Ventures B.V. Shell Lubricants Supply Company B.V. Shell Nederland B.V. Shell Nederland Chemie B.V. Shell Nederland Raffinaderij B.V. Shell Nederland Verkoopmaatschappij B.V. Shell Trademark Management B.V. Shell Trading Rotterdam B.V. Tankstation Exploitatie Maatschappij Holding B.V. Shell & Turcas Petrol A.S. Shell Caribbean Investments Ltd Shell Chemicals U.K. Ltd Shell International Petroleum Company Ltd Shell International Trading And Shipping Company Ltd Shell Marine Products Ltd Shell Trading International Ltd The Shell Company Of Thailand Ltd Equilon Enterprises LLC Jiffy Lube International, Inc Pennzoil-Quaker State Company Shell Chemical LP Shell Chemicals Arabia LLC Shell Pipeline Company LP Shell Trading (US) Company SOPC Holdings East LLC SOPC Holdings West LLC TMR Company International Energy Bank Ltd Shell Bermuda (Overseas) Ltd Shell Holdings (Bermuda) Ltd Shell Overseas Holdings (Oman) Ltd Solen Insurance Ltd Shell Americas Funding (Canada) ULC Shell Treasury Hong Kong Ltd Shell Finance Luxembourg Sarl Shell Treasury Luxembourg Sarl Shell Treasury Centre East (Pte) Ltd Shell Finance Switzerland AG Solen Versicherungen AG Shell Finance (Netherlands) B.V. Shell International B.V.
% 100 100 51 100 100 100 76.1 67.1 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 70 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 99.9 100 100 100 100 100 100 100 100 100
Country of incorporation Luxembourg Malaysia Malaysia Morocco New Zealand New Zealand Pakistan Philippines Poland Singapore Singapore Singapore Singapore South Africa South Africa South Africa Sweden Switzerland the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands Turkey United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America Barbados Bermuda Bermuda Bermuda Bermuda Canada Hong Kong Luxembourg Luxembourg Singapore Switzerland Switzerland the Netherlands the Netherlands
Principal activities Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered, Voting Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Ordinary Ordinary Partnership Capital Ordinary Partnership Capital Ordinary Membership Interest Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered, Voting Ordinary Ordinary
Shell Annual Report and Form 20-F 2009 Exhibits
E5
Company name Shell International Finance B.V.* Shell Overseas Investments B.V. Shell Petroleum N.V.* Shell Treasury Netherlands B.V. Shell Energy Investments Ltd Shell Holdings (U.K.) Ltd Shell International Investments Ltd Shell Overseas Holdings Ltd Shell Research Ltd Shell Treasury Centre Ltd Shell Treasury Dollar Company Ltd Shell Treasury Euro Company Ltd Shell Treasury UK Ltd The Shell Petroleum Company Ltd The Shell Transport and Trading Company Ltd Criterion Catalysts & Technologies L.P. Pecten Victoria Company Shell Petroleum Inc. Shell Treasury Center (West) Inc.
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation the Netherlands the Netherlands the Netherlands the Netherlands United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America
Principal activities Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary
E6
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 12.1
I, Peter Voser, certify that:
1. I have reviewed this Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
/s/
Peter Voser
Peter Voser
Chief Executive Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E7
EXHIBIT 12.2
I, Simon Henry, certify that:
1. I have reviewed this Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
/s/
Simon Henry
Simon Henry
Chief Financial Officer March 15, 2010
E8
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 13.1
In connection with the Annual Report on Form 20-F of Royal Dutch Shell plc (the Company) 2009, a corporation organised under the laws of England and Wales for the period ending December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer’s knowledge, that: 1. The Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not intended to be used or relied upon for any other purpose.
/s/
Peter Voser
Peter Voser
Chief Executive Officer
/s/
Simon Henry
Simon Henry
Chief Financial Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E9
EXHIBIT 99.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-155201, 333-155201-01) and the Registration Statements on Form S-8 (No. 333-126715 and 333-141397) of Royal Dutch Shell plc of our report dated March 15, 2010, relating to the Consolidated Financial Statements and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London March 15, 2010
E10
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 99.2
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-155201, 333-155201-01) and the Registration Statement on Form S-8 (No. 333-126715) of the Royal Dutch Shell Dividend Access Trust of our report dated March 15, 2010, relating to the Royal Dutch Shell Dividend Access Trust Financial Statements, and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London March 15, 2010
CONTACT INFORMATION
REGISTERED OFFICE
Royal Dutch Shell plc Shell Centre London SE1 7NA United Kingdom Registered in England and Wales, Company number 4366849 Registered with the Dutch Trade Register under number 34179503
RETAIL SHAREHOLDERS
Enquiries from retail shareholders: Shareholder Relations Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR The Hague The Netherlands +31 (0)70 377 1365 +31 (0)70 377 4088 +31 (0)70 377 3953 or Shareholder Relations Royal Dutch Shell plc Shell Centre London SE1 7NA United Kingdom +44 (0)20 7934 3363 +44 (0)20 7934 7515 [email protected] www.shell.com/shareholder
INVESTOR RELATIONS
Enquiries from institutional shareholders: Investor Relations Royal Dutch Shell plc PO Box 162 2501 AN The Hague The Netherlands +31 (0)70 377 4540 +44 (0)20 7934 3856 (UK) or Investor Relations Shell Oil Company PO Box 2463 Houston, TX 77252 USA +1 713 241 1042 +1 713 241 0176 [email protected] [email protected] www.shell.com/investor
HEADQUARTERS
Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR The Hague The Netherlands
For questions about:
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ANNUAL REPORT
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ANNUAL REVIEW
Annual Report and Form 20-F for the year ended December 31, 2009 A comprehensive operational and financial overview of Shell.
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Royal Dutch Shell plc Financial anD
opeRational inFoRmation 2005–2009
Royal Dutch Shell plc SuStainability RepoRt 2009
sUsTAINABILITy REPORT
Royal Dutch Shell plc SuStainability Review 2009
sUsTAINABILITy REVIEW
Financial and Operational Information 2005–2009 Five years' detailed financial and operational information, including maps.
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doc_222411257.pdf
The report for the financial year 2009 - 2010 of shell.
ROYAL DUTCH SHELL PLC ANNUAL REPORT AND FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2009
ANNUAL REPORT
OUR BUSINESSES
a
c
d
E
b M
J
K
F H M l G I N
CHEMICAL PRODUCTS USED FOR
? Plastics ? Coatings ? Detergents
REFINED OIL PRODUCTS GAS AND ELECTRICITY
? Industrial use ? Domestic use
? (Bio) Fuels ? Lubricants ? Bitumen ? Liquefied petroleum gas
UPSTREAM
? Exploring for oil and gas a ? Developing fields b ? Producing oil and gas c ? Mining oil sands d ? Extracting bitumen E ? Liquefying gas by cooling (LNG) F ? Regasifying LNG G ? Converting gas to liquid products (GTL) H ? Generating wind energy I
DOWNSTREAM
? Refining oil into fuels and lubricants J ? Producing petrochemicals K ? Developing biofuels l ? Trading M ? Retail sales N ? Managing CO2 emissions ? Supply and distribution ? Business-to-business sales
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009 Commission file number 1-32575
Royal Dutch Shell plc
(Exact name of registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organisation)
Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands Tel. no: 011 31 70 377 9111
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class Name of Each Exchange on Which Registered
American Depositary Receipts representing Class A ordinary shares of the issuer of an aggregate nominal value e0.07 each American Depositary Receipts representing Class B ordinary shares of the issuer of an aggregate nominal value of e0.07 each 1.30% Guaranteed Notes due 2011 5.625% Guaranteed Notes due 2011 Floating Guaranteed Notes due 2011 4.95% Guaranteed Notes due 2012 4.0% Guaranteed Notes due 2014 3.25% Guaranteed Notes due 2015 5.2% Guaranteed Notes due 2017 4.3% Guaranteed Notes due 2019 6.375% Guaranteed Notes due 2038
New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Outstanding as of December 31, 2009: 3,454,731,900 Class A ordinary shares of the nominal value of e0.07 each. 2,667,562,105 Class B ordinary shares of the nominal value of e0.07 each. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¥ Yes n If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. n Yes ¥ Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¥ Yes n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP n International Financial Reporting Standards as issued by the International Accounting Standards Board ¥ Other n If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 n Item 18 n If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). n Yes ¥
Copies of notices and communications from the Securities and Exchange Commission should be sent to: Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR, The Hague, The Netherlands Attn: Mr. M. Brandjes
No No
No
No
2
Shell Annual Report and Form 20-F 2009 About this Report
ABOUT THIS REPORT
This Report serves as the Annual Report and Accounts in accordance with UK requirements and as the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission (SEC) for the year ended December 31, 2009, for Royal Dutch Shell plc (the Company) and its subsidiaries (collectively known as Shell). It presents the Consolidated Financial Statements of Shell (pages 97-139) and the Parent Company Financial Statements of Shell (pages 159-167). Cross references to Form 20-F are set out on pages 175-176 of this Report. In this Report “Shell” is sometimes used for convenience where references are made to the Company and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. “Subsidiaries”, “Shell subsidiaries” and “Shell companies” as used in this Report refer to companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. The Consolidated Financial Statements consolidate the financial statements of the Parent Company and all subsidiaries. The companies in which Shell has significant influence but not control are referred to as “associated companies” or “associates” and companies in which Shell has joint control are referred to as “jointly controlled entities”. Joint ventures are comprised of jointly controlled entities and jointly controlled assets. In this Report, associates and jointly controlled entities are also referred to as “equityaccounted investments”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect (for example, through our 34% shareholding in Woodside Petroleum Ltd.) ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interests. Except as otherwise specified, the figures shown in the tables in this Report represent those in respect of subsidiaries only, without deduction of minority interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through both subsidiaries and equity-accounted investments. All of a subsidiary’s production, processing or sales volumes are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of equity-accounted investments, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. The Financial Statements contained in this Report have been prepared in accordance with the provisions of the Companies Act 2006, Article 4 of the International Accounting Standards (IAS) Regulation and with both International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS as adopted by the European Union. IFRS as defined above includes International Financial Reporting Interpretations Committee (IFRIC) interpretations. Except as otherwise noted, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency. The Business Review (BR) and other sections of this Report contain forward-looking statements (within the meaning of the United States
Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Shell. 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 forwardlooking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “scheduled”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for the Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserve 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 as a result of climate changes; (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. Also see “Risk factors” for additional risks and further discussion. All forward-looking statements contained in this Report are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forwardlooking statement speaks only as of the date of this Report. Neither the Company nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Report. This Report contains references to Shell’s website. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com.
Documents on display
Documents concerning the Company, or its predecessors for reporting purposes, which are referred to in this Report have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. For further information on the operation of the public reference room and the copy charges, please call the SEC at (800) SEC-0330. All of the SEC filings made electronically by Shell are available to the public at the SEC website at www.sec.gov (commission file number 1-32575). This Report, as well as the Annual Review, is also available, free of charge, at www.shell.com/annualreport or at the offices of Shell in The Hague, the Netherlands and London, UK. You may also obtain copies of this Report, free of charge, by mail.
Shell Annual Report and Form 20-F 2009 About this Report
3
ABBREVIATIONS
CURRENCIES
$ £ ¤ CHF C$
UNITS OF MEASUREMENT
US dollar sterling euro Swiss franc Canadian dollar
acre b(/d) bcf/d boe(/d) (k)dwt MMBtu mtpa MW per day scf
PRODUCTS
approximately 0.4 hectares or 4 square kilometres barrels (per day) billion cubic feet per day barrel of oil equivalent (per day); natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel (thousand) deadweight tonnes million British thermal units million tonnes per annum megawatts volumes are converted to a daily basis using a calendar year standard cubic feet
GTL LNG LPG NGL
MISCELLANEOUS
gas to liquids liquefied natural gas liquefied petroleum gas natural gas liquids
ADR AGM CO2 DBP EMTN FID GHG HSSE IFRIC IFRS LTIP NGO OML OPEC OPL PSA PSC PSP R&D REMCO RSP SEC TRCF WTI
American Depositary Receipt Annual General Meeting carbon dioxide deferred bonus plan euro medium-term note final investment decision greenhouse gas health, safety, security and environment International Financial Reporting Interpretations Committee International Financial Reporting Standards long-term incentive plan non-governmental organisation onshore oil mining lease Organization of the Petroleum Exporting Countries oil prospecting licence production-sharing agreement production-sharing contract performance share plan research and development Remuneration Committee restricted share plan United States Securities and Exchange Commission total recordable case frequency West Texas Intermediate
4
Shell Annual Report and Form 20-F 2009 About this Report
TABLE OF CONTENTS
5 6 7 8 8 10 11 13 16 19 38 44 45 49 50 53 56 57 60 76 87 96 140 158 170 177 Our locations Chairman’s message Chief Executive Officer’s review Business Review Key performance indicators Selected financial data Business overview Risk factors Summary of results and strategy Upstream Downstream Corporate Liquidity and capital resources Our people Environment and society The Board of Royal Dutch Shell plc Senior Management Report of the Directors Directors’ Remuneration Report Corporate governance Additional shareholder information Consolidated Financial Statements Supplementary information – oil and gas Parent Company Financial Statements Royal Dutch Shell Dividend Access Trust Financial Statements Exhibits
Shell Annual Report and Form 20-F 2009 Our locations
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OUR LOCATIONS
Upstream Europe Austria Belgium Bulgaria Czech Republic Denmark Finland France Germany Gibraltar Greece Hungary Ireland Italy Luxembourg The Netherlands Norway Poland Portugal Slovakia Slovenia Spain Sweden Switzerland UK Ukraine Asia Brunei China Guam India Indonesia Iran Iraq Japan Jordan Kazakhstan Laos Malaysia Oman Pakistan Papua New Guinea Philippines Qatar Russia Saudi Arabia Singapore South Korea Sri Lanka Syria Taiwan Thailand Turkey United Arab Emirates Vietnam Australia/Oceania Australia New Zealand
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Downstream
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Upstream Africa Algeria Benin Botswana Burkina Faso Cameroon Cape Verde Islands Côte d’Ivoire Egypt Gabon Ghana Guinea Kenya Libya Madagascar Mali Mauritius Morocco Namibia Nigeria La Réunion Senegal South Africa Tanzania Togo Tunisia Uganda North America Barbados Canada Costa Rica Dominican Republic El Salvador Mexico Panama Puerto Rico Trinidad & Tobago USA South America Argentina Brazil Chile Colombia French Guiana Guyana Peru Venezuela
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Downstream
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Shell Annual Report and Form 20-F 2009 Chairman’s message
CHAIRMAN’S MESSAGE
In 2009 the world felt the acute effects of the global recession. Oil demand experienced its steepest drop since 1982. Consumption of natural gas in the European Union fell more than it ever has before. Refining margins were put under great pressure, as were the margins in the petrochemicals business. Financing of projects tightened as banks rebuilt their balance sheets. And the treasuries of many countries came under severe strain. By the end of 2009, unprecedented economic-stimulus packages and the irrepressible growth of key Asian nations appeared to turn around the global economy. But weak consumer demand and lingering unemployment in the USA and Europe are likely to weigh down the recovery for some time. We responded swiftly to the downturn, restructuring Shell to make it more competitive. And we did so without diluting the talents that make our company strong. At the same time, we retained our long-term view. We stuck to our capital-spending plans throughout 2009 and continued working on the energy projects that form the foundations of our future. With economic recovery, global demand for energy will resume its growth, in step with increasing population and rising wealth in developing countries. Supplies of all kinds of energy – not just oil and gas but also renewables – will struggle to keep pace. And even while energy use grows, carbon dioxide (CO2) emissions must be kept in check. As the world evolves toward a low-carbon energy system in the years and decades ahead, our unrivalled tradition of technical innovation positions us well.
Our technology enables us to find and produce crude oil and natural gas in hard-to-reach places, from the deep ocean to the frozen Arctic. It will one day enable us to produce transport fuels from unusual sources, such as agricultural waste. We are already applying our technology to capitalise on our supplies of natural gas, the cleanest-burning fossil fuel. When used to generate electricity, it emits half the CO2 of coal. New production techniques help us coax it out of impermeable rock. We aim to maintain our leading position in liquefied natural gas, allowing us to extract gas in far-flung locations and transport it to markets in sea-going tankers. We are also turning natural gas into high-performance lubricants and liquid transport fuels. All of this means that by 2012 more than half of our production will be natural gas. Shell excels at applying technology to complex projects on a massive scale. The offshore fields that we recently brought on-stream in Brazil and Russia attest to that. We are following a similar project-engineering approach in several demonstration projects to capture CO2 and store it safely underground. We are also working to squeeze more value out of every unit of energy we use in our operations. And we are introducing new products and services that help our customers become more efficient energy-users themselves. Making the world’s energy supply secure, affordable and sustainable is not just a worthy goal; it is a global imperative. It will take time, and it will take a lot of effort. But with our far-sightedness and technical prowess, we can contribute to the endeavour even as we deliver the results that our shareholders expect in the long term.
Jorma Ollila
Chairman
Shell Annual Report and Form 20-F 2009 Chief Executive Officer’s review
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CHIEF EXECUTIVE OFFICER’S REVIEW
It is a privilege for me to give my first review of Shell’s performance as its Chief Executive Officer. I am proud to report how these trying times have brought out some of our best qualities. Our new field developments and ramp-ups produced enough oil and gas in 2009 to offset the natural decline of our older fields. The reliability of our refineries also improved. We reduced underlying operating costs by more than $2 billion. And our cash inflows and outflows were broadly balanced in both Upstream and Downstream. But despite our best efforts, 2009 earnings amounted to $12.7 billion, down from $26.5 billion the year before. The reasons for the drop span all our businesses. Our production decreased because of lower demand for natural gas, although divestments and OPEC quotas were partly responsible as well. Lower oil and gas prices also contributed to lower Upstream revenues. Global demand for oil products weakened and refining margins declined to historical lows, reducing our Downstream earnings. Lower sales volumes and margins affected our chemicals performance. Those tough economic realities highlight the need for us to do better in containing our costs and improving our competitiveness. Our performance improved in 2009 in many of the areas we monitor related to sustainable development. Our occupational injury rate was the lowest we have ever recorded. However, tragically we did incur 20 work related fatalities during 2009. To help bring down such fatalities – ideally to zero – we launched a set of safety rules to address specifically the work-time practices with the greatest risk to life. We had a good year in 2009 in exploration. We discovered gas in shale formations of North America and off shore western Australia. There were 11 notable discoveries. Additions to our proved reserves were more than double our production volumes for the year. We will continue to apply our exploration capabilities wherever they are appropriate, including our new leases in Egypt, South Africa and French Guiana. Resources found will be matured into the project funnel that drives our growth. Several major projects already matured in our Upstream portfolio in 2009 – with several more set to reach first production within a few years. Together with our partners, we completed Russia’s first liquefied natural gas (LNG) plant, Sakhalin II, one of the world’s largest integrated projects. In 2009, the Parque das Conchas project offshore Brazil began delivering heavy oil from fields in waters two kilometres deep. In 2010 our Perdido platform in the Gulf of Mexico will tap fields lying under more than three kilometres of water – a world record. At such depths sophisticated sub-sea equipment is needed, and it has to be built on site by remote-controlled machines in near-freezing darkness. Our Pearl gas to liquids project in Qatar will apply Shell technology to convert some 1.6 billion cubic feet of gas per day into liquid transport fuel and other high-quality oil products and petrochemical feedstocks. The Qatargas 4 project will take about the same amount of gas and turn it into LNG. Both projects are progressing well; construction is expected to be completed by the end of 2010 with production ramp-up in 2011.
We have agreed with our partners to begin construction on one of the world’s largest natural gas developments: the Gorgon offshore gas field of Australia. The project will nearly double Australia’s LNG output. It is also expected to pioneer the large scale capture and storage of carbon dioxide. In late 2009, we secured an important position in Iraq with the government contract for developing the Majnoon field – a huge field in a country with great potential. Our Downstream portfolio will need to be carefully reassessed in view of the overcapacity in the refining industry and the growth potential for petrochemicals in Asia. But some new business opportunities were already opened up by 2009 developments. Our new lubricants complex in Zhuhai – our sixth such facility in China – will help us to supply the world’s fastest-growing lubricants market. With the potential for expansion, the complex could become one of Shell’s top three lubricants blending plants. We also started up the first of several new advanced processing units at the Shell Eastern Petrochemicals Complex in Singapore. All the new units are expected to be up and running in 2010, reinforcing our ambition to maintain a leading position in the regional market. We have expanded our association with Iogen and Codexis to develop better enzymes and processes for the production of biofuels from straw. In early 2010 we announced our intention to form a $12 billion joint venture with Cosan in Brazil for the production, supply, distribution and retailing of ethanol-based transport fuels. Our successful projects, our new business opportunities and our continued financial flexibility give me confidence to face the economic uncertainties of 2010. Thereafter, a period of production and cash-flow growth awaits us. To reach it, we will have to rely even more on technical ingenuity, project management and operational excellence – the very things that distinguish us from our competitors. To channel our skills more quickly, more effectively and more economically, last year I reorganised our business units. One of the main aims was to concentrate in one unit the accountabilities for delivering major new projects and developing new technologies. That will better position us to execute Upstream operations and secure access to resources. It will also help us better manage the many environmental and societal issues associated with developing oil and gas fields. These changes, which were implemented shortly after I took on the position of CEO, were not a reaction to transient tough times. In the short term they did accelerate our plans to reduce complexity, overheads and – ultimately – costs. But in the long term they will improve our performance by sharpening our external focus and giving added impetus to our technology and innovation. I look forward to seeing our revitalised organisation succeed in 2010 and beyond.
Peter Voser
Chief Executive Officer
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Shell Annual Report and Form 20-F 2009 Business Review ? Key performance indicators
BUSINESS REVIEW
KEY PERFORMANCE INDICATORS
Shell scorecard
Refinery and chemical plant availability 2009 93.3% 2008 92.5%
Total shareholder return 2009 22.6%
2008
(33.5)%
Refinery and chemical plant availability is the weighted average of the actual uptime of plants as a percentage of their maximum possible uptime. The weighting is based on the capital employed. It excludes downtime due to uncontrollable factors, such as hurricanes. This indicator is a measure of operational excellence of Shell’s Downstream manufacturing facilities.
Total shareholder return (TSR) is the difference between the share price at the start of the year and the share price at the end of the year, plus gross dividends paid during the calendar year (reinvested quarterly), expressed as a percentage of the year-start share price. The TSRs of major publicly-traded oil and gas companies can be directly compared, providing a way to determine how Shell is performing against its industry peers.
Total reportable case frequency (injuries per million working hours) 2009 1.4 2008 1.8
Total reportable case frequency (TRCF) is the number of staff or contractor injuries requiring medical treatment or time off for every million hours worked. It is a standard measure of occupational safety.
Net cash from operating activities ($ billion) 2009 21 2008 44
Net cash from operating activities is the total of all cash receipts and payments associated with our sales of oil, gas, chemicals and other products. The components that provide a reconciliation from income for the period are listed in the Consolidated Statement of Cash Flows on page 100. This indicator reflects Shell’s ability to generate cash for investment and distributions to shareholders. For scorecard purposes only, it is adjusted to exclude taxes paid on divestments.
Production available for sale (thousands boe/d) 2009 3,142 2008 3,248
Production is the sum of all average daily volumes of unrefined oil and natural gas produced for sale. The unrefined oil comprises crude oil, natural gas liquids and synthetic crude oil. The gas volume is converted into energy-equivalent barrels of oil to make the summation possible. Changes in production have a significant impact on Shell’s cash flow.
Sales of liquefied natural gas (million tonnes) 2009 13.4 2008 13.1
Sales of liquefied natural gas (LNG) is a measure of the operational excellence of Shell’s Upstream business and the LNG market demand.
Shell Annual Report and Form 20-F 2009 Business Review ? Key performance indicators
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Additional performance indicators
Reserves
Operational spills over 100 kilograms 2009 264 2008
275
Proved oil and gas reserves (million boe) 2009 14,132 2008 10,903
Operational spills are the total number of spills of oil and oil products over 100 kilograms per spill that resulted from our operations.
Employees (thousands) 2009 101
2008
102
Employees is the number of notional full-time employees whose work hours would be equivalent to those of all staff actually holding full-time and part-time employment contracts with Shell subsidiaries, averaged throughout the year.
Proved oil and gas reserves (excluding minority interest) are the total estimated quantities of oil and gas that geoscience and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs, as at December 31, under existing economic and operating conditions. Gas volumes are converted into barrels of oil equivalent (boe). Reserves are crucial to an oil and gas company, since they constitute the source of future production. Reserves estimates are subject to change based on a wide variety of factors, some of which are unpredictable; see pages 13 to 15. The proved reserves volumes reported for 2009 have been established using the new SEC rules on oil and gas reporting.
Income for the period ($ million) 2009 12,718 2008
26,476
Income for the period is the total of all the earnings from every business segment. It is of fundamental importance for a sustainable commercial enterprise.
Return on average capital employed 2009 8.0% 2008
18.3%
Return on average capital employed (ROACE) is defined as annual income, adjusted for after-tax interest expense, as a percentage of average capital employed during the year. Capital employed is the sum of total equity and total debt. ROACE measures the efficiency of Shell’s utilisation of the capital that it employs and is a common measure of business performance; see page 48.
Gearing 2009 15.5%
2008
5.9%
Gearing is defined as net debt (total debt minus cash and cash equivalents) as a percentage of total capital (net debt plus total equity), at December 31. It is a measure of the degree to which Shell’s operations are financed by debt. (For further information see Note 16 to the Consolidated Financial Statements.)
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Shell Annual Report and Form 20-F 2009 Business Review ? Selected financial data
SELECTED FINANCIAL DATA
The selected financial data set out below is derived, in part, from the Consolidated Financial Statements. This data should be read in conjunction with the Consolidated Financial Statements and related Notes, as well as the Business Review in this Report.
CON SO L I D ATE D S TATE ME N T OF I N COME A N D OF COMPR E HE N S I V E I N COME DATA $ MILLION
Revenue Income from continuing operations Income/(loss) from discontinued operations Income for the period Income attributable to minority interest Income attributable to Royal Dutch Shell plc shareholders Comprehensive income attributable to Royal Dutch Shell plc shareholders
2009 278,188 12,718 – 12,718 200 12,518 19,141
2008 458,361 26,476 – 26,476 199 26,277 15,228
2007 355,782 31,926 – 31,926 595 31,331 36,264
2006 318,845 26,311 – 26,311 869 25,442 30,113
2005 306,731 26,568 (307) 26,261 950 25,311 20,945
CON SO L I D ATE D B A L A N CE SH E E T D ATA
$ MILLION
Total assets Total debt Share capital Equity attributable to Royal Dutch Shell plc shareholders Minority interest
2009 292,181 35,033 527 136,431 1,704
2008 282,401 23,269 527 127,285 1,581
2007 269,470 18,099 536 123,960 2,008
2006 235,276 15,773 545 105,726 9,219
2005 219,516 12,916 571 90,924 7,000
E ARN I N G S PE R S HA RE
$
Basic earnings per ¤0.07 ordinary share from continuing operations from discontinued operations Diluted earnings per ¤0.07 ordinary share from continuing operations from discontinued operations
2009 2.04 2.04 – 2.04 2.04 –
2008 4.27 4.27 – 4.26 4.26 –
2007 5.00 5.00 – 4.99 4.99 –
2006 3.97 3.97 – 3.95 3.95 –
2005 3.79 3.84 (0.05) 3.78 3.83 (0.05)
S HA R E S
NUMBER
Basic weighted average number of Class A and B shares Diluted weighted average number of Class A and B shares
2009 6,124,906,119 6,128,921,813
2008 6,159,102,114 6,171,489,652
2007 6,263,762,972 6,283,759,171
2006 6,413,384,207 6,439,977,316
2005 6,674,179,767 6,694,427,705
OTH E R F IN ANCIAL DATA
$ MILLION
Net cash from operating activities Net cash used in investing activities Dividends paid Net cash used in financing activities (Decrease)/increase in cash and cash equivalents Earnings by segment Upstream Downstream Corporate Total Capital investment [A] Upstream Downstream Corporate Total
2009 21,488 26,234 10,717 829 (5,469) 8,354 3,054 1,310 12,718 23,951 7,510 274 31,735
2008 43,918 28,915 9,841 9,394 5,532 26,506 39 (69) 26,476 32,166 6,036 242 38,444
2007 34,461 14,570 9,204 19,393 654 18,094 12,445 1,387 31,926 21,362 5,295 415 27,072
2006 31,696 20,861 8,431 13,741 (2,728) 17,852 8,165 294 26,311 20,281 4,346 269 24,896
2005 30,113 8,761 10,849 18,573 2,529 15,827 10,106 328 26,261 13,698 3,450 288 17,436
[A] Capital expenditure, exploration expense and new equity and loans in equity-accounted investments.
Shell Annual Report and Form 20-F 2009 Business Review ? Business overview
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BUSINESS OVERVIEW
History
From 1907 until 2005, Royal Dutch Petroleum Company (Royal Dutch) and The “Shell” Transport and Trading Company, p.l.c. (Shell Transport) were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group” (Group). Operating activities were conducted through the subsidiaries of Royal Dutch and Shell Transport. In 2005, Royal Dutch Shell plc (Royal Dutch Shell) became the single parent company of Royal Dutch and Shell Transport, the two former public parent companies of the Group (the Unification). Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands.
BU SINESSES Upstream International
manages the upstream business outside the Americas. It searches for and recovers crude oil and natural gas, liquefies and transports gas and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream International also manages the global LNG business and the wind business in Europe. The activities are organised within geographical units, some business-wide managed activities and supporting activities.
Upstream Americas
manages the upstream business in North and South America. It searches for and recovers crude oil and natural gas, liquefies and transports gas and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream Americas also extracts bitumen from oil sands that is converted into synthetic crude oil. Additionally, it manages the US based wind business. It comprises operations organised into business-wide managed activities and supporting activities. manages Shell’s manufacturing, distribution and marketing activities for oil products and chemicals. These activities are organised into globally managed classes of business, including chemicals, some regionally and globally managed activities and supporting activities. Manufacturing and supply includes refining, supply and shipping of crude oil. Marketing sells a range of products including fuels, lubricants, bitumen and liquefied petroleum gas (LPG) for home, transport and industrial use. Chemicals produces and markets petrochemicals for industrial customers, including the raw materials for plastics, coatings and detergents used in the manufacture of textiles, medical supplies and computers. Downstream also trades Shell’s flow of hydrocarbons and other energy related products, supplies the Downstream businesses, markets gas and power and provides shipping services. Downstream also oversees Shell’s interests in alternative energy (excluding wind) and CO2 management.
Activities
Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. Our oil and gas producing heartlands are the core countries that have the available infrastructure, expertise and remaining growth potential for Shell to sustain strong operational performance and support continued investment. They are Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA. Russia represents a new heartland with Sakhalin II on-stream in 2009, and we expect Qatar to become a heartland in the coming years. We are bringing new oil and gas supplies on stream from major field developments. We are also investing in growing our gas-based business through liquefied natural gas (LNG) and gas to liquids (GTL) projects. For example, we are building one of the world’s largest GTL projects in Qatar, and we are participating in the Gorgon LNG project in Australia. At the same time, we are exploring for oil and gas in prolific geological formations that can be conventionally developed, such as those found in the Gulf of Mexico, Brazil and Australia. But we also are exploring for hydrocarbons in formations, such as low-permeability gas reservoirs in the USA, Canada and China, which can be economically developed only by unconventional means. We also have a diversified and balanced portfolio of refineries and chemicals plants and are a major distributor of biofuels. We have the largest retail portfolio of our peers, and delivered strong growth in differentiated fuels. We have a strong position not only in the major industrialised countries but also in the developing ones. The distinctive Shell pecten (a trademark in use since the early part of the twentieth century) and trademarks in which the word Shell appears support this marketing effort throughout the world.
Downstream
Projects & Technology
manages the delivery of Shell’s major projects and drives the research and innovation to create technology solutions. It provides technical services and technology capability covering both Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment and contracting and procurement.
SEGMENTAL REPORTING
Organisation
On July 1, 2009, Peter Voser succeeded Jeroen van der Veer as Chief Executive Officer (CEO). On the same date, a series of changes in the organisation and responsibilities of senior management became effective. The changes were part of the reorganisation programme, called “Transition 2009”. The aim of the programme was to enhance accountability for operating performance and technology development within Shell’s organisation, thereby quickening decision-making and execution as well as reducing costs.
With effect from July 1, 2009, Upstream consists of the activities previously reported in the Exploration & Production, Gas & Power (excluding solar) and Oil Sands segments. It combines the operating segments Upstream International and Upstream Americas, which have similar economic characteristics and these operating segments are similar in respect of the nature of products and services, the nature of production processes, type and class of customers and the methods of distribution. Downstream consists of the activities previously reported in the Oil Products and Chemicals segments and solar. Upstream and Downstream earnings include their respective elements of Projects & Technology and of trading activities. Corporate represents the key support functions comprising holdings and treasury, headquarters, central functions and Shell’s insurance activities. Comparative information in this Report has been reclassified.
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Shell Annual Report and Form 20-F 2009 Business Review ? Business overview
RE V E N U E BY B U S IN E SS SE G M E N T (IN C LUD IN G IN TE R - SE G ME N T SA LE S)
$ MILLION
2009 Upstream Third parties Inter-segment Downstream Third parties Inter-segment Corporate Third parties Inter-segment 27,996 27,144 55,140 250,104 258 250,362 88 – 88
2008 45,975 42,333 88,308 412,347 466 412,813 39 – 39
2007 32,014 35,264 67,278 323,711 569 324,280 57 – 57
RE VE N U E BY G E O G RAPH ICA L AR E A [A] (E XC LUD IN G IN TE R - SE G ME N T SA LE S)
$ MILLION
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 103,424
80,398 60,721 33,645 278,188
% 2008 37.2 184,809
28.9 120,889 21.8 100,818 12.1 51,845 100.0 458,361
% 40.3
26.4 22.0 11.3 100.0
2007 138,089
90,141 87,548 40,004 355,782
%
38.8 25.3 24.6 11.3 100.0
[A] With effect from 2009, the reporting of third-party revenue by geographical area has been changed to reflect better the location of certain business activities. Comparative information is reclassified.
Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
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RISK FACTORS
Shell’s operations and earnings are subject to risks from changing conditions in competitive, economic, political, legal, regulatory, social, industry, business and financial fields. These risks could have a material adverse effect separately or in combination on Shell’s operational performance, earnings or financial condition. Investors should carefully consider the risks below and the limitation of shareholder remedies associated with our Articles of Association as discussed below.
Shell’s operating results and financial condition are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals.
PRO VE D DE VE L OPE D A N D U N DE VE L OPE D RE S E RVE S [A] (AT D E CE MBE R 31)
MILLION BOE [C]
Shell subsidiaries (less minority interest) Shell share of equity-accounted investments Total
2009 [D] 2008 [E] 2007 [E] 9,846 7,078 6,669 4,286 14,132 3,825 10,903 4,140 10,809
[A] We manage our total proved reserves base without distinguishing between proved oil and gas reserves associated with our equity-accounted investments and proved oil and gas reserves from subsidiaries. The SEC and FASB adopted revised standards for oil and gas reserves reporting for 2009. Prior years’ reserves quantities have been determined on the basis of the predecessor rules, accordingly proven minable oil sands reserves of 997 million boe are not included in 2008 (2007: 1,111 million boe). [C] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. [D] Includes proved reserves associated with future production that will be consumed in operations and synthetic crude oil reserves. [E] Does not include volumes expected to be produced and consumed in our operations and synthetic crude oil reserves.
Prices of oil, natural gas, oil products and chemicals are affected by supply and demand. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations have a material effect on our earnings and our financial condition. For example, in a low oil and gas price environment Shell would generate less revenue from its Upstream production, and as a result certain long-term projects might become less profitable or even incur losses. Additionally, low oil and gas prices could result in the debooking of oil or natural gas reserves, if they become uneconomic in this type of environment. Prolonged periods of low oil and gas prices, or rising costs, could also result in projects being delayed or cancelled, as well as in the impairment of certain assets. In a high oil and gas price environment, we can experience sharp increases in cost and under some production-sharing contracts our entitlement to reserves would be reduced. Higher prices can also reduce demand for our products. Lower demand for our products might result in lower profitability, particularly in our Downstream business. Oil and gas prices can move independently from each other.
Shell’s future hydrocarbon production depends on the delivery of large and complex projects, as well as the ability to replace oil and gas reserves.
Shell’s ability to achieve its strategic objectives depends on our reaction to competitive forces.
We face significant competition in each of our businesses. While we try to differentiate our products, many of them are competing in commodity-type markets. If we do not manage our expenses adequately, our cost efficiency might deteriorate and our unit costs might increase. This in turn might erode our competitive position. Increasingly, we compete with state-run oil and gas companies, particularly in seeking access to oil and gas resources. Today, these state-run oil and gas companies control vastly greater quantities of oil and gas resources than the major publicly held oil and gas companies. State-run entities have access to significant resources and may be motivated by political or other factors in their business decisions which may harm our competitive position or access to desirable projects.
An erosion of Shell’s business reputation would have a negative impact on our licence to operate, our brand, our ability to secure new resources and our financial performance.
We face numerous challenges in developing capital projects, especially large ones. Challenges include uncertain geology, frontier conditions, the existence and availability of necessary technology and engineering resources, availability of skilled labour, project delays and potential cost overruns, as well as technical, fiscal, regulatory, political and other conditions. Such potential obstacles may impair our delivery of these projects, as well as our ability to fulfil related contractual commitments, and, in turn, adversely affect our operational performance and financial position. Future oil and gas production will depend on our access to new proved reserves through exploration, negotiations with governments and other owners of known reserves, and acquisitions. Failure to replace proved reserves could result in lower future production.
OIL AND GAS PRODUCTION AVAILABLE FOR SALE [A] MILLION BOE
Shell is one of the world’s leading energy brands, and our brand and reputation are important assets. The Shell General Business Principles and Code of Conduct govern how Shell and our individual companies conduct our affairs. While we seek to ensure compliance with these requirements by all of our 101 thousand employees, it is a significant challenge. Failure – real or perceived – to follow these principles, or other real or perceived failures of governance or regulatory compliance could harm our reputation. This could impact our licence to operate, damage our brand, harm our ability to secure new resources and affect our operational performance and financial condition.
Rising climate change concerns could lead to additional regulatory measures that may result in project delays and higher costs.
Subsidiaries Equity-accounted investments Total
2009 828 319 1,147
2008 846 314 1,160
2007 886 295 1,181
[A] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. Includes synthetic crude oil production.
Emissions of greenhouse gases and associated climate change are real risks to Shell. In the future, in order to help meet the world’s energy demand, we expect more of our production to come from unconventional sources than at present. Energy intensity of production of oil and gas from unconventional sources can be higher than that of production from conventional sources. Therefore, in the long term, it is expected that both the CO2 intensity of our production as well as our absolute CO2 emissions might increase, for example from the expansion of oil sands activities in Canada. Also our Pearl GTL project in Qatar is expected to increase our CO2 emissions when production begins. Over time, we expect that a growing share of our CO2
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Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
emissions will be subject to regulation and carry a cost. If we are unable to find economically viable as well as publicly accepted solutions that reduce our CO2 emissions for new and existing projects or products, regulatory and/or political and societal pressures could lead to project delays, additional costs as well as compliance and operational risks.
The nature of Shell’s operations exposes us to a wide range of significant health, safety, security and environment (HSSE) risks.
meet their financial or other obligations to the projects, threatening the viability of a given project.
Reliable information technology (IT) systems are a critical enabler of our operations.
The HSSE risks, to which we are potentially exposed, cover a wide spectrum, given the geographic range, operational diversity and technical complexity of Shell’s daily operations. Shell has significant operations in difficult geographies or climate zones, as well as environmentally sensitive regions which exposes us to the risk, amongst others, of major process safety incidents, effects of natural disasters, social unrest, personal health and safety and crime. If a major HSSE risk, such as an explosion or hydrocarbon spill due to a process safety incident, materialises, this could result in injuries, loss of life, environmental harm, disruption to business activities and, depending on their cause and severity, material damage to Shell’s reputation.
Shell operates in over 90 countries, with differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments and resulting changes to laws and regulations.
Organisational changes and process standardisation, which lead to more reliance on a decreasing number of global systems, outsourcing and relocation of information technology services as well as increased regulations increase the risk that our IT systems may fail to deliver products, services and solutions in a compliant, secure and efficient manner.
Shell’s future performance depends on successful development and deployment of new technologies.
Technology and innovation are essential to Shell. If we do not develop the right technology, do not have access to it or do not deploy it effectively, it may affect the delivery of our strategy, our profitability and our financial condition.
The general macroeconomic environment as well as financial and commodity market conditions influence Shell’s operating results and financial condition as our business model involves trading, treasury, interest rate and foreign exchange risks.
Developments in politics, laws and regulations can and do affect our operations and earnings. Potential developments include forced divestment of assets; expropriation of property; cancellation of contract rights; additional windfall taxes and other retroactive tax claims; import and export restrictions; foreign exchange controls; and changing environmental regulations. In our Upstream activities these developments could additionally affect land tenure, re-writing of leases, entitlement to produced hydrocarbons, production rates, royalties and pricing. Parts of our Downstream business are subject to price controls in some countries. When such risks materialise they can affect the employees, reputation, operational performance and financial position of Shell as well as of the Shell companies located in the country concerned. If we do not comply with policies and regulations, it may result in regulatory investigations, lawsuits and ultimately sanctions.
Shell’s international operations expose us to social instability, terrorism and acts of war or piracy that could significantly impact our business.
Shell companies are subject to differing economic and financial market conditions throughout the world. Political or economic instability affect such markets. For example, if the current worldwide economic downturn deepens or is prolonged, it could contribute to instability in financial markets. Shell uses debt instruments such as bonds and commercial paper to raise significant amounts of capital. Should our access to debt markets become more difficult, we might not be able to maintain a level of liquidity required to fund the implementation of our strategy. Trading and treasury risks include among others exposure to movements in commodity prices, interest rates and foreign exchange rates, counterparty default and various operational risks (see also pages 81-82). As a global company doing business in over 90 countries, we are exposed to changes in currency values and exchange controls. While Shell does undertake some currency hedging, we do not do so for all of our activities. The resulting exposure could affect our earnings and cash flow (see Notes 4 and 23 to the Consolidated Financial Statements).
The estimation of reserves is a process that involves subjective judgements based on available information, so subsequent downward adjustments are possible. If actual production from such reserves is lower than current estimates indicate, our profitability and financial condition could be negatively impacted.
Social and civil unrest, both within the countries in which we operate and internationally, can and does affect operations and earnings. Potential developments that could impact our business include international conflicts, including war, acts of political or economic terrorism and acts of piracy on the high seas, as well as civil unrest and local security concerns that threaten the safe operation of our facilities and transport of our products. If such risks materialise, they can result in injuries and disruption to business activities, which could have a material adverse effect on our operational performance and financial condition, as well as our reputation.
Our investment in joint ventures and associated companies may reduce our degree of control as well as our ability to identify and manage risks.
The estimation of oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. The estimate may change because of new information from production or drilling activities or changes in economic factors. It may also alter because of acquisitions and disposals, new discoveries and extensions of existing fields and mines, as well as the application of improved recovery techniques. Published reserves estimates may also be subject to correction due to the application of published rules and guidance. Any downward adjustment would indicate lower future production volumes and may adversely affect our earnings as well as our financial condition.
The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This might limit shareholder remedies.
Many of our major projects and operations are conducted in joint ventures or associated companies. In certain cases, we may have less influence over and control of the behaviour, performance and cost of operations in which a Shell company holds an interest. Additionally, our partners or members of a joint venture or associated company (particularly local partners in developing countries) may not be able to
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
Shell Annual Report and Form 20-F 2009 Business Review ? Risk factors
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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 for any reason determined to be invalid or unenforceable, the dispute may only be brought in the courts of England and Wales. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions. Please see “Corporate governance” for further information.
Violations of antitrust and competition law pose a financial risk for Shell and expose Shell or our employees to criminal sanctions.
Shell has substantial pension commitments, whose funding is subject to capital market risks.
Antitrust and competition laws apply to Shell companies in the vast majority of countries in which we do business. Shell companies have been fined for violations of antitrust and competition law. These include a number of fines by the European Commission Directorate-General for Competition (DG COMP). Due to the DG COMP’s fining guidelines, any future conviction of Shell companies for violation of European Union (EU) competition law could result in significantly enhanced fines. Violation of antitrust laws is a criminal offence in many countries, and individuals can be either imprisoned or fined. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages.
An erosion of the business and operating environment in Nigeria could adversely impact our earnings and financial position.
The risk regarding pensions is the ability to fund defined benefit plans to the extent that the pension assets fail to meet future liabilities. Liabilities associated with and cash funding of pensions can be significant and are dependent on various assumptions. Volatility in capital markets and the resulting consequences for investment performance as well as interest rates, may result in significant changes to the funding level of future liabilities. In case of a shortfall, Shell might be required to make substantial cash contributions, depending on the applicable regulations per country. For example, as a result of the funding shortfall experienced at the end of 2008, employer contributions to defined benefit pension funds in 2009 were $3.6 billion higher than in 2008. See “Liquidity and capital resources” for further discussion.
Shell companies face the risk of litigation and disputes worldwide.
From time to time cultural and political factors play a significant role in unprecedented and unanticipated judicial outcomes contrary to local and international law. In addition, certain governments, states and regulatory bodies have, in the opinion of Shell, exceeded their constitutional authority by attempting unilaterally to amend or cancel existing agreements or arrangements; by failing to honour existing contractual commitments; and by seeking to adjudicate disputes between private litigants. Adverse outcomes in these areas could have a material effect on our operations and financial condition.
Shell is currently under investigation by the United States Securities and Exchange Commission and the United States Department of Justice for violations of the US Foreign Corrupt Practices Act.
We face various risks in our Nigerian operations. These risks include security issues surrounding the safety of our people, host communities, and operations, our ability to enforce existing contractual rights, limited infrastructure and potential legislation that could increase our taxes. The Nigerian government is contemplating new legislation to govern the petroleum industry which, if passed into law, would likely have a significant influence on Shell’s existing and future activities in that country and could adversely affect our financial returns from projects in that country.
Shell has investments in Iran and Syria, countries against which the US government imposed sanctions. We could be subject to sanctions or other penalties in connection with these activities.
In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has an ongoing internal investigation and is co-operating with the US Department of Justice and the US Securities and Exchange Commission investigations. As a result of these investigations, Shell may face fines and additional costs.
US laws and regulations identify certain countries, including Iran and Syria, as state sponsors of terrorism and currently impose economic sanctions against these countries. Certain activities and transactions in these countries are banned. Breaking these bans can trigger penalties including criminal and civil fines and imprisonment. For Iran, US law sets a limit of $20 million in any 12-month period on certain investments knowingly made in that country, prohibits the transfer of goods or services made with the knowledge that they will contribute materially to that country’s weapons capabilities and authorises sanctions against any company violating these rules (including denial of financings by the US export/import bank, denial of certain export licences, denial of certain government contracts and limits of loans or credits from US financial institutions). However, compliance with this investment limit by European companies is prohibited by Council Regulation No. 2271/96 adopted by the Council of the EU, which means the statutes conflict with each other in some respects. While Shell did not exceed the limit on investments in Iran in 2009, we have exceeded it in the past and may exceed the US-imposed investment limits in Iran in the future. While we seek to comply with legal requirements in our dealings in these countries, it is possible that Shell or persons employed by Shell could be found to be subject to sanctions or other penalties under this legislation in connection with their activities in these countries.
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Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
SUMMARY OF RESULTS AND STRATEGY
S E GM E N T E ARN IN GS $ MILLION
The gearing ratio was 15.5% at the end of 2009, compared with 5.9% at the end of 2008. The change reflects the increase of the total debt in combination with a decrease in the cash and cash equivalents position in 2009.
2009 Upstream Downstream Corporate Income for the period 8,354 3,054 1,310 12,718
2008 26,506 39 (69) 26,476
2007 18,094 12,445 1,387 31,926
Market overview
The demand for oil and gas is strongly linked to the strength of the global economy. For that reason, projected economic growth is considered an indicator of the future demand for our products and services. Following the extreme contraction in the global economy in the fourth quarter of 2008 and first quarter of 2009 that was triggered by the severe financial crisis in the USA and Europe, world output accelerated over the remaining quarters of 2009. The recession ended in most major economies by the third quarter of the year. This turnaround was due in part to the extraordinary macroeconomic stimulus and financial sector supports implemented by governments and central banks to contain the crisis. In this context, the global economy contracted by (0.8%) in 2009, down from growth of 3.2% in 2008 and 5.1% in 2007. In 2010, global output growth is expected to recover, but the recovery is likely to be slow and uncertain given the depth of contraction in 2009.
OIL AND NATURAL GAS PRICES
Earnings 2009-2007
The most significant factors affecting year-to-year comparisons of earnings and cash flow generated by our operating activities are: changes in realised oil and gas prices; oil and gas production levels; and refining and marketing margins. During 2009, oil prices increased, but the average price was lower than in 2008. Gas prices and refining margins declined sharply, because of weaker demand and high industry inventory levels. Oil and gas production available for sale in 2009 was 3,142 thousand barrels of oil equivalent per day (boe/d), compared with 3,248 thousand boe/d in 2008 (including mined oil sands production of 78 thousand b/d). Earnings in 2009 were 52% lower than in 2008, when they were 17% lower than in 2007. The decrease reflected lower realised oil and gas prices and lower production in Upstream as well as lower margins and sales volumes in Downstream. These effects more than offset the positive effect on earnings of increasing oil prices on inventory. In 2009, Upstream earnings were $8,354 million, 68% lower than in 2008 and 54% lower than in 2007. Earnings in 2009 reflected the effect of significantly lower realised prices for both oil and gas in combination with lower production volumes. Moreover, the 2008 earnings included significant gains from the divestment of various assets. In 2008, earnings increased by 46% from 2007, mainly reflecting higher realised oil and gas prices, partly offset by lower production volumes. Downstream earnings in 2009 were $3,054 million, compared with $39 million in 2008 and $12,445 million in 2007. When earnings are adjusted for the impact of changing oil prices on inventory, then earnings in 2009 decreased significantly with respect to 2008 because lower demand drove down our realised refining margins and most of our realised marketing margins in 2009. The adjusted earnings also decreased between 2007 and 2008 because of lower margins on chemical products, lower refining margins in the USA and higher operating costs.
Oil prices rose steadily through 2009. Brent crude oil started the year at $40 per barrel and in mid-November reached the $78 mark, which is approximately where it ended the year. On average, however, 2009 prices were considerably lower than they were in 2008. Brent crude oil averaged $61.55 per barrel in 2009, compared with $97.14 in 2008, and West Texas Intermediate averaged $61.75 per barrel in 2009, compared with $99.72 a year earlier. Natural gas prices also spanned a wide range in 2009. The Henry Hub prices trended downwards between January and September: from a monthly average high of $5.27 per million British thermal units (MMBtu) in January down to a monthly low of $2.88 in September, when inventories were hitting an all-time high and production had to be discouraged. From October until the end of 2009, however, Henry Hub gas prices reversed the trend with the onset of winter weather. Overall, the Henry Hub gas price averaged $3.90 per MMBtu in 2009 compared with $8.85 in 2008. In the UK, prices at the National Balancing Point averaged 30.93 pence/therm in 2009 compared with 58.06 pence/therm in 2008. Unlike crude oil pricing, which is global in nature, gas prices can vary significantly from region to region. Shell produces and sells natural gas in regions whose supply, demand and regulatory circumstances differ markedly from those of the US’s Henry Hub or the UK’s National Balancing Point. Natural gas prices in continental Europe and in the Asia-Pacific region are predominantly indexed to oil prices. In Europe, contractual time-lag effects resulted in a continued price decline throughout the first half of 2009, while demand was at the same time severely impacted by the recession. Oil-indexed prices started to recover in the fourth quarter, maintaining a very significant premium above the UK’s National Balancing Point.
OIL AND NATURAL GAS PRICES FOR INVESTMENT EVALUATION
Balance sheet and capital investment
Shell’s strategy to invest in the development of major growth projects, primarily in Upstream, explains the most significant changes to the balance sheet in 2009. Property, plant and equipment increased by $19.6 billion mainly as a result of capital investment of $31.7 billion, 17% lower than capital investment in 2008. The effect of capital investment on property, plant and equipment was partly offset by depreciation, depletion and amortisation of $14.5 billion in 2009. Of the 2009 capital investment, $24 billion related to Upstream projects that will primarily deliver organic growth over the long term. These projects include several multi-billion-dollar, integrated facilities that are expected to provide significant cash flows for the coming decades. In 2009, the total debt increased by $11.8 billion. Overall, total equity increased by $9.3 billion in 2009, to $138.1 billion.
The range of possible future crude oil and natural gas prices used in project and portfolio evaluations within Shell are determined after assessment of short-, medium- and long-term price drivers under different sets of assumptions. Historical analysis, trends and statistical volatility are all part of this assessment, as are analyses of possible future economic conditions, geopolitics, OPEC actions, supply costs
Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
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and the balance of supply and demand. Sensitivity analyses are used to test the impact of low-price drivers, such as economic weakness, and high-price drivers, such as strong economic growth and low investment levels in new production. Short-term events, such as relatively warm winters or cool summers, weather-and (geo)political-related supply disruptions, contribute to price volatility. Shell expects oil prices to typically average $50 to $90 per barrel and screens new upstream opportunities inside this range. Shell uses a grid based on low, medium and high oil and gas prices to test the economic performance of long-term projects. As part of our normal business practice, the range of prices used for this purpose is always subject to review and change.
REFINING AND PETROCHEMICAL MARKET TRENDS
and project-management skills that allow us to deliver large oil and gas projects, and the management of integrated value chains. We leverage our diverse and global business portfolio and customer-focused businesses built around the strength of the Shell brand.
OUTLOOK
We have defined three distinct layers for Shell’s strategy development: near-term performance focus, medium-term growth delivery and maturing next generation project options.
Performance focus
Refining margins were lacklustre in all key refining centres in 2009. Margins came under downward pressure with the reduced demand due to the global recession. On top of that, there was significant refinery overcapacity following the start-up of major refining facilities in Asia. Demand for petrochemicals recovered during the second half of 2009, as GDP growth resumed and restocking took place. Global ethylene demand grew a little under 1% in 2009 after suffering a decline of over 3% in 2008. Industry refining margins in 2010 are likely to remain fundamentally weak because of the expected ongoing global excess product inventory, particularly for middle distillates.
In the near-term, we will emphasise performance focus. We will work on continuous improvements in operating performance, with an emphasis on health, safety and environment, asset performance and operating costs, including plans for $1 billion of cost savings in 2010. There will be asset sales of up to $3 billion per year as Shell exits from non-core positions across the company. We have new initiatives that are expected to improve on Shell’s industry-leading Downstream, focusing on the most profitable positions and growth potential. Shell has plans to exit from 15% of its world-wide refining capacity and from selected retail and other marketing positions, and is taking steps to improve the quality of its chemicals assets. We plan net capital investment of some $29 billion in 2010 (net capital investment represents capital investment, less divestment proceeds). This amount relates largely to investments in projects where the final investment decision has already been taken or is expected to be taken in 2010. This excludes any impact of the indicative offer to acquire Arrow Energy Limited.
Growth delivery
Strategy and outlook
STRATEGY
Our strategy seeks to reinforce our position as a leader in the oil and gas industry in order to provide a competitive shareholder return while helping to meet global energy demand in a responsible way. Intense competition will remain for access to resources by our Upstream businesses and new markets by our Downstream businesses. We believe our technology, project-delivery capability and operational excellence will remain key differentiators for our businesses. In Upstream, we focus on exploration for new oil and gas reserves and developing major projects where our technology and know-how adds value to the resource holders. In our Downstream businesses, our emphasis remains on sustained cash generation from our existing assets and selective investments in growth markets. We will continue to focus on capital and cost discipline. We expect around 80% of our capital investment in 2010 to be in our Upstream projects. In Downstream, we aim to maintain relatively steady capital employed. Meeting the growing demand for energy worldwide in ways that minimise environmental and social impact is a major challenge for the global energy industry. We are committed to improving energy efficiency in our own operations, supporting customers in managing their energy demands and continuing to research and develop technologies that increase efficiency and reduce emissions in oil and gas production. Our commitment to technology and innovation continues to be at the core of our strategy. As energy projects become more complex and more technically demanding, we believe our technical expertise will be a deciding factor in the growth of our businesses. Our key strengths include the development and application of technology, the financial
Organic capital investment is expected to be $25 to $30 billion per year for 2011 to 2014, as Shell invests for long-term growth. Annual spending will be driven by the timing of investment decisions and the near-term macro outlook. Cash flow from operations excluding working capital was $24 billion in 2009. Shell expects cash flow to grow by around 50% from 2009 to 2012 assuming a $60 oil price and a more normal environment for natural gas prices and downstream. In an $80 environment, 2012 cash flow should be at least 80% higher than 2009 levels. In Downstream, Shell is adding new chemicals capacity in Singapore and refining capacity in the USA, and making selective growth investment in marketing. Oil and gas production is expected to average 3.5 million boe/d in 2012, compared to 3.1 million boe/d in 2009, an increase of 11%, and with confidence of further growth to 2014.
Maturing next generation project options
Shell has built up a substantial portfolio of options for the next wave of growth. This portfolio has been designed to capture price upside, and minimise Shell’s exposure to industry challenges from cost inflation and political risk. Key elements of this opportunity set are in the Gulf of Mexico, USA and Canada tight gas, and Australia LNG. These are the projects that have the potential to underpin production growth to the end of the decade. Shell is working to mature these projects, with an emphasis on financial returns.
Reserves and production
Shell added 4,417 million boe of proved oil and gas reserves before production, of which 3,632 million boe comes from Shell subsidiaries
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Shell Annual Report and Form 20-F 2009 Business Review ? Summary of results and strategy
and 785 million boe is associated with the Shell share of equityaccounted investments. Included in the 4,417 million boe is 1,630 million boe of synthetic crude oil reserves. Last year, we had reported 997 million boe of proven minable oil sands reserves as of December 31, 2008. As a result of the SEC rule changes these proven minable reserves have been converted to synthetic crude oil proved reserves and are included in the 1,630 million boe. Accordingly we will no longer be reporting proven minable oil sands reserves. The increase of 4,417 million boe of proved oil and gas reserves also includes approximately 270 million boe associated with other SEC changes in proved reserves reporting. Furthermore, for the first time we have included 599 million boe proved reserves associated with future production that will be consumed in operations (for example, as fuel gas). Finally, the total additions reflect a net positive impact from commodity price changes of approximately 260 million boe proved reserves. In 2009, total oil and gas production available for sale was 1,147 million boe. An additional 40 million boe was produced and consumed in operations. Production available for sale from subsidiaries was 828 million boe with an additional 35 million boe consumed in operations. The Shell share of the production available for sale of equity-accounted investments was 319 million boe with an additional 5 million boe consumed in operations. Accordingly, after taking into account total production we had a net increase of 3,230 million boe in proved oil and gas reserves of which 2,769 million boe is from subsidiaries and 461 million boe is associated with the Shell share of equity-accounted investments. Details of Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved reserves are summarised in the table on page 29 and are set out under the heading “Supplementary information – Oil and gas” on pages 140-149.
that stands most to profit from what they deliver. In doing so, we also established useful links between our Upstream and Downstream technologies. The new R&D organisation also enables us to introduce further simplification and standardisation in the way we manage the development of technology. Our R&D programme for 2010 will remain on the same general course as that for 2009. But it will benefit from the clearer lines of sight now established between a technology’s creation and its ultimate deployment in the field.
Key accounting estimates and judgements
Please refer to Note 3 to the Consolidated Financial Statements for a discussion of key accounting estimates and judgements.
Legal proceedings
Please refer to Note 28 to the Consolidated Financial Statements for a discussion of legal proceedings.
Audit fees
Please refer to Note 29 to the Consolidated Financial Statements for a discussion of auditors’ fees and services.
Research and development
In 2009, our research and development (R&D) expenses were $1,125 million, compared with $1,230 million in 2008 and $1,167 million in 2007. Our R&D programme adapts and applies technologies that reduce the energy requirements, environmental impacts and running costs of our current operations. It also develops technologies that help us capitalise on business-growth opportunities, both in Upstream and in Downstream. And it can create entirely new technologies, such as those needed for alternative fuels or carbon capture and sequestration, which may become part of the world’s energy system in the longer term. The technologies we created, developed and applied in our businesses during 2009 certainly spanned that wide range of purpose. For example, our current operations were made more efficient by the many Smart Field implementations that optimised production from oil and gas fields and by the catalysts we manufactured for the nearly completed Pearl GTL plant. New exploration prospects were identified in the Middle East and Africa with novel seismic survey technologies. And new markets were opened by our high-mileage FuelSave gasoline formulation, which was launched in various countries. Unprecedented technological achievements were also in the works in 2009, so that we can build a floating LNG plant for the offshore Prelude and Concerto fields of Australia and realise a full-scale cellulose-to-ethanol plant for next-generation biofuels. With the Transition 2009 reorganisation, we sharpened the accountability for delivery of all aspects of our R&D programme. We also linked the programme’s projects more closely with the business
Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
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UPSTREAM
K E Y S TAT I ST I CS $ MILLION
2009 Revenue (including inter-segment sales) Segment earnings Including: Production and manufacturing expenses Selling, distribution and administrative expenses Exploration Depreciation, depletion and amortisation Share of profit of equity-accounted investments Capital investment Oil and gas production available for sale (thousand boe/d) LNG sales volume (million tonnes) Proved reserves (million boe) [A] 55,140 8,354 13,958 2,206 2,178 9,875 3,852 23,951 3,142 13.40 14,132
2008
2007
88,308 67,278 26,506 18,094 13,763 2,030 1,995 9,906 7,521 32,166 3,248 13.05 10,903 13,122 2,015 1,822 9,913 5,446 21,362 3,315 13.18 10,809
lower realised oil and gas prices. Higher costs and lower sales volumes also contributed slightly to the decline. The earnings decline was partly offset by lower royalties, lower taxes and higher trading contributions. Additionally, 2009 earnings included a net charge of $134 million compared with net gains of $3,487 million in 2008. The net charge of $134 million in 2009 mainly relates to impairments and redundancy charges, partly offset by exceptional tax items, and divestment gains. The net gains of $3,487 million in 2008 mainly related to the divestment of assets in Australia, Canada, Germany, the Netherlands, Nigeria, the UK and the USA, which were partly offset by the mark-to-market valuation of certain UK gas contracts and an exceptional tax charge due to new legislation in Italy. While natural gas production was flat in 2009, LNG sales volumes of 13.40 million tonnes were 3% higher than in 2008. This increase reflected the ramp-up in sales volumes from the Sakhalin II LNG project and Train 5 at the Australian North West Shelf project, which were partly offset by lower volumes from Nigeria LNG and reduced LNG demand due to the recession. Segment earnings in 2008 were $26,506 million, 46% higher than in 2007, due to the impact of higher realised oil and gas prices. This was partly offset by lower production volumes, particularly in the USA, where hurricanes affected operations. Higher taxes, royalties and exploration costs also reduced 2008 earnings. Net gains of $3,487 million in 2008 compared with net gains of $1,471 million in 2007. The net gains in 2007 mainly related to asset divestments and various taxation credits, which were partly offset by the mark-to-market valuation of certain UK gas contracts and a charge mainly relating to the onshore assets in Nigeria, including impairments and provisions arising from the funding and security situation there.
[A] Excludes minority interest. Minable oil sands reserves of 997 million boe in 2008 and 1,111 million boe in 2007 are not included in the proved reserves.
Overview
Our Upstream businesses explore for and extract crude oil and natural gas, often in joint ventures with international and national oil companies. We liquefy natural gas by cooling and transport it to customers across the world. We also convert natural gas to liquids (GTL) to provide cleaner burning fuels. Upstream markets and trades natural gas and power in support of our businesses. We extract bitumen – an especially thick, heavy oil – from mined oil sands and convert it to synthetic crude oil. We are also developers of wind power as a means to generate electricity.
Capital investment, portfolio actions and business development
Capital investment in 2009 was $24 billion. This represents a 26% decrease from 2008, which included over $8 billion in acquisitions, primarily relating to Duvernay Oil Corp. Capital investment included exploration expenditure of $4.5 billion (2008: $11.0 billion). In Abu Dhabi, Shell signed an agreement with Abu Dhabi National Oil Company (ADNOC) to extend the GASCO joint venture for a further 20 years. In Australia, Shell and its partners took the final investment decision (FID) for the Gorgon LNG project (Shell share 25%). Gorgon will supply global gas markets to at least 2050, with a capacity of 15 million tonnes (100% basis) of LNG per year and a major carbon capture and storage scheme. Shell has announced a front-end engineering and design study for a floating LNG (FLNG) project, with the potential to deploy these facilities at the Prelude offshore gas discovery in Australia (Shell share 100%). In Australia, Shell confirmed that it has accepted Woodside Petroleum Ltd.’s (Woodside) entitlement offer of new shares at a total cost of $0.8 billion, maintaining its 34.27% share in the company; $0.4 billion was paid in 2009 with the remainder paid in 2010. In Bolivia and Brazil, Shell sold its share in a gas pipeline and in a thermoelectric power plant and its related assets for a total of around $100 million. In Canada, the Government of Alberta and the national government jointly announced their intent to contribute $0.8 billion of funding towards the Quest carbon capture and sequestration project. Quest,
Earnings 2009-2007
The economic environment in 2009 was a challenge to both Shell and the industry. According to the International Energy Agency, the 2009 oil demand decline of 1.5% is the largest decline since 1982. Similarly, we faced gas demand declines in Europe and the USA of some 7% and 2% respectively. At the same time, global liquefied natural gas (LNG) capacity increased by 20% in 2009, exerting downward pressure on global gas prices. Spot gas prices were significantly lower in 2009 than in 2008. Much of Shell’s natural gas and LNG portfolio has term contracts with price realisations that trailed oil price trends, typically by 4 to 6 months. Gas production represented 47% of total production of 3,142 thousand boe/d. The chart below illustrates the significant difference in direction between Shell’s realised prices for oil and gas in 2009.
RE A L I SE D PRI CE
$120 $100 $80 $60 $40 $20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2008 2008 2008 2009 2009 2009 2009 Oil Natural gas
$/BOE
Segment earnings in 2009 were $8,354 million, 68% lower than in 2008. The decrease in 2009 from 2008 was mainly due to significantly
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
which is at the feasibility study stage, could capture CO2 from the Athabasca Oil Sands Project at the Scotford Upgrader, for underground storage. In Egypt, Shell signed agreements to acquire a 40% holding and become the operator on the Alam El Shawish West Concession, where oil and gas discoveries have been confirmed. In Iraq, Shell was awarded a contract as lead operator in developing the Majnoon field (Shell interest 45%). Production is expected to reach 1.8 million boe/d, up from a current level of approximately 45 thousand boe/d (100% basis). In addition, Shell was awarded a 15% share in a contract for the development of the West Qurna 1 field. According to the contracts’ provisions, Shell’s equity entitlement volumes will be lower than the Shell interest implies. In the USA, the FID was taken on the Caesar Tonga project (Shell interest 22.4%), with estimated peak production of 40 thousand boe/d (100% basis). In Africa and Europe, Shell has agreed to an asset swap with Hess Corporation to acquire assets in Gabon and in the UK North Sea in return for Shell’s interest in a pair of Norwegian offshore fields (subject to government approval and other requisite consents).
contain. Shell also saw particularly strong results from exploration and appraisal drilling in the North American Haynesville and Groundbirch tight gas areas. In appraisal drilling, Shell participated in three notable successes in onshore and offshore Australia and the UK. In total, Shell participated in 345 successful wells drilled outside proved areas. This comprises 28 conventional oil and gas wells and 148 unconventional gas exploration and appraisal wells, as well as 169 additional appraisal wells intended to extend proved areas near existing assets. In 2009, Shell added acreage to our exploration portfolio mainly from new licences in Australia, Brazil, Canada, Guyana, Italy, Jordan, Norway and the USA, and successfully bid for new exploration licences in Egypt, South Africa and French Guiana. Shell acquired one licence in the Exmouth area, offshore north-west Australia. In Brazil, Shell was awarded 5 blocks in the onshore frontier Sao Francisco Basin. In Canada, Shell expanded our acreage holdings in British Columbia. In Guyana, the farm-in agreement to the Stabroek licence was finalised. In Italy, Shell farmed into six blocks in the deepwater Sicily Channel area. In Jordan, an oil shale concession agreement was finalised. In Norway, Shell was awarded two licences in the 20th bid round. In the US Gulf of Mexico, Shell was awarded exploration rights on 42 blocks in two lease sales, of which 39 were in lease sale 208. In total, Shell secured rights to some 97,000 km2 of new exploration acreage. Overall, our exploration acreage increased in 2009 relative to 2008, mainly due to the acreage additions in locations noted above, partly offset by a combination of divestments, relinquishments and licence expiry of acreage in various countries (mainly Canada, Malaysia and the UK).
Production
In 2009, hydrocarbon production averaged 3,142 thousand boe/d, which was 3% lower than in 2008 and 5% lower than in 2007. Lower production in 2009 when compared with 2008 is attributable to field declines, OPEC restrictions, lower production in Nigeria due to security issues, and higher maintenance downtime, mainly in the UK. A reduction in gas demand due to the global recession was also a key factor. These declines were partly offset by ramp-up of new fields, PSC price effects and a comparatively mild 2009 hurricane season in the USA. Field declines affecting production were predominantly in the UK and the USA, but were also seen in Australia, Brazil, Canada, Denmark, Malaysia and Norway. The effect of declining fields was more than offset by production from new fields. In Brazil, production started from the multi-field Parque das Conchas (BC-10) project (Shell interest 50%). Production wells, which are some two kilometres deep, are linked to a floating production, storage and offloading vessel with a capacity to process 100 thousand barrels of oil and 50 million cubic feet of natural gas a day (100% basis). In Brunei, field-development projects at Mampak Block 4 and Bugan came on-stream in 2009. In Norway, the Ormen Lange gas field (Shell interest 17%) reached peak production in November 2009. The field delivers gas to the UK market. In Russia, the Sakhalin II project (Shell interest 27.5%) achieved peak production of over 400 thousand boe/d in the third quarter. It also successfully ramped up production from its two LNG trains, ahead of schedule. Production continued to increase from the Salym fields (Shell interest 50%), reaching almost 160 thousand boe/d during the latter half of 2009.
Outlook
Shell, along with the oil and gas industry as a whole, was impacted by the global recession during 2009. Compared with the previous year, the business environment was characterised by overall weaker oil and gas demand, reduced spending on non-core development and exploration activities and lower average realised prices. Although oil prices did recover throughout the year, this was driven more by disciplined production controls from OPEC and other oil producing countries than from a recovery in underlying demand. In the short term, uncertainties around the robustness of the global economic recovery continue to present the industry with challenges in terms of investment choices, and require a sharp and sustained increase in emphasis on cost management. Longer term we do believe that global energy demand will again experience strong growth based on the fundamentals of an increasing global population and economic development, with supplies of easy-to-access oil and gas remaining challenged to keep up with demand. This long-term view on global energy demand means that Shell’s strategy, which has been pursued consistently for several years, remains unchanged. The implementation of our strategy will see us actively manage our portfolio around four themes: maximising long-term value in our existing businesses, especially in our heartlands, by striving for, and sustaining, operational excellence and a keen focus on competitive cost management; maturing our substantial resource base to bring new projects onstream, in particular long-life assets with attractive price upside, through the leveraging of our strong commercial and technical capabilities; further building our resource base through an aggressive, focused, exploration programme and selective new business development; and
Exploration
During 2009, Shell participated in 11 notable discoveries in Australia, Malaysia, Norway, Oman and the US Gulf of Mexico. Discoveries will be evaluated in order to establish the extent of the volumes they
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continuing our industry leadership in integrated gas developments and increasing our unconventional gas business. Based on production, our heartlands have traditionally included Australia, Brunei, Canada, Denmark, Malaysia, the Netherlands, Nigeria, Norway, Oman, the UK and the USA. Russia represents a new heartland with Sakhalin II on-stream in 2009, and we expect Qatar to become a heartland in the coming years. Underpinning these four themes is a foundation of technology; Shell’s ability to develop and deploy technology is a key differentiator, with applications across the value chain, and we continue significant investment in R&D to support this position. We continue to pursue an aggressive exploration programme and we are adding more acreage in support of our strategy themes. Our emphasis remains on drilling large exploration prospects and plays, in selected basins, and targeting under-explored areas with significant potential. The programme is further complemented by our focused Near Field Exploration programme aiming to leverage existing infrastructure near selected Shell production facilities around the world. Shell seeks to build on its position as one of the world’s largest natural gas producers and retain our position as industry leader in LNG, with a significant presence in the key markets of North America, Asia-Pacific and Europe. We aim to access and monetise new natural gas resources by offering competitive value propositions to our customers and major resource holders. In doing so, we leverage a diverse natural gas portfolio; global capabilities including technical and commercial skills, financing, marketing, trading, shipping and project management expertise; premium market access (for LNG and GTL); and leading technology. With Sakhalin II in Russia now on-stream, integrated gas focus moves to the completion of the Qatar projects, and to further progress in Australia, notably on the Gorgon LNG project, and on moving towards FID on the Prelude floating LNG development. This latter project is an exciting opportunity, continuing Shell’s tradition of driving technological innovation to unlock new resources. In North America, we continue to progress our onshore unconventional gas developments in Pinedale (Wyoming), Haynesville (Louisiana), Groundbirch (British Columbia) and other assets largely as planned, whilst utilising the inherent flexibility some of these developments provide to manage shorter term activity levels. With respect to Nigeria, the impact of continued security problems in the Niger Delta, and partner funding limitations within the onshore joint venture, continue to present challenges. While we have achieved some success with both funding and restoring production, the security situation remains fragile. Shell’s operating capability with existing assets and infrastructure remains strong in a country with a plentiful hydrocarbon resource base. However, the future industry outlook is uncertain, with the government contemplating the introduction of a new Petroleum Industry Bill, which could potentially reduce the economic attractiveness of oil and gas projects. Unconventional oil is a material component of our portfolio and in 2009 Shell and others in the oil sands industry reacted to the recession and low oil prices by deferring projects. This has eased the pressure on the demand for labour, and with energy costs also falling, a lower cost environment is starting to materialise. Looking forward it is anticipated that this trend will reverse, although the extreme labour shortages of recent years are not expected to return. The outlook for energy costs is also higher as the economy moves out of recession. These market factors underpin Shell’s continued focus on operational excellence and cost management to ensure a robust business.
Proved reserves
Details of Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved reserves are summarised in the table on page 29 and are set out under the heading “Supplementary information – Oil and gas” on pages 140-149. It should be noted that totals are further influenced by commodity price effects. In December 2008, the United States Securities and Exchange Commission (SEC) and subsequently in January 2010 the Financial Accounting Standards Board (FASB) adopted revisions to oil and gas reporting rules in order to modernise and update the oil and gas reserves estimation and disclosure requirements. Our proved reserves volumes reported for the end of 2009 have been determined in accordance with these updated rules. In 2009, we updated and enhanced our reserves assurance process by creating a central group of reserves experts, whom on average have over 25 years experience in the oil and gas industry. This group of experts are part of the Reserves Assurance and Reporting organisation (RAR). RAR provides primary assurance for all proved reserves bookings. A Vice President with over 35 years’ experience in the oil and gas industry currently heads RAR. He is a member of the Society of Petroleum Engineers and holds a Bachelor of Science in Petroleum Engineering from the University of Tulsa, Oklahoma, USA and Master of Science degrees in both Petroleum Engineering and Operations Research from Stanford University, California, USA. This RAR organisation reports directly to an Executive Vice President of Finance, who is a member of the Upstream Reserves Committee. The Upstream Reserves Committee is a multidisciplinary committee consisting of senior representatives from the Finance, Legal, Projects & Technology and the Upstream organisations. The Upstream Reserves Committee reviews and endorses all proved reserves bookings with final approval remaining with Shell’s Executive Committee. Internal Audit also provides secondary assurance through risk-based audits, focusing on the control framework and large proved reserves bookings. In 2009, Shell added 4,417 million boe of proved oil and gas reserves before accounting for production, of which 3,632 million boe comes from Shell subsidiaries and 785 million boe is associated with Shell’s share of equity-accounted investments. Included in the 4,417 million boe is 1,630 million boe of synthetic crude oil reserves that, as a result of SEC rule changes, can now be considered proved oil and gas reserves as well as approximately 270 million boe associated with other SEC rule changes pertaining to the use of reliable technologies and the use of analogues. The application of reliable technologies contributed approximately 150 million boe of the 270 million boe. The most significant increases related to the use of wireline pressure gradients and wireline testing. If the 2009 year-end spot price had been used instead of the new SEC requirement to use the 12 month average commodity price, this would have resulted in a reduction of about 160 million boe. Finally, the 4,417 million boe includes 599 million boe that is expected to be consumed in our operations (for example as fuel gas). Total production available for sale in 2009 was 1,147 million boe and an additional 40 million boe was consumed in our operations. Production from Shell subsidiaries was 828 million boe with an additional 35 million boe consumed in operations. Production associated with the Shell share of equity-accounted investments was 319 million boe with an additional 5 million boe consumed in operations. Accordingly, after taking into account production and volumes consumed in operations, we had a net increase of 3,230 million boe in proved oil and gas reserves of which
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2,769 million boe is from Shell subsidiaries and 461 million boe is associated with the Shell share of equity-accounted investments.
SHELL SUBSIDIARIES
barrels, of which 54 million barrels is attributed to revisions and reclassifications and 2 million barrels to extensions and discoveries; after taking into account production of 7 million barrels, the bitumen proved reserves were 57 million barrels at December 31, 2009.
DEPRECIATION, DEPLETION AND AMORTISATION
Before taking into account production, Shell subsidiaries added 3,632 million boe of proved oil and gas reserves. This includes 843 million barrels of oil and natural gas liquids, 1,103 million boe (6,397 thousand million scf) of natural gas, 1,630 million barrels of synthetic crude oil and 56 million boe of bitumen. Of those volumes 2,266 million boe came from revisions and reclassifications. The revisions and reclassifications include 1,207 million barrels of synthetic crude oil, of which 997 million boe had been previously booked as proven minable oil sands reserves and 325 million boe for volumes expected to be consumed in operations. Also contributing to the 3,632 million boe was a net 2 million boe relating to acquisitions and divestments; 1,324 million boe from extensions and discoveries of which 96 million boe are related to volumes consumed in operations; and 40 million boe from improved recovery. After taking into account production of 863 million boe (of which 35 million boe was consumed in operations), Shell subsidiaries added 1,017 million boe of proved developed reserves and 1,752 million boe of proved undeveloped reserves.
SHELL’S EQUITY- ACCOUNTED IN VESTMENTS
The changes resulting from the revised SEC rules to Shell’s estimates of proved developed reserves affect prospectively from 2010 the amounts of depreciation, depletion and amortisation charged. These changes will not have a material impact.
Proved undeveloped reserves
The net addition to proved undeveloped reserves was 2,055 million boe in 2009. During the year we converted approximately 556 million boe of proved undeveloped reserves to proved developed reserves, of which approximately 40% is related to fields with no previously reported proved developed reserves. We spent approximately $7.3 billion in developing proved undeveloped reserves in 2009. As at December 31, 2009 we had 7,602 million boe of proved undeveloped reserves. As at December 31, 2009, approximately 1,064 million boe have been held as proved undeveloped reserves for five years or longer. A majority of these reserves are in locations where Shell has a proven track record of developing major projects, such as in the Netherlands, Nigeria, Norway, Russia and the USA. These proved undeveloped reserves relate primarily to long-life fields. Approximately 90% of these proved undeveloped reserves are associated with currently producing fields. These reserves are expected to be converted from proved undeveloped to proved developed over time as development activities are undertaken to meet contractual obligations and production facilities are expanded or upgraded. The majority of these undeveloped proved reserves are associated with fields that will produce for decades. Accordingly, over the life of these fields, we will be required to provide gas compression and drill additional wells to support existing gas delivery commitments as well as a number of phased developments that will optimise the use of production facilities. In the coming years we expect an increase in our proved undeveloped reserves that have been held for five years or longer due to the relatively recent commencement of construction of major, long-lasting production projects in Canada, Kazakhstan and Qatar.
Before taking into account production, Shell’s equity-accounted investments added 785 million boe of proved reserves, 331 million barrels from oil and natural gas liquids and 454 million boe (2,634 thousand million scf) of natural gas. The majority of these additions – 745 million boe – were from revisions and reclassifications. Included in the 745 million boe is 177 million boe for volumes expected to be consumed in operations and 568 million boe due to extension of licences, improved well performance, ongoing development and commodity price changes. After taking into account production of 324 million boe (of which 5 million boe was consumed in operations), Shell’s equity-accounted investments added 158 million boe to proved developed reserves and 303 million boe to proved undeveloped reserves.
PROVED SYNTHETIC CRUDE OIL RESERVES
As a result of SEC rules changes, we are required to report proved synthetic crude oil reserves from our Canadian oil sands operations. Accordingly, in 2009 we added 1,630 million barrels of synthetic crude oil to our proved oil and gas reserves before accounting for production. Last year, we had reported as proven minable oil sands reserves 997 million barrels. As a result of the SEC rules changes these proven minable oil sands reserves have been converted to synthetic crude oil reserves and are included in the 1,630 million barrels of proved synthetic crude oil reserves. Accordingly, we will no longer be reporting proven minable oil sands reserves. Also included in the 1,630 million barrels are 423 million barrels related to new mine extensions. In 2009 we had synthetic crude oil production of 31 million barrels of which 2 million barrels were consumed in operations. Therefore, as at December 31, 2009 we had total net proved synthetic crude oil reserves of 1,599 million barrels, of which 691 million barrels were proved developed reserves and 908 million barrels were proved undeveloped reserves.
BITUMEN
Delivery commitments
Shell sells crude oil and natural gas from its producing operations under a variety of contractual obligations. Most contracts generally commit Shell to sell quantities based on production from specified properties, some natural gas sales contracts specify delivery of fixed and determinable quantities, as discussed below. Shell is contractually committed to deliver to third parties and affiliates a total of approximately 4,500 billion cubic feet of natural gas from 2010 through 2012 from Australia, Brunei, China, Malaysia, Nigeria, Norway, Philippines, Russia and the UK. The sales contracts contain a mixture of fixed and variable pricing formulas that are generally referenced to the prevailing market price for crude oil, natural gas or other petroleum products at the time of delivery. Shell believes it can satisfy these contracts from gas sources in these regions. Shell has met all contractual delivery commitments.
Business and property
Shell subsidiaries and equity-accounted investments are involved in all aspects of Upstream activities, including matters such as land tenure, entitlement to produced hydrocarbons, production rates, royalties,
The bitumen proved reserves are reported under the SEC rules definition as other natural resources. The net increase in these proved reserves, before taking into account production, was 56 million
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pricing, environmental protection, social impact, exports, taxes and foreign exchange. The conditions of the leases, licences and contracts under which oil and gas interests are held vary from country to country. In almost all cases (outside North America), the legal agreements generally are granted by or entered into with a government, government entity or state oil company, and the exploration risk practically always rests with the oil company. In North America, these agreements may also be with private parties who own mineral interests. Of these agreements, the following are most relevant to Shell’s interests: Licences (or concessions), which entitle the holder to explore for hydrocarbons and exploit any commercial discoveries. Under a licence, the holder bears the risk of exploration, development and production activities and of financing these activities. In principle, the licence holder is entitled to the totality of production minus any royalties in kind. The state or state oil company may sometimes enter as a joint venture participant sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the state oil company or agency has an option to purchase a certain share of production. Lease agreements are typically used in North America and are usually governed by similar terms as licences. However, participants may include governments or private entities and royalties are either paid in cash or in kind. PSCs entered into with a state or state oil company oblige the oil company, as contractor, to provide all the financing generally, and bear the risk of exploration, development and production activities in exchange for a share of the production. Usually this share consists of a fixed or variable part, which is reserved for the recovery of contractor’s cost (cost oil); the remainder is split with the state or state oil company on a fixed or volume/revenue-dependent basis. In some cases, the state oil company will participate in the rights and obligations of the contractor and will share in the costs of development and production. Such participation can be across the venture or on a per field basis. Additionally, as the price of oil or gas increases above certain pre-determined levels, Shell’s entitlement share of production would normally decrease.
EUROPE Denmark
been producing for 15 years, and the Ormen Lange gas field (Shell interest 17%), which reached peak production in 2009. Shell was also the operator of the development phase of the Troll field and is a partner in the Statfjord field, both of which were producing in 2009. Shell also holds interests in potential development assets and in several Norwegian gas transportation and processing systems, pipelines and terminals.
UK
In terms of production volumes, Shell is one of the largest oil and gas exploration and production companies operating in the UK. It operates a significant number of its interests in the UK Continental Shelf on behalf of a 50:50 joint venture with ExxonMobil. Most of Shell’s UK oil and gas production comes from the North Sea. Natural gas comes from associated gas in mixed oil and gas fields in the northern sector of the North Sea and gas fields in the southern sector. Crude oil comes from the central and northern fields. In the Atlantic Margin area, Shell has interests as a non-operating participant principally in the West of Shetlands area, which encompasses the Schiehallion, Clair and Loyal fields.
Rest of Europe
In Ireland, the Corrib Gas Project (Shell interest 45%, operator) is currently under development, and is largely complete (pending final decision from the Irish planning board on an application for a nine kilometres onshore pipeline). Shell also has interests in Austria, Germany, Greece, Hungary, Italy, Slovakia, Spain, Sweden and Ukraine.
ASIA (INCLUDING MIDDLE EAST AND RUSSIA) Brunei
Shell holds a 46% interest in a producing concession until 2042. Shell’s interest will reduce to 36.8% in July 2012, when the government increases its position to a 20% fully participating stake in the concession. Shell also holds an interest in one other non-operated exploration licence.
The Netherlands
Shell and the Brunei government are 50:50 shareholders in Brunei Shell Petroleum Company Sendirian Berhad (BSP). BSP holds long-term oil and gas concession rights onshore and offshore Brunei and sells most of its natural gas production to Brunei LNG Sendirian Berhad (BLNG, Shell interest 25%). BLNG was the first LNG plant in the Asia Pacific region and sells most of the LNG on long-term contracts to buyers in Japan and South Korea. Shell has a 35% interest in the Block B concession where gas is produced from the Maharaja Lela Field. Shell also has a 54% operating interest in exploration Block A.
China
Shell has interests in various assets through its participation in Nederlandse Aardolie Maatschappij B.V. (NAM), a 50:50 joint venture between Shell and ExxonMobil. Those assets are operated by NAM. An important part of NAM’s gas production is from its onshore Groningen gas field, in which the Dutch government has a 40% financial interest, with NAM retaining the remaining share. During 2009 a field renovation project was completed.
Norway
Shell operates the onshore Changbei tight gas field (Shell interest 50% average) under a PSC with PetroChina. Shell also participates in the offshore Xijiang fields (Shell interests ranging from 24.5% to 47.8%).
Iran
Shell is a partner in over 20 production licences on the Norwegian continental shelf. Shell is operator in eight of these, including those of the Shell-operated Draugen oil field (Shell interest 26%), which has
Iran is a major resource holder. It has the world’s second largest oil and natural gas resources. At current global gas usage rates, Iran’s gas is enough to supply the entire world for about 10 years. Given the size and global importance of Iranian hydrocarbon resources, Shell finds it hard to see a future in which production of these resources would not, at some point, play an important role in the global energy supply and demand balance. Major new projects to deliver hydrocarbon resources to customers can easily take more than 10 years to prepare, and require the completion
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of a number of phases of feasibility work before any final decision can be taken. It is hard to predict how circumstances in any one country will evolve over that period. Some countries that today appear stable may become less stable and vice versa. It therefore makes sense for Shell and other international energy companies to prepare a portfolio of possible new energy projects in a variety of different locations, and to leave a final investment decision on whether to proceed until the last practicable moment. We recognise that there are export controls and sanctions legislation in various jurisdictions targeting Iran. We have established programmes to manage compliance with such applicable laws, including the US Export Administration Regulations and the Iranian Transaction Regulations. However, as discussed in the Risk factors section (pages 13 to 15) conflicting US and European Union regulations in this area complicate compliance matters for European companies. Shell Exploration B.V. (Shell interest 100%) has a 70% interest in an agreement with the National Iranian Oil Company (NIOC) concerning the Soroosh/Nowrooz fields. The development phase is completed and all permanent facilities were handed over to NIOC in 2005. Since then, the Soroosh/Nowrooz fields have been producing, with NIOC being responsible for all aspects of the operations. The term of the agreement expires when all petroleum costs and the remuneration fee have been recovered, which is expected to occur in 2010. A project framework agreement for the Persian LNG project was signed in 2004 with Repsol and the National Iranian Oil Co. to take forward the Persian LNG project to the next stage of design. Under this agreement, it is envisaged that Shell would acquire a 50% interest in a project to develop phases of the South Pars field in the Persian Gulf and a 25% interest in the midstream liquefaction company. In early 2007, Shell and Repsol entered into a service contract with respect to development of the South Pars fields for the Persian LNG project. Negotiations on commercial issues continued to make progress in 2009. During 2009 we have also looked to mature the technical basis of the project, including front-end engineering design work for the offshore facilities and for the liquefaction plant. The parties will not reach a final decision on whether to proceed with the project until the remaining significant commercial and engineering work is complete. As with all projects, decision timing is fundamentally driven by the need to ensure first class decision quality. Our main concern is getting the remaining significant commercial and engineering work right. When we come to make a final investment decision, we will take political considerations into account. Naturally, we are following international developments closely and keeping a wide range of governments and other stakeholders informed. We are also providing China Petroleum and Chemical Corporation with technical services relating to their development of the Yadavaran field in Iran. At this time, we have not made any decision on whether to take an equity stake in the project. Shell’s investments and activities in Iran are not material to our revenues, earnings or assets. In general, potential US sanctions could have a material adverse effect on our future earnings (see Risk factors).
Iraq
was also awarded a 15% interest in the West Qurna 1 field, as part of the ExxonMobil-led consortium. According to the contracts’ provisions, Shell’s equity entitlement volumes will be lower than the Shell interest implies. Shell signed a heads of agreement with the Iraqi Ministry of Oil in September 2008 which sets out the commercial principles to establish a joint venture between Shell and the South Gas Company. The South Gas Company would be the 51% majority shareholder in the joint venture, with Shell holding 44% and Mitsubishi Corporation holding 5%. The joint venture would gather, treat and process raw gas produced within Basrah and sell the processed natural gas (and associated products such as condensate and LPG) for use in the domestic and export markets. The government has extended the heads of agreement by six months from its current expiry date in March 2010.
Kazakhstan
Shell has a 16.81% share in the offshore Kashagan field. This shallowwater field covers an area of approximately 3,400 km2. Phased development of the field will lead to an expected plateau production of 300 thousand boe/d (100%) from phase 1, increasing further with additional phases of development. Shell is now executing Kashagan Phase 2 front-end engineering and design. Shell and KazMunayGas will manage production operations on behalf of the operator. Shell is also a 55% partner in the Pearls production-sharing agreement (PSA) that covers an area of some 1,000 km 2 in a water depth of nine metres in the North Caspian Sea. The block contains two oil discoveries, Khazar (2007) and Auezov (2008), which are currently under appraisal. In 2009, a successful appraisal well and production test were completed on the Khazar discovery. The Caspian Pipeline Consortium (Shell interest 5.1%) exports production from west Kazakhstan to the Black Sea. The pipeline is 1,510 kilometres long and has been operational since October 2001. In December 2009, the Caspian Pipeline Consortium shareholders approved a pipeline expansion implementation plan. The expansion project is expected to be fully completed in early 2015.
Malaysia
Shell, as contractor to Petronas, produces oil and gas located offshore of Sarawak and Sabah under 15 PSCs, where Shell’s interests range from 30% to 80%. In Sabah, Shell operates four producing offshore oil fields (with a 50% interest in three and 80% in the other). Shell also has interests in offshore PSCs for the exploration and development of three blocks with interests ranging from 35% to 40%. In addition, Shell has a 50% interest in offshore blocks ND-6 and ND-7. Shell operates the unitised Gumusut field (Shell interest 33%), which is currently being developed, and the Malikai field (Shell interest 35%). Shell has a 30% interest in the Kebabangan field held through the Kebabangan Cluster PSC and the Kebabangan Petroleum Operating Company. Shell took FID to proceed with the F28 field development (Shell interest 50%) project under the SK308 PSC in 2009. In Sarawak, Shell is the operator of 16 gas fields, in which its interests range from 37.5% to 70%. Shell also has a 40% interest in the PETRONAS Carigali operated Baram Delta PSC and a 50% exploration interest in SK-307. In 2009, over 92% of the gas produced by Shell in Malaysia was supplied to the LNG complex in Bintulu, Sarawak (see table on page 37).
The Iraqi Ministry of Oil awarded Shell a 20-year contract as lead contractor in the development of the Majnoon oilfield. Shell will operate the development and production service contract. The Iraqi state owns 25% of the participating interest and Shell will hold a 45% share with Petronas holding the remaining 30%. Majnoon, located in southern Iraq, is considered one of the world’s largest oil fields. The current level of production is approximately 45 thousand boe/d. Shell
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Shell also operates a GTL plant (see table on page 37), adjacent to the LNG facilities. Using Shell technology, the plant converts natural gas into high-quality middle distillates and other specialty products.
Oman
Syria
Shell has a 34% interest in Petroleum Development Oman (PDO), which is the operator of an oil concession expiring in 2044. The government of Oman holds a 60% interest in the concession and Private Oil Holdings Oman Ltd. (POHOL) holds the remaining 40%. Shell has an 85% shareholding in POHOL. PDO has a portfolio of field-development projects that will build on the successful delivery of ongoing enhanced oil recovery projects and other chemical and thermal pilots. Shell also participates in the development of the Mukhaizna oil field (Shell interest 17%) where horizontal steam flooding will be applied on a large scale. Additionally, Shell has a 30% interest in Oman LNG which mainly supplies Asian markets under long-term contracts, and an interest of 11% in Qalhat LNG.
Philippines
A registered branch of Syria Shell Petroleum Development B.V. (Shell interest 100%) holds interests ranging from 62.5% to 66.67% in three PSCs (Deir Ez Zor, Fourth Annex and Ash Sham). These were extended by 10 years in December 2008 and now expire between 2018 and 2024. In addition, Shell companies are parties to a gas utilisation agreement for the collection, processing and sharing of natural gas from designated fields for use in Syrian power generation and other industrial plants. Al Furat Petroleum Company, a Syrian joint stock company in which Syria Shell Petroleum Development B.V. holds a 31.25% to 33.3% interest, performs operations under these contracts. Shell South Syria Exploration Limited (Shell interest 100%) entered into two production-sharing contracts, effective from February 2007, for Blocks 13 and 15 in the south of Syria. There is a four-year exploration period for these blocks, expiring in February 2011, and seismic data acquisition was completed in 2008. Prospect maturation and drilling preparation is ongoing. Shell completed a 30% farm-out to Tri Ocean Energy in November 2009. Shell remains operator with 70% interest.
United Arab Emirates
Shell has a 45% interest in the deep-water PSC for block SC-38, which includes a production licence for the Malampaya, Camago and San Martin fields. Current production comprises gas and condensate from the Malampaya field via a platform north-west of the island of Palawan. Shell also holds a 55% interest in block SC-60, an area offshore of north-east Palawan.
Qatar
In Abu Dhabi, Shell holds a concessionary share of 9.5% in the onshore crude oil and natural gas liquids operations of the Abu Dhabi Company for Onshore Oil Operations (ADCO). The licence expires in 2014. Shell also has a 15% interest in the licence of Abu Dhabi Gas Industries Limited (GASCO), which extracts and exports propane and butane as well as heavier liquid hydrocarbons from the wet natural gas associated with the oil produced by ADCO. Shell signed an agreement with Abu Dhabi National Oil Company (ADNOC) to extend the GASCO Joint Venture for a further twenty years to 2028.
Rest of Asia
In 2006, construction started on the integrated Pearl GTL project. Shell provides 100% of project funding under the development and PSA with the government of the State of Qatar. The fully integrated project includes Upstream production of some 1.6 bcf/d of well-head gas from two unmanned platforms in Qatar’s North Field, transport and processing of the gas to produce around 120 thousand b/d of natural gas liquids and ethane, and the conversion of the remaining gas into 140 thousand b/d of high-quality liquid hydrocarbon products in the world’s largest GTL plant. Construction is scheduled to be completed by the end of 2010 with production ramp-up in 2011. The Qatargas 4 LNG project (Shell interest 30%) is progressing. The project comprises facilities to produce some 1.4 bcf/d of natural gas from Qatar’s North Field, an onshore gas-processing facility and an LNG complex yielding 70 thousand b/d of natural gas liquids and 7.8mtpa of LNG, and shipping of the LNG to markets in North America, China and Dubai. Construction of the Qatargas 4 project is expected to be substantially complete by the end of 2010.
Russia
Shell also has interests in India, Japan, Jordan, Pakistan, Saudi Arabia, Singapore, South Korea and Turkey.
AUSTRALIA/ OCEAN IA Australia
Shell has interests in offshore production and exploration licences in the North West Shelf (NWS) and Greater Gorgon areas of the Carnarvon Basin, as well as in the Browse Basin and Timor Sea area. Some interests in these areas are held directly, and some indirectly through a 34.27% shareholding in Woodside. Woodside is the operator on behalf of six joint venture participants of the NWS gas, condensate and oil fields, of which Shell has a 22.4% interest. Construction of the North Rankin 2 low-pressure gas platform continued in 2009, which will be linked to the existing North Rankin A platform and is designed to recover remaining low-pressure gas from the North Rankin fields. Shell has a 25% interest in the Gorgon development project covering the offshore Greater Gorgon fields, with the exception of Io gas field, where Shell has a 12.5% interest. The final investment decision on the project was taken in September 2009, and construction activities on Barrow Island commenced in December 2009. Gorgon is the largest single resource project in Australia and, at 15mtpa, the world’s largest foundation LNG project. Shell is operator and 100% equity holder of a permit in the Browse Basin, in which 12 exploration wells have been drilled, finding two separate gas fields – Prelude and Concerto. After evaluating development options, Shell is working towards deployment of FLNG technology. FLNG processes gas in situ at the offshore gas field
Shell’s main asset is the Sakhalin II project (Shell interest 27.5%), an integrated oil and gas export project in a sub-arctic environment. The construction of the project was completed in 2009, and the first LNG from Russia was exported in March 2009. Plateau production from the Sakhalin II project will be some 400 thousand boe/d of oil and gas, supplying 9.6mtpa of LNG from two production trains. Shell has a 50% interest in the Salym fields in Western Siberia, where production increased, reaching almost 160 thousand boe/d during the latter half of 2009.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
location, reducing project costs and minimising the environmental footprint. During 2009, Shell entered the front-end engineering and design phase for Prelude FLNG. Environmental approval work is continuing. Also in the Browse basin, Shell is a participant in the Woodside operated Browse Joint Venture (Shell interest approximately 25%) covering the Torosa, Brecknock and Calliance gas fields. The Browse Joint Venture participants have agreed to enter the Basis of Design phase for development of the Browse gas resources at the Kimberley LNG Precinct. Utilising our 30% equity interest in the Surat and Bowen basin Coal Seam Gas (CSG) reserves we hold in an alliance with Arrow Energy, Shell has progressed its Shell Australia LNG CSG project in Gladstone, Queensland. The project has been granted ‘significant project’ status by the state government, triggering the environmental permitting process. Shell holds further interests in the Sunrise and Evans Shoal gas fields in the Timor Sea (Shell interests 38% and 25% respectively). Sunrise joint venture partners are considering two concepts for the development of Greater Sunrise gas, which would be delivered either to an offshore Shell FLNG plant or to the onshore Darwin LNG plant. Shell has a 33% interest in the WA-16-R permit, where a discovery was made with the Iago-2 well. Development options are being assessed. Shell also has gas rights in the Crux field (AC/P23) and in the Libra-1 gas discovery in the Shell-operated AC/P41 block (Shell interest 80%).
New Zealand
Offshore Nigeria The main offshore activities are carried out by Shell Nigeria Exploration and Production Company (SNEPCo – Shell interest 100%) with interests in three deep-water blocks, of which two are operated by Shell. This includes the Bonga field 120 kilometres offshore with a production capacity of more than 200 thousand barrels of oil and 150 million standard cubic feet of gas per day. Deep-water offshore activities are typically governed through PSCs with the Nigerian National Petroleum Corporation.
SPDC also holds an interest in six shallow water offshore leases, of which five expired on November 30, 2008. However, under the Nigerian Petroleum Act, SPDC is entitled to an extension. Currently, the status quo is maintained following a court order issued on November 26, 2008. The parties involved are pursuing a negotiated resolution. Production from one of the leases – the Sea Eagle FPSO (“EA licence”) restarted on July 2, 2009, following the shut-down as a result of security incidents in 2006. Other Shell companies in Nigeria have an interest in deep-water block OPL 322 and a disputed interest in OML 122. Furthermore, the ownership of the licence and the rights in the OPL 245 PSC are the subject of ongoing litigation. Shell also has a 25.6% interest in NLNG, which operates six LNG trains with a total capacity of 21.6mtpa (100%). NLNG currently has operational control of 24 LNG vessels.
Rest of Africa
Shell has an 83.75% interest in the offshore Maui gas field, a 50% interest in the onshore Kapuni gas field and a 48% interest in the offshore Pohokura gas field. The produced gas is sold domestically, mainly under long-term contracts. Shell also has interests in other exploration licence areas in the Taranaki Basin.
AFRICA Nigeria Onshore Nigeria
In Egypt, Shell has a 50% interest in the Badr El-Din Petroleum Company joint venture with the Egyptian General Petroleum Corporation (the Egyptian national oil company). Shell also participates in the deep-water North East Mediterranean Deepwater concession and the North West Damietta concession. In 2009, Shell acquired a 40% working interest in the Alam El Shawish West concession, located in the Egyptian western desert. In Gabon, Shell has interests in nine onshore mining concessions and exploitation permits, and operates six of them. The three non-Shelloperated concessions expire between 2010 and 2021. Shell also holds the Igoumou Marin permit in ultra-deep water and two exploration and production-sharing contracts offshore Gabon. In South Africa, Shell won the exploration rights in the Orange Basin deep-water area off the country’s west coast in November 2009. The exploration area covers approximately 37,000 km2. In December 2009, the South African Petroleum Authorities (Petroleum Agency SA) awarded Shell a Technical Cooperation Permit for a one-year study to determine the hydrocarbon potential in parts of the Karoo Basin in central South Africa. Shell also has interests in Algeria, Cameroon, Ghana, Libya, Morocco and Tunisia.
NORTH AMERICA Canada
The Shell Petroleum Development Company of Nigeria Ltd. (SPDC) is the operator of a joint venture (Shell interest 30%) that holds 30 onshore oil mining leases (OML) in the Niger Delta. The leases expire in 2019. In 2009, SPDC ramped up power output of the 640 MW Afam VI Power Plant and fuel gas production from the Okoloma Gas Plant in the Niger Delta, and continued to deliver production from gas wells associated with the project – collectively known as the Afam Integrated Gas and Power Project. The Afam VI Power Plant is capable of delivering over 400 MW since July 2009, but the lack of upgrades on the Nigeria electricity grid limits full production.
The Gbaran-Ubie integrated oil and gas project (Shell interest 30%) is developing an area of approximately 650 km2 in Bayelsa State. When fully operational, it is expected at its peak to produce one bcf/d of gas and 70 thousand b/d of oil. SPDC will drill more than 30 new oil and gas wells, and is building a central processing facility with gas delivery to power plants and Nigeria LNG Ltd. (NLNG). On the financing side, progress has been made towards full implementation of the Modified Carry Agreements (MCAs) and the bridge loan signed in 2008 and 2009. All requirements for the utilisation of the bridge loan and the implementation of the MCAs have been met in the fourth quarter of 2009.
Shell produces natural gas, NGL, bitumen, synthetic crude oil and sulphur mainly in Alberta and British Columbia where the main leases/ assets are held. In total, Shell holds over 2,100 leases. Canadian exploration rights are generally granted for varying terms, depending upon the provincial jurisdiction and applicable regulations. Subject to certain conditions, exploration rights can be converted to production leases, which may be
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27
extended as long as there is commercial production pursuant to the lease. The Alberta government implemented a new royalty framework effective January 1, 2009, which increased royalty rates in both the pre-payout and post-payout periods based on a sliding scale linked to WTI price movement. This resulted in a pre-payout royalty rate increase ranging from 1% to 9% of gross revenues, and a post-payout rate increase ranging from the greater of between 25% and 40% of net revenues or between 1% and 9% of gross revenues (depending on WTI price).
Gas
completing a minimum level of development prior to their expiry, leases may be extended.
USA
The majority of Shell’s Canadian gas production comes from the Foothills region of Alberta. Shell also owns and operates four natural gas processing and sulphur extraction plants in southern and southcentral Alberta and is among the world’s largest producers and marketers of sulphur. In addition, it holds a 31.3% interest in the Sable Offshore Energy Project, a natural gas complex offshore eastern Canada, has a non-operating 20% interest in an early stage deepwater exploration asset off the east coast of Newfoundland and is a joint venture participant in the Mackenzie Gas Pipeline proposal in northern Canada.
Shell is a producer of oil and gas in the Gulf of Mexico (GoM), onshore tight gas (south Texas, Wyoming and Louisiana) and heavy oil (California). The majority of Shell’s oil and gas production interests are acquired under leases granted by the owner of the minerals underlying the relevant acreage (including many leases for federal onshore and offshore tracts). Such leases are currently running on an initial fixed term that is automatically extended by the establishment of production for as long as production continues, subject to compliance with the terms of the lease (including, in the case of federal leases, extensive regulations imposed by federal law). In Alaska, Shell holds over 410 federal leases in the Beaufort and Chukchi seas but did not pursue offshore drilling or seismic programmes on them in 2009. It concentrated on obtaining permits and other preparatory work to advance more limited single-year drilling plans in 2010. The modified plans, developed in consultation with native stakeholders, were approved by the Minerals Management Service. Final Environmental Protection Agency air permits, however, still remain to be granted before drilling can begin. Shell hopes to drill exploratory wells in the north Alaska offshore in 2010.
Gulf of Mexico
In 2009, Shell continued unconventional gas development in westcentral Alberta and east-central British Columbia through drilling programmes and investment in infrastructure facilitating new production. Shell holds approximately 600 thousand tight gas acres (2,400 km2) in these areas, and the Groundbirch area reached a 100 million scf/d production milestone in November.
Bitumen
Shell produces and markets bitumen, a very heavy crude oil, through cold (primary) production and thermal (enhanced) recovery in the Peace River area of Alberta, and established a steam-assisted gravity drainage project (Phase 1) near Cold Lake, Alberta.
The Gulf of Mexico is the major production area, accounting for some 60% of Shell’s oil and gas production in the USA. Shell holds more than 460 federal offshore leases in the Gulf, about a quarter of them producing. Shell operates five deep-water tension leg platforms, and a dozen others, with average Shell-share production of over 270 thousand boe/d in 2009. Key producing fields are Auger, Mars, Ram Powell, Ursa, Princess, Brutus, NaKika and Deimos. Shell, with partners, are advancing the Perdido project (Shell interest 35.4%) in the far south-west Gulf of Mexico throughout 2009 and will achieve first oil in 2010. Shell will operate this ultra deep water spar facility.
Additional heavy oil resources and advanced recovery technologies are under evaluation on about 1,200 km2 in the Grosmont oil sands area, also in north Alberta. The Athabasca Oil Sands Project (AOSP) in northeast Alberta mines bitumen-saturated sand from which synthetic crude oil is produced. AOSP, operated by Shell, is a joint venture (Shell share 60%) that holds the Muskeg River Mine lease (Lease 13).
Oil sands/synthetic crude oil
The oil sand is open-pit mined, using a truck and shovel operation, then processed in on-site bitumen extraction and clean-up facilities to yield a bitumen product. Power and steam for the operations are provided from an on-site co-generation facility, which is owned and operated by an independent power company, in combination with boiler facilities owned by the joint venture. The bitumen is transported by pipeline for processing at the Scotford Upgrader, which is operated by Shell and located in the Edmonton area of central Alberta. Scotford’s upgrading process adds hydrogen to the bitumen, breaking up the large hydrocarbon molecules. Using this process we produce a wide range of synthetic crude oils suitable as a feedstock for refineries, which process them into refined products such as gasoline. AOSP’s current bitumen production capacity is 155 thousand boe/d (Shell interest 60%). An expansion of AOSP, expected to be completed in 2010 to 2011, will add about 100 thousand barrels of daily production capacity (Shell interest 60%). Shell also holds a number of other minable oil sands leases in the Athabasca region with expiry dates ranging from 2010 to 2020. By
Onshore Shell continues to operate efficient multi-rig onshore gas-well drilling programmes in south Texas and Wyoming, where Shell and partners recorded their first full year under revised federal environmental rules allowing year-round operations. Shell also added to its substantial acreage position in the Haynesville shale tight-gas opportunity of north-west Louisiana. Our Haynesville activities are being executed through joint operations (Shell interest 50%), with approximately 25 drilling rigs in operation as at January 1, 2010 between Shell and partners, and a ramp-up of operations is planned for 2010.
Shell holds a 51.8% interest in Aera Energy LLC, a US-based exploration and production company with assets in the San Joaquin Valley and Los Angeles Basin areas of southern California. Aera operates more than 15,000 wells, producing about 170 thousand boe/d of heavy oil and gas, and accounting for approximately 30% of the state’s production. Shell continues research into the development of oil shale resources in the Piceance Basin of north-west Colorado, and holds three federal leases for future oil shale activities.
LNG and wind
Shell holds capacity rights in US LNG import terminals, at the Cove Point and Elba Island regasification terminals. In the wind energy business, Shell has interests in eight US wind projects (Shell interest 50%) with a total installed capacity of 899 MW.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
Mexico
Shell has a 50% interest in an LNG regasification terminal at Altamira, on Mexico’s gulf coast, and a 75% interest in a separate marketing company that holds the capacity rights in the terminal. Shell also holds capacity rights at the Costa Azul LNG import terminal in Baja California on Mexico’s west coast.
SOUTH AMERICA Brazil
Shell produces oil and gas from the offshore Parque das Conchas (BC-10) field, which came on-stream in 2009 (Shell operated; interest 50%) and Bijupirá and Salema fields (Shell operated; interest 80%). Shell also has an interest in an operated offshore development block and interests in seven deep-water exploration blocks in the Campos, Santos and Espirito Santo basins. Shell operates two of these blocks with interests ranging from 17.5% to 100%. Shell operates two heavy oil fields in block BS-4 (Shell interest 40%) in the Santos Basin where potential development concepts are being assessed. Shell formally received exploration rights to five onshore blocks comprising over 11,000 km2 in the Sao Francisco basin. ˜ Shell holds an 18% interest in Brazil Companhia de Gas de Sao Paulo ˜ (Comgás), a natural gas distribution company in the state of Sao Paulo. ˜
Rest of South America
Shell also has interests in Argentina, Colombia, French Guiana, Guyana and Venezuela.
LNG supply and shipping
Four operations aim to secure LNG supplies for downstream natural gas markets: Shell Western LNG; Shell Eastern LNG; Shell International Trading Middle East LNG; and Shell North American LNG (all Shell interests 100%). These operations primarily use ships (currently a fleet of eight, of which one is on long-term-charter to a third party) which have been acquired, leased or chartered by Shell Tankers Singapore Ltd., Shell Tankers (UK) Ltd and Shell Bermuda (Overseas) Ltd. All of the five Shell owned LNG vessels in the shipping fleet are managed by Shell International Trading and Shipping Company Ltd.
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SU MMARY OF OI L A N D G A S R E SE RV E S FOR S HE L L S U B S I D IA RI E S AN D SH E L L SH A RE OF E QU I T Y- A C COU N T E D I N V E S T ME N T S AT DE CE MB E R 3 1 , 2 0 0 9 [ A]
BASED ON AVERAGE PRICES FOR 2009
Oil and natural gas liquids million barrels Proved developed Europe Asia Australia/Oceania Africa North America USA Canada South America Proved undeveloped Europe Asia Australia/Oceania Africa North America USA Canada South America Total proved developed and undeveloped Europe Asia Australia/Oceania Africa North America USA Canada South America Total 393 761 79 379 465 23 52 133 1,069 56 356 245 15 5
Natural gas thousand million scf 12,306 4,391 1,400 957 1,304 754 178 3,529 15,421 5,232 2,081 1,019 418 65
Synthetic crude oil million barrels
Bitumen million barrels
Total all products million boe 2,515 1,518 320 544 690 873 83 741 3,728 958 715 421 1,023 16
691
29
908
28
526 1,830 135 735 710 38 57 4,031
15,835 19,812 6,632 3,038 2,323 1,172 243 49,055
3,256 5,246 1,278 1,259 1,111 1,896 99 14,145
1,599 1,599
57 57
[A] Including minority interest. Natural gas has been converted to an oil equivalent basis at 5,800 scf per barrel.
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
LO CATI ON OF OI L AN D G A S PRO DU CI N G ACTI VITI E S (AT D ECE MBER 31, 2009 ) [A]
CA PITAL E X PE N D I T U RE ON O I L AN D G A S ACT I V I TI E S AN D E X PL O RATI ON E X PE N S E OF S HE L L SU BS ID I A R IE S BY G E O GR APHI CA L ARE A [A] $ MILLION
Exploration Europe Denmark Germany Ireland Italy The Netherlands Norway Sweden UK Ukraine Asia Brunei China Iran Jordan Kazakhstan Malaysia Oman Pakistan Philippines Qatar Russia Saudi Arabia Syria United Arab Emirates Australia/Oceania Australia New Zealand Africa Algeria Cameroon Egypt Gabon Libya Nigeria Tunisia North America USA Canada South America Argentina Brazil Colombia Guyana Venezuela
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
Development and/or production
m m m m m m m
Shell operator
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
2009 2008 2,618 2,818 4,539 969 2,351 4,114 4,305 537 19,433 4,633 698 1,824 5,597 6,854 955 23,379
2007 2,767 4,014 488 2,209 3,873 1,298 189 14,838
m m m m m
[A] Capital expenditure is the cost of acquiring property, plant and equipment for exploration and production activities, and – following the successful efforts method in accounting for exploration costs – includes exploration drilling costs capitalised pending determination of commercial reserves. In the case of major capital projects, the related interest cost is included until these are placed in service. Exploration expense is the cost of geological and geophysical surveys and of other exploratory work charged to income as incurred. Exploration expense excludes depreciation and release of currency translation differences. Includes synthetic crude oil activities ($3,133 million).
m m m
m m m
m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m
O IL AN D G AS AVE RA GE I N DU STRY PRI CE S
2009 Brent ($/b) [A] WTI ($/b) [A] Henry Hub ($/MMBtu) UK National Balancing Point (pence/therm) 61.55 61.75 3.90 30.93
2008 97.14 99.72 8.85 58.06
2007 72.45 72.16 6.94 30.01
[A] Average industry prices differ from realised prices because the quality, and therefore the price, of actual crude oil produced differs from the blends used for market pricing purposes or quoted blends.
m
[A] Including equity-accounted investments. Where an equity-accounted investment has properties outside its base country, those properties are not shown in this table. In several countries where “Shell operator” is indicated, Shell is the operator of some but not all exploration and/or production ventures.
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31
Average realised price by geographical area
OI L AN D N ATU RAL GA S L IQ U I DS $/BARREL
2009 Shell share of Shell subsidiaries 55.53 57.50 50.47 61.45 57.25 39.26 57.76 57.39 equity-accounted investments 56.97 36.53 56.16 [A] – 56.24 – 58.00 42.49 Shell subsidiaries 89.28 95.92 85.92 98.52 97.95 67.07 79.42 92.75
2008 Shell share of equity-accounted investments 86.33 49.78 99.99 [A] – 89.74 – 82.25 63.59 Shell subsidiaries 68.45 67.49 72.70 72.92 66.49 50.27 63.09 67.99
2007 Shell share of equity-accounted investments 73.12 53.53 78.29 [A] – 64.45 – 71.21 59.23
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate. Includes bitumen.
NATURAL G AS
$/SCF
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
Shell subsidiaries 7.06 3.61 5.29 1.71 4.36 3.73 3.18 4.83
2009 Shell share of equity-accounted investments 8.17 4.26 3.94 [A] – 5.02 – – 6.73
Shell subsidiaries 9.46 4.67 2.96 1.67 9.61 7.71 4.37 6.85
2008 Shell share of equity-accounted investments 10.87 7.06 4.13 [A] – 12.15 – – 9.63
Shell subsidiaries 7.24 3.46 2.22 1.20 7.23 5.90 3.58 5.14
2007 Shell share of equity-accounted investments 8.54 3.15 1.81 [A] – 9.85 – – 6.83
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate.
SY N TH E TI C CRU DE O I L
$/BARREL
North America – Canada
2009 Shell subsidiaries 56.23
BITUMEN
$/BARREL
2009 Shell North America – Canada subsidiaries 50.00
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Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
Average production costs by geographical area
OI L , N ATU R AL G AS L I Q U I DS AN D N AT U RAL G A S [A ] $/BOE
2009 Shell share of Shell subsidiaries 11.91 5.86 3.63 9.71 12.11 16.63 12.94 9.88 equity-accounted investments 3.18 5.44 5.59 – 15.74 – 12.75 5.72 Shell subsidiaries 9.25 7.01 3.41 7.53 9.54 17.67 10.76 8.61
2008 Shell share of equity-accounted investments 3.41 4.99 3.40 – 18.46 – 11.26 5.67 Shell subsidiaries 9.15 7.20 2.64 7.62 7.88 15.43 11.09 8.19
2007 Shell share of equity-accounted investments 3.58 3.75 3.23 – 15.15 – 10.54 4.95
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
[A] Natural gas has been converted to oil equivalent using a factor of 5,800 scf per barrel. Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the number is an estimate.
S Y N TH E T IC CR U D E OI L
$/BARREL
North America – Canada
2009 Shell subsidiaries 39.83
BITUMEN
$/BARREL
2009 Shell subsidiaries North America – Canada 18.32
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Oil and gas production (available for sale)
CRUDE OIL AND N ATURA L GAS LIQUIDS PRODUCTION [ A] THOUSAND B/D
2009 Shell share of Shell subsidiaries Europe UK Denmark Norway Italy The Netherlands Germany Total Europe Asia Oman United Arab Emirates Russia Brunei Malaysia Syria China Iran Philippines Others Total Asia Australia/Oceania Australia New Zealand Total Australia/Oceania Africa Nigeria Gabon Cameroon Egypt Total Africa North America USA Canada Total North America South America Brazil Others Total South America Total 110 107 62 30 – 3 312 195 – – 2 39 22 11 5 4 – 278 18 12 30 231 29 12 12 284 195 20 215 24 1 25 1,144 equity-accounted investments – – – – 5 – 5 – 127 106 76 – – – – – 1 310 35 – 35 – – – – – 78 – 78 – 9 9 437 Shell subsidiaries 154 114 67 32 – 3 370 192 – – 1 38 22 14 10 5 – 282 17 12 29 266 30 13 9 318 190 46 236 23 1 24 1,259
2008 Shell share of equity-accounted investments – – – – 5 – 5 – 146 70 80 – – – – – 1 297 39 – 39 – – – – – 82 – 82 – 11 11 434 Shell subsidiaries 183 126 69 35 – 4 417 191 – – 2 42 24 17 10 5 – 291 25 13 38 287 31 14 10 342 238 47 285 22 1 23 1,396
2007 Shell share of equity-accounted investments – – – – 6 – 6 – 146 51 90 – – – – – 1 288 33 – 33 – – – – – 86 – 86 – 9 9 422
[A] Includes natural gas liquids. Royalty purchases are excluded. In those countries where PSCs operate, the figures shown represent the entitlement of the subsidiaries concerned under those contracts. Includes bitumen production.
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NATURA L G AS PRODUCTION [ A]
MILLION SCF/DAY
Shell subsidiaries Europe The Netherlands Norway UK Denmark Germany Italy Others Total Europe Asia Malaysia Brunei China Russia Philippines Syria Others Total Asia Australia/Oceania Australia New Zealand Total Australia/Oceania Africa Nigeria Egypt Total Africa North America USA Canada Total North America South America Brazil Others Total South America Total – 593 561 335 311 31 – 1,831 886 44 257 – 121 4 92 1,404 383 218 601 292 163 455 1,055 530 1,585 18 63 81 5,957
2009 Shell share of equity-accounted investments 1,639 – – – – – – 1,639 – 473 – 192 – – – 665 216 – 216 – – – 6 – 6 – – – 2,526
Shell subsidiaries – 492 678 406 333 29 – 1,938 874 51 231 – 113 6 86 1,361 345 216 561 552 145 697 1,048 406 1,454 33 65 98 6,109
2008 Shell share of equity-accounted investments 1,741 – – – – – – 1,741 – 499 – – – – – 499 215 – 215 – – – 5 – 5 – – – 2,460
Shell subsidiaries – 357 663 369 390 34 – 1,813 865 47 106 – 109 7 76 1,210 339 230 569 584 167 751 1,124 402 1,526 35 58 93 5,962
2007 Shell share of equity-accounted investments 1,518 – – – – – 19 1,537 – 506 – – – – – 506 203 – 203 – – – 6 – 6 – – – 2,252
[A] In those countries where PSCs operate, the figures shown represent the entitlements of the companies concerned under those contracts.
SYN TH E TIC CR U DE OIL PRO DUCTION
THOUSAND B/D
North America – Canada
2009 Shell subsidiaries 80
BITUMEN PR ODUCTION
THOUSAND B/D
2009 Shell North America – Canada subsidiaries 19
MI N E D OI L S A N DS PRO D U CTI ON
THOUSAND B/D
Athabasca Oil Sands Project after royalties
2008 78
2007 81
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35
OI L AN D GA S ACR E AG E [A] (AT D E CE MBE R 31)
THOUSAND ACRES
Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total
Developed Gross Net 9,045 2,592 30,969 2,276 7,393 1,030 966 126 51,805 11,108 568 2,615 597 628 59 18,167
2009 Undeveloped Gross Net 9,770 3,653 78,382 82,945 27,096 6,250 26,712 18,081 249,236 40,547 24,326 18,656 5,027 19,448 7,178 118,835
Developed Gross Net 9,646 2,785 31,252 2,146 7,314 1,009 1,025 115 52,507 11,260 552 2,582 593 707 53 18,532
2008 Undeveloped Gross Net 8,924 3,038 74,749 79,548 26,959 6,238 27,792 4,387 228,597 36,811 23,052 20,290 4,973 19,546 1,877 109,586
Developed Gross Net 10,253 2,894 32,677 2,013 7,568 1,067 803 114 54,495 11,971 516 2,709 620 544 54 19,308
2007 Undeveloped Gross Net 10,384 3,007 76,890 82,560 38,203 4,825 27,409 4,387 244,658 32,269 20,791 24,079 3,542 19,200 1,877 104,765
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
N U M B E R OF PRO DU CT IV E W E L L S [ A] ( AT D EC EMBER 3 1)
Gross Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total 1,544 6,751 39 1,150 15,425 446 72 25,427
Oil Net 423 2,250 6 415 7,835 382 32 11,343
Gross 1,343 207 566 80 1,640 947 12 4,795
2009 Gas Net 446 99 122 53 1,170 713 5 2,608
Gross 1,569 6,043 42 1,163 15,505 429 68 24,819
Oil Net 422 2,038 9 420 7,828 365 29 11,111
Gross 1,323 200 319 79 1,412 888 12 4,233
2008 Gas Net 440 95 60 49 1,037 665 5 2,351
Gross 1,638 5,652 31 1,028 15,493 360 67 24,269
Oil Net 427 1,906 7 374 7,825 303 29 10,871
Gross 1,334 178 116 71 1,040 339 12 3,090
2007 Gas Net 452 85 34 47 765 262 6 1,651
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
N U M B E R OF N E T PRO DU CTIVE W E L L S A N D DRY H OL E S DRI L L E D
Productive Exploratory Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Development Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total 6 38 24 8 49 32 1 158 15 260 27 12 424 45 5 788
2009 Dry 3 10 3 4 2 19 – 41 – 3 – 1 1 – – 5
Productive 9 27 6 13 13 41 3 112 7 210 3 17 475 59 2 773
2008 Dry 3 4 2 4 4 46 1 64 1 1 – 1 1 – – 4
Productive 10 41 3 11 23 50 1 139 18 185 3 22 475 42 2 747
2007 Dry 1 7 8 6 3 10 1 36 1 2 – – 2 – – 5
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N U MBE R OF W E LL S I N THE PR OCE S S OF E XP LOR ATORY DRI LL I N G [A] [C ][ D]
2009
Wells in the process of Wells in the process of drilling at January 1 and drilling at January 1 and determined as dry allocated proved during the year At January 1 reserves during the year Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net 33 11 54 19 56 11 42 27 54 24 77 73 17 8 333 173 (7) (2) (6) (1) (18) (3) (15) (11) (11) (6) (26) (23) (6) (3) (89) (49) (4) (1) (6) (3) (2) – (13) (9) – – (3) (3) (1) – (29) (16)
New wells in the process of drilling at December 31 12 5 25 11 116 22 8 6 73 45 11 11 2 1 247 101
At December 31 34 13 67 26 152 30 22 13 116 63 59 58 12 6 462 209
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest. [C] Wells in the process of drilling includes exploratory wells temporarily suspended. [D] In addition to the present activities above Shell has on going activities related to the installation of waterflood projects in Europe, Asia and North America; activities related to steam floods are in progress in Europe, Asia and North America and gas compression is being installed in Europe.
N U MBE R OF W E L L S I N T HE PR OCE S S OF DE V E L OPME N T D RI L L I N G [A ][ B]
2009
At January 1 Europe Asia Australia/Oceania Africa North America – USA North America – Canada South America Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net 23 4 65 29 5 1 5 2 90 47 12 11 – – 200 94
At December 31 16 3 69 22 28 6 3 1 100 47 41 34 1 1 258 114
[A] Including equity-accounted investments. The term “gross” relates to the total activity in which Shell subsidiaries and equity-accounted investments have an interest, and the term “net” relates to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interest.
Shell Annual Report and Form 20-F 2009 Business Review ? Upstream
37
SH E L L IN T E RE S T I N L N G L I QU E FA CT I ON PL A N T CA PA CI TY (AT D ECE MBER 31, 2009 )
Australia North West Shelf Brunei LNG Malaysia LNG (Dua and Tiga) Nigeria LNG Oman LNG Qalhat (Oman) LNG Sakhalin LNG [A] As reported by the operator. Our interests in the Dua and Tiga plants are due to expire in 2015 and 2023 respectively.
Location Karratha Lumut Bintulu Bonny Sur Sur Prigorodnoye
Shell interest (%) 22 25 15 26 30 11 27.5
100% capacity (mtpa) [A] 16.3 7.8 14.6 21.6 7.1 3.7 9.6
LN G L I QUE FACTIO N PLA N T CAPA CITY UN DE R CO N S TR U CTIO N (AT DE CE MBER 31, 2009 )
Location Australia Pluto 1 Gorgon Qatargas 4 [A] As reported by the operator. Based on 90% Woodside shareholding in the Pluto 1 plant. Karratha Barrow Island Ras Laffan
Shell interest (%) 31 25 30
100% capacity (mtpa) [A] 4.3 15.3 7.8
L N G R E GA SI F I CATI ON TE R MI N A L CA PA CI T Y (AT D E CEMBE R 31, 2 009)
Huelva Barcelona Hazira Altamira Cove Point Costa Azul Elba Island Elba Expansion
Location Huelva, Spain Barcelona, Spain Gujarat, India Altamira, Mexico Lusby, MD, USA Baja California, Mexico Elba Island, GA, USA Elba Island, GA, USA
Shell capacity rights (mtpa) 0.3 [A] 0.9 [A] 2.2 3.3 1.8 2.9 2.8 4.2
Capacity right period 2001-2009 2005-2020 from 2005 from 2006 2003-2023 2008-2028 2006-2036 2010-2035
Status In operation In operation In operation In operation In operation In operation In operation In construction
Start-up date 1988 1969 2005 2006 2003 2008 2006 2010
[A] Capacity rights as at end 2009, which will change over capacity right period. Capacity leased to third party until 2010.
G TL PL A N T S (AT D EC EMBER 31 , 200 9)
Bintulu Pearl Train 1 Pearl Train 2
Location Malaysia Qatar Qatar
Shell interest (%) 72 100 100
100% capacity (b/d) 14,700 70,000 70,000
Status In operation In construction In construction
L N G G AS CARR IE RS [ A] (AT D EC EMBER 31 )
Contract Owned/demise-hire (LNG) Time-charter (LNG) Total [A] Excludes LNG ships owned or chartered by LNG joint ventures. Three of these ships were on flexible charter based on market demand.
2009 5 3 8
2008 5 4 9
number of ships 2007 6 5 11
2009 657 427 1,084
thousand cubic metres 2008 2007 657 797 566 849 1,233 1,646
38
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
DOWNSTREAM
K E Y STAT I ST I CS $ MILLION
remainder of this section pertains to earnings excluding the oil-price effect on inventory. Our 2009 Refining earnings were significantly below those of 2008, due to substantially lower industry and realised refining margins worldwide. Weak margins were the result of lower demand, industrywide excess inventory and new industry refining capacity, which was brought on-stream. In addition, Refining earnings were impacted by asset impairments and redundancy and restructuring provisions. Marketing earnings related to oil products decreased compared with 2008, due to lower marketing sales volumes and lower Retail and B2B margins, which were partly offset by higher Lubricants margins. These earnings were further reduced by redundancy and restructuring provisions as well as impairments. Earnings from trading activities were higher than in 2008 as the market remained in a contango structure (forward prices higher than current spot prices) throughout most of the year and benefited from storage opportunities and arbitrage opportunities (the pricing difference between markets). Earnings in Chemicals were higher than in 2008 due to higher income from equity-accounted investments and higher divestment gains, which were partly offset by lower realised margins and lower sales volumes. Downstream earnings in 2009 included net charges of $1,682 million reflecting asset impairments mainly relating to refining assets, redundancy and restructuring provisions, a charge related to the estimated fair value accounting of commodity derivatives, non-cash pension charges, a charge related to a retirement healthcare-plan modification and other provisions. These charges were partly offset by tax credits and gains from divestments, including benefits from the sale of our share in a bitumen joint venture in Australia and 49% of our shares in two petrochemical joint ventures in Singapore. In 2009, revenues decreased by $162,451 million compared with 2008, reflecting lower average oil prices in 2009 and lower sales volumes due to weak demand. Production and manufacturing expenses in 2009 decreased by $396 million compared with those of 2008. The decrease was driven by the sale of our French refineries in 2008, the impact of lower refinery intakes and sales volumes on processing fees and transport costs and the effect of a stronger US dollar on non-dollar denominated costs. These cost-decreasing factors were partly offset by the impact of higher redundancy and restructuring provisions. Selling, distribution and administrative expenses increased between 2008 and 2009 as a result of significantly higher pension charges and redundancy provisions associated with structural cost reduction actions, which outweighed the impact of ongoing cost reductions and the effect of a stronger US dollar on non-dollar denominated costs. Depreciation, depletion and amortisation increased by $825 million compared with the same period a year ago, largely because of impairments. After taking into account the impact of rising oil prices on inventory, our share of profit from equity-accounted investments decreased in 2009 compared with 2008, primarily as a result of significantly lower refining margins. This was partly offset by higher income in the Chemicals business.
2009 Revenue (including inter-segment sales) Segment earnings Including: Production and manufacturing expenses Selling, distribution and administrative expenses Depreciation, depletion and amortisation Share of profit of equity-accounted investments Capital investment Refinery availability (%) Chemical plant availability (%) Refinery processing intake (thousand boe/d) Oil products sales volumes (thousand b/d) Chemicals sales volumes (thousand tonnes) 250,362 3,054
2008 412,813 39
2007 324,280 12,445
11,829 14,505 4,399 1,110 7,510 93 92 3,067 6,156 18,311
12,225 14,451 3,574 17 6,036 91 94 3,388 6,568 20,327
10,546 13,858 3,106 2,904 5,295 91 93 3,779 6,625 22,555
Overview
Shell’s Downstream organisation is made up of a number of different businesses. Collectively these turn crude oil into a range of refined products, which are moved and marketed around the world for domestic, industrial and transport use. These include gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants and bitumen. In addition, we produce and sell petrochemicals for industrial use worldwide. Our Manufacturing business includes Refining, Supply and Distribution. Marketing includes our Retail, Business to Business (B2B), Lubricants, Alternative Energies and CO2 businesses. Our Chemicals business has dedicated Manufacturing and Marketing units of its own. We also trade crude oil, oil products and petrochemicals primarily to optimise feedstock for our Manufacturing business and to supply our Marketing businesses. Shell’s Downstream businesses have faced a very difficult operating environment during 2009 as a result of the global economic downturn, weak demand and rising oil prices. At the same time, some 2 million barrels per day of new refining capacity came on line in 2009, further impacting the already existing excess supply in the market at a time when industry-wide inventories were at high levels.
Earnings 2009-2007
Segment earnings in 2009 were $3,054 million, compared with $39 million in 2008 and $12,445 million in 2007. In 2009, segment earnings were estimated to be positively impacted by rising oil prices on our inventory by $2,796 million (a negative impact of $5,270 million in 2008 and a positive impact of $3,857 million in 2007). This impact is caused by the price difference between the purchase date of oil for conversion and products and the date of sale of the product. The prices of our purchases and sales are both linked to the oil prices at the transaction date. In a rising oil price environment the purchase is made at a lower price when compared to a higher price at the moment of the sale. In 2009, after taking into account the impact of rising oil prices on our inventory, earnings fell by 95% from 2008. The discussion in the
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
39
Refinery processing intake in 2009 declined 9% from 2008 despite improved availability, reflecting reduced run rates due to weak demand, new industry capacity brought on-stream and the sale of the French refineries in the first quarter of 2008. Total oil products sales volumes in 2009 were 6% lower than in 2008. Oil products marketing sales volumes (adjusted for the impact of divestments) dropped by some 3%, mainly because of lower B2B volumes, partly offset by increased Retail sales volumes. In 2009, Chemical sales volumes decreased by 10% compared with those of 2008, primarily due to lower demand resulting from the global economic downturn. In 2008, segment earnings were adversely impacted by falling oil prices on inventory by $5,270 million. In 2007, earnings benefited from the impact of increasing oil prices on inventory by $3,857 million. In 2008, after taking into account the impact of falling oil prices on our inventory, earnings fell by 38% from 2007. Our 2008 Refining earnings were lower than those of 2007 due to lower realised margins in the USA, which were partly offset by higher realised margins in Europe and the Asia-Pacific region. Additionally, 2008 refining earnings were adversely impacted by higher unplanned downtime (6.5% compared with 5.7% in 2007), which included the hurricane impact in the US Gulf Coast region, as well as currencyexchange impacts and higher operating costs compared with those of 2007. Marketing earnings in 2008 related to oil products increased (excluding impairments) on the basis of higher Retail, B2B and Base Oil Lubricants margins. Higher margins were partly offset by lower sales volumes relative to 2007 and currency-exchange impacts. Earnings from trading activities in 2008 were higher than in 2007, driven by the return of more favourable trading conditions during the year as the market shifted back into contango and trading benefited from arbitrage opportunities. In 2008, Chemicals earnings were lower relative to 2007, reflecting significantly lower margins (particularly in the USA), volume decline, lower income from equity-accounted investments and higher operating expenses. Downstream earnings in 2008 included net charges of $435 million relating to impairments, provisions and a charge related to the estimated fair value accounting of commodity derivatives. These were partly offset by gains from divestments, including the sale of our refineries in France and the Dominican Republic, as well as by tax credits and pension accounting adjustments. In 2008, Downstream revenue increased by $88,533 million compared with 2007, reflecting higher average oil prices in 2008. Production and manufacturing expenses increased by $1,679 million relative to 2007, largely because of increased refinery maintenance costs, higher energy-related costs, increased trading expenses and the effect of a weaker US dollar on non-dollar denominated costs. Selling, distribution and administrative expenses increased by $593 million between 2007 and 2008 as a result of higher energyrelated distribution costs, higher corporate and functional costs, additional costs related to governance changes (Canada and
Alternative Energy) and the effect of a weaker US dollar on non-dollar denominated costs. Depreciation, depletion and amortisation in 2008 increased by $468 million, largely because of impairments. In 2008, after taking into account the impact of falling oil prices on inventory, our share of profit from equity-accounted investments decreased from 2007, mainly due to lower income from Motiva and Deer Park as a result of lower industry refining margins in the USA and the impact of hurricanes in the US Gulf Coast. We also obtained lower income from the Nanhai chemical plant in 2008 because of weakened demand and higher feedstock costs. Refinery processing intake declined in 2008 by around 10% relative to 2007, reflecting the sale of our French refineries and higher unplanned outages. Total oil products sales volumes in 2008 were 1% lower than in 2007. Adjusted for the impact of divestments, oil products marketing sales volumes were in line with those in 2007. In 2008, Chemical sales volumes fell by 10% from the levels of 2007, largely due to the performance of our base chemicals business in the USA.
Capital investment and portfolio actions
Capital investment was $7.5 billion in 2009, of which $4.4 billion was in Manufacturing, $1.7 billion was in Marketing and $1.4 billion was new equity and loans in equity-accounted investments. Around 62% of our 2009 capital expenditure was to maintain integrity and performance of our asset base; a slightly higher percentage than the 2007-2009 average of around 57%. Investments were aligned with the strategy of selective growth, portfolio concentration and operational excellence. The two main growth investments are the expansion of the Port Arthur refinery in Texas and the Shell Eastern Petrochemicals Complex (SEPL) in Singapore. During 2009, the monoethylene glycol unit within the SEPL started up successfully. Shell also started construction of a new hydrodesulphurisation plant at the Pernis refinery in the Netherlands to manufacture cleaner-burning oil products. In the Marketing businesses, we continued to invest in selected markets such as Germany and China in our Retail business, and in China and Russia to grow our Lubricants business. Several developments in 2009 led to the concentration of our global Downstream portfolio. Shell agreed to sell its Downstream businesses in Greece. The retail network will continue to operate under the Shell brand. This transaction is subject to regulatory approvals. Shell sold 49% of its interest in Petrochemical Corporation of Singapore and in The Polyolefin Company to Qatar Petroleum International. In Canada, Shell announced the decision to convert the Montreal East Refinery into a terminal for distribution of gasoline, diesel and aviation fuels.
40
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
In Australia and New Zealand, Shell announced the sale of its share in two bitumen joint ventures. The sale will be concluded in several phases and finalised by 2014. The portfolio concentration will continue. Some 15% of Shell’s worldwide refining capacity – some 560 thousand barrels per day – is under review for possible disposal, conversion to terminals or closure. In 2008 capital investment was $6.0 billion of which $4.0 billion was in Manufacturing, $1.9 billion was in Marketing and $0.1 billion was new equity and loans in equity-accounted investments. The main investments included expenditure in the fully integrated Shell Eastern Petrochemicals Complex in Singapore and refining investments to maintain the integrity and performance of the asset base. Retail investments included upgrades in selected European markets and growth in Asia, while Lubricants investments prioritised growth in the East.
145 billion litres of fuel in 2009. With more than 100 years of experience in fuel development we believe we are a leading provider of innovative fuels. Differentiated fuels with special formulations designed to clean engines and improve performance are available in more than 60 countries under the Shell V-Power brand. Our Fuel Economy formula for gasoline and diesel is now available in nearly 30 countries, including the new Shell FuelSave brand recently introduced in 5 countries. Our 2009 global customer tracker survey ranked Shell number one globally as the preferred global brand of service stations.
Lubricants
Outlook
Industry refining margins in 2010 are likely to remain fundamentally weak because of the expected ongoing global excess product inventory, particularly for middle distillates. Margins may recover slightly in the latter half of 2010, as increased demand for middle distillates might coincide with further improvement in the global economy. However, the overall strengthening of margins is likely to be tempered by the large excess refinery capacity. The eventual margin level will be influenced by the pace of the global economic recovery, the extent of refinery rationalisation in the face of weak margins and the pace of new refining capacity start-ups in China, India and the USA. The growth of demand for petrochemicals in 2010 is expected to be in line with GDP growth. Sizeable cracker capacity expansion projects in the Middle East and China, delayed during 2009, are expected to come on-stream. They will be joining other expansions that were scheduled for 2010. Cracker capacity is expected to increase at a rate twice that of demand growth, placing significant pressure on loading rates and margins during the year.
Shell Lubricants sells more branded lubricants than any other lubricants manufacturer and is also the largest marketer of lubricants overall, with a 13% share of the global finished lubricants market in volume terms (2008). We sell technically advanced lubricant products to customers across the transport sector for passenger cars, trucks and coaches, as well as in manufacturing, mining, power generation, agriculture and construction industries. Our products are available in around 100 countries.
Business to Business (B2B)
B2B sells fuels and speciality products and services to a broad range of commercial customers and consists of six separate businesses:
Shell Aviation provides fuel every day at over 850 airports across some 55 countries, for more than 7,000 aircraft, refuelling a plane every 12 seconds. Shell Marine Products
provides fuels, lubricants and related technical services to the marine industry. We supply over 100 grades of marine lubricants and 20 different types of marine fuel for vessels powered by diesel, steam and gas turbine engines. We serve more than 15,000 customer vessels, ranging from large ocean going tankers to small fishing boats in more than 600 ports in 49 countries.
Shell Gas (LPG)
provides liquefied petroleum gas and related services in 29 countries to domestic, commercial and industrial customers for activities as diverse as transport, cooking, heating, and lighting applications.
Business and property
MANUFACTU RIN G Refining Shell Commercial Fuels provides transport, industrial and heating fuels and related services to more than 200,000 customers in more than 40 countries. Our Commercial Road Transport business supplies road haulage and bus companies worldwide through a global network of sites and offers payment through Shell’s card system. More than 500,000 fuel cards are in operation. Shell Bitumen
We have interests in more than 35 refineries worldwide with the capacity to process some 4 million barrels of crude oil per day. Our refining portfolio is global with approximately 40% of our refining capacity in Europe and Africa, 30% in the Americas and 30% in AsiaPacific. Our refineries make a wide range of products including gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, liquefied petroleum gas and sulphur.
Supply and Distribution
With 9,000 kilometres of pipeline, more than 2,500 storage tanks and some 250 distribution facilities in around 60 countries, our Supply and Distribution infrastructure is well positioned for global delivery. Deliveries include feedstocks for Shell refineries and finished products for Shell’s Downstream marketing businesses and customers worldwide.
MARKETING Retail
supplies around 11,000 tonnes of bitumen products every day to some 1,600 customers worldwide; the equivalent of resurfacing one kilometre of road every four minutes. Shell Bitumen continues to grow in key markets, most notably in the paving solutions and airport sectors. We are also developing innovative products like Warm Asphalt Mix and Shell Floraphalte that can be mixed and laid at lower temperatures to reduce energy use and carbon dioxide emissions.
Shell Sulphur Solutions
develops sulphur products that provide innovative uses for sulphur, a natural by-product of oil and gas processing. These include Shell Thiopave, a paving solution that can prolong road life; Shell Thiocrete, a highly durable, fast-setting concrete; and Shell Thiogro, a new family of fertilisers to enhance crop yields in sulphur-responsive soils.
The Shell branded fuels retail network is the world’s largest with around 44,000 service stations in more than 80 countries, selling more than
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
41
Alternative Energies and CO 2
Shell Alternative Energies investigates and develops alternative energy technologies with a long-term aspiration to develop business opportunities. Our focus is on biofuels. Shell is building capacity in conventional biofuels that meet our corporate and social responsibility and is researching advanced biofuels technologies. We also continue to evaluate and explore the potential of hydrogen as an alternative energy carrier for the longer term. Shell CO2 is responsible for coordinating and driving CO2 management activities across the company.
CHEMICALS Manufacturing
OI L PRODUCTS – CO ST OF CRU DE O I L PRO CE SS E D OR CO N S U ME D [A ]
$ PER BARREL
Total
2009 58.96
2008 94.05
2007 71.83
[A] Includes Upstream margin on crude supplied by Shell and equity-accounted investment exploration and production companies.
OPE R ABL E CRU DE OI L DI STI L LATIO N CAPA CI TY [A ]
THOUSAND BARRELS/CALENDAR DAY [C]
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 1,519 935 801 384 3,639
2008 1,601 923 803 351 3,678
2007 1,815 953 835 350 3,953
We have interests in more than 30 chemical manufacturing sites worldwide, including joint ventures. Our chemical manufacturing portfolio produces a range of base chemicals including ethylene, propylene and aromatics, and intermediate chemicals such as styrene monomer, propylene oxide, solvents, detergent alcohols, ethylene oxide and ethylene glycol. Our portfolio has the capacity to produce some 5 million tonnes of ethylene per annum.
Marketing
[A] Shell average operating capacity for the year and excluding mothballed capacity. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil. [C] Calendar day capacity is the maximum sustainable capacity minus capacity loss due to normal unit downtime.
Shell Chemicals sells a range of petrochemicals to industrial customers globally. The products are widely used in plastics, coatings and detergents, which in turn are used in products such as fibres and textiles, thermal and electrical insulation, medical equipment and sterile supplies, computers, vehicles, paints and biodegradable detergents. Chemicals has more than 1,300 major industrial customers across the world, with the 20 largest accounting for about 50% of our third-party sales proceeds. These key customers are major multinational organisations, including many household names, which buy large volumes from us, often across several product areas.
Downstream business activities with Iran
E T HY L E N E CAPA CITY – S HE L L AN D E QUI T Y- ACCO UN TE D I N V E S T ME N T S [A]
2009 Nominal capacity (thousand tonnes/year) Utilisation (%) 5,182 80
2008 5,827 87
2007 6,216 90
[A] Data includes our share of capacity entitlement (offtake rights) that may be different from nominal equity interest. With effect from 2008, we have excluded from our ethylene capacity certain US units which have been taken offline for a long-term or indefinite period. Nominal capacity is quoted as at December 31, 2009. Utilisation is based on the annual average capacity.
In 2009, Shell produced lubricants in Iran through an associate company and sold them through an Iranian joint venture. Through Shell’s trading activities, we purchased crude oil from Iran as part of the optimisation of feedstocks for our refining operations. We also purchased feedstock from Iran for the Nanhai petrochemical facility in China. We sold some refined products and petrochemicals to Iran. Since October 2009 there have been no gasoline sales to Iran. In addition we provided refinery and gas plant consulting advice and services.
OI L PRODUCTS – CRU DE O IL PROCE S S E D [A]
THOUSAND B/D
Europe Africa, Asia, Australia/Oceania USA Other Americas Total Shell share of equity-accounted investments
2009 1,251 523 721 288 2,783 360
2008 1,394 683 751 294 3,122 372
2007 1,644 765 789 299 3,497 392
[A] Including natural gas liquids; includes processing for others and excludes processing by others. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
42
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
RE F I N E RY PROCE S S IN G I N TAK E [A ]
THOUSAND B/D
O IL SA L E S [A]
THOUSAND B/D
Crude oil Feedstocks Total Europe Africa, Asia, Australia/Oceania USA Other Americas Total Metric equivalent (mpta)
2009 2,783 284 3,067 1,330 596 805 336 3,067 153
2008 3,123 265 3,388 1,481 729 826 352 3,388 167
2007 3,496 283 3,779 1,731 811 879 358 3,779 185
Product volumes Europe Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Africa, Asia, Australia/Oceania Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total USA Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Other Americas Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Export sales [C] Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Total product sales Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total
2009 415 198 766 113 145 1,637 394 168 453 101 147 1,263 802 164 183 61 117 1,327 277 78 232 51 58 696 183 133 397 278 242 1,233 2,071 741 2,031 604 709 6,156
2008 408 224 855 193 151 1,831 361 167 456 121 152 1,257 801 175 248 45 133 1,402 270 76 242 58 73 719 211 150 453 325 220 1,359 2,051 792 2,254 742 729 6,568
2007 501 205 834 178 168 1,886 368 168 455 141 151 1,283 851 166 257 39 174 1,487 260 71 242 63 36 672 198 146 507 283 163 1,297 2,178 756 2,295 704 692 6,625
[A] Including crude oil and natural gas liquids plus feedstocks processed in crude oil distillation units and in secondary conversion units. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
RE F I N E RY PROCE S S IN G O U T T U RN [ A]
THOUSAND B/D
Gasolines Kerosines Gas/Diesel oils Fuel oil Other Total
2009 1,179 341 1,025 279 432 3,256
2008 1,229 375 1,145 315 471 3,535
2007 1,363 366 1,190 348 593 3,860
[A] Excluding “own use” and products acquired for blending purposes. One barrel per day is equivalent to approximately 50 tonnes a year, depending on the specific gravity of the crude oil.
[A] Sales figures exclude deliveries to other companies under reciprocal sale and purchase arrangements, which are in the nature of exchanges. Sales of condensate and natural gas liquids are included. Certain contracts are held for trading purposes and reported net rather than gross. The effect in 2009 is a reduction in oil product sales of approximately 739,000 b/d, 698,000 b/d in 2008 and 805,000 b/d in 2007. [C] Export sales as a percentage of total oil sales amounts to 20.0% in 2009, 20.7% in 2008 and 19.6% in 2007.
Shell Annual Report and Form 20-F 2009 Business Review ? Downstream
43
CHE M ICA L S A L E S VOL U ME S B Y M A I N PRODU CT CATE G ORY [A]
OI L TA N K E RS [A] (AT D E CE MBE R 31) THOUSAND TONNES
Base chemicals First-line derivatives Other Total
2009 10,166 8,143 2 18,311
2008 11,573 8,746 8 20,327
2007 12,968 9,577 10 22,555
2009 Owned/demise-hired Large range (45,000 to 160,000 dwt) Medium range (25,000 to 45,000 dwt) General purpose/Specialist (10,000 to 25,000 dwt) Total Time-chartered [C] VLCCs (very large crude carriers over 160,000 dwt) [D] Large range (45,000 to 160,000 dwt) Medium range (25,000 to 45,000 dwt) General purpose/ Specialist (10,000 to 25,000 dwt) Total Total oil tankers Owned/demise-hired under construction or on order 6 1
number of ships 2008 2007 2009
million dwt 2008 2007
7 5
8 5
0.6 0.1
0.6 0.2
0.7 0.2
[A] Excluding volumes sold by equity-accounted investments, chemical feedstock trading and by-products.
CHE M ICA L S A L E S VOL U ME S B Y R E G IO N [A]
THOUSAND TONNES
Europe Africa, Asia, Australia/Oceania USA Other Americas Total
2009 7,386 4,831 5,833 261 18,311
2008 8,472 4,924 6,362 569 20,327
2007 8,908 5,466 7,469 712 22,555
3 10
4 16
4 17
– 0.7
0.1 0.9
0.1 1.0
13 37 7
8 32 13
7 31 14
3.9 2.9 0.3
2.4 2.5 0.5
2.1 2.6 0.5
[A] Excluding volumes sold by equity-accounted investments, chemical feedstock trading and by-products.
15 72 82
26 79 95
25 77 94
0.2 7.3 8.0
0.4 5.8 6.7
0.4 5.6 6.6
–
–
1
–
–
0.1
[A] Oil tankers and ocean going articulated tug barges of 10,000 dwt and above which are owned/chartered by subsidiaries where the equity shareholding is at least 50%. Time-chartered oil tankers include consecutive voyage charters. [C] Contracts of affreightment are not included. [D] Five of the VLCCs are directly manned and managed by subsidiaries.
L PG G A S CAR RI E RS [ A] ( AT D EC EMBER 3 1)
2009 Time-chartered (LPG) 2
number of ships thousand cubic metres 2008 2007 2009 2008 2007 5 3 154 399 212
[A] LPG gas carriers of 10,000 dwt and above which are owned/chartered by subsidiaries where the equity shareholding is at least 50%. See page 37 for LNG gas carriers.
44
Shell Annual Report and Form 20-F 2009 Business Review ? Corporate
CORPORATE
E A RN I N G S $ MILLION
Earnings 2009-2007
Segment earnings were $1,310 million, compared with a $69 million loss in 2008 and earnings of $1,387 million in 2007.
2009 2008 328 (650) 253 (69) 2007 875 205 307 1,387
Interest and investment income/(expense) Currency exchange gains/(losses) Other – including taxation Segment earnings/(losses)
360 644 306 1,310
Overview
The Corporate segment covers the non-operating activities supporting Shell. It includes Shell’s holdings and treasury organisation, its headquarters and central functions as well as its insurance companies. All finance expense and income as well as taxes on these items are included in the Corporate segment earnings rather than in the earnings of the business segments. The Corporate segment earnings also include insurance underwriting results and the functional and service-centre costs that have not been allocated to the other segments. The holdings and treasury organisation manages the financial assets and liabilities of Shell. As the point of contact between Shell and the external capital markets, it conducts a broad range of transactions from raising debt obligations to transacting foreign exchange. Treasury centres in London, Singapore and Rio de Janeiro support these activities. Headquarters and central functions provide business support in the areas of finance, human resources, legal services, corporate affairs, real estate and IT. They also provide support for the shareholder-related activities of the Company. The central functions have been increasingly supported by shared service centres located around the world. These centres process transactions, manage data and produce statutory reports, amongst other services. The majority of the headquarters and central-function costs are recovered from the business segments. Those costs that are not recovered are retained in Corporate. Shell insurance companies provide the worldwide insurance cover required by subsidiaries; cover is also offered to joint ventures in which Shell has an equity interest. The type and extent of the coverage is equal to what is otherwise commercially available. In the case of joint ventures, however, the amount of insurance offered is usually limited to Shell’s interest. During 2009, Shell’s self-insurance activities were consolidated within the corporate segment. As a result, the 2009 earnings before tax of the corporate segment were reduced by $422 million, with no impact on Shell’s income for the period.
Net interest and investment income increased by $32 million between 2008 and 2009. An increase in borrowings resulted in increased interest cost, despite lower interest rates. Capitalised interest consequently increased. Interest income was lower due to lower cash balances and lower interest rates. Between 2007 and 2009, net interest and investment income decreased by $515 million. The main reason for the decrease is that the 2007 earnings included the realisation of $404 million in gains on the sale of the equity portfolio held by the Shell insurance companies. Currency exchange gains of $644 million in 2009 were mainly driven by the depreciation of the US dollar against most other currencies on loan payable balances in operating units with a non-US dollar functional currency. Other earnings increased by $53 million in 2009 compared with 2008, mainly because of tax credits arising from settlement of prior-year tax returns.
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
45
LIQUIDITY AND CAPITAL RESOURCES
Overview
The most significant factors affecting year-to-year comparisons of cash flow provided by operating activities are: changes in realised prices for crude oil and natural gas; crude oil, natural gas, synthetic crude oil and bitumen production levels; refining and marketing margins. These factors also have the most significant influence on income. Acquisitions, divestments and other portfolio changes can affect the comparability of cash flows. Since the contribution of Upstream to earnings is larger than that of Downstream, changes affecting Upstream – particularly changes in realised crude oil and natural gas prices and production levels – have a significant impact on Shell’s cash flow. While Upstream benefits from higher realised crude oil and natural gas prices, the extent of such benefit (and the extent of a detriment from a decline in these prices) is dependent on the extent to which contractual arrangements are tied to market prices; the dynamics of production-sharing contracts; the existence of agreements with governments or national oil companies that have limited sensitivity to crude oil price; tax impacts; the extent to which changes in crude oil price flow through into operating costs; and the impact of natural gas prices. Changes, therefore, in benchmark prices for crude oil and natural gas only provide a broad indicator of changes in the earnings experienced in any particular period by Upstream. In Downstream, changes in any one of a range of factors derived from either within the industry or the broader economic environment can influence margins in the short or long term. The precise impact of any such change at a given point in time is dependent upon other prevailing conditions and the elasticity of the oil markets. The duration and impact of economic dynamics is a function of a number of factors that determine the market response, including whether a change in crude price affects the crude types or only a specific grade; regional and global crude oil and refined products inventory; and the collective speed of response of the industry refiners and product marketers in adjusting their operations. It should be noted that commonly agreed benchmarks for refinery and marketing margins do not exist in the way that Brent and WTI crude oil prices and Henry Hub natural gas prices in the USA serve as benchmarks in the Upstream. In the longer term, replacement of oil and gas reserves will affect the ability of Shell to continue to maintain or increase production levels in Upstream, which in turn will affect our cash flow provided by operating activities and income. We will need to take measures to maintain or increase production levels and cash flows in future periods, which may include developing new fields and mines, continuing to develop and apply new technologies and recovery processes to existing fields and mines, and making selective focused acquisitions. Our goal is to offset declines from production and increase reserves. However, reserves and/or production increases are subject to a variety of risks and other factors, including the uncertainties of exploration, operational interruptions, geology, frontier conditions, availability of new technology and engineering capacity, availability and cost of skilled or specialist resources, project delays and potential cost overruns as well as fiscal, regulatory and political changes. Shell has a diverse portfolio of development projects and exploration opportunities, which may mitigate political and technical risks of Upstream and the associated cash flow provided by operating activities.
It is our intention to continue to divest and, where appropriate, make selective acquisitions as part of active portfolio management. The number of companies or assets divested will depend on market opportunities.
Statement of cash flows
The net cash provided by operating activities amounted to $21.5 billion in 2009, compared with $43.9 billion in 2008 and $34.5 billion in 2007. Lower earnings and an increase in net working capital compared with a decrease in 2008, primarily in relation to our Downstream business, were the main drivers for the decreased net cash from operations in 2009. Net cash used in investing activities was $26.2 billion in 2009, a decrease from $28.9 billion in 2008. The decrease is mainly the result of $8.5 billion lower capital expenditure (investments in projects and acquisitions) while proceeds from sale of assets, equity-accounted investments and financial assets also decreased. In 2007, net cash used in investing activities was $14.6 billion, reflecting lower capital expenditure in combination with higher proceeds from the sale of assets relative to 2008. Net cash used in financing activities decreased to $0.8 billion in 2009 from $9.4 billion in 2008, primarily due to the increase in debt. The difference between the net cash used in financing in 2008 and 2007 relates primarily to the impact of the acquisition of the Shell Canada minority interest in 2007 (see Note 25 to the Consolidated Financial Statements) and the increase in current debt in 2008. Cash and cash equivalents were $9.7 billion at year end compared with $15.2 billion in 2008 and $9.7 billion in 2007.
EX TR ACT FR OM CASH F L OW S TATEMENT [ A] $ BILLION
Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Currency translation differences relating to cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year
2009 21.5 (26.2) (0.8) 0.1 (5.5) 15.2 9.7
2008 43.9 (28.9) (9.4) (0.1) 5.5 9.7 15.2
2007 34.5 (14.6) (19.4) 0.2 0.7 9.0 9.7
[A] For Consolidated Statement of Cash Flows see page 100.
Financial condition and liquidity
Shell’s financial position is strong. In 2009, we generated a ROACE of 8.0% (see page 48) with a year-end gearing ratio of 15.5% (2008: 5.9%) and returned $10.5 billion to our shareholders through dividends. The size and scope of our business requires a robust financial control framework and effective management of our various risk exposures. The international financial markets crisis, followed by the global economic slowdown in late 2008 and in 2009, put significant stress on the business environment in which we operate. As a result, certain risk exposure increased, requiring further financial control measures to be taken, particularly in the area of credit management. The credit crisis affected Shell’s activities most exposed to financial counterparty risk; that is, the credit exposure arising from Shell’s cash deposits, money market funds, foreign exchange and financial instrument trading with financial institutions. Exposure to failed financial counterparties was minimal in 2009 (see Note 23 to the Consolidated Financial Statements).
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Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
As a result of the decrease of the assets in our pension plans during 2008, Shell made significant cash contributions to the plans in 2009, in addition to the regular contributions of $1-2 billion per annum in recent years. In 2010, additional contributions are expected to be paid as well. Total contributions in 2009 amounted to $5.2 billion, while contributions in 2010 are expected to be around $2.1 billion. Additionally, the lower pension asset values at the beginning of 2009 are the main cause of the $2.8 billion increase in the pre-tax pension costs between 2008 and 2009. Note 3 to the Consolidated Financial Statements describes the principal assumptions and Note 18 provides further disclosure on retirement benefits. In all of our businesses – but particularly in chemicals – customers, suppliers, partners and counterparties show signs of financial stress. Entire industrial sectors and countries are under economic strains. Certain joint ventures and associated companies have faced constrained capital markets as well as an increased cost of bank debt. Limited bank and capital funding capacity for lower-rated companies, together with the global economic slowdown, may restrict Shell’s business opportunities, notably in the area of potential divestments. In response to the international credit environment, we continue to take a variety of measures to reduce and diversify risk exposure. These measures include intensified credit analysis and monitoring of trading partners, restricting large-volume trading activities to the highest-rated counterparties, shortening exposure duration, and taking collateral or other security. As Shell’s treasury and trading operations are highly centralised, these measures have proved reasonably effective in controlling credit exposures associated with managing Shell’s substantial cash, foreign exchange and commodity positions. 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. The measures include shortened payment terms, collateral or other security posting and vigorous collections. Cash and cash equivalents amounted to $9.7 billion at the end of 2009 (2008: $15.2 billion). Cash and cash equivalents are held in various currencies but primarily in US dollar, euro and sterling. Total current and non-current debt rose $11.8 billion in the year. Total debt at the end of 2009 amounted to $35.0 billion. The total debt outstanding (excluding leases) at December 31, 2009 will mature as follows: 13% in 2010, 11% in 2011, 10% in 2012, 12% in 2013 and 54% in 2014 and beyond. Shell believes its current working capital is sufficient for its present requirements. Shell currently satisfies its funding and working capital requirements from the cash generated within its business and through the issuance of external debt. Our external debt is principally financed from the international debt capital markets through debt instruments issued under two commercial paper programmes (CP programmes), a euro medium-term note programme (EMTN programme) and a US universal shelf registration (US shelf registration), each guaranteed by Royal Dutch Shell plc. The central debt programmes and facilities consist of: a $10 billion global CP programme, exempt from registration under section 3(a)(3) of the US Securities Act 1933, with maturities not exceeding 270 days; a $10 billion CP programme, exempt from registration under section 4(2) of the US Securities Act 1933, with maturities not exceeding 397 days;
a $25 billion EMTN programme; and an unlimited US shelf registration. Despite an uncertain start to 2009, public debt markets were favourable to high investment grade corporate issuers and Shell successfully accessed the commercial paper markets and issued $18 billion of long-term publicly traded debt during the course of the year comprised of $7.5 billion under the US shelf registration and $10.5 billion under the EMTN programme. All CP, EMTN and US shelf issuances were undertaken by Shell International Finance B.V. (SIF BV), and guaranteed by Royal Dutch Shell plc. Further disclosure on debt issued – including maturity profile and fixed/floating rate characteristics – is included in Note 16 to the Consolidated Financial Statements. Certain joint venture operations are separately financed. Shell currently maintains $2.5 billion of committed bank facilities which, together with internally available liquidity, provides back-up coverage for commercial paper maturing within 30 days. Aside from this facility and certain borrowing in local subsidiaries, Shell does not have committed bank facilities as this is not considered to be a necessary or cost-effective form of financing for Shell, given its size, credit rating and cash-generative nature. The maturity profile of Shell’s outstanding commercial paper is actively managed to ensure that the amount of commercial paper maturing within 30 days remains consistent with the level of supporting liquidity. The committed facilities, which are with a number of international banks, will expire in 2012. Shell expects to be able to renew or increase these facilities on commercially acceptable terms. While Shell is subject to restrictions (such as foreign withholding taxes) on the ability of subsidiaries to transfer funds in the form of cash dividends, loans or advances, such restrictions are not expected to have a material impact on the ability of Shell to meet its cash obligations. The following table sets forth the consolidated unaudited ratio of earnings to fixed charges of Royal Dutch Shell for the years ended December 31, 2005, 2006, 2007, 2008 and 2009.
R AT I O OF E A R N I N G S T O F I X E D CH A RG E S
2009 Ratio of earnings to fixed charges 9.28
2008 20.27
2007 21.43
2006 19.99
2005 23.33
For the purposes of this table, earnings consist of pre-tax income from continuing operations (before adjustment for minority interest and share of profit from equity-accounted investments) plus fixed charges (excluding capitalised interest) less undistributed earnings of equityaccounted investments plus distributed income from equity-accounted investments. Fixed charges consist of expensed and capitalised interest plus interest within rental expenses (for operating leases) plus preference security dividend requirements of subsidiaries. Please refer to Exhibit 7.1 for details concerning the calculation of the ratio of earnings to fixed charges.
Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
47
CAPI TAL I SAT I ON TA BL E
$ MILLION
Dec 31, 2009 Equity attributable to Royal Dutch Shell plc shareholders Current debt Non-current debt [A] Total debt Total capitalisation 136,431 4,171 28,387 32,558 168,989
Dec 31, 2008 127,285 9,497 11,259 20,756 148,041
Guarantees and other off-balance sheet arrangements
Guarantees at December 31, 2009, were $3.3 billion (2008: $3.7 billion), of which $2.5 billion were guarantees of debt of equityaccounted investments (2008: $2.6 billion).
Financial framework
Shell manages its business to deliver strong cash flows to fund investment and growth based on cautious assumptions relating to crude oil prices.
[A] Non-current debt excludes $2.5 billion of certain tolling commitments (2008: $2.5 billion). As of December 31, 2009, Shell had outstanding guarantees of $3.3 billion (2008: $3.7 billion), of which $2.5 billion (2008: $2.6 billion) related to debt of equity-accounted investments. $30.0 billion (2008: $18.6 billion) of debt was unsecured and $5.0 billion (2008: $4.6 billion) was secured.
Share repurchases
During 2009, the Company did not purchase any of its common stock for cancellation. In 2008 101 million shares were purchased for cancellation at a gross cost of $3.6 billion. Share buyback plans will be reviewed periodically, and are subject to market conditions and the capital requirements of Shell. A resolution will be submitted to the 2010 AGM to seek shareholder approval for Shell to make such market purchases of its ordinary shares, together with an explanation that shares so repurchased may, at Shell’s discretion, be either held in treasury or cancelled.
Credit ratings
On September 3, 2009, Standard & Poor’s Ratings Services (S&P) lowered its corporate credit rating for Royal Dutch Shell plc and its related subsidiaries to AA stable outlook from AA+ stable outlook. On November 4, 2009, Moody’s Investors Services (Moody’s) affirmed the Aa1 long-term issuer rating of Royal Dutch Shell plc with stable outlook, as well as the guaranteed programmes/outstanding debt securities of its issuance subsidiary SIF BV. Short-term credit ratings of the CP programmes remain unchanged at Prime-1 and A-1+ from Moody’s and S&P respectively. All central debt programmes and facilities continue to operate under the guarantee of Royal Dutch Shell plc, with all debt issuance in 2009 undertaken by SIF BV.
Contractual obligations
The table below summarises Shell companies’ principal contractual obligations at December 31, 2009 by expected settlement period. The amounts presented have not been offset by any committed third-party revenues in relation to these obligations.
CON T RACTUAL OBL I G AT I ON S $ BILLION
Capital investments and dividends
After servicing outstanding debt, Shell’s first priority for applying its cash is payment of the dividend. Shell’s policy of growing the dividend in US dollar at least in line with inflation over time has changed beginning in 2010. Going forward, the policy will be to grow the dividend in US dollar over time in line with our view of the underlying earnings and cash flow of Shell. When setting the dividend, the Board looks at a range of factors, including the macro environment, the current balance sheet and future investment plans. In addition, Shell may choose to return cash to shareholders through share buybacks, subject to the capital requirements of Shell. Shell’s capital expenditure, exploration expense and new investments in equity-accounted investments decreased by $6.7 billion to $31.7 billion in 2009. Of the total capital investment, $24.0 billion (2008: $32.2 billion; 2007: $21.4 billion) related to Upstream. Downstream accounted for $7.5 billion (2008: $6.0 billion; 2007: $5.3 billion). Capital investment in Corporate was $0.2 billion (2008: $0.2 billion; 2007: $0.4 billion). In March 2007, Shell acquired all remaining shares of Shell Canada that were not already owned by Shell, at a total cost of some $7.1 billion. As from the second quarter 2007, Shell’s Consolidated Financial Statements include the fully consolidated results of Shell Canada with no minority interest impact. In April 2007, Shell completed the divestment to OAO Gazprom of 50% of its stake in the Sakhalin II project in Russia. Shell reduced its stake in the project from 55% to 27.5% for a total sale price of $4.1 billion. Shell’s Consolidated Financial Statements from the second quarter of 2007 include Sakhalin II on an equity-accounted basis, rather than as a subsidiary.
Debt [A] Finance leases Operating
Within 1 year
2/3 years
4/5 years
After 5 years
Total (2010) (2011/2012) (2013/2014) (2015 and after) 30.6 3.8 6.5 6.1 14.2 7.8 0.8 1.3 5.3 74.7 1.2 2.8 50.7 4.5 4.1 183.6
leases [C] 16.4 4.2 Purchase obligations [D] 440.5 131.5 Other long-term contractual liabilities [E] Total 0.8 496.1 140.3
0.4 88.2
0.2 61.0
0.2 206.6
[A] The amounts are the contractual repayments and exclude $4.3 billion of finance lease obligations. See Note 16 to the Consolidated Financial Statements. Includes interest. See Note 16 to the Consolidated Financial Statements. [C] See Note 16 to the Consolidated Financial Statements. [D] Includes all significant items, including fixed or minimum quantities to be purchased; fixed, minimum or any agreement to purchase goods and services that is enforceable, legally binding and specifies variable price provisions; and the approximate timing of the purchase. [E] Includes all obligations included in “Other non-current liabilities” on the Consolidated Balance Sheet that are contractually fixed as to timing and amount. In addition to these amounts, Shell has certain obligations that are not contractually fixed as to timing and amount, including contributions to defined benefit pension plans (see Note 18 to the Consolidated Financial Statements) and obligations associated with decommissioning and restoration (see Note 19 to the Consolidated Financial Statements).
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Shell Annual Report and Form 20-F 2009 Business Review ? Liquidity and capital resources
The table above excludes interest expense related to debt estimated to be $1.3 billion in 2010, $2.2 billion in 2011/2012, $1.7 billion in 2013/2014 and $0.7 billion in 2015 and after (assuming interest rates with respect to variable interest rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table).
Return on average capital employed (ROACE)
ROACE measures the efficiency of Shell’s utilisation of the capital that it employs. In this calculation, ROACE is defined as income for the period adjusted for interest expense, after tax, as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt. The tax rate is derived from calculations at the published segment level.
CAL CU L AT I ON O F R E TU RN ON AVE RAG E CAPI TA L E MPL OY E D (R OAC E)
$ MILLION
Income for the period Interest expense after tax ROACE numerator Capital employed – opening Capital employed – closing Capital employed – average ROACE
2009 12,718 328 13,046 152,135 173,168 162,652 8.0%
2008 26,476 615 27,091 144,067 152,135 148,101 18.3%
2007 31,926 699 32,625 130,718 144,067 137,393 23.7%
Financial information relating to the Royal Dutch Shell Dividend Access Trust
The results of operations and financial position of the Dividend Access Trust are included in the consolidated results of operations and financial position of Royal Dutch Shell. Set out below is certain condensed financial information in respect of the Dividend Access Trust. Separate financial statements for the Dividend Access Trust are also included in this Report. For the years 2009, 2008 and 2007 the Dividend Access Trust recorded income before tax of £2,902 million, £2,277 million and £1,930 million respectively. In each period this reflected the amount of dividends received on the dividend access share. At December 31, 2009, the Dividend Access Trust had total equity of £ Nil (2008: £ Nil; 2007: £ Nil), reflecting cash of £525,602 (2008: £205,518; 2007: £444,639) and unclaimed dividends of £525,602 (2008: £205,518; 2007: £444,639). The Dividend Access Trust only records a liability for an unclaimed dividend, and a corresponding amount of cash, to the extent that cheques expire, which is one year after their issuance, or to the extent that they are returned unpresented.
Shell Annual Report and Form 20-F 2009 Business Review ? Our people
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OUR PEOPLE
Shell employs around 101,000 people in over 90 countries worldwide. Our people ultimately put into practice Shell’s business strategy. They are recruited, trained and remunerated according to a People Strategy based on four priorities: assuring sources of talent now and in the future; strengthening leadership and professionalism; enhancing individual and organisational performance; improving systems and processes. In 2009 our People Strategy remained unchanged, but much of its execution focused on the “Transition 2009” programme, which began in the second quarter of that year.
Diversity and inclusion
Shell continues to promote the integration of diversity and inclusion into our operations and culture. Our intention is to provide equal opportunity in recruitment, career development, promotion, training and reward for all employees. Where existing employees become disabled, our policy is to provide continuing employment and training, wherever practicable. By the end of 2009, the proportion of women in senior positions had risen to 14.0%, compared with 13.6% in 2008. In 37% of the countries, local nationals filled more than half the senior positions, compared with 32% in 2008. Another outcome of our Shell People Survey is the D&I (diversity and inclusion) indicator, a global measure of workplace inclusion. We are pleased to report that we once again saw improvement in this indicator, from 67% in 2008 to 69% in 2009.
Transition 2009
Transition 2009 is intended to help improve our competitive position by building – from the top down – a simpler, leaner organisational structure with clearer accountabilities, enabling more customer focus and faster decision-making. The new top-level organisation structure enabled us to reduce the number of senior management positions by around 20% in July 2009. A broader reorganisation followed, requiring affected employees to re-apply for some 15,000 roles in the restructured businesses and corporate functions. Around 5,000 staff are leaving Shell as a result of this restructuring, mostly in management and non-operational positions. A framework of people principles ensured a consistency of approach towards resourcing the new organisation. The framework also ensured that due regard was given to those whom the reorganisation affected. Appropriate diversity checks were embedded into the Transition 2009 resourcing process to ensure we maintained our focus on gender, ethnicity and local hires throughout the process. Despite staff reductions in 2009, Shell has maintained external recruitment commitments in order to keep our capability to deliver our strategy and plans over time. We continue to transfer work to our growing business service centres around the world.
Employee share plans
There are a number of share-based compensation plans for Shell employees. The principal ones currently operating are discussed below. For information on the share-based compensation plans for Executive Directors, see the Directors’ Remuneration Report on pages 60-75. Under the Performance Share Plan awards are made to some 15,000 employees each year. Some 30,000 employees in 50 countries participate in the Global Employee Share Purchase Plan.
PERFORMANCE SHARE PLAN
Under the terms of the Performance Share Plan (PSP), conditional awards of the Company’s shares are made to employees as part of a long-term incentive plan, which was introduced in 2005. For the PSP awards made in 2005 and 2006, the extent to which the awards vested depended on the total shareholder return (TSR) of Shell compared with four of its main competitors over a three-year performance period. For the PSP awards made in 2007 until 2009, the extent to which the awards vest is determined by two performance conditions. For half of the award the number of shares that may vest depends on the relative TSR measure over the measurement period. The other half of the award will be linked to Shell’s declared Business Performance Factor. None of the awards will result in beneficial ownership until the shares are released. Any shares that vest will be increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date.
RESTRICTED SHARE PLAN
Employee communication and involvement
Two-way communication with our staff – either directly or via staff councils or recognised trade unions – is important to us. The Transition 2009 programme has been communicated via different channels and engagement sessions, including regular letters to staff from the Chief Executive Officer, webcasts, publications and face-to-face gatherings. One of the principal tools by which the effectiveness of our employee communications is assessed is the Shell People Survey. It provides valuable insights into employees’ views, and it has had a consistently high response rate. A key outcome from the Shell People Survey is the employee engagement index, which measures affiliation and commitment to Shell. The average index score in 2009 was 78%, which is an increase of 4 percentage points from the 2008 index score. We encourage safe and confidential reporting of views about our processes and practices. Our global telephone helpline and website enable employees to report breaches of our Code of Conduct and the Shell General Business Principles, confidentially and anonymously (see page 76).
Under the Restricted Share Plan (RSP), awards are made on a highly selective basis to senior staff. Shares are awarded subject to a threeyear retention period. Any shares that vest will be increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date.
GLOBAL EMPLOYEE SHARE PURCHASE PLAN
This plan enables eligible employees in participating countries to make contributions towards the purchase of the Company’s shares at a price which is the lower of the market price on the first trading day of the twelve-months savings cycle or the first trading day of the following cycle, reduced by 15%.
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Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
UK SHARESAVE SCHEME
Eligible employees of participating companies in the UK may participate in the UK Sharesave Scheme. Options are granted over the Company’s shares at prices not less than the market value on a date not normally more than 30 days before the grant date of the option. These options are normally exercisable after completion of a three-year or five-year contractual savings period. Please refer to Note 24 to the Consolidated Financial Statements for a further discussion of the principle Shell share plans.
ENVIRONMENT AND SOCIETY
Our success in business depends on our ability to meet a range of environmental and social challenges. We must show we can operate safely and manage the effect our activities can have on neighbouring communities and society as a whole. If we fail to do this, we may lose opportunities to do business and our reputation as a company may also be harmed. We have standards and processes, controls, incentives and a firm governance structure in place to make sure that our operations manage their impacts. The Shell General Business Principles include a commitment to sustainable development that involves integrating economic, environmental and social aspects into our business decisions. Detailed 2009 environmental and social performance data will be published in May 2010 the Shell’s Sustainability Report.
Employee data
See Note 6 to the Consolidated Financial Statements for employee data.
Safety
Maintaining the safety and reliability of our operations – such as refineries, chemicals plants, exploration and production projects – is critical to our ability to sustain a licence to operate and to form joint ventures with other companies, including national oil companies. We continued to invest in process safety during the economic downturn to maintain the safety of our operations. During 2009, we launched a set of 12 Life-Saving Rules across Shell to reinforce our drive towards zero fatalities and injuries by specifically addressing work activities posing the greatest risks to life.
Climate change
The need to manage carbon dioxide (CO2) emissions – the most significant greenhouse gas (GHG) – will become increasingly important as concerns over climate change lead to tighter environmental regulations. Governments at the UN conference on climate change in Copenhagen at the end of 2009 agreed to continue working towards deep cuts in the growth of GHG emissions. Shell already assesses potential costs associated with CO2 emissions in its evaluation of future projects. But in the years to come regulations may impose a price on CO2 emissions that all companies will have to incorporate in their investment plans and that may result in higher energy and product costs. Governments may also require companies to apply technical measures to reduce their CO 2 emissions into the atmosphere, which will add to project costs. Current proposed legislation in the USA, Europe and other regions is expected to increase the cost of doing business through such regulatory mechanisms. Shell, together with other energy companies, has been subject to litigation regarding climate change. We believe these lawsuits are without merit and not material to Shell. As easily accessible oil and gas resources decline, Shell is developing resources that take more energy and advanced technology to produce. We also plan to increase production from unconventional sources such as Canada’s oil sands which are more energy-intensive to develop. A 100 thousand b/d expansion of the Athabasca Oil Sands Project (Shell interest 60%) is under way. Also our Pearl GTL gas to liquids plant in Qatar is expected to increase our CO2 emissions when production begins. We are seeking cost-effective ways to manage CO2 and see potential business opportunities in developing such solutions. We are involved in a number of demonstration projects to develop carbon capture and storage technology, including the European Union’s CO2SINK project in Germany. The Canada and Alberta governments have pledged C$865 million to our proposed Quest project to capture and store underground over 1 million tonnes of CO2 a year from the Scotford
Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
51
Upgrader, although we have not yet made a final investment decision (see page 19). There will be costs involved in developing the technologies needed to capture and store CO2 underground. We continue to urge governments to introduce incentives as soon as possible to make such technology commercially viable. We are offering our customers more efficient fuels. In 2009 we launched our most economical fuel to date, Shell FuelSave, in the Netherlands, Malaysia, Singapore, Hong Kong and Turkey. Shell FuelSave will be launched in more countries in 2010. It can save up to one litre of fuel for every 50-litre tankful, depending on driving habits and the condition of the car. We are working to improve energy efficiency and reduce GHGs across all our operations. Of our total GHGs in 2009, a small proportion came from the flaring or burning off of gas in our Upstream business. Most of our continuous flaring is in Nigeria. Since 2002 the Shell Petroleum Development Company-operated joint venture (Shell interest 30%) in Nigeria has spent over $3 billion to install gas-gathering equipment, reducing continuous flaring by more than 30%. But a further $3 billion at least is needed to complete this programme and the majority shareholder, the government, cannot readily fund its share of the programme. The security and funding situation has hindered progress. Our flaring in Nigeria also reduced partly because sabotage and theft have forced a temporary halt to production at some facilities.
Shell’s tailings pond at the Athabasca Oil Sands Project (AOSP) in Alberta, Canada, is around 12 km2. Tailings are toxic, so we continually assess and manage them to reduce their potential impact. This includes steps to prevent contamination of surface and ground water and measures to protect wildlife. A government-approved project is under way to manage the tailings from planned production expansions at the AOSP. The intent is to remove all water from the tailings and then treat the remaining solid tailings, to make reclamation of the land more effective. This land must be reclaimed – for example, through revegetation or reforestation – to a state that matches its pre-mined capability, as required by the Alberta government.
Water
Our industry is not as big a water user as some others, such as power generation. But some of the industry’s activities use quantities of water that can be significant. For example, refining processes and growing crops for biofuels are water intensive. Extracting one barrel of bitumen from oil sands takes two to three barrels of water. In 2009, Shell operations used around 198 million cubic metres of fresh water, compared with 224 cubic metres in 2008. We develop and use advanced technology so as to continue to reduce our need for fresh water. At our oil sands project in Canada we use far less than our water allocation from the Athabasca River, and we minimise the amount withdrawn during the winter months when the flow rate is low. We also recycle water from collection ponds for tailings. In 2009, we continued working on a pilot project testing new technology to extract more water from tailings to improve storage, treatment and recycling. Once operational, the Pearl GTL plant will take no fresh water from its arid surroundings. Instead, it will use and recycle water produced by the GTL manufacturing processes. At both the Schoonebeek oil field (Shell interest 50%) in the Netherlands and the SAPREF refinery (Shell interest 50%) in South Africa we have agreements with local water authorities that allow us to use household wastewater recycled for industrial purposes.
Spills
Large spills of oil and oil products can incur major clean-up costs. If they are operational spills, they can also affect our licence to operate and harm our reputation. In operations that we control we have clear requirements and procedures designed to prevent such spills. These can occur for reasons such as operational failure, accidents or corrosion. We continue to learn from such spills. In Nigeria, sabotage and theft are a significant cause of spills. In 2009, we had 264 oil spills over 100 kilograms from operations and 95 spills over 100 kilograms from sabotage. This is down from our 2008 totals of 275 from operations and 115 from sabotage. The 2008 total volume of spills from operations has been re-estimated at 8.8 thousand tonnes, an increase from that reported in the 2008 Annual Report. This increase was primarily the result of a single November 2008 spill in Nigeria, that was not yet included in our reported 2008 total as an agreement on the spill volume estimate from the investigation was still pending with the Nigerian authorities (as noted in the 2008 Annual Report, investigations can take several months to complete). As noted above detailed 2009 data, including spill volumes, will be published in May 2010 in Shell’s Sustainability Report.
Environmental costs
Shell operates in environments where the most advanced technologies are needed. We place a premium on developing effective technologies that are also safe for the environment. However, when operating at the cutting edge of technology, there is always the possibility of unknown and unforeseeable environmental impacts. While Shell takes all necessary precautions to limit these risks, we are subject to additional remedial environmental and litigation costs as a result of unknown and unforeseeable impacts to the environment from our operations. While these costs have not been material to the Company, no assurance can be made that this will continue to be the case, as we continue to develop advance technologies necessary to differentiate us from the competition and help meet energy demand. We are also subject to a variety of environmental laws, regulations and reporting requirements in the countries where we operate. Infringing any of these laws and requirements can harm our ability to do business in a country. The costs of environmental clean-up can be high. Our operating expenses include the costs of avoiding emissions into the air and water and the safe disposal and handling of waste. In November, 2009, Shell agreed to pay $19.5 million in a settlement accepted by the Superior Court of California, USA, following allegations by the state government concerning some of our
Oil-sands tailings
Mining oil sands to extract and process bitumen, an extra-heavy oil, in Canada’s Alberta province poses several environmental challenges. These include water use and CO2 emissions from the energy-intensive processing needed to turn the bitumen into a synthetic crude oil. Tailings are another environmental impact of mining oil sands. Tailings are the mix of sand, clay, water and heavy metals left over after bitumen has been removed from the mined ore. When a mine first opens, tailings are stored in an external pit, with a dam constructed of compacted low-grade ore. Once mining is completed in this area, dykes are constructed to hold future tailings in a tailings pond.
52
Shell Annual Report and Form 20-F 2009 Business Review ? Environment and society
underground storage tanks. We did not admit liability but were pleased to agree to this settlement after working with the State of California since 2006 to resolve the matter. Many of the measures outlined in the settlement were steps Shell had already put in place to improve such operations. Shell can also be affected by third-party litigation against governments. For example, Shell’s 2007 drilling plan in the Beaufort and Chukchi seas off Alaska was delayed when non-governmental organisations took legal action against the US Department of Interior (DOI), challenging its approval of Shell’s plan of exploration. As a result of this action, we revised our 2010 drilling plans for that area. We intend to use only one rig in a smaller programme designed to limit our potential effects on the environment. A similar legal challenge was made in early 2010 to the DOI’s approval of these drilling plans.
our approach. These help to rule out the use of child or forced labour and avoid damage to protected areas, such as those rich in biodiversity, when biofuels crops are grown and processed. In 2009, Shell continued to work towards raising sustainability standards with industry, governments, intergovernmental agencies and policy-makers. We are exploring opportunities to invest in the production of ethanol from Brazilian sugar cane, which has the lowest CO2 footprint of today’s biofuels. We are also accelerating research, development and the demonstration of cellulosic ethanol and other advanced biofuels that will not compete with food crops for land, but these are not expected to become commercially viable for perhaps a decade.
Neighbouring communities Biofuels
Shell is a major distributor of biofuels. We sold 9 billion litres of biofuels in 2009, mainly to meet government mandates in the USA, Brazil and Europe. We see low-carbon biofuels as one of the most realistic commercially viable ways to reduce CO2 emissions from transport fuels in the coming 20 years and we continue to build capacity in current biofuels that meet our requirements for sustainability. Biofuels are the renewable that most closely fits our existing transport fuels business and our customers’ needs. Some biofuels pose sustainability challenges. These include CO2 emissions that vary according to the raw materials and production processes used as well as competition with food crops for available land. Shell has been working to raise sustainability standards in its biofuels supply chain for a number of years. Since 2007 we have followed a clear policy and have dedicated resources to help assess potential risks, implement controls and to monitor compliance. The inclusion of sustainability clauses in new and renewed supply contracts is central to Gaining the trust of local communities is essential to the success of our projects and operations. We engage with our neighbours at the earliest opportunity in a planned new development or if changes are being considered to existing operations. Our approach has developed as we have learned from experience; for example, in working with indigenous peoples as the Sakhalin II liquefied natural gas project was developed in Russia’s far east. In 2009 we adopted a new approach at a project in Alberta, Canada, that combined social, health, environmental, legal, and regulatory challenges, many of which were closely linked. We asked local people to contribute to key project decisions, including the siting of facilities. We also invited them to take part in environmental, social and health studies. As a result of this approach we were able to go ahead with three years of exploration activities. During 2009 we were able to use what we learned from this project at other new projects and existing operations across Canada, the USA and Latin America.
Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
53
THE BOARD OF ROYAL DUTCH SHELL PLC
Jorma Ollila
CHAIRMAN
Peter Voser
CHIEF EXECUTIVE OFFICER
Chairman of the Nomination and Succession Committee Born August 15, 1950. A Finnish national, appointed Chairman of the Company with effect from June 2006. He started his career at Citibank in London and Helsinki, before moving in 1985 to Nokia, where he became Vice President of International Operations of Nokia. In 1986 he was appointed Vice President Finance of Nokia. Between 1990 and 1992 he served as President of Nokia Mobile Phones. Between 1992 and 1999 he was President and Chief Executive Officer of Nokia and from 1999 to June 2006 he was Chairman and Chief Executive Officer. He is Chairman of the Board of Nokia.
Lord Kerr of Kinlochard GCMG
DEPUTY CHAIRMAN AND SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
Born August 29, 1958. A Swiss national, appointed Chief Executive Officer of the Company with effect from July 2009. Previously, Chief Financial Officer since October 2004. He first joined Shell in 1982 and held a variety of finance and business roles in Switzerland, the UK, Argentina and Chile, including Chief Financial Officer of Oil Products. In 2002 he joined the Asea Brown Boveri (ABB) Group of Companies, based in Switzerland as Chief Financial Officer and Member of the ABB Group Executive Committee. He returned to Shell in October 2004, when he became a Managing Director of Shell Transport and Chief Financial Officer of the Royal Dutch/Shell Group. He was a member of the Supervisory Board of Aegon N.V. from 2004 until April 2006. He is a member of the Supervisory Board of UBS AG [A] and a member of the Swiss Federal Auditor Oversight Authority.
[A] Peter Voser will not be standing for re-election to the Board of UBS AG at its AGM in April 2010.
Member of the Audit Committee, the Corporate and Social Responsibility Committee and the Nomination and Succession Committee Born February 22, 1942. A British national, appointed a Nonexecutive Director of the Company in October 2004. He was a Nonexecutive Director of Shell Transport from 2002 to 2005. A member of the UK Diplomatic Service from 1966 to 2002, he was UK Permanent Representative to the EU, British Ambassador to the USA and Foreign Office Permanent Under Secretary of State. He was Secretary-General of the European Convention (2002 – 2003), and in 2004 became an independent member of the House of Lords and sits on the EU Select Committee. He is a Non-executive Director of Rio Tinto plc, Scottish American Investment Company plc and Scottish Power, a BAE Systems Advisory Board member, Chairman of Imperial College and the Centre for European Reform and a Rhodes and Carnegie Trustee.
Simon Henry
CHIEF FINANCIAL OFFICER
Born July 13, 1961. A British national, appointed Chief Financial Officer of the Company with effect from May 2009. He joined Shell in 1982 as an engineer at the Stanlow refinery in the UK. After qualifying as a member of the Chartered Institute of Management Accountants in 1989, he held various Finance posts, including Finance Manager of Marketing in Egypt, Controller for the Upstream business in Egypt, Oil Products finance adviser for Asia Pacific, Finance Director for the Mekong Cluster and General Manager Finance for the South East Asian Retail business. He was appointed Head of Group Investor Relations in 2001 and Chief Financial Officer for Exploration & Production in 2004.
Malcolm Brinded CBE
EXECUTIVE DIRECTOR, UPSTREAM INTERNATIONAL
Born March 18, 1953. A British national, appointed an Executive Director of the Company in October 2004 responsible for global Exploration & Production, and from July 2009 for Upstream International. He was previously a Managing Director of Shell Transport from March 2004 and, prior to that, a Managing Director of Royal Dutch from 2002. He joined Shell in 1974 and has held various positions around the world including in Brunei, the Netherlands and Oman. He was also Country Chair for Shell in the UK. He is a member of the Nigerian Presidential Honorary International Investor Council, Chairman of the Shell Foundation and a Trustee of the Emirates Foundation and the International Business Leaders Forum.
54
Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
Josef Ackermann
NON-EXECUTIVE DIRECTOR
Nick Land
NON-EXECUTIVE DIRECTOR
Member of the Remuneration Committee Born February 7, 1948. A Swiss national, appointed a Non-executive Director of the Company in May 2008. He is Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG. He was appointed to these positions in 2006 and 2002 respectively. He joined Deutsche Bank’s Management Board in 1996, with responsibility for the investment banking division. He started his professional career in 1977 at Schweizerische Kreditanstalt (SKA), where he held a variety of positions in Corporate Banking, Foreign Exchange/Money Markets, Treasury and Investment Banking. In 1990, he was appointed to SKA’s Executive Board, on which he served as President between 1993 and 1996. He is currently also a member of the Supervisory Board of Siemens AG.
Member of the Audit Committee and the Corporate and Social Responsibility Committee Born February 6, 1948. A British national, appointed a Non-executive Director of the Company with effect from July 2006. He qualified as an accountant in 1970 and was a partner of Ernst & Young LLP from 1978 until June 2006. He was Chairman of Ernst & Young LLP and a member of the Global Executive Board of Ernst & Young Global LLP from 1995 until June 2006. He is a Non-executive Director of BBA Aviation plc, Ashmore Group plc and Vodafone Group plc, Director of Alliance Boots GmbH, a member of the Finance and Audit Committees of the National Gallery and Advisor to Denton Wilde Sapte LLP.
Christine Morin-Postel
NON-EXECUTIVE DIRECTOR
Sir Peter Job KBE
NON-EXECUTIVE DIRECTOR
Chairman of the Audit Committee Born October 6, 1946. A French national, appointed a Non-executive Director of the Company in October 2004. She was a member of the Royal Dutch Supervisory Board from July 2004 and was a Board member of Royal Dutch until December 2005. Formerly she was Chief Executive of Société Générale de Belgique, Executive Vice-President and member of the Executive Committee of Suez S.A., Chairman and CEO of Credisuez plc from 1996 to 1998 and a Non-executive Director of Pilkington plc and Alcan Inc. She is a Non-executive Director of 3i Group plc, British American Tobacco PLC and EXOR S.p.A.
Member of the Remuneration Committee Born July 13, 1941. A British national, appointed a Non-executive Director of the Company in October 2004. He was a Non-executive Director of Shell Transport from 2001 to 2005. Previously he was Chief Executive of Reuters Group plc. He is a Non-executive Director of Schroders plc and TIBCO Software Inc. and a member of the Supervisory Board of Deutsche Bank AG.
Wim Kok
NON-EXECUTIVE DIRECTOR
Lawrence Ricciardi
Chairman of the Corporate and Social Responsibility Committee and Member of the Nomination and Succession Committee Born September 29, 1938. A Dutch national, appointed a Nonexecutive Director of the Company in October 2004. He was a member of the Royal Dutch Supervisory Board from 2003 to July 2005. He chaired the Confederation of Dutch Trade Unions (FNV) before becoming a member of the Lower House of Parliament and parliamentary leader of the Partij van de Arbeid (Labour Party). Appointed Minister of Finance in 1989 and Prime Minister in 1994, serving for two periods of government up to July 2002. Member of the Supervisory Boards of KLM N.V. and TNT N.V.
NON-EXECUTIVE DIRECTOR
Member of the Nomination and Succession Committee Born August 14, 1940. A US national, appointed a Non-executive Director of the Company in October 2004. He was appointed a member of the Royal Dutch Supervisory Board in 2001 and was a Board member of Royal Dutch until December 2005. Previously he was President of RJR Nabisco, Inc. and subsequently Senior Vice President and General Counsel of IBM. He is a Non-executive Director of Citigroup Inc., Senior Advisor to the IBM Corporation as well as to Jones Day and to Lazard Frères & Co and a Trustee of the Andrew W. Mellon Foundation and the Pierpoint Morgan Library.
Shell Annual Report and Form 20-F 2009 The Board of Royal Dutch Shell plc
55
Jeroen van der Veer
NON-EXECUTIVE DIRECTOR
Member of the Corporate and Social Responsibility Committee Born October 27, 1947. A Dutch national, appointed a Non-executive Director of the Company with effect from July 2009. Previously, Chief Executive since October 2004. He was appointed President of Royal Dutch in 2000, having been a Managing Director since 1997, and was a Board member until December 2005. He was a Director of Shell Canada Limited from April 2003 until April 2005. He joined Shell in 1971 in refinery process design and held a number of senior management positions around the world. He is Vice-Chairman and Senior Independent Director of Unilever (which includes Unilever N.V. and Unilever plc), Vice-Chairman of ING Group, a member of the Supervisory Board of Royal Philips Electronics N.V. and Vice-Chairman of a NATO Expert Group.
Hans Wijers
NON-EXECUTIVE DIRECTOR
Chairman of the Remuneration Committee Born January 11, 1951. A Dutch national, appointed a Non-executive Director of the Company with effect from January 2009. He is Chief Executive Officer and Chairman of the Board of Management of Akzo Nobel N.V. He joined Akzo Nobel N.V. in 2002 as a Board member, and was appointed Chairman in May 2003. He obtained a PhD in Economics in 1982 while teaching at the Erasmus University Rotterdam. Later he became managing partner of The Boston Consulting Group. He served as Dutch Minister for Economic Affairs from 1994 to 1998, after which he returned to The Boston Consulting Group as senior partner until his appointment as a Board member of Akzo Nobel N.V. He is a trustee of various charities and a member of the European Roundtable of Industrialists.
Michiel Brandjes
COMPANY SECRETARY
Born December 14, 1954. A Dutch national, appointed as Company Secretary and General Counsel Corporate of the Company in February 2005. Previously he was Company Secretary of Royal Dutch. He joined Shell in 1980 as a Legal Adviser.
56
Shell Annual Report and Form 20-F 2009 Senior Management
SENIOR MANAGEMENT
In addition to the Executive Directors listed on page 53, the Company has the following Senior Management, each of whom is a member of the Executive Committee (see page 78):
Matthias Bichsel
Born July 24, 1954. A Swiss national, appointed Projects & Technology Director with effect from July 1, 2009. Previously, he was Executive Vice President, Development and Technology, being responsible for delivering reserves and production from new upstream projects, as well as providing technology applications and research via Shell’s upstream technology organisation.
Beat Hess
Born July 6, 1949. A Swiss national, appointed Legal Director in June 2003. Previously he was General Counsel of ABB Group from 1988 to 2003. He is a Non-executive Board Director of Nestlé S.A.
Hugh Mitchell
Born February 13, 1957. A British national, appointed Chief Human Resources & Corporate Officer with effect from July 1, 2009. He joined Human Resources (HR) in Shell Exploration & Production in 1979 and was appointed to other HR and business roles across the UK and Brunei in both upstream and downstream businesses. In 1997 he became HR Vice President for the Global Oil Products business and in 2003 was appointed Director International, one of the Group’s Corporate Centre Directors. In 2005 he was appointed Human Resources Director of Royal Dutch Shell.
Marvin Odum
Born December 13, 1958. A US national, appointed Upstream Americas Director with effect from July 1, 2009. Previously he was Executive Vice President for the Americas for Shell Exploration & Production. He was appointed President of Shell Oil Company in 2008 having served as Executive Vice President since 2005 with responsibility for Shell’s exploration and production businesses in the western hemisphere. He was appointed Chairman of the Executive Committee of the Athabasca Oil Sands Project on July 1, 2009.
Mark Williams
Born November 9, 1951. A US national, appointed Downstream Director with effect from January 1, 2009. He has previously held the positions of Executive Vice President, Global Businesses, and Vice President of Strategy, Portfolio and Environment for Oil Products. In 2004, he was appointed Executive Vice President of Supply and Distribution in Shell Downstream Inc., a position he held until December 2008.
Shell Annual Report and Form 20-F 2009 Report of the Directors
57
REPORT OF THE DIRECTORS
Principal activities
Royal Dutch Shell plc (the Company) is a holding company which owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. Details of the Company’s subsidiaries can be found in Exhibit 8.
are paid by default in euros, although holders of Class A shares are able to elect to receive dividends in sterling. Dividends declared on Class B shares are paid by default in sterling, although holders of Class B shares are able to elect to receive dividends in euros. Dividends declared on ADRs are paid in US dollars. Eligible shareholders must make currency elections by the day before the declaration date. The Directors have proposed a fourth quarter interim dividend as set out in the table below, payable on March 17, 2010, to shareholders on the register of members at close of business on February 12, 2010.
Business Review
The information that fulfils the requirements of the Business Review can be found in the Chairman’s message on page 6, the Chief Executive Officer’s review on page 7 and also in the Business Review on pages 8-52, all of which are incorporated in this Report of the Directors by way of reference. Throughout this Report of the Directors, the Board aims to present a balanced and understandable assessment of the Company’s position and prospects in its financial reporting to shareholders and other interested parties.
Creditor payment policy and practice
Statutory regulations issued under the UK Companies Act 2006 (the Act) require a public company to make a statement of its policy and practice on the payment of trade creditors. As a holding company whose principal business is to hold shares in Shell companies, the Company has no trade creditors. Given the international nature of Shell’s operations there is no specific company-wide creditor payment policy. Relationships with suppliers are governed by Shell’s commitment to long-term relations, based on trust and mutually beneficial arrangements. Shell U.K. Limited, Shell’s most significant UK operating company, had approximately 33 days’ purchases outstanding at December 31, 2009, (2008: 38 days) based on the average daily amount invoiced by suppliers during the year. In February 2009, Shell U.K. Limited adopted the Prompt Payment Code. A copy is available from the Company Secretary.
Research and development
Shell research and development programmes are carried out in a worldwide network of Shell technology centres complemented by external partnerships. The main technology centres are in the Netherlands and the USA, with other centres in Canada, Germany, India, Norway, Oman, Qatar and the UK. Further details of research and development, including expenditure, can be found on page 18 of the Business Review as well as in the Consolidated Statement of Income.
Recent developments and post-balance sheet events
Recent developments and post-balance sheet events are given in Note 31 to the Consolidated Financial Statements.
Directors’ responsibilities in respect of the preparation of the financial statements
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. UK company law requires the Directors to prepare financial statements for each financial year. Under that law, 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. The financial statements also comply with IFRS as issued by the International Accounting Standards Board (IASB). The financial statements are required by law to give a true and fair view of the state of affairs of Shell and the parent company and of the profit or loss of Shell and parent company for that period.
Financial statements and dividends
The Consolidated Statement of Income and Consolidated Balance Sheet are available on pages 97 and 98. The table below sets out the dividends on each class of share and each class of American Depositary Receipt (ADR). Dividends are declared in US dollars and the Company announces the euro and sterling equivalent amounts at the same time, using an exchange rate from the day before the declaration date. Dividends declared on Class A shares
DIV IDEN DS
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
$ 0.42 0.42 0.42 0.42 1.68
¤ 0.3211 0.2987 0.2845 0.3018 1.2061 1.2068
Class A shares pence 28.65 25.59 25.65 26.36 106.25 107.86
$ 0.42 0.42 0.42 0.42 1.68
pence 28.65 25.59 25.65 26.36 106.25 107.86
Class B shares [A] Class A ADRs ¤ $ 0.3211 0.84 0.2987 0.84 0.2845 0.84 0.3018 1.2061 1.2068 0.84 3.36 3.32
Class B ADRs $ 0.84 0.84 0.84 0.84 3.36 3.32
[A] It is expected that holders of Class B ordinary shares will receive dividends through the dividend access mechanism applicable to such shares. The dividend access mechanism is described more fully on pages 83-84.
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Shell Annual Report and Form 20-F 2009 Report of the Directors
In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state that the financial statements comply with IFRS as adopted by the European Union and IFRS as issued by the IASB; prepare the financial statements on the going concern basis, unless it is inappropriate to assume that the Company or Shell will continue in business; and prepare a management report giving a fair review of the business and the principal risks and uncertainties. The Directors confirm that they have complied with the above requirements when preparing the financial statements and that the Business Review gives a fair review of the business and the principal risks and uncertainties. In addition, as far as each of the Directors are aware, there is no relevant audit information of which the auditors are unaware. Each Director has taken all the steps he or she ought to have taken in order to become aware of any relevant audit information and to establish that the auditors are aware of such information. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Shell and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Consolidated Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and Shell and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Financial risk management, objectives and policies
Descriptions of the use of financial instruments and Shell financial risk management objectives and policies are set out in the Business Review and on pages 81-82, and also in Note 23 to the Consolidated Financial Statements.
Qualifying third-party indemnities
The Company has entered into a deed of indemnity with each of the Directors. The terms of these deeds are identical and reflect the statutory provisions under UK law. Under the terms of each of these deeds, the Company has indemnified each of the Directors, to the widest extent permitted by the applicable laws of England and Wales, against any and all liability, howsoever caused (including by that Director’s own negligence), suffered or incurred in the course of acting as a Director or employee of the Company or certain other entities.
Directors’ interests
The interests (in shares or calculated equivalents) of the Directors in office at the end of the financial year, including any interests of a “connected person” (as defined in the Disclosure and Transparency Rules) of the Directors, are set out below:
DI RE CTOR S’ I N TE R E STS
Josef Ackermann Malcolm Brinded Simon Henry Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine Morin-Postel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer Peter Voser Hans Wijers
January 1, 2009 [A] Class A Class B 10,000 – 20,028 87,128 4,175 [C] 37,756 [C] – – 4,000 – 8,485 25,000 20,000 [D] 123,822 44,946 – 4,112 10,000 – 3,074 – – – – – –
December 31, 2009 Class A Class B 10,000 – 20,028 140,855 4,175 38,673 – – 4,000 – 8,485 25,000 30,000 [E] 190,195 90,694 5,000 4,690 15,000 – 3,074 – – – – – –
Board of Directors
The Directors during the year were Josef Ackermann, Maarten van den Bergh (retired with effect from May 19, 2009), Malcolm Brinded, Linda Cook (resigned on June 1, 2009), Simon Henry (appointed with effect from May 20, 2009), Sir Peter Job, Lord Kerr of Kinlochard, Wim Kok, Nick Land, Christine Morin-Postel, Jorma Ollila, Lawrence Ricciardi, Jeroen van der Veer, Peter Voser and Hans Wijers.
Appointment and re-appointment of Directors
All Directors will be retiring and seeking re-appointment at the 2010 AGM, except for Sir Peter Job and Lawrence Ricciardi, both of whom are standing down after having served nine years as Non-executive Directors. Shareholders will also be asked to vote on the appointment of Charles O. Holliday as a Director of the Company with effect from September 1, 2010. Going forward, it is intended that all Directors will retire at each AGM and, subject to the Articles of Association and their wish to continue as a Director of the Company, seek re-appointment by shareholders. The biographies of all Directors are given on pages 53-55 and, for those seeking appointment or re-appointment, also in the Notice of the AGM. Details of the Executive Directors’ contracts can be found on page 68 and copies are available for inspection from the Company Secretary. Furthermore, a copy of the form of these contracts has been filed with the US Securities and Exchange Commission as an exhibit. The terms and conditions of appointment of Non-executive Directors are set out in their letters of appointment with the Company which, in accordance with the 2008 Combined Code on Corporate Governance, are available for inspection from the Company Secretary. No Director is, or was, materially interested in any contract subsisting during or at the end of the year that was significant in relation to the Company’s business. See also “Related party transactions” on page 59.
[A] Excludes interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans as at January 1, 2009. Interests under these plans as at January 1, 2009 are set out on pages 71-73. Excludes interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans as at December 31, 2009. Interests under these plans as at December 31, 2009 are set out on pages 71-73. [C] At the date of appointment. [D] Held as 10,000 ADRs (RDS.A ADR). One RDS.A ADR represents two Class A ordinary shares. [E] Held as 15,000 ADRs (RDS.A ADR). One RDS.A ADR represents two Class A ordinary shares.
There were no changes in Directors’ share interests during the period from December 31, 2009 to March 10, 2010, except for in the case of Sir Peter Job whose interests increased by 2,131 Class B shares and for those changes in the interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, the Restricted Share Plan and the Share option plans set out in the Directors’ Remuneration Report on pages 71-73. As at March 10, 2010, the Directors and Senior Management [A] of the Company beneficially owned individually and in aggregate (including shares under option) less than 1% of the total shares of each class of the Company shares outstanding.
[A] The Senior Management of the Company are given on page 56.
Shell Annual Report and Form 20-F 2009 Report of the Directors
59
Related party transactions
Other than disclosures given in Notes 6 and 10 to the Consolidated Financial Statements on pages 109 and 115 respectively, there were no transactions or proposed transactions that were material to either the Company or any related party. Nor were there any transactions that were unusual in their nature or conditions with any related party.
TRANSFER OF SECURITIES
There are no significant restrictions on the transfer of securities.
SHARE OWNERSHIP TRUSTS
Share repurchases
On May 19, 2009, shareholders approved an authority, expiring at the end of the next AGM, for the Company to repurchase its own shares up to a maximum of 10% of the issued share capital (excluding share purchases for employee share benefit plans). Whilst no share repurchases were made during 2009, the Board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the Company. A resolution will be proposed to the forthcoming AGM to renew the authority for the Company to purchase its own share capital up to specified limits for another year. More detail of this proposal is given in the Notice of the AGM.
Shell currently operates two primary employee share ownership trusts, a Dutch Stichting and a US Rabbi Trust. The shares in the Stichting are voted by the Stichting Board, and the shares in the Rabbi Trust are voted by the Voting Trustee, Evercore Trust Company, N.A. Both the Stichting Board and the Voting Trustee are independent of the Company. The Shell All Employee Share Ownership Plan (SAESOP) has a separate related share ownership trust. Shares held for the SAESOP are voted by its trustee, EES Corporate Trustees Limited, as directed by the participants. The Global Employee Share Purchase Plan (GESPP) had a separate related share ownership trust and shares held for the GESPP were voted by its trustee, Halifax EES International Limited. However, with effect from January 19, 2009, the GESPP trust ceased to hold any shares. All shares were transferred to a nominee account and the nominee will vote as directed by the participants.
SIGNIFICANT DIRECT AND INDIRECT SHAREHOLDINGS
Political and charitable contributions
No donations were made by any Shell company to political parties or organisations during the year. Shell Oil Company administers the nonpartisan Shell Oil Company Employees’ Political Awareness Committee (SEPAC), a political action committee registered with the US Federal Election Commission. Eligible employees may make voluntary personal contributions to SEPAC. Shell, through individual Shell companies, sponsors social investment programmes in many countries throughout the world. In the UK, Shell donated $24 million in 2009 to charitable causes. See Substantial shareholdings table below.
ARTICLES OF ASSOCIATION
Information concerning the Articles of Association is given on pages 82-86.
Substantial shareholdings
As at February 23, 2010, the Company had been notified by the following investors of their interests in 3% or more of the Company’s shares. These interests are notified to the Company pursuant to Disclosure and Transparency Rule 5.
I N V E S T OR
Diversity and inclusion
Detailed information can be found in the Business Review on page 49.
Employee communication and involvement
Detailed information can be found in the Business Review on page 49.
Legal & General Group plc The Capital Group Companies Inc
Class A shares 3.64% 4.52%
Class B shares 4.54% 6.45%
Corporate social responsibility
A summary of Shell’s approach to corporate social responsibility is contained in pages 51-52 of the Business Review. Further details will be available in Shell’s Sustainability Report 2009.
Auditors
PricewaterhouseCoopers LLP have signified their willingness to continue in office, and a resolution for their re-appointment will be submitted to the AGM.
Essential contracts and Takeovers Directive information
Shell does not have contracts or other arrangements which individually are essential to its business nor does it have any significant agreements that would take effect, alter or terminate upon a change of control of the Company following a takeover bid.
SHARE CAPITAL
Corporate governance
The Company’s statement on corporate governance is included in the Corporate Governance Report on pages 76-86.
Annual General Meeting
The AGM will take place on May 18, 2010, in the Circustheater, Circusstraat 4, The Hague, The Netherlands with a satellite link to The Barbican Centre, London, UK. An audio-visual link will permit active two-way participation by persons physically present in the UK and the Netherlands. Details of the business to be put to shareholders at the AGM can be found in the Notice of the Annual General Meeting. Signed on behalf of the Board
Michiel Brandjes
The Company’s authorised and issued share capital as at December 31, 2009, is set out in Note 10 to the Parent Company Financial Statements. The percentage of the total issued share capital represented by each class of share is given below. Other disclosure requirements pursuant to The Takeovers Directive can be found below and on pages 82-86.
SH ARE CA PITAL PER CENTAG E
Share Class Class A Class B Sterling deferred shares
% 56.8 43.2 de minimis
Company Secretary March 15, 2010
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
INDEX TO THE DIRECTORS’ REMUNERATION REPORT
60 Letter of the Chairman of REMCO 61 Overview 63 Executive Directors 63 The Remuneration Committee (REMCO) 63 How REMCO manages remuneration 63 Pay for performance and strategy alignment 65 65 65 66 66 66 66 67 67 67 67 67 68 68 Competitiveness Shareholding Consistency Compliance and risk assessment How REMCO managed remuneration in 2009 Base salary Annual bonus Other cash and non-cash earnings Long-term incentives Pension interests Benefits Former Executive Director – Jeroen van der Veer Former Executive Director – Linda Cook Executive Directors’ contracts
Dear Shareholders, As the new Chairman of the Remuneration Committee (REMCO), I am pleased to present to you the 2009 Directors’ Remuneration Report of Royal Dutch Shell plc. I hope you will find the new format transparent and easy to understand. Following the 2009 AGM we had an extensive dialogue with major shareholders and shareholder bodies on our Executive Directors’ pay. We took their views on board and made a number of changes, which are reflected in this report. A high level overview was presented in my letter to shareholders of February 16, 2010. In my view, the most significant of these changes are that we have committed not to use upward discretion on share awards without prior consultation with major shareholders, we have updated the metrics for the incentive plans and we have ended the practice of free matching shares in our deferred bonus plan. In respect of the changes to the incentive plan metrics, we introduced additional measures to better reflect key business priorities and concerns expressed by shareholders around the sole use of Total Shareholder Return (TSR). For the long-term incentive plans this means that from 2009 in addition to TSR, Executive Directors’ pay is now directly linked to Shell’s competitive performance in respect of net cash from operating activities, earnings per share and hydrocarbon production. And for our balanced scorecard, which drives the annual bonus payout, we will replace TSR with a project delivery target. This measure reinforces our focus on year-by-year delivery of major projects as part of our strategy. The success criteria for projects are: on time and on budget. Furthermore, we have sharpened the pay link to sustainable development on the scorecard by introducing the externally assessed Dow Jones Sustainability Index for the oil and gas sector. These changes come into effect from 2010. There can be no doubt that 2009 was a challenging year for the Company. However, despite the continued pressures posed by the global recession and changes internally, we stayed focused on delivering results. I look forward to meeting you at our AGM on May 18, 2010.
Hans Wijers
68 External appointments 69 Non-executive Directors 69 Remuneration policy 69 Pension interests 69 Compensation of Directors and Senior Management 70 Data tables
Chairman of the Remuneration Committee March 10, 2010
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Overview
61
OVERVIEW
At the 2009 Annual General Meeting (AGM) of Royal Dutch Shell plc (the Company), shareholders did not approve the Directors’ Remuneration Report. Since then we have undertaken an extensive dialogue with major shareholders and shareholder bodies. We received broad feedback during the summer of 2009, took external specialist input, developed a new way forward, and then consulted again with major shareholders during the fourth quarter of 2009. With that in mind, the Remuneration Committee made the changes presented in this report. We endeavoured to get better alignment between remuneration and individual accountability for the short-term delivery of our business
strategy, and to strengthen longer-term alignment with shareholder interests through increased executive shareholding. We also wish to demonstrate appropriate restraint in the current economic environment. We are committed to continuing our dialogue with major shareholders over remuneration. Following the publication of the Annual Report and Form 20-F 2009, we will again be meeting major shareholders to listen to their feedback. The following table provides an overview of the current Executive Directors’ remuneration and the changes implemented in 2009 and proposed for 2010.
Current policy Base Salary
Changes to the policy
Referenced to companies of comparable size, complexity and global scope. The current comparator group consists of BP, Chevron, ExxonMobil and Total as well as a selection of top European-based companies. Salary review date is July each year. Target levels (as % of base salary): Chief Executive Officer - 150% Other Executive Directors - 110% Maximum payout - 250% and 220%, respectively. Calculation of an Executive Director’s annual bonus: – Shell results at the end of the year are translated into a score between zero and two, by means of a predefined scorecard and REMCO’s judgement. – Bonus awards are based on this score multiplied by the target bonus levels. Award levels (as % of base salary): Chief Executive Officer - 300% Other Executive Directors - 240% Maximum payout 600% and 480%, respectively. Shareholding requirements - two times base salary over five years. The actual value delivered after three years depends on the relative performance of LTIP measures against other oil majors. Under the DBP, Executive Directors are required to invest no less than 25% and can choose to invest up to 50% of their annual bonus in deferred bonus shares. Half of these deferred bonus shares are matchable with additional performance-related shares which can be earned on the same basis as the LTIP vesting. One free share is awarded on the purchase of four deferred bonus shares.
No salary increase for 18 months. There were no increases in July 2009 and there will be no increases until January 2011, except for promotional adjustments. Move salary review date from July to January.
Annual Bonus
No change to target levels. No change to the calculation method. Added new performance measures for the 2010 annual bonus, being project delivery and a broader assessment of sustainable development. Introduced an individual performance component to the annual bonus to increase personal accountability for short-term results.
Long-term Incentive Plan (LTIP)
No upward discretion for LTIP vesting in 2010. Introduced requirement for all LTIP shares to be held for two years following vesting. Increased the shareholding requirement to three times salary for the Chief Executive Officer.
Deferred Bonus Plan (DBP)
Removed the free matching share awarded under the DBP to ensure all matching shares are tied to performance. No upward discretion for DBP vesting in 2010.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Overview
In addition, we took the following actions regarding our Executive Directors’ remuneration in 2009:
Base salary
Set the salary for Chief Executive Officer Peter Voser at ¤1.5 million on his promotion with effect from July 1, 2009. Set the salary for Chief Financial Officer Simon Henry at ¤850,000, with effect from May 1, 2009, the date of his promotion to the position. Applied restraint and used downward discretion on the Shell Scorecard result, setting it at 1.10 from the mathematical result of 1.28. Set the actual bonuses for 2009 at ¤1,864,000, ¤1,422,000, and ¤542,000 for Peter Voser, Malcolm Brinded and Simon Henry, respectively. Vested zero LTIP shares and zero performancerelated matching DBP shares in March 2010. Peter Voser, Malcolm Brinded and Simon Henry all elected to put 50% of their Annual Bonus into the DBP.
Annual bonus
Long-term incentives
Below is a table summarising 2009 compensation for Executive Directors. The amounts in the table reflect pro-rata adjustments according to the portion of the year in which Executive Directors were in office, where applicable. The earnings amount includes salary, bonus paid in 2010 for 2009 performance, and other cash and noncash remuneration. The amounts shown as value of released DBP awards represent the value of matching shares delivered at vesting on bonuses from 2006, less the original amount deferred.
S U MMA RY COM PE N S AT I ON ( UN AUD ITED ) ¤ THOUSANDS
Jeroen Peter Voser 3,157 690 – – 3,847 5,350 3,429 Malcolm Brinded 2,654 801 (36) – 3,419 4,755 3,048 Simon Henry 1,069 240 – – 1,309 1,820 1,167 van der Veer 3,505 1,373 (1) – 4,877 6,784 4,349 Linda Cook 6,542 687 – – 7,229 10,055 6,445
Earnings [A] Value of released LTIP awards Value of released DBP awards Value of exercised share options Total in euro Total in dollar Total in sterling
[A] More details can be found on page 70. Value of performance shares at release in March 2009, prior to Simon Henry’s appointment as an Executive Director.
The report follows the UK requirements of the Companies Act 2006, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Combined Code and the Listing Rules. It outlines the remuneration policies and individual remuneration details for Executive Directors and Non-executive Directors of the Company for the year ended December 31, 2009. The Board has approved this report and it will be presented to shareholders for approval at the AGM of the Company on May 18, 2010.
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
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EXECUTIVE DIRECTORS The Remuneration Committee (REMCO)
Following the 2009 AGM, REMCO engaged with major shareholders to understand their main concerns and get their input. The Committee engaged Deloitte LLP to provide an external perspective regarding remuneration policies and plans, their competitiveness, their alignment with corporate strategy, and their compliance with corporate governance requirements. External market data and plan valuations from Towers Watson supported our decision-making. REMCO’s key responsibilities in respect of Executive Directors include: Setting remuneration policy; Agreeing performance frameworks, setting targets and reviewing performance; Determining actual remuneration and benefits; and Determining contractual terms. REMCO’s Terms of Reference are reviewed regularly and updated, where necessary. You can find them on the Shell website www.shell.com/investor or you can ask the Company Secretary for copies. See inside back cover for details. REMCO is currently made up of three independent Non-executive Directors: Hans Wijers (Chairman); Sir Peter Job; and Josef Ackermann. Lord Kerr of Kinlochard stood down as a member of the Committee with effect from September 11, 2009. See their biographies on pages 54 and 55 and their committee meeting attendance on page 78. Changes to REMCO membership during 2009 are described in the Corporate Governance section on page 80. The following Board members were invited and attended REMCO meetings from time to time to provide their opinion on external advice and other remuneration issues: Jorma Ollila; and Lawrence Ricciardi. Advice on various subjects including the Shell Scorecard, the remuneration of senior management, and the performance of the other Executive Directors was sought within Shell from: Hugh Mitchell, Chief Human Resources & Corporate Officer and Secretary to the Committee; Michael Reiff, Executive Vice President Remuneration, Benefits & Services; Peter Voser and Jeroen van der Veer, Chief Executive Officer and former Chief Executive, respectively.
execution of the strategy, and REMCO ensures that Executive Directors’ performance-based reward reflects how successfully this is done. The Executive Director remuneration package is made up of a base salary, an annual bonus and a package of long-term incentives as well as a pension plan and other benefits. There are two main long-term incentive programmes currently in use: the Long-term Incentive Plan (LTIP) and the Deferred Bonus Plan (DBP). The Restricted Share Plan (RSP) is available for retention purposes.
20 09 PAY M IX FO R E XECU TI VE DIRECTORS
Base salary 20% Annual bonus 27% Longterm incentives 53%
REMCO considers the connection between an Executive Director’s pay and Shell’s business strategy as critical. Most of the compensation package is therefore linked to the achievement of stretch targets that are consistent with the execution of Shell’s strategy. The following remuneration policy principles explain how the long-term value of Executive Directors’ pay is tied to Shell’s future performance: Pay for Performance; Alignment with Shell’s strategy; Competitiveness; Long-term alignment with shareholder interests; Consistency; Compliance and Risk Assessment.
PAY FOR PERFORMANCE AND STRATEGY ALIGNMEN T
Over three-quarters of Executive Director compensation (excluding pension) is linked directly to the Company’s performance.
Annual bonus
REMCO uses the annual bonus to focus on the short-term targets that the Board sets each year as part of the Business Plan and individual performance against these targets. These are the steps that Shell needs to take every year as the pathway to long-term growth. They are a balance of financial, operational, project delivery and sustainable development targets, captured in a scorecard. The targets are stretching but realistic. The scorecard is set and approved by REMCO. The outcome of the performance year is usually known in February of the next year, and REMCO translates this into a score between zero and two. To better reflect Shell’s short-term priorities from 2010 onwards, REMCO replaced the short-term TSR measure with a measurement of Project Delivery (20% weight) – on time and on budget – and placed a greater emphasis on cash generation (from 25% to 30% weight). It also expanded the sustainable development targets to include the Sustainable Asset Management (SAM) external assessment used by the Dow Jones Sustainability Indexes (DJSI) for the oil and gas producers group. With these changes, the annual bonus performance metrics are more closely aligned with the year-by-year delivery of Shell’s business plans and the safeguarding of Shell’s licence to operate. REMCO exercises its judgement to make sure that the final annual bonus results for Executive Directors are in line with Shell’s performance.
How REMCO manages remuneration
Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. On an ongoing basis, its most senior managers are asked to make decisions affecting multi-billion-dollar assets and investments. The Board agrees on a strategy for Shell. The Chief Executive Officer and Executive Directors execute this strategy. The Board tracks the
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
AN NUAL BON U S S COR E CARD MEASUR ES FOR 2 010 EXECUTIVE D I RE CT ORS AN D S E N I OR M A N A G E ME N T
REMCO selected these measures because they underpin Shell’s business strategy in various ways:
L ON G - TE RM I N CE N T I V E ME A S U RE S
Measure Net cash from operating activities
Reason for the measure Cash generated from operations that factors in the impact of commodity price fluctuations as well as business performance so that Executive Directors, like shareholders, share the effects of both.
Weight 30%
Measure TSR growth EPS growth (on a CCS basis [A]) 30%
Reason for the measure Assessment of actual wealth created for shareholders. Indicator of the quality of revenue growth and cost management that underpins the TSR. Earnings on an estimated current cost of supplies basis takes into account the changes in the cost of supplies and thereby enables a consistent comparison with other oil majors.
Weight 30% 30%
Operational excellence
Indicator of the full and effective use of resources – both facilities and people – according to the relevant business: hydrocarbon production, LNG sales or refinery availability. Assessment of projects’ cost management and on-schedule delivery. Indicator of safety performance and sustainable development performance, as reflected by a DJSI broad-base comparison within the Oil & Gas Producers Group.
Project delivery Sustainable development
20% 20%
Net cash from operating activities growth Hydrocarbon production growth
Source of dividends and capital expenditure commitments which support sustainable growth based on portfolio and cost management. Overall indicator of success in locating and developing reserves.
20%
20%
REMCO has also decided to strengthen the Executive Directors’ individual accountability by increasing or decreasing their annual bonuses to take account of how well they have delivered against their own individual performance contract. To summarise, the calculation of an Executive Director’s annual bonus is: Annual bonus = base salary target bonus % scorecard result individual performance adjustment by REMCO.
AN NUAL BON U S L EVELS
[A] Earnings per share on a CCS basis is calculated in this way: the income attributable to shareholders is first adjusted to take into account the after-tax effect of oil-price changes on inventory before it is divided by the average number of shares outstanding. Without the adjustment, earnings per share is affected by changes in inventory caused simply by movements in the oil price.
Chief Executive Officer Other Executive Directors
Long-term incentives
Target award Maximum (as a % of salary) (as a % of salary) 150% 250% 110% 220%
These measures were introduced in 2009 to better reflect key business priorities and to address concerns by shareholders that a single TSRbased assessment was not appropriate. During 2009, REMCO discussed these measures further with major shareholders. REMCO therefore confirmed this broader assessment of competitive performance as the basis for long-term remuneration. For simplicity, we measure growth based on the data points at the beginning of the threeyear performance period relative to the data points at the end of the period, using unadjusted publicly reported data. REMCO always approves award dates in advance.
T I ME L IN E FO R 20 10 LT I P SH A RE AWA RD S
Performance Period LTIP Award Retention Period
Consistent with the long-term nature of Shell’s strategy, LTIP and DBP determine more than half of Executive Director remuneration. Both plans grant share-based awards linked to the future price and dividends of Royal Dutch Shell plc shares. Awards vest depending on performance against pre-defined measures and targets over a three year performance period. These plans focus on performance relative to the other oil majors: BP, Chevron, ExxonMobil and Total. They reward Executive Directors if Shell outperforms its peers on the basis of a combination of TSR, earnings per share (EPS) on the basis of current cost of supplies (CCS), net cash from operating activities and hydrocarbon production.
February Award
Vesting
Release
2010
2011
2012
2013
2014
2015
To increase shareholding further, REMCO decided in 2009 that for all future LTIP awards, Executive Directors should hold all vested shares (following payment of taxes) for a further two-year period after the three-year performance period.
LT I P AWA RD L E V E L S [ A]
Chief Executive Officer Other Executive Directors
Maximum Target award payout (as a % of salary) (as a % of salary) 300% 600% 240% 480%
[A] LTIP awards cannot exceed a target level of four times salary, as approved by shareholders.
Under the DBP, Executive Directors are required to invest no less than 25% and can choose to invest up to 50% of their annual bonus in deferred bonus shares. Half of these deferred bonus shares are matchable with additional performance-related shares which can be earned on the same basis as the LTIP vesting, see below.
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
65
Under the old DBP one free share was awarded on the purchase of four deferred bonus shares to encourage share ownership. REMCO has now decided to stop this practice, and from 2010 all matching shares will be performance-based.
T IM E L I N E F O R 2 0 0 9 DE F E R RE D B O N U S AWARD
Performance Period for Annual Bonus Deferral Period
E U R OPE A N CO MPA RATO R G ROU P
Allianz Anglo American AstraZeneca AXA Barclays BHP Billiton Deutsche Bank
Diageo E.ON GlaxoSmithKline HSBC Nokia Novartis Philips
Rio Tinto Roche Siemens Unilever Vivendi Vodafone
February Award
Release
2009
2010
2011
2012
2013
The LTIP and DBP vest on the basis of relative performance rankings as follows:
RE L ATI VE PE RF OR MAN CE RA N K I N G S
In certain circumstances, awards may be made under the RSP for retention purposes. Under the RSP, shares are subject to a restriction period of three years and are released with the addition of dividend shares if the individual remains in continuous service during this period. REMCO will retain discretion to reduce the number of shares vesting should either business or individual performance warrant review. Due to the range of national social security and tax regimes involved, Executive Directors’ pensions are maintained in their base country, the same as for other employees working internationally. Contribution rates for Executive Directors are the same as for other employees under these plans. REMCO will agree on retirement schedules with Executive Directors in order to plan effective leadership succession, taking into account applicable regulations and the individual’s preferences.
SHAREHOLDING
Shell’s overall rank against peers, taking into account the weightings of the four performance measures 1st 2nd 3rd 4th or 5th Number of conditional performance shares ultimately awarded 2 x initial LTIP award 2 x half of the deferred bonus shares 1.5 x initial LTIP award 1.5 x half of the deferred bonus shares 0.8 x initial LTIP award 0.8 x half of the deferred bonus shares Nil
Ultimately, our objective must always be to safeguard returns to shareholders. Therefore, if the TSR ranking is below median, the level of award that can be vested on the basis of the three other measures will be capped at 50% of maximum payout for LTIP and half of the deferred bonus shares for DBP. To deliver shares under these plans, we use market purchased shares, when required, rather than issue new ones. To date, no shareholder dilution resulted from these plans, although the rules of the plans permit it.
Use of discretion
REMCO believes that Executive Directors should align their interests with those of shareholders by holding shares in Royal Dutch Shell plc. In a business where it can take many years to reach a final investment decision on a project and many further years of construction before a facility comes on-stream, long-term shareholding properly aligns executive interests with those of shareholders better than any long-term incentive plan. Executive Directors are therefore expected to build up shareholdings to the value of two times their base salary over five years. The Chief Executive Officer’s required shareholding has been increased to three times salary. REMCO periodically translates these guidelines into fixed shareholding targets. These numbers are currently set at 240,000 shares for the Chief Executive Officer and 100,000 shares for other Executive Directors. Details of all Executive Directors’ shareholdings are found on page 58. Until these targets are met, Executive Directors must (in the course of the relevant year) acquire shares to the value of at least 50% of the after-tax gain arising from any long-term incentive awards vesting from 2008 onwards. Once the targets have been met, they are required to hold the shares and maintain that level for the full period of their appointment as Executive Director.
CONSISTENCY
During the shareholder consultation process, REMCO confirmed that in future it would exercise upward discretion only after consulting major shareholders. In addition, REMCO confirmed upfront that, for awards vesting in March 2010, no upward discretion would be applied. REMCO further noted that, since the new approach is based on four publicly reported, relative performance measures, the need for discretionary adjustments would, in any case, be rarer in future.
COMPETITIVENESS
Sound leadership is essential for long-term success; therefore attracting and retaining talented individuals is necessary for the delivery of Shell’s strategy. REMCO determines remuneration levels by reference to companies of comparable size, complexity and global scope. The current key comparator group is BP, Chevron, ExxonMobil and Total as well as a selection of top European-based companies listed below. The spread provides a balanced mix across industries and geography.
The remuneration structure is generally consistent for Executive Directors and senior managers of Shell. This consistency builds a culture of alignment to Shell’s purposes and a common approach to sharing in Shell’s success. Executive Directors’ benefits are also established in line with those for other employees on the basis of local market practices. Personal loans or guarantees are not provided to Executive Directors. They are not eligible to participate in all-employee share plans. They are employed under local Dutch terms and conditions – except for their pensions. Their base salary levels are therefore set in euro.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
REMCO periodically monitors pay and employment conditions of other employees within Shell to ensure alignment and consistency with remuneration of senior managers and Shell’s remuneration objectives. Given the current economic circumstances, REMCO reviewed 2010 salary increase budgets for countries where Shell has the majority of its employees. The salary freeze applied to Executive Directors was not imposed in the wider organisation.
COMPLIANCE AND RISK ASSESSMENT
ANNUAL BONUS
Details of the 2009 Shell Scorecard outcomes can be seen in the Key Performance Indicators section on page 8.
2 009 SH E L L SCO RE CARD COM PON E N TS
Total shareholder return (TSR) against major integrated oil companies 25% Net cash from operating activities 25% Operational excellence 30% Sustainable development [A] 20%
REMCO takes its decisions in the context of the Shell General Business Principles. It also ensures compliance with applicable laws and corporate governance requirements when designing and implementing policies and plans. REMCO ensures the remuneration structures and rewards meet riskassessment tests to ensure that shareholder interests are safeguarded and that inappropriate actions are avoided. For example: Executive Directors’ expenses are audited internally and reviewed by REMCO on a regular basis. All performance-based payments made to Executive Directors are subject to a ‘claw-back’ provision. This means that all incentives paid within 12 months of the first public issuance of the financial statements that require restatement due to material noncompliance will be subject to claw-back. The use of multiple performance measures for the annual scorecard and the revised LTIP ensure that unintended financial and behavioural consequences are mitigated. The measures taken to increase executive shareholdings ensure that executives bear the consequences of management decisions.
[A] Primarily based on number of reported cases of work-related injury, but also taking into account other sustainable development measures, details of which can be found in Shell’s Sustainability Report 2009 to be published in May 2010.
2009 Assessment – Scorecard result set at 1.10
In assessing Shell’s 2009 performance, REMCO noted that: the TSR was at the median value, being in third place; net cash from operating activities was on target at $21 billion; operational excellence was above target, with hydrocarbon production at 3,142 thousand boe/d, LNG sales was at 13.4 mtpa and refinery availability at 93.3%; sustainable development was outstanding, with Total Recordable Case Frequency (TRCF) of 1.4 per million working hours being the lowest recorded level in Shell’s history. REMCO also noted that 20 people (1 employee, 19 contractors) sadly lost their lives while working for Shell; 2009 income was 52% lower than that of 2008 (although on target relative to the oil price over the year and above target relative to the gas price over the year); over 5,000 jobs were eliminated, including over 20% of senior jobs. Overall, REMCO felt that the scorecard results did not reflect the overall competitive position and the need for improvement. Taking both Shell’s overall performance as well as the external environment into account, REMCO sought to use restraint and lowered the scorecard result from 1.28 to 1.10.
Individual performance
How REMCO managed remuneration in 2009
BASE SALARY
Following the remuneration review in 2009, REMCO decided to review and adjust base salary levels with effect from January 1 each year; in previous years the adjustment date was July 1. Recognising the economic turmoil during the year, REMCO decided to freeze Executive Directors’ base salaries for 18 months until January 2011 this was ; supported by the Directors. The next salary review will be in January 2011.
BAS E S ALA RY OF CUR RE N T E XE CU TI VE DI RE CTOR S (UNA UDITED)
Peter Voser Malcolm Brinded Simon Henry
¤ 1,500,000 1,175,000 850,000
Effective date July 1, 2009 July 1, 2008 May 1, 2009
An Executive Director’s individual performance is also taken into account in determining his annual bonus. Individual performance is assessed against personal targets, and REMCO uses its judgement to reduce or increase the bonus as it deems appropriate to reflect how well the Executive Director met those targets. REMCO assessed the individual performance of each Executive Director serving during 2009 and determined to make no further adjustment to their individual annual bonus.
Simon Henry was on expatriate terms before he became Executive Director and for practical reasons REMCO decided to keep him on expatriate terms for the rest of 2009. As of January 2010 Simon Henry is employed on local terms, the same as other Executive Directors.
20 09 S HE L L S CORE CA RD F OR E XE C U TIVE DI RE CTOR S
Measures Total shareholder return Net cash from operating activities Operational excellence Production Sales of liquified natural gas Refinery and chemical plant availability Sustainable development Overall performance
Unit % $ billion thousand boe/d mtpa % TRCF+
Weight 25% 25% 30% 12% 6% 12% 20% 100%
Score
Below Threshold
Range On Target Above Outstanding
1.0 0.9 1.4 1.3 0.9 1.6 2.0 1.28
0.00 0.39 0.40 0.79 0.80 1.19 1.20 1.59 1.60 2.00
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2009 Annual bonuses
Award
The target level of the 2009 bonuses was unchanged from 2008. Other than Malcolm Brinded, each Executive Director received a pro-rata bonus for the portion of the year they served as Executive Director. Hence, Chief Executive Officer Peter Voser received a bonus based on a target of 110% for the first six months and 150% for the last six months of 2009. Similarly, Chief Financial Officer Simon Henry received a bonus based on a target of 70% for the first four months and 110% for the last eight months of the year. Taking into account the 2009 Shell Scorecard result, individual performances and the pro-rata portions, REMCO determined the annual bonuses payable for 2009 as: ¤1,864,000 for the Chief Executive Officer, ¤1,422,000 for Executive Director Malcolm Brinded and ¤542,000 for the Chief Financial Officer.
OTHER CASH AND NON-CASH EARNINGS
Peter Voser, Malcolm Brinded and Simon Henry all elected to put 50% of their annual bonuses into the DBP on February 5, 2010, resulting in share awards as follows, half of which are matchable:
AWARDE D SH ARE S
Peter Voser [A] Malcolm Brinded Simon Henry [C] [A] Royal Dutch Shell plc Class A shares. Royal Dutch Shell plc Class B shares. [C] Simon Henry deferred 50% of his full year bonus.
Deferred shares awarded 47,121 37,474 17,607
For details of DBP awards and releases see the Deferred Bonus Plan table on page 72.
RESTRICTED SHARE PLAN
Executive Directors received: car allowances, representation allowances (which is a Dutch tax feature to simplify expenses related to business entertainment at home, amongst other things), transport to and from home and office, as well as employer contributions to insurance plans. Individuals who are not living in their base country received additional amounts for their children’s school fees. The Executive Directors’ 2009 Earnings table is on page 70.
LONG-TERM INCENTIVE PLAN Vesting
No RSP awards were made in 2009, nor did any outstanding awards vest. The award made to Linda Cook lapsed effective December 31, 2009. For details of outstanding awards, see the Restricted Share Plan table on page 72.
PENSION INTERESTS
In 2007 Executive Directors were granted a conditional award of performance shares under the LTIP. At the end of the performance period, which lasted from January 1, 2007 to December 31, 2009, Shell was ranked fifth amongst its peer group in terms of TSR. Therefore, zero shares were released under the LTIP.
Award
During 2009 Peter Voser, Malcolm Brinded, Simon Henry, Jeroen van der Veer and Linda Cook accrued retirement benefits under defined benefit plans. Linda Cook also accrued retirement benefits under defined contribution plans. In addition to the standard Swiss pension arrangements, Peter Voser has an unfunded pension arrangement that was created in 2006 when pensionable salaries in the standard arrangements were capped following a change in Swiss regulations. For details of accrued pension benefits see the Pensions table on page 74. The transfer values have been calculated in accordance with Actuarial Guidance Note GN11/UK.
BENEFITS
On February 2, 2010, REMCO determined to award the Chief Executive Officer a conditional award of performance shares under the LTIP with a face value of three times his base salary. For other Executive Directors the level of award was retained at 2.4 times base salary. On February 5, 2010, the following shares were awarded conditionally:
AWAR DE D S H ARE S
Peter Voser [A] Malcolm Brinded Simon Henry [A] Royal Dutch Shell plc Class A shares. Royal Dutch Shell plc Class B shares.
Total number of shares conditionally awarded 227,560 148,660 107,541
REMCO decided to discontinue the use of the representation allowance for Executive Directors’ expenses as of 2010. Instead, business expenses will be reimbursed on an itemised basis, consistent with the global process for other staff. The 2009 representation allowances are included in the Earnings table, within cash benefits.
FORMER EXECUTIVE DIRECTOR – JEROEN VAN DER VEER
Jeroen van der Veer had intended to retire on June 30, 2008, after he had turned 60. But in 2007 the Board asked him to stay on as Chief Executive for an extra year. He agreed with the Board that an extra year of service as Chief Executive would provide stability and continuity for the management of the company. Around the same time, Shell in the Netherlands introduced new pension plan rules, providing flexibility to retire between the ages of 55 and 65 but with an actuarial discount, along with lower accrual rates. Like other Dutch employees, he was required to accept the new regulations in order to remain in employment beyond his original retirement date. As Jeroen van der Veer was disadvantaged by this move, the Board agreed to a lump-sum payment of ¤843,000 to give him the same overall benefit that he would have accrued through to June 30, 2009 under the old regulations. This left him in the same position as if the pension regulations had not changed. In respect of his service as Chief Executive, Jeroen van der Veer also received a pro-rata annual bonus for the first six months of the year, January 1 to June 30, 2009, of ¤1,650,000.
For details of LTIP awards and releases see the Long-term Incentive Plan table on page 71.
DEFERRED BONUS PLAN Vesting
In 2007 Executive Directors were granted conditional awards of matching shares under the DBP. The performance period was January 1, 2007, to December 31, 2009. Given that the performance condition of the DBP is consistent with that of the 2007 LTIP, REMCO decided to release zero performance-related matching shares under the DBP.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Executive Directors
Jeroen van der Veer remains on the Board as a Non-executive Director, so his pension will be reported in future Directors’ Remuneration Reports.
FORMER EXECUTIVE DIRECTOR – LINDA COOK
REMCO will recommend terms and conditions for any situation that arises where a severance payment is appropriate, taking into consideration applicable law and corporate governance provisions.
External appointments
The Board considers external appointments to be valuable in broadening Executive Directors’ knowledge and experience. The number of outside directorships is generally limited to one, except when an Executive Director is within a year of retirement. The Board must explicitly approve such appointments. Executive Directors are allowed to retain any cash or share-based compensation they receive from such external board directorships.
E X T E RN A L A PPOI N T ME N T S
Linda Cook resigned as an Executive Director of the Company on June 1, 2009, following the changes in organisation and responsibilities of senior management referenced on page 11. Linda Cook had served Shell in various capacities for 29 years, of which the last six years as an Executive Director of the Company. As an Executive Director she had a contract of employment with Shell Expatriate Employment US Inc (SEEUS), governed by the laws of the Netherlands, where the Gas & Power business, which she led, was located. Dutch law makes provisions in certain areas that are different from those found in the UK. At the time of her resignation as Executive Director, Linda Cook agreed separation terms with SEEUS, as follows: Linda Cook returned to the United States where she was employed by Shell Oil Company to support transition, particularly in the Gas & Power business, until December 31, 2009, which was agreed as her last day of employment. For the period of her employment with Shell Oil Company, Linda Cook’s salary was set at $1,400,000 (¤1,035,000) per annum and she continued to participate in normal US benefits. Linda Cook received a performance bonus for 2009 in the amount of $1,540,000 (¤1,107,000). The separation agreement with Linda Cook provided for a severance payment of $7,600,000 (¤5,464,000). As Linda Cook’s contract of employment was governed by Dutch law, this severance payment was calculated on the basis of the Dutch courts’ formula, in line with prevailing Dutch employment law practice at the time the severance was agreed. The formula calculates compensation based on age, years of service and salary including bonus. Linda Cook’s grants under the Long-term Incentive Plan, Deferred Bonus Plan and Share Option Plan continue and vest consistent with the plan rules. The grant under the Restricted Share Plan lapsed on December 31, 2009.
Executive Director Peter Voser [A]
Appointee organisation UBS AG
Total fees rounded to the nearest thousand CHF 425,000 as cash or vested shares held for four years. ¤38,000 from the N.V. and £34,000 from the plc. $42,000 cash, $54,000 stock units, deferred until retirement from Boeing service.
Jeroen van der Veer Unilever N.V. and Unilever plc Linda Cook The Boeing Company
[A] Peter Voser will not be standing for re-election to the Board of UBS AG at its Annual General Meeting in April 2010. Fees are prorated according to the period Jeroen van der Veer (until June 30, 2009) and Linda Cook (until June 1, 2009) served as Executive Directors at Royal Dutch Shell plc.
Executive Directors’ contracts
Executive Directors’ contracts that have been entered into with the companies are set out in the table below. Contracts for Executive Directors are governed by Dutch law, consistent with those of other Netherlands-based senior managers and staff. The contracts end by notice of either party or automatically at retirement.
E X E CU TI V E DI RE CT OR S’ E M PL OY ME N T CO N T RA CT S
Executive Director Peter Voser Malcom Brinded Simon Henry Jeroen van der Veer Linda Cook
Employing Company Shell Petroleum N.V. Shell Petroleum N.V. Shell Petroleum N.V. Shell Petroleum N.V. Shell Expatriate Employment US Inc.
Contract date July 20, 2005 July 20, 2005 May 20, 2009 July 20, 2005 August 1, 2005
Contracts do not contain predetermined settlements for early termination. Under Dutch law, their contracts entitle them to the statutory notice period that applies for employees in the Netherlands. This is one month for an employee and up to a maximum of four months for the employer, depending on the duration of the employment contract concerned at the time of termination.
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NON-EXECUTIVE DIRECTORS Remuneration policy
The Board determines the fees payable to Non-executive Directors (NEDs) of the Company, within a limit specified by the Articles of Association of ¤4,000,000. In 2009 the total amount of fees payable to NEDs was ¤2,119,000. Whilst the Board reviews NED remuneration levels periodically to ensure they are aligned with other major listed companies, no such review was undertaken in 2009. A review of the fee level for the Chairman of the Board was undertaken during the year; however, taking into account the economic environment, it was decided that no adjustments would be made in 2009. The Chairman and the other NEDs do not participate in any incentive or performance-based remuneration plans, nor are there any pension arrangements. Also, personal loans or guarantees are not granted to Non-executive Directors. NEDs receive an additional fee of ¤4,500 for any Board meeting involving intercontinental travel – except for one meeting per year held in a location other than The Hague.
N ON -E X E CU T IVE DI RE CT OR S F E E S STRU CTU RE (UNAUDITE D )
The earnings of the NEDs in office during 2009 can be found on page 75.
Pension interests
NEDs do not accrue any retirement benefits as a result of their Nonexecutive Directorships with the Company. During their services as employees, Jeroen van der Veer and Maarten van den Bergh accrued retirement benefits, which are summarised on page 74.
COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
Shell paid and/or accrued a total amount of compensation of $48,895,000 [A] (2008: $57,985,000) for services in all capacities that Directors and Senior Management at Shell provided during the year ended December 31, 2009. In addition, Shell accrued a total amount of $19,027,000 (excluding inflation), to provide pension, retirement and similar benefits for Directors and Senior Management during the year ended December 31, 2009.
[A] Compensation includes gains realised from long-term incentive awards released and share options exercised during the year.
¤
Chairman of the Board NED Annual Fee Senior Independent Director Audit Committee Chairman [A] Member Remuneration Committee Chairman [A] Member Corporate and Social Responsibility Committee Chairman [A] Member Nomination and Succession Committee Chairman [A] Member Intercontinental Travel Fee
750,000 115,000 55,000 45,000 25,000 35,000 17,250 35,000 17,250 25,000 12,000 4,500
Biographies of the Directors and Senior Management are found on pages 53-56.
[A] The Chairman of a Committee does not receive an additional fee for membership in that Committee.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
DATA TABLES
E A RN I N G S O F E X E CU T I V E DI RE C TO RS I N O FF I CE D U R IN G 2 0 0 9 (AUDITED) ¤ THOUSANDS
Peter Voser 2009 2008 Salary Bonus [C] Cash benefits [D] Non-cash benefits [G] Total in euro Total in dollar Total in sterling 1,267 1,864 23 3 3,157 4,390 2,814 1,010 1,423 22 1 2,456 3,592 1,958
Malcolm Brinded 2009 2008 1,175 1,422 8 49 2,654 3,692 2,367 1,148 1,616 8 59 2,831 4,140 2,257
Simon Henry [A] 2009 2008 449 542 76 2 1,069 1,486 952 – – – – – – –
Jeroen van der Veer [A] 2009 2008 1,000 1,650 850 [E] 5 3,505 4,875 3,125 1,925 3,750 14 11 5,700 8,338 4,546
2009
Linda Cook [A] 2008 1,010 1,423 155 56 2,644 3,869 2,109
431 461 5,612 [F] 38 6,542 9,099 5,833
[A] Earnings for Simon Henry, Jeroen van der Veer and Linda Cook relate to their time as Executive Directors in 2009. In addition Linda Cook received a salary of ¤604,000 ($817,000) and a bonus of ¤646,000 ($898,000) for the remaining seven months of the year. Total base salary for the full year was ¤1,035,000 ($1,400,000), bonus ¤1,107,000 ($1,540,000). [C] The annual bonus figures are shown in the table in their related performance year and not in the following year in which they are paid (see also the DBP table on page 72). [D] Includes representation allowances, employer contributions to insurance plans, school fees, car allowances and tax compensation. [E] Jeroen van der Veer received a lump sum cash payment of ¤843,000 to offset a loss in pension benefits caused by deferring his retirement and extending his service to June 30, 2009 (see pages 67-68 “Former Executive Director – Jeroen van der Veer”). [F] Linda Cook’s severance payment of ¤5,464,000 ($7,600,000) is included in Cash benefits along with other cash benefits explained in [D] (see page 68 “Former Executive Director – Linda Cook”). [G] Comprises life and medical insurance and company-provided transport for home to office commuting.
The aggregate amount paid to or receivable by Executive Directors from Royal Dutch Shell plc and other Shell companies for services in all capacities during the fiscal year ended December 31, 2009 was ¤16,927,000 (2008: ¤17,163,000).
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71
Executive Directors’ long-term incentive interests
The following tables show the LTIP, the DBP, the RSP and the share option interests of the Executive Directors in office during 2009.
L O N G - T E RM I N CE N T IV E PL A N
Audited Number of shares under award as at January 1, 2009 [A] Additional Total number of shares Number of Dividend Dividend shares under Value of shares awarded/ shares Market shares award as at shares at released (lapsed) accrued price at accrued December 31, release during the during the date of during the in prior Original 2009 year (thousands) [C] year year years award award
Royal Dutch Shell plc Class A shares Peter Voser 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 Malcolm Brinded 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 2009 to 2011 2008 to 2010 2007 to 2009 Jeroen van der Veer 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 Linda Cook 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 64,971 49,058 39,378 34,798 2,386 3,474 4,476 49.23 71.66 68.02 64.89 4,116 3,259 2,715 726 – – 20,000 – – (20,000) – – 919 69,087 54,703 45,567 0 2,983 3,158 2,283 – 309,358 192,949 156,202 137,168 9,337 13,812 17,868 19.40 23.97 26.12 27.12 $ 19,945 13,042 10,962 2,742 – – 78,889 – – (78,889) – – 1,373 $ 329,303 215,328 180,976 0 5,603 4,153 3,478 – 7,496 6,176 4,793 – $ 153,855 114,201 91,730 81,191 26,000 26,000 26,000 950 1,978 5,433 7,977 10,363 16.58 17.58 17.07 19.33 15.40 20.15 18.57 ¤ 10,101 7,855 6,546 1,662 1,218 1,769 1,837 – – – – – – ¤ – – 46,608 – – (46,608) – – 717 163,956 127,489 106,253 0 27,218 28,719 29,815 2,384 1,801 1,335 – 389 531 500 ¤ 3,394 3,587 2,674 – 539 1,042 992 $ 128,074 98,623 78,751 68,952 4,772 6,963 8,982 19.40 23.97 26.12 27.12 £ 8,257 6,666 5,527 1,378 – – 39,656 – – (39,656) – – 690 £ 136,331 110,061 91,241 0 2,320 2,123 1,753 – £ 3,103 3,157 2,417 – $ ¤ ¤
Unaudited
Expected
Potential
gains as at value Decemof the ber 31, performance 2009 share award (thousands) [D] (thousands) [E]
¤ $ ¤ – 0 0 – £ – 0 0 – 0 379 386 ¤ – 0 0 – $ – 0 0 – $ – 0 0 – 0 546 556 $ – 0 0 – $ – 0 0 –
Royal Dutch Shell plc Class B shares
Simon Henry (Performance Share Plan Awards) [F]
Royal Dutch Shell plc Class A shares
Royal Dutch Shell plc Class A ADRs
[A] The 2009 award was made on January 30, 2009. Dividend shares are performance related and accumulate each year at an assumed notional LTIP award of 100% and a dividend payment of 100%. When an award vests, dividend shares will be awarded as if the vested shares were held from the original award date. [C] The vested awards were delivered on April 30, 2009 at a share price of ¤17.41 for Peter Voser and Jeroen van der Veer, £15.39 for Malcolm Brinded and $45.95 for Linda Cook. [D] The expected value of the 2009 awards is equal to 87.71% of the face value of the conditional awards. The expected value of the TSR-related conditional performance shares has been calculated on the basis of a Monte Carlo pricing model. Currently, the Monte Carlo model is considered the most appropriate way to value a plan with a relative market condition such as TSR. In respect of the three non-market measures, a statistical equal probability of ranking outcome has been used. The valuations were provided by Towers Watson after which a risk of forfeiture discount was applied. [E] Potential gains represent the value of the conditional shares awarded in previous years under the LTIP at the end of the financial year. This is calculated by multiplying the fair market value of the shares of Royal Dutch Shell plc, at December 31, 2009, by the number of shares under the LTIP that would vest based on the achievement of performance conditions as determined by TSR up to December 31, 2009. [F] All performance shares awarded to Simon Henry were awarded under the Performance Share Plan (PSP) prior to his appointment as an Executive Director. The expected values of the PSP awards have been calculated on the basis of a Monte Carlo pricing model, adjusted with PSP conditions. The 2009 PSP award date was March 10, 2009. The 2007 award vested at 61% on March 10, 2010. More information about the Performance Share Plan can be found on page 134.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
DE F E RRE D BO N U S PLA N (AUDITE D )
Number of shares under award as at January 1, 2009 Nonperformance related matching shares Dividend shares accrued in Dividend shares accrued Performance related matching shares released Dividend shares accrued Number of shares on the performance released/ (lapsed) related matching shares during the year Total number of shares under award as at
Number of shares
Market price at
Value of shares at
awarded at deferred from grant the bonus [C] Awards [A] Royal Dutch Shell plc Class A shares Peter Voser 2009 to 2011 36,687 9,171 2008 to 2010 14,690 2007 to 2009 21,477 2006 to 2008 9,722 Royal Dutch Shell plc Class B shares Malcolm Brinded 2009 to 2011 2008 to 2010 2007 to 2009 2006 to 2008 44,073 34,022 25,017 23,046 3,673 5,369 2,431
date of prior years [D] award ¤ 19.40 888 2,374 1,462 23.97 26.12 27.32 £ 16.58 17.58 17.07 19.54 ¤
during the year [D]
December 31, release 2009 (thousands) [E] ¤ 48,815
2,957 1,241 1,884 241 – – 1,215 – – 170 – – 15,241 – – 265 £
20,492 31,104 –
11,018 8,505 6,254 5,762
2,023 2,719 3,405
3,617 2,925 2,232 585
– – 2,881
– – 399
– – 36,078
– – 555 ¤
58,708 47,475 36,222 –
Royal Dutch Shell plc Class A shares Jeroen van der Veer 2009 to 2011 96,674 24,168 2008 to 2010 60,200 15,050 2007 to 2009 39,050 2006 to 2008 35,459 Royal Dutch Shell plc Class A ADRs Linda Cook 2009 to 2011 2008 to 2010 2007 to 2009 18,612 14,615 10,740 9,763 8,865
3,641 4,315 5,335
19.40 23.97 26.12 27.32 $ 49.23 71.66 68.02
7,791 5,086 3,427 878
– – 4,433
– – 621
– – 55,591
– – 968 $
128,633 83,977 56,554 –
4,652 3,654 2,685
888 1,184
1,473 1,213 926
– –
– –
– –
– –
24,737 20,370 15,535
[A] Awards made in 2007, 2008 and 2009 refer to the portion of the 2006, 2007 and 2008 annual bonus, respectively, which was deferred, and the related accrued dividends and matching shares. The 2009 award was made on January 30, 2009. [C] Representing the proportion of the annual bonus that has been deferred and converted into notional share entitlements (deferred bonus shares), in which there is no beneficial ownership. The value of the deferred bonus shares awarded for 2009 is also included in the annual bonus figures in the Earnings of Executive Directors table on page 70. [D] Representing dividends accumulated since the award on the number of shares equal to the deferred bonus shares awarded. [E] The vested awards were delivered on April 30, 2009 at a share price of ¤17.41 for Peter Voser and Jeroen van der Veer and £15.39 for Malcolm Brinded.
RE S T RI CT E D S HA RE PL A N (AUDITE D )
Number of shares under award as at January 1, 2009 [A] Number of Dividend shares accrued in prior years 1,264 1,413 645 Market price at date of award ¤22.56 £17.50 $70.12 Dividend shares accrued during the year 3,039 3,569 1,497 shares released/ (lapsed) during the year – – (25,131) Value of shares at release/ (lapse) (thousands) Total number of shares under award as at December 31, 2009 50,180 57,923 0 Value of shares as at December 31, 2009 (thousands) ¤1,059 £1,049 0
Original Peter Voser Malcolm Brinded Linda Cook Type of share RDSA RDSB RDS.A ADR award 45,877 52,941 22,989
$(1,511)
[A] Restricted share awards were made on August 1, 2008, following shareholder approval at the 2008 AGM. Consistent with the terms of her termination, the award made to Linda Cook lapsed on December 31, 2009.
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73
SH ARE O PTI ON S (A UDITED)
Number of options under award as at January 1, 2009 Royal Dutch Shell plc Class A shares Malcolm Brinded 50,000 230,000 Jeroen van der Veer 67,500 80,000 105,000 300,000 300,000 Linda Cook 212,600
Number of options exercised during the year – – – – – – – – – – – – – – – – – – – –
Number of options under award as at December 31, Exercisable 2009 Grant price [A] from date ¤ 50,000 31.05 21/03/05 230,000 67,500 80,000 105,000 300,000 300,000 212,600 229,866 52,797 4,022 39,968 229,866 12,872 16,694 22,728 32,583 43,750 35,000 70,500 18.41 29.77 31.30 31.05 18.41 20.65 21.34 £ 15.04 17.58 19.59 19.21 13.89 19.21 18.20 12.74 13.89 $ 60.75 54.35 40.64 19/03/06 23/03/03 26/03/04 21/03/05 19/03/06 07/05/07 05/11/07 05/11/07 23/03/03 13/11/03 26/03/04 07/05/07 26/03/04 21/03/05 19/03/06 07/05/07 08/03/02 21/03/03 19/03/04 Expiry date 20/03/12 18/03/13 22/03/10 25/03/11 20/03/12 18/03/13 06/05/14 04/11/14 04/11/14 22/03/10 12/11/10 25/03/11 06/05/14 25/03/11 20/03/12 18/03/13 06/05/14 07/03/11 20/03/12 18/03/13
Realisable gains as at December 31, 2009 (thousands) ¤ $ – – 620 – – – 809 137 – 893 – – – 1,165 197 –
Realised gains on options exercised during the year ¤ $ – – 0 – – – 0 0 – £ 0 0 – – 0 – – 0 0 0 – – – 0 0 – $ 0 0 – – 0 – – 0 0 $ – 0 0
Royal Dutch Shell plc Class B shares Peter Voser 229,866 Malcolm Brinded 52,797 4,022 39,968 229,866 Simon Henry [C] 12,872 16,694
£ $ 708 1,143 28 – – 972 – – 122 138 46 – – 1,569 – – 197 222 $ – 202 1,373
22,728 32,583 Royal Dutch Shell plc Class A ADRs Linda Cook [D] 43,750 35,000 70,500
[A] The grant price is the average of the opening and closing share prices over a period of five successive trading days prior to and including the day on which the options are granted (not at a discount). Represents the value of unexercised share options granted in previous years, calculated by taking the difference between the grant price of the option and the fair market value of the shares of Royal Dutch Shell plc at December 31, 2009, multiplied by the number of shares under option at December 31, 2009. The actual gain realised, if any, will depend on the market price of the Royal Dutch Shell plc shares at the time of exercise. [C] All stock options awarded to Simon Henry were awarded prior to his appointment as an Executive Director. [D] Prior to her appointment as an Executive Director, Linda Cook was awarded US dollar-based options.
Shell suspended share option grants in 2005 in favour of conditional share awards under the LTIP and the DBP. The share options listed above relate to Royal Dutch Shell plc shares and have a 10 year term. The price range of the Royal Dutch Shell plc Class A shares listed at the Euronext Exchange during the year was ¤15.27 to ¤21.46 and the market price at the year end was ¤21.10. The price range of the Royal Dutch Shell plc Class B shares listed at the London Stock Exchange
during the year was £13.15 to £18.97 and the market price at the year end was £18.12. The price range of the Royal Dutch Shell plc Class A ADRs listed at the NYSE during the year was $38.29 to $63.75 and the market price at year end was $60.11. During 2009 Executive Directors did not realise gains from exercised share options.
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Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
PE N S I ON S (AUDITE D )
THOUSANDS
At December 31, 2009 CHF $ Peter Voser [A] Malcolm Brinded Simon Henry Jeroen van der Veer [C] Maarten van den Bergh [D] Linda Cook [E] 1,154 £ 568 304 ¤ 1,527 677 1,120 $ 917 490 $ 2,201 975 $ 1,753
Increase over the year CHF $ 388 £ 16 135 ¤ 195 4 377 $ 25 219 $ 281 5 $ 453
Accrued pension Increase over the year (excluding inflation) CHF $ 388 £ 14 135 ¤ 184 (2) 377 $ 22 218 $ 265 (2) $ 430
PE N S I ON S (AUDITE D )
THOUSANDS
Transfer values of accrued benefits Increase in accrued pension over the year (excluding inflation) less Director’s contribution CHF $ 4,402 £ 302 2,450 ¤ 1,739 (21) 4,272 $ 488 3,955 $ 2,506 (30) $ 6,091
At December 31, 2009 CHF $ Peter Voser [A] Malcolm Brinded Simon Henry Jeroen van der Veer [C] Maarten van den Bergh [D] Linda Cook [E] 13,308 £ 13,518 5,575 ¤ 23,742 9,770 12,915 $ 21,821 8,999 $ 34,218 14,080 $ 24,849
At December 31, 2008 CHF $ 8,490 £ 12,888 2,695 ¤ 20,301 9,590 8,041 $ 18,752 3,922 $ 28,605 13,512 $ 11,500
Increase over the year less Director’s contribution CHF $ 4,745 £ 602 2,849 ¤ 3,363 91 4,605 $ 972 4,600 $ 4,847 131 $ 13,350
[A] The pension values for Peter Voser include all pension benefits. This includes a capped defined benefit pension in the Swiss pension fund based on salary up to a cap of CHF 821,000 and benefits for salary in excess of this level in an individual savings account and an unfunded benefit promise. As at December 31, 2009, his capped defined benefit pension was CHF 389,000 and the transfer value in respect of this benefit is CHF 4,438,000. The individual savings account was CHF 2,386,000 at the end of the year. The balance of CHF 6,483,000 will be provided through an unfunded pension arrangement. Malcolm Brinded and Simon Henry elected to have their benefits in the Shell Contributory Pension Fund restricted to the applicable lifetime allowance with any excess provided from an unfunded defined benefit scheme (Shell Supplementary Pension Plan). This promise of delivery is contained in the aggregate values presented in the table, and therefore not disclosed separately. [C] The pension values for Jeroen van der Veer are based on a retirement date of June 30, 2009. The increase in his pension is partly due to an enhancement related to a change in his pension terms with regard to accrual up to January 1, 2006, and partly due to exchange of widower’s pension for additional member pension in line with pension fund plan regulations. The transfer value of his pension excludes pension payments made to Jeroen van der Veer during 2009, which amounted to approximately ¤765,000. [D] Maarten van den Bergh retired from the board as NED on May 19, 2009. The values relating to the Shell Petroleum Company Limited Managing Directors’ Pension Scheme are accrued in sterling and have been converted into euro at the rate of exchange on December 31, 2009. [E] Linda Cook’s pension and the transfer value of her pension increased significantly during the year as a result of: 1) achieving immediate pension eligibility, a standard provision of the plan for all employees when a certain age and service threshold is reached, which entitled Linda to draw her pension at age 60 instead of 65 without reduction for early payment; and at the same time 2) vesting in certain enhanced pension arrangements offered to Linda Cook upon her promotion to senior leadership on July 1, 1997. These arrangements, which have now been discontinued, were a normal provision of senior leadership remuneration in the US at the time and consist of: (i) five additional years of pensionable service; (ii) entitlement to draw her pension at age 55 instead of 60 without reduction for early payment; (iii) definition of final salary changed from a three year average of salary plus bonus to one year average of salary plus three year average of bonus. The greatest impact on the increase in transfer value of $13,350,000 relates to 1) and (ii) above. Because these early pension benefits only vested in 2009, they were not included in previously reported transfer values. In addition, the company contributed a total of $237,000 (from January 1 to June 1, 2009) to the Shell Provident Fund for US employees and the Senior Executive Group Deferral Plan, both of which are defined contribution plans.
Shell Annual Report and Form 20-F 2009 Directors’ Remuneration Report ? Data tables
75
E A RN IN G S OF N O N - E X E CU T I V E DIR E CTO RS I N O F F ICE D U R IN G 2 0 0 9 (AUDITE D )
THOUSANDS
Non-executive Directors Josef Ackermann Maarten van den Bergh [A] Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine Morin-Postel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer [C] Hans Wijers [D]
¤ 132 51 146 207 162 145 160 750 163 66 137
2009 $ 184 71 202 288 225 202 223 1,043 227 92 190
¤ 80 127 143 189 155 134 145 750 171 – –
2008 $ 117 186 208 277 226 196 213 1,097 250 – –
[A] Maarten van den Bergh retired from the board on May 19, 2009. Jorma Ollila receives no additional payments for chairing the Nomination and Succession Committee. He does have the use of an apartment when on business in The Hague. [C] Jeroen van der Veer was appointed on July 1, 2009. [D] Hans Wijers was appointed on January 1, 2009.
Additional statutory disclosure
PERFORMANCE GRAPHS
The graphs below compare, on the basis required by the UK Companies Act 2006, Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the TSR performance of Royal Dutch Shell plc over the past five financial years with that of the companies comprising the Euronext 100 share index and the FTSE 100 share index. The Board regards the Euronext 100 and the FTSE 100 share indices as appropriate broad market equity indices for comparison, as they are the leading market indices in Royal Dutch Shell plc home markets.
HISTORICAL TSR PERFORMANCE OF ROYAL DU TCH SHELL PLC CLA SS A SHARES HISTORICAL TSR PERFORMANCE OF ROYAL DUTCH SHELL PLC CLASS B SHARES
Growth in the value of a hypothetical ¤100 holding [A] over five years and since the Unification on July 20, 2005. Euronext 100 comparison based on 30 trading day average values.
RDS A VE RS U S E U RON E XT 100
Value of hypothetical £100 Holding 175 150 125 100 [A] 75 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Royal Dutch Shell plc Class A Euronext 100
Growth in the value of a hypothetical £100 holding [A] over five years and since the Unification on July 20, 2005. FTSE 100 comparison based on 30 trading day average values.
RDS B V E RS U S F TS E 1 0 0
Value of hypothetical £100 Holding £175 £150 £125 £100 [A] £75 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Royal Dutch Shell plc Class B FTSE 100
Signed on behalf of the Board
Michiel Brandjes
Company Secretary March 15, 2010
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Shell Annual Report and Form 20-F 2009 Corporate governance
CORPORATE GOVERNANCE
The Company is committed to the highest standards of corporate governance and believes that such standards are essential to business integrity and performance. This Corporate Governance Report sets out the policies and practices of the Company that have been applied during the year. The Board confirms that during the year the Company complied with the principles and provisions set out in Section 1 of the 2008 Combined Code on Corporate Governance (the Combined Code). In addition to complying with applicable corporate governance requirements in the UK, the Company must follow the rules of the Euronext Amsterdam Stock Exchange as well as the Dutch securities laws due to its listing on this exchange. The Company must also follow US securities laws and the New York Stock Exchange (NYSE) rules and regulations due to registration of its securities in the USA and the listing of its securities on the NYSE.
accordance with English law, the Company’s Audit Committee makes recommendations to the Board, for it to put to shareholders for approval in General Meeting, regarding the appointment, re-appointment and removal of independent auditors. Consequently, the Company’s Audit Committee is not directly responsible for the appointment of independent auditors.
SHAREHOLDER APPROVAL OF SHARE-BASED COMPENSATION PLANS
NYSE governance standards
In accordance with the NYSE rules for foreign private issuers, the Company follows home-country practice in relation to corporate governance. However, foreign private issuers are required to have an audit committee that satisfies the requirements of US Securities and Exchange Commission’s Rule 10A-3 and the Company’s Audit Committee satisfies such requirements. The NYSE also requires a foreign private issuer to provide certain written affirmations and notices to the NYSE as well as a summary of the ways in which its corporate governance practices significantly differ from those followed by domestic US companies under NYSE listing standards. The Company’s summary is given below and can also be found at www.shell.com/investor.
NON-EXECUTIVE DIRECTOR INDEPEN DENCE
The Company complies with the listing rules of the UK Listing Authority which require shareholder approval for the adoption of share-based compensation plans which are either long-term incentive schemes in which Directors can participate or schemes which may involve the issue of new shares. Under the UK Listing Authority rules, such plans cannot be changed to the advantage of participants without shareholder approval, except for certain minor amendments, for example to benefit the administration of the plan or to take account of tax benefits. The rules on the requirements to seek shareholder approval for share-based compensation plans, including those in respect of material revisions to such plans, may deviate from the NYSE listing standards.
CODE OF ETHICS
The NYSE listing standards require that listed companies adopt a code of business conduct and ethics for all directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. The Company has adopted the Shell General Business Principles (see below), which satisfy the NYSE requirements. The Company also has internal procedures in place by which any employee can raise in confidence accounting, internal accounting controls and auditing concerns. Additionally, any employee can report irregularities to management through a worldwide dedicated telephone line and website without jeopardising his or her position (see below).
The Board follows the provisions of the Combined Code in respect of Non-executive Director independence. The Combined Code states that at least half the Board, excluding the Chairman, should comprise Nonexecutive Directors determined by the Board to be independent. In the case of the Company, the Board has determined that a majority of Non-executive Directors are wholly independent (see page 77 for more information).
NOMINATING/ CORPORATE GOVERNANCE COMMITTEE AND COMPEN SATION COMMITTEE
Shell General Business Principles
The Shell General Business Principles define how Shell companies are expected to conduct their affairs. These principles include, among other things, Shell’s commitment to support fundamental human rights in line with the legitimate role of business and to contribute to sustainable development. They can be found at www.shell.com/sgbp.
Shell Code of Conduct
Directors and employees are required to comply with the Shell Code of Conduct, which is intended to help them put Shell’s business principles into practice through the basic rules and standards they are expected to follow and the behaviour expected of them. The Shell Code of Conduct is available online at www.shell.com/codeofconduct.
The NYSE listing standards require that a listed company maintain a Nominating/Corporate Governance Committee and a Compensation Committee, both composed entirely of independent directors and with certain specific responsibilities. The Company’s Nomination and Succession Committee and Remuneration Committee, respectively, comply with these requirements, except that the terms of reference of the Nomination and Succession Committee require only a majority of the committee members to be independent.
AUDIT COMMITTEE
Code of Ethics
Executive Directors and Senior Financial Officers of Shell must also comply with a Code of Ethics. The Code of Ethics is specifically intended to meet the requirements of Section 406 of the SarbanesOxley Act and the listing requirements of the NYSE (see above). The Code of Ethics can be found at www.shell.com/codeofethics.
As required by NYSE listing standards, the Company maintains an Audit Committee for the purpose of assisting the Board’s oversight of the financial statements, its internal audit function and its independent auditors. The Company’s Audit Committee is in full compliance with the US Securities and Exchange Commission’s Rule 10A-3 and Section 303A.06 of the NYSE Listed Company Manual. However, in
Shell Global Helpline
Shell employees may raise ethics and compliance concerns through the Shell Global Helpline. The Shell Global Helpline is a worldwide reporting mechanism, operated by an external third party, which is
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open 24 hours a day, seven days a week through local telephone numbers and through the internet at www.shell.com or www.compliance-helpline.com/shell.
that role on June 30, 2009. The standard by which Directors’ independence is determined can be found online at www.shell.com/ investor within the terms of reference of the Nomination and Succession Committee.
Board structure and composition
For the period up to the 2009 Annual General Meeting (the AGM), the Board comprised the Chairman, Jorma Ollila, four Executive Directors including the Chief Executive, and nine Non-executive Directors, including the Deputy Chairman and Senior Independent Non-executive Director, Lord Kerr of Kinlochard. At the 2009 AGM, Simon Henry was appointed an Executive Director and Maarten van den Bergh retired as a Non-executive Director. Linda Cook resigned as an Executive Director on June 1, 2009 and Jeroen van der Veer became a Non-executive Director following his retirement as Chief Executive on June 30, 2009. Peter Voser succeeded Jeroen van der Veer as Chief Executive. As a result of these changes, the Board comprised the Chairman, three Executive Directors and nine Nonexecutive Directors. A list of current Directors, with their biographies, is given on pages 5355. The Board meets eight times a year and has a formal schedule of matters reserved to it. This includes overall strategy and management, corporate structure and capital structure, financial reporting and controls, internal controls, approval of the Annual Report and Form 20-F, approval of interim dividends, significant contracts, succession planning and new Board appointments. The full list of matters reserved to the Board for decision is available at www.shell.com/investor.
Conflicts of interest
Certain statutory duties with respect to directors’ conflicts of interest are in force under the Companies Act 2006 (the Act). In accordance with that Act and the Articles, the Board may authorise any matter that may otherwise involve the Directors breaching the duty to avoid conflicts of interest. The Board has adopted a procedure to address these requirements, which includes the Directors completing detailed conflicts of interest questionnaires. The matters disclosed in the questionnaires are reviewed by the Board and, if considered appropriate, authorised in accordance with the Act and the Articles. Conflicts of interest and gifts and hospitality received by and provided by Directors are kept under review by the Board.
Significant commitments of the Chairman
The Chairman’s other significant commitments are given in his biography on page 53.
Independent professional advice
All Directors may seek independent professional advice in connection with their role as a Director. All Directors have access to the advice and services of the Company Secretary. The Company has provided to the Directors indemnities and directors’ and officers’ insurance in connection with the performance of their responsibilities. Copies of these indemnities and the directors’ and officers’ insurance policies are open to inspection. Copies of these indemnities have been previously filed with the US Securities and Exchange Commission and are incorporated by reference as an exhibit to this Report.
Role of Directors
The roles of the Chairman, a non-executive role, and the Chief Executive Officer are separate, and the Board has agreed their respective responsibilities. The Chairman, Jorma Ollila, is responsible for the leadership and management of the Board and for ensuring that the Board and its committees function effectively. The Chief Executive Officer, Peter Voser, bears overall responsibility for the implementation of the strategy agreed by the Board, the operational management of the Company and the business enterprises connected with it. He is supported in this by the Executive Committee, which he chairs (see page 78).
Board activities during the year
The Board met eight times during the year, and each meeting was held in The Hague, the Netherlands. The agenda for each meeting comprises a number of regular items, including reports from each of the Board Committees and from the Chief Executive Officer, the Chief Financial Officer and the other members of the Executive Committee. At most meetings the Board also considered a number of investment, divestment and financing proposals. In accordance with matters specifically reserved for the Board, during the year the Board considered numerous strategic issues and approved each of the quarterly and full-year financial results and dividend announcements. The Board received regular reports from the various functions, including Corporate (which includes Human Resources, Health and Security), Legal and Finance (which includes Investor Relations).
Non-executive Directors
Non-executive Directors are appointed for specified terms of office, subject to the provisions of the Articles of Association (the Articles) regarding their appointment and re-appointment at the AGM. Appointments are subject to three months’ notice, and there is no compensation provision for early termination. The Non-executive Directors bring a wide range of skills and international business experience to Shell. They also bring independent judgement on issues of strategy, performance and risk through their contribution to Board meetings and to the Board’s committee meetings. The Chairman and the Non-executive Directors meet routinely without the Executive Directors to discuss, among other things, the performance of individual Directors. All the Non-executive Directors as at the end of 2009 are considered by the Board to be wholly independent, with the exception of Jeroen van der Veer who served as Chief Executive up until his retirement in
Induction and training
Following appointment to the Board, Directors receive a comprehensive induction tailored to their individual needs. This includes meetings with senior management to enable them to build up a detailed understanding of Shell’s business and strategy, and the key risks and issues with which they are faced. Throughout the year, regular updates on developments in legal matters, governance and accounting are provided to Directors. The Board regards site visits as an integral part of ongoing Director training. Additional training is available so that Directors can update their skills and knowledge as appropriate.
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Attendance at Board and Board Committee Meetings
Attendance during the year for all Board and Board Committee meetings are given in the table below.
AT TE N DAN CE AT BOAR D A N D BOA RD COMMI T T E E ME E T IN G S [ A]
On May 27, 2009 the Company announced changes to senior management roles and responsibilities which took effect from July 1, 2009. With effect from this date and for the remainder of the year the Executive Committee comprised:
E X E CU T I V E COMMI T T E E FR OM J U LY 1, 20 09
Corporate and Nomination and Social Audit Responsibility Succession Remuneration Josef Ackermann Maarten van den Bergh Malcolm Brinded Linda Cook Simon Henry Sir Peter Job Lord Kerr of Kinlochard Wim Kok Nick Land Christine MorinPostel Jorma Ollila Lawrence Ricciardi Jeroen van der Veer Peter Voser Hans Wijers Board Committee 7/8 0/2 8/8 3/3 6/6 6/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 7/8 4/5 2/2 3/3 3/3 1/1 6/6 6/6 7/7 2/2 1/1 4/4 1/1 7/7 7/7 Committee Committee Committee 4/9
Peter Voser Matthias Bichsel Malcolm Brinded Simon Henry Beat Hess Hugh Mitchell Marvin Odum Mark Williams
– Chief Executive Officer [F][G] – Projects & Technology Director [G] – Executive Director Upstream International [F][G] – Chief Financial Officer [F][G] – Legal Director [G] – Chief Human Resources & Corporate Officer [G] – Upstream Americas Director [G] – Downstream Director [G]
0/2
9/9 6/6
[A] Jeroen van der Veer retired as Chief Executive on June 30, 2009 and now serves as a Non-executive Director of the Company. Linda Cook resigned as an Executive Director on June 1, 2009. [C] Roxanne Decyk stepped down from the Executive Committee with effect from July 1, 2009. She now heads Shell’s Government Affairs department based in Washington DC reporting to the Chief Executive Officer. [D] Simon Henry was appointed Chief Financial Officer with effect from May 1, 2009 and a Director of the Company with effect from May 20, 2009. [E] Peter Voser was appointed Chief Executive Officer with effect from July 1, 2009. [F] Director of the Company. [G] Designated an Executive Officer pursuant to US Exchange Act Rule 3b-7. Beneficially owns less than 1% of outstanding classes of securities.
Board committees
There are four Board committees made up of Non-executive Directors. These are the: Audit Committee; Corporate and Social Responsibility Committee; Nomination and Succession Committee; and Remuneration Committee. A copy of each committee’s terms of reference is available from the Company Secretary and can be found online at www.shell.com/investor.
A UDIT COMMITTEE
[A] The first figure represents attendance and the second figure the possible number of meetings. For example, 6/8 signifies attendance at six out of eight possible meetings. Where a Director stepped down from the Board or a Board Committee during the year, or was appointed during the year, only meetings before stepping down or after the date of appointment are shown.
Executive Committee
The Executive Committee operates under the direction of the Chief Executive Officer and supports him with his responsibility for the executive management of the Company’s overall business and affairs. The Chief Executive Officer has final authority in all matters of management that are not within the duties and authorities of the Board or of the shareholders’ general meeting. During the period up until July 1, 2009 the Executive Committee comprised:
E X E CU TI V E CO MMI T TE E U N T IL JU LY 1, 2 0 0 9
Jeroen van der Veer Malcolm Brinded Linda Cook Roxanne Decyk Simon Henry Beat Hess Hugh Mitchell Peter Voser Mark Williams
– Chief Executive [A] – Executive Director Exploration & Production – Executive Director Gas & Power, Shell Trading, Global Solutions and Technology – Corporate Affairs and Sustainable Development Director [C] – Chief Financial Officer [D] – Legal Director – Human Resources Director – Chief Executive Officer (Designate) [E] – Downstream Director
The current members of the Audit Committee are Christine Morin-Postel (chairman of the Committee), Nick Land and Lord Kerr, all of whom are financially literate, independent, Non-executive Directors. For the purposes of the 2008 Combined Code, Christine Morin-Postel qualifies as a person with “recent and relevant financial experience” and for the purposes of US securities laws is an “audit committee financial expert”. Lawrence Ricciardi stepped down as a member of the Committee with effect from September 11, 2009 and was succeeded by Lord Kerr. The Committee met six times during the year and Committee Members’ attendances are shown above. The key responsibilities of the Committee are to assist the Board in fulfilling its oversight responsibilities in relation to internal control and financial reporting, the effectiveness of the risk management and internal control system, compliance with applicable external legal and regulatory requirements, monitoring the qualifications, expertise, resources and independence of both the internal and external auditors and assessing each year the auditors’ performance and effectiveness. The Committee keeps the Board informed of the Committee’s activities and recommendations. Where the Committee is not satisfied with or wherever it considers action or improvement is required concerning any aspect of risk management and internal control, financial reporting
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or audit-related activities, it promptly reports these concerns to the Board. It invites the external auditors, the Chief Financial Officer, the Chief Internal Auditor, the Executive Vice President Controller and the Vice President Accounting and Reporting to attend each meeting and other members of management attend as and when requested. The Committee holds private sessions with the external auditors and the Chief Internal Auditor without members of management present. Each year the Committee also considers the re-appointment of the external auditors and makes a recommendation to the Board. There are no contractual obligations that restrict the Committee’s ability to make such a recommendation. The last competitive audit tender was in 2005. During the year a new lead partner from the external audit firm replaced the former lead partner who had completed five years in this role. The Committee has adopted guidelines allowing audit, audit-related and non-audit services to be contracted with the external auditors without pre-approval so long as the fee value for each contract does not exceed $500,000. The scope of the permitted non-audit services contracted with the external auditors in 2009 consisted of tax compliance work, tax advice on proposed transactions and regulatory compliance work. Any other services must be specifically preapproved. Under the guidelines, permitted services must not present a conflict of interest nor compromise the independence of the external auditor. The Committee has reviewed quarterly all engagements with the external auditors. The following table sets out the aggregate fees paid by the Company to the external auditors, all of which have been approved by the Committee:
SH E L L AU DI T F E E [ A] $ MILLION
The Committee also reviewed the Internal Audit Department’s annual audit plan and the performance assessment of the Internal Audit function, the latter including a review of a report on the effectiveness of the Internal Audit function by an external firm. Finally the Committee conducted an annual evaluation of its performance and concluded that it was effective and able to fulfill its role in accordance with its Terms of Reference.
CORPORATE AND SOCIAL RESPONSIBILITY COMMITTEE
The members of the Corporate and Social Responsibility Committee are Wim Kok (chairman of the Committee), Lord Kerr of Kinlochard, Nick Land and Jeroen van der Veer. Maarten van den Berg stood down as a member of the Committee with effect from May 19, 2009 and was succeeded by Jeroen van der Veer with effect from July 1, 2009. Hans Wijers stood down as a member of the Committee with effect from September 11, 2009 and was succeeded by Lord Kerr and Nick Land. The Committee met four times during the year and Committee Members’ attendances are shown on page 78. The aim of the Committee is to maintain a thorough overview of the broad scope and variety of topics that fall within its remit, which include responsibilities for Health, Safety & Environment, Shell General Business Principles, Sustainable Development and the Code of Conduct. It reports on areas of focus and on its own conclusions and recommendations to executive management and the Board. In this regard, the Committee fulfills its responsibilities by receiving reports and reviewing with management Shell’s overall health, safety, environment and social performance, Shell’s annual performance against the Code of Conduct, the management of social and environmental impacts at major projects and operations and emerging social and environmental issues. It also provides input on and reviews Shell’s Sustainability Report, including meeting face-to-face with the report’s External Review Committee. In addition to regular formal meetings the Committee also visits Shell locations, meeting with local staff and external stakeholders in order to observe how Shell’s standards are being implemented in practice and where in its judgement there might be areas for increased focus. During 2009 the Committee visited Qatar to review Shell’s activities in regards to Health, Safety, Environment, and Sustainable Development. A scheduled 2009 visit to the Pernis Refinery in the Netherlands was rescheduled to early 2010.
NOMINATION AND SUCCESSION COMMITTEE
Audit fees Audit-related services Taxation services [C] Other services [E] Total
2009 57 2 1 [D] 60
2008 54 2 [D] 1 57
2007 48 3 [D] 1 52
2006 52 5 1 1 59
[A] Note 29 to the Consolidated Financial Statements on page 139 provides additional detail on Shell audit fee. Fees for other audit-related services and other services provided pursuant to legislation. [C] Fees primarily for tax compliance. [D] Less than US$1 million. [E] Other fees primarily relate to the subscription to a knowledge database.
During the year the Committee received comprehensive reports from management and the internal and external auditors. In particular it reviewed quarterly reports on risks, controls and assurance, monitored the effectiveness of the procedures for internal control over financial reporting, reviewed the Company’s evaluation of the internal control systems as required under Section 404 of the Sarbanes-Oxley Act and discussed the Company’s annual accounts and quarterly unaudited financial statements with management and the external auditors. It also discussed with the Chief Financial Officer, the Executive Vice President Controller and the external auditors issues that arose on accounting policies, practices and reporting and received reports regarding the receipt, retention, investigation and treatment of complaints regarding accounting, internal accounting controls, auditing and other matters. The Committee received reports on the changes to the SEC reserves reporting requirements. The Committee has furthermore requested reports on such matters or topics that it deemed appropriate including on relevant developments concerning the financial crisis and volatility in financial markets. The Committee conducted a site visit during the year.
The members of the Nomination and Succession Committee are Jorma Ollila (chairman of the Committee), Lord Kerr of Kinlochard, Wim Kok and Lawrence Ricciardi. Lawrence Ricciardi was appointed a member of the Committee with effect from September 11, 2009. The Committee met seven times during the year and Committee Members’ attendances are shown on page 78. The Committee keeps under review the leadership needs of the Company. It identifies and nominates suitable candidates for the Board’s approval to fill vacancies as and when they arise. The Committee also makes recommendations on who should be appointed chairman of the Audit Committee, the Corporate and Social Responsibility Committee and the Remuneration Committee and, in consultation with the relevant chairman, on the appointment of committee members. It makes recommendations on corporate governance guidelines, monitors compliance with corporate governance requirements and makes recommendations on disclosures connected to corporate governance and its appointment processes. During the year, the Committee dealt with director search, succession and nomination issues, Board committee membership rotation matters
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and the executive management structure. It also considered the Walker Review of Corporate Governance of UK Banking Industry and the Financial Reporting Council 2009 Review of the Combined Code. Finally, the Committee dealt with the Board evaluation process and considered any potential conflicts of interest and the independence of the Non-executive Directors.
REMUNERATION COMMITTEE
E VA L U AT I ON
Body to be evaluated Board as a whole Board Committees
Process Chairman to interview each Director Deputy Chairman to interview Chairman Committee Chairman to interview each Committee Member
The members of the Remuneration Committee are Hans Wijers (chairman of the Committee with effect from October 1, 2009), Josef Ackermann and Sir Peter Job (chairman of the Committee up until October 1, 2009). Lord Kerr of Kinlochard stood down as a member of the Committee with effect from September 11, 2009. The Committee met nine times during the year and Committee Members’ attendances are shown on page 78. The Committee determines and agrees with the Board the remuneration policy for the Chief Executive Officer and Executive Directors and, within the terms of this policy, determines the individual remuneration package for the Chief Executive Officer and the Executive Directors. The Committee also considers and advises on the terms of any contract to be offered to an Executive Director. It monitors the remuneration for other senior executives and makes recommendations. Since the 2009 AGM when shareholders did not approve the Directors’ Remuneration Report (DRR), the Committee has undertaken an extensive dialogue with major shareholders and shareholder bodies. It received broad feedback during the summer of 2009, took external specialist input, developed a new way forward, and then consulted again with major shareholders during the fourth quarter of 2009. With that in mind, the Committee has made the changes presented in the 2009 DRR (see pages 60-75). Following the publication of the Annual Report and Form 20-F 2009, the Committee will again be meeting major shareholders to listen to their feedback. Further information on the work of the Committee and details of the remuneration of all the Directors for the year ended December 31, 2009, are set out in the DRR.
Individual Director to be evaluated Process Chairman Each Director to complete questionnaire Directors for review by the Deputy Chairman Chairman to interview each Director
Shareholder communications
The Board recognises the importance of two-way communication with the Company’s shareholders. As well as giving a balanced report of results and progress at each AGM, the Company meets with institutional and retail shareholders to respond to their questions. Shell’s corporate website at www.shell.com/investor has information for institutional and retail shareholders alike. Shareholders have an opportunity to ask questions in person at the AGM, and are free to contact the Company directly at any time of the year. Shareholders can contact Shell directly via dedicated shareholder email addresses or via dedicated shareholder telephone numbers as given on the inside back cover. The Company’s Registrar, Equiniti, operates an internet access facility for shareholders, providing details of their shareholdings at www.shareview.co.uk. Facilities are also provided for shareholders to lodge proxy appointments electronically. The Company’s Corporate Nominee provides a facility for investors to hold their shares in the Company in paperless form.
Results presentations and analysts meetings
The quarterly and annual results presentations and all major analysts meetings are announced in advance on the Shell website and through a regulatory release. These presentations can be followed live via webcasting or tele-conference. Other meetings with analysts or investors are not normally announced in advance, nor can they be followed by webcast or any other means. Discussions in such meetings are always limited to information already in the public domain. Presentations in such meetings are available at www.shell.com. This is in line with the requirement to ensure that all shareholders and other parties in the financial market have equal and simultaneous access to information that may influence the price of the Company’s securities. The Chairman, the Deputy Chairman, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President Investor Relations report regularly to the Directors on the views of major shareholders.
Board evaluation
The Board carried out a performance evaluation of the Board, the Board Committees, the Chairman and each of the Directors. As in previous years, this was an internal exercise led by the Nomination and Succession Committee. The Board agreed to conduct the exercise by a combination of questionnaire and structured one-to-one interviews (see table below). This was followed by a discussion by the full Board of the results of the evaluation of the Board and Board Committees, while the results of the evaluation of the Chief Executive Officer and the other Executive Directors were discussed by the Chairman and the Non-executive Directors. The evaluation of the Chairman was discussed by the full Board in the Chairman’s absence. The performance evaluation provided feedback on what in the view of both individual Directors and the Board went well and what could be improved further. Directors were generally positive about the meetings of the Board and its processes and operations and a number of new initiatives implemented since the summer by the Chairman and the new Chief Executive Officer, including the greater interface of the Board with the whole of the Executive Committee and the new format of the involvement of the Board in strategy formulation and the strategy day, were well received. In 2010 the Board was planning to devote particular attention to the system of risk reporting and contingency planning.
Responsibility for preparing accounts
See the Report of the Directors in this Report.
Going concern
The Directors consider that, taking into account the assets and income of Shell, the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors adopt the going concern basis for the Financial Statements contained in this Report.
Controls and procedures
The Board is responsible for Shell’s system of internal control and for reviewing its effectiveness and has delegated authority to the Audit Committee to assist it in fulfilling its responsibilities in relation to internal control and financial reporting.
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A single overall control framework is in place that is designed to manage rather than eliminate the risk of failure to achieve business objectives. It therefore only provides a reasonable and not an absolute assurance against material misstatement or loss. In general, the Shell Control Framework applies to all wholly-owned Shell companies and to those ventures and other companies where the Company, directly or indirectly, has a controlling interest. The following diagram illustrates the Control Framework’s key components, Foundations, Organisation and Processes. In ‘Foundations’ the objectives, principles and rules that underpin and establish boundaries for Shell’s activities are stated. ‘Organisation’ sets out how the various legal entities involved relate to each other and how their business activities are organised and managed. ‘Processes’ concerns the more material processes, including how authority is delegated and how strategy, planning, appraisal and assurance are used to improve performance. All control activities relate to one or more of these components.
For further information regarding the judgement applied in these assumptions and the relation to the financial position and performance of Shell, see Notes 3 and 18 to the Consolidated Financial Statements. Shell has a number of responses to address key pensions risks. Principal amongst these is the Pensions Forum, a joint Finance/Human Resources body, chaired by the Chief Financial Officer, which provides guidance on Shell input to pension strategy, policy and operation. It also reviews the results of assurance processes that have been established with respect to pension plan investments, liabilities and funding as well as pension reporting (see “Risk factors” on pages 13-15).
Treasury and trading
In the normal course of business, Shell uses financial instruments of various kinds for the purposes of managing exposure to interest rate, currency and commodity price movements. Shell has treasury standards 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 derivative instruments, as well as the treasury control framework. Wherever possible, treasury operations are carried out through specialist Shell group regional organisations without removing from each subsidiary the responsibility to formulate and implement appropriate treasury policies. Most of Shell’s debt is raised from central borrowing programmes. The financing of most subsidiaries is also structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged. Each company has treasury policies in place that are designed to measure and manage their foreign exchange exposures by reference to their functional currency. Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream companies and those with significant cross-border business is the dollar. For Downstream companies, the local currency is typically also the functional currency. Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most subsidiaries is not permitted by their treasury policy. Certain subsidiaries have a mandate to trade natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products, and to use commodity swaps, options and futures as a means of managing price and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are contained within authorised limits. Shell uses risk management systems for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Shell’s exposure to significant trading losses is therefore considered limited. Shell utilises VAR techniques based on variance/covariance or Monte Carlo simulation models and makes a statistical assessment of the
External Regulatory and Legal Environment, External Stakeholders Shell General Business Principles Royal Dutch Shell plc Board, Chief Executive Officer and Executive Committee Statement on Risk Management Standards, Manuals and Guides Delegation of Authority Code of Conduct Strategy, Planning and Appraisal
Compliance and Assurance Businesses, Functions Legal Entities
Foundations
Organisation
Processes
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by Shell, which has been in place throughout the year and up to the date of this Report, is regularly reviewed by the Board and accords with the guidance for directors, known as the Turnbull Guidance. Shell has a variety of processes for obtaining assurance on the adequacy of risk management and internal control. It has a structured process to identify and review risks to the achievement of Shell’s objectives. The Executive Committee and the Audit Committee regularly consider group-level risks and associated control mechanisms. The Board has conducted its annual review of the effectiveness of Shell’s system of risk management and internal controls which cover financial, operational and compliance controls.
Pension funds
In general, local trustees manage the pension funds and set the required contributions from subsidiaries in accordance with local regulations and on the basis of independent actuarial valuation rather than the International Financial Reporting Standards (IFRS) measures. The actuarial valuations are sensitive to changes in the assumptions made regarding future outcomes, the principal ones being in respect of the discount rate used to convert future cash flows to present values, the long-term return on plan assets, increases in remuneration and pension benefits and demography (including mortality). Substantial judgement is required in determining the assumptions.
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market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair value movements to ensure model integrity is maintained. Other than in exceptional cases, the use of external derivative instruments is confined to specialist oil and gas trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems. Information on derivatives and other financial instruments and derivative commodity instruments is provided in Note 23 of the Consolidated Financial Statements on pages 128-134 of this Report.
Management’s evaluation of disclosure controls and procedures of Shell
The Trustee’s and Management’s Evaluation of disclosure controls and procedures for the Royal Dutch Shell Dividend Access Trust
The Trustee and Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures in respect of the Dividend Access Trust as at December 31, 2009. On the basis of this evaluation, these officers have concluded that the disclosure controls and procedures of the Trust are effective.
Changes in internal control over financial reporting
As indicated in the certifications in Exhibits 12.1 and 12.2 of this Report, Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Shell’s disclosure controls and procedures as at December 31, 2009. On the basis of that evaluation, these officers have concluded that Shell’s disclosure controls and procedures are effective.
Management’s Report on internal control over financial reporting of Shell
There has not been any change in the internal controls over financial reporting of Shell or the Dividend Access Trust that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting. The daily operations of the Dividend Access Trust are administered on behalf of Shell by Lloyds TSB Offshore Trust Company Limited, an established trustee services company. Material financial information of the Dividend Access Trust is included in the Consolidated Financial Statements of Shell and is therefore subject to the same disclosure controls and procedures of Shell. See below and the Royal Dutch Shell Dividend Access Trust Financial Statements for additional information.
Memorandum and Articles of Association
The following summarises certain provisions of the Company’s Memorandum and Articles of Association [A] and of the applicable laws of England and Wales. This summary is qualified in its entirety by reference to the Act and the Memorandum and Articles of Association.
[A] Copies of the Company’s Memorandum and Articles of Association have been previously filed with the SEC and are incorporated by reference as exhibits to this Report. They are available on the Company’s website at www.shell.com.
Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over Shell’s financial reporting and the production of the Consolidated Financial Statements. It conducted an evaluation of the effectiveness of internal control over financial reporting and the production of the Consolidated Financial Statements with respect to Shell based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting and the production of the Consolidated Financial Statements with respect to Shell was effective as at December 31, 2009. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Company’s internal control over financial reporting, as stated in their report on page 95.
The Trustee’s and Management’s Report on internal control over financial reporting of the Royal Dutch Shell Dividend Access Trust
Management and Directors
The Articles of Association (the Articles) provide that the Company’s Board of Directors must consist of not less than three members nor more than 20 members at any time. The Company has a single tier Board of Directors headed by a Chairman, with management led by a Chief Executive Officer. See ‘‘Board structure and composition’’ section. At every AGM any Director who was in office at the time of the two previous AGMs and who did not retire at either of them must retire. At the AGM at which a Director retires, shareholders can pass an ordinary resolution to re-appoint the Director or to appoint another eligible person in his or her place. A Director who would not otherwise be required to retire must retire if he or she has been in office, other than as a Director holding an executive position, for a continuous period of nine years or more at the date of the meeting. Any such Director will be eligible to stand for re-appointment. Under the Articles: a Director may not vote or be counted in the quorum in respect of any matter in which he or she is materially interested including any matter related to his own compensation; the Directors may exercise the Company’s power to borrow money provided that the borrowings of Shell shall not, without the consent of an ordinary resolution of the Company’s shareholders, exceed two times the Company’s adjusted capital and reserves (these powers relating to borrowing may only be varied by special resolution of shareholders);
The Trustee of the Royal Dutch Shell Dividend Access Trust is responsible for establishing and maintaining adequate internal control over the Trust’s financial reporting. The Trustee and the Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. On the basis of this evaluation, the Trustee and management concluded that the Trust’s internal control over financial reporting was effective as at December 31, 2009. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Trustee’s and management’s internal control over financial reporting, as stated in their report on page 169.
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Directors are not required to hold shares of the Company to qualify as a director; and Directors are appointed in accordance with the Articles and need to stand for re-election at least every third annual general meeting.
Rights attaching to shares
Dividend rights and rights to share in the company’s profit
Dividend access mechanism for Class B ordinary shares
General
Class A ordinary shares and Class B ordinary shares are identical, except for the dividend access mechanism, which will only apply to the Class B ordinary shares. Dividends paid on Class A ordinary 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 Class B ordinary shares will receive dividends through the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for UK and Dutch tax purposes. There will be no Dutch withholding tax on such dividends and certain holders (not including US holders of Class B ordinary shares or Class B American Depositary Receipts (ADRs)) will be entitled to a UK tax credit in respect of their proportional shares of such dividends. For further details regarding the tax treatment of dividends paid on the Class A and Class B ordinary shares and ADRs, please refer to “Taxation” on pages 91-92.
Description of dividend access mechanism
Under the applicable laws of England and Wales, dividends are payable on Class A ordinary shares and Class B ordinary shares only out of profits available for distribution, as determined in accordance with the Act and under IFRS. Subject to the Act, if the Directors consider that the Company’s financial position justifies the declaration of a dividend, the Company can pay an interim dividend. Shareholders can declare dividends by passing an ordinary resolution. Dividends cannot exceed the amount recommended by the Company’s Directors. It is the intention that dividends will be declared and paid quarterly. Dividends are payable to persons registered as shareholders on the record date relating to the relevant dividend. All dividends will be divided and paid in proportions based on the amounts paid up on the Company’s shares during any period for which that dividend is paid. Any dividend or other money payable in cash relating to a share can be paid by sending a cheque, warrant or similar financial instrument payable to the shareholder entitled to the dividend by post addressed to the shareholder’s registered address or it can be made payable to someone else named in a written instruction from the shareholder (or all joint shareholders) and sent by post to the address specified in that instruction. A dividend can also be paid by inter-bank transfer or by other electronic means (including payment through CREST) directly to an account with a bank or other financial institution (or other organisation operating deposit accounts if allowed by the Company) named in a written instruction from the person entitled to receive the payment under the Articles. Such account must be an account in the UK unless the share on which the payment is to be made is held by Euroclear Nederland and to which the Securities Giro Act (Wet giraal effectenverkeer) applies. Alternatively, a dividend can be paid in some other way requested in writing by a shareholder (or all joint shareholders) and agreed to by the Company. The Company will not be responsible for a payment which is lost or delayed. Where any dividends or other amounts payable on a share have not been claimed, the Directors can invest them or use them in any other way for the Company’s benefit until they are claimed. The Company will not be a trustee of the money and will not be liable to pay interest on it. If a dividend or other money has not been claimed for 12 years after being declared or becoming due for payment, it will be forfeited and go back to the Company, unless the Directors decide otherwise. The Company expects that dividends on outstanding Class B ordinary shares will be paid under the dividend access mechanism described below. The Articles provide that if any amount is paid by the issuer of the dividend access share by way of dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B ordinary shares, the dividend that the Company would otherwise pay to such holder of Class B ordinary shares will be reduced by an amount equal to the amount paid to such holder of Class B ordinary shares by the dividend access trustee.
A dividend access share has been issued by The Shell Transport and Trading Company Limited (Shell Transport) to Lloyds TSB Offshore Trust Company Limited (formerly Hill Samuel Offshore Trust Company Limited) as dividend access trustee (the Trustee). Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of Class B ordinary shares on occasion and will arrange for prompt disbursement of such dividends to holders of Class B ordinary shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends which are unclaimed after 12 years will revert to Shell Transport. Holders of Class B ordinary shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend access share. The only assets held on trust for the benefit of the holders of Class B ordinary shares will be dividends paid to the dividend access trustee in respect of the dividend access share. The declaration and payment of dividends on the dividend access share will require board action by Shell Transport and will be subject to any applicable limitations in law or in the Shell Transport articles of association in effect from time to time. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate of the dividend declared by the board of the Company on the Class B ordinary shares in respect of the same period.
Operation of the dividend access mechanism
If, in connection with the declaration of a dividend by the Company on the Class B ordinary shares, the board of Shell Transport elects to declare and pay a dividend on the dividend access share to the dividend access trustee, the holders of the Class B ordinary shares will be beneficially entitled to receive their share of that dividend 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 by way of a dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B ordinary shares, the dividend which the Company would otherwise pay on the Class B ordinary shares will be reduced by an amount equal to the amount paid to such holders of Class B ordinary shares by the dividend access trustee.
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The Company will have a full and unconditional obligation, in the event that the dividend access trustee does not pay an amount to holders of Class B ordinary shares on a cash dividend payment date (even if that amount has been paid to the dividend access trustee), to pay immediately the dividend declared on the Class B ordinary shares. The right of holders of Class B ordinary shares to receive distributions from the dividend access 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 Class B ordinary shares. Any payment by the Company will be subject to Dutch withholding tax (unless in any particular case an exemption is obtained under Dutch law or the provisions of an applicable tax treaty). If for any reason no dividend is paid on the dividend access share, holders of Class B ordinary shares will only receive dividends from the Company directly. The dividend access mechanism has been approved by the Dutch Revenue Service pursuant to 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. The agreement states, among other things, that dividend distributions on the dividend access share by Shell Transport will not be subject to Dutch dividend 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 Class B ordinary shares without the approval of the Dutch Revenue Service. Accordingly, the Company would not expect to issue additional Class B ordinary shares unless that approval was obtained or the Company determined that the continued operation of the dividend access mechanism was unnecessary. Any further issue of Class B ordinary 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, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. The daily operations of the Dividend Access Trust are administered on behalf of Shell by the Trustee. Material financial information of the Dividend Access Trust is included in the Consolidated Financial Statements of Shell and is therefore, subject to the same disclosure controls and procedures of Shell. On February 5, 2010 (Completion), the Trustee entered in to an agreement with ESS Trustee International Limited (the New Trustee) whereby the benefit of certain clients of the Trustee, including the Trust, would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust and Fund Business Administration Agreement between the Trustee and the New Trustee.
Disputes between a shareholder or ADR holder and Royal Dutch Shell, any subsidiary, Director or professional service provider
Directors; (iii) between a shareholder in such capacity and the Company’s professional service providers (which could include the Company’s auditors, legal counsel, bankers and ADR depositaries); and (iv) between the Company and its professional service providers arising in connection with any claim within the scope of (iii) above, shall be exclusively and finally resolved by arbitration in The Hague, the Netherlands under the Rules of Arbitration of the International Chamber of Commerce (ICC), as amended from time to time. This would include all disputes arising under UK, Dutch or US law (including securities laws), or under any other law, between parties covered by the arbitration provision. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions, and the ability of shareholders to obtain monetary or other relief may therefore be limited and/or their cost of seeking and obtaining recoveries in a dispute increased. The tribunal shall consist of three arbitrators to be appointed in accordance with the ICC rules. The chairman of the tribunal must have at least 20 years’ experience as a lawyer qualified to practise in a common law jurisdiction which is within the Commonwealth (as constituted on May 12, 2005) and each other arbitrator must have at least 20 years’ experience as a qualified lawyer. Pursuant to the exclusive jurisdiction provision in the Articles if a court or other competent authority in any jurisdiction determines that the arbitration requirement described above is invalid or unenforceable in relation to any particular dispute in that jurisdiction, that dispute may only be brought in the courts of England and Wales, as is the case with any derivative claim bought under the Act. The governing law of the Articles is the substantive law of England. Disputes relating to the Company’s failure or alleged failure to pay all or part of a dividend which has been declared and which has fallen due for payment will not be subject to the arbitration and exclusive jurisdiction provisions of the Articles. Any derivative claim bought under the Act will not be the subject to the arbitration provisions of the Articles. Pursuant to the relevant Depositary agreement, each holder of ADRs is bound by the arbitration and exclusive jurisdiction provisions of the Articles as described in this section as if that holder were a shareholder.
Voting rights and General Meetings of shareholders
Shareholders meetings
Under the applicable laws of England and Wales, the Company is required in each year to hold an AGM of shareholders in addition to any other meeting of shareholders that may be held. Not more than 15 months may elapse between the date of one AGM of shareholders and that of the next. Additionally, shareholders may submit resolutions in accordance with section 338 of the Act. Directors have the power to convene a general meeting of shareholders at any time. In addition, Directors must convene a meeting upon the request of shareholders holding not less than 5% of the Company’s paid-up capital carrying voting rights at general meetings of shareholders pursuant to section 303 of the Act. A request for a general meeting of shareholders must state the general nature of the business to be dealt with at the meeting, and must be signed by the requesting shareholders and deposited at the Company’s registered office. If Directors fail to give notice of such meeting to shareholders within 21 days from receipt of notice, the shareholders that requested the general meeting, or any of them representing more than one-half of the total voting rights of all shareholders that requested the meeting, may
The Articles generally require that, except as noted below, all disputes (i) between a shareholder in such capacity and the Company and/or its Directors, arising out of or in connection with the Articles or otherwise; (ii) so far as permitted by law, between the Company and any of its Directors in their capacities as such or as the Company’s employees, including all claims made by the Company or on its behalf against
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themselves convene a meeting which must be called within three months. Any such meeting must be convened in the same manner, as readily as possible, as that in which meetings are to be convened by Directors. The Company is required to give at least 21 days’ notice of any AGM, any general meeting where a special resolution is to be voted upon, or to pass a resolution of which special notice under the Act has been given. “Special resolutions” generally involve proposals to: change the name of a company; alter a company’s capital structure; change or amend the rights of shareholders; permit a company to issue new shares for cash without applying shareholders’ pre-emptive rights; amend a company’s objects clause in its Memorandum of Association; amend a company’s Articles of Association; and carry out other matters for which a company’s Articles of Association or the Act as may be applicable prescribe that a “special resolution” is required. At least 14 days’ notice is required for all other general meetings. The Articles require that in addition to any requirements under the legislation, the notice for any general meeting must state where the meeting is to be held (the principal meeting place) and the location of any satellite meeting place, which shall be identified as such in the notice. At the same time that notice is given for any general meeting, an announcement of the date, time and place of that meeting will, if practicable, be published in a national newspaper in the Netherlands. The listing rules (the Listing Rules) of the UK Listing Authority, the Euronext Amsterdam rules and the rules of the New York Stock Exchange require the Company to inform holders of its securities of the holding of meetings which they are entitled to attend. A shareholder is entitled to appoint a proxy (which is not required to be another shareholder) to represent and vote on behalf of the shareholder at any general meeting of shareholders, including the AGM. Business may not be transacted at any general meeting, including the AGM, unless a quorum is present. A quorum is two people who are entitled to vote at that general meeting. They can be shareholders who are personally present or proxies for shareholders entitled to vote at that general meeting or a combination of both. If a quorum is not present within five minutes of the time fixed for a general meeting to start or within any longer period not exceeding one hour which the chairman of the meeting can decide and if the meeting was called by shareholders, it will be cancelled. Any other meeting will be adjourned to any day (being not less than three nor more than 28 days later), time and place stated in the notice of the meeting. If the notice does not provide for this, the meeting shall be adjourned to a day, time and place decided upon by the chairman of the meeting. One shareholder present in person or by proxy and entitled to vote will constitute a quorum at any adjourned general meeting.
Record dates
Voting rights
The Class A ordinary shares and Class B ordinary shares have identical voting rights and vote together as a single class on all matters including the election of directors unless a matter affects the rights of one class as a separate class. If a resolution affects the rights attached to either class of shares as a separate class, it must be approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount, excluding any shares of that class held as treasury shares, or by special resolution passed at a separate meeting of the registered holders of the relevant class of shares. It is the intention that all voting at general meetings will take place on a poll. A poll is voting by means of a ballot where the number of shares held by each voting shareholder is counted, as opposed to voting by way of a show of hands where the actual number of shares held by voting shareholders is not taken into account. Under the Act, if a poll is demanded, the resolution conducted on a poll must be approved by holders of at least a majority of the votes cast at the meeting. Special resolutions require the affirmative vote of at least 75% of the votes cast at the meeting to be approved. On a poll, every holder of Class A ordinary shares or Class B ordinary shares present in person or by proxy has one vote for every share he or she holds. This is subject to any rights or restrictions which are given to any class of shares. No shareholder is entitled to vote if he or she has been served with a restriction notice after failure to provide the Company with information concerning interests in his or her shares required to be provided under section 793 of the Act. Major shareholders have no differing voting rights.
Rights in a winding up
If the Company is voluntarily wound up the liquidator can distribute to shareholders any assets remaining after the liquidator’s fees and expenses have been paid and all sums due to prior ranking creditors (as defined under the laws of England and Wales) have been paid. Under the Articles, the holders of the sterling deferred shares would be entitled (such entitlement ranking in priority to the rights of holders of ordinary shares) to receive an amount equal to the aggregate of the capital paid up or credited as paid up on each sterling deferred share but would not be entitled to participate further in the profits or assets of the Company. Any assets remaining after the entitlements of the holders of sterling deferred shares are satisfied would be distributed to the holders of Class A and Class B ordinary shares pro rata to their shareholdings.
Redemption provisions
Ordinary shares are not subject to any redemption provisions.
Sinking fund provisions
Ordinary shares are not subject to any sinking fund provision under the Memorandum and Articles of Association or as a matter of the laws of England and Wales.
Liability to further calls
No holder of the Company’s ordinary shares is currently liable to make additional contributions of capital in respect of the Company’s ordinary shares in the future.
Discriminating provisions
Entitlement to attend and vote at the AGM is determined by reference to the Company’s Register of Members. In order to attend and vote at the AGM, a member must be entered on the Register of Members or the register of the Royal Dutch Shell Corporate Nominee no later than the record date. The record date will not be more than 48 hours before the meeting, not taking account of any part of a day that is not a working day.
There are no provisions discriminating against a shareholder because of his or her ownership of a particular number of shares.
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Variation of rights
The Act does not give Directors authority to amend the Memorandum and Articles of Association without shareholder approval. Under the Act, shareholders have the power to amend the objects clause and any provision of the Articles, in each case by special resolution, subject to the rights of dissenting shareholders available under the Act. The Articles provide that, if permitted by legislation, the rights attached to any class of shares can be changed if this is approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount (excluding any shares of that class held as treasury shares) or by a special resolution passed at a separate meeting of the holders of the relevant class of shares. At each such separate meeting, all of the provisions of the Articles relating to proceedings at a general meeting apply, except that: (i) a quorum will be present if at least one shareholder who is entitled to vote is present in person or by proxy who owns at least one-third in amount of the issued shares of the class; (ii) any shareholder who is present in person or by proxy and entitled to vote can demand a poll; (iii) on a poll every shareholder who is present in person or by proxy and entitled to vote is entitled to one vote for every share he or she has of the class (subject to any special rights or restrictions which are attached to any class of shares); and (iv) at an adjourned meeting, one person entitled to vote and who holds shares of the class, or his or her proxy, will be a quorum. These provisions are not more restrictive than required by law in England.
Limitations on rights to own shares
the following further restrictions: (i) Directors can withhold any dividend or part of a dividend or other money otherwise payable in respect of the identified shares without any liability to pay interest when such money is finally paid to the shareholder; and (ii) Directors can refuse to register a transfer of any of the identified shares which are certificated shares unless Directors are satisfied that they have been sold outright to an independent third party. Once a restriction notice has been given, Directors are free to cancel it or exclude any shares from it at any time they think fit. In addition, they must cancel the restriction notice within seven days of being satisfied that all information requested in the statutory notice has been given. Also, where any of the identified shares are sold and Directors are satisfied that they were sold outright to an independent third party, they must cancel the restriction notice within seven days of receipt of the notification of the sale. The Articles do not restrict in any way the provision of the legislation which apply to failures to comply with notices under the legislation. The UK City Code on Takeovers and Mergers (the Takeover Code) imposes rigorous disclosure requirements affecting parties to a proposed takeover, their “associates” and persons acting “in concert” in relation to the shares of a company. These requirements also extend to dealings by persons who directly or indirectly own or control (either before or as a result of the dealing) 1% or more of the equity shares in an offeror or offeree company or of any other class of shares relevant to the offer in question [A].
[A] Certain changes to the disclosure regime under the Takeover Code are expected to take effect on April 19, 2010.
There are no limitations imposed by the applicable laws of England and Wales or the Memorandum and Articles of Association on the rights to own shares, including the right of non-residents or foreign persons to hold or vote the Company’s shares, other than limitations that would generally apply to all shareholders.
Change of control
Rule 13d-1 of the US Securities Exchange Act of 1934 requires that a person or group acquiring beneficial ownership of more than 5% of equity securities registered under the US Securities Exchange Act discloses such information to the SEC within 10 days after the acquisition.
Capital changes
There are no provisions in the Memorandum and Articles of Association or of corporate legislation in England and Wales that would delay, defer or prevent a change of control.
Threshold for disclosure of share ownership
The conditions imposed by the Memorandum and Articles of Association for changes in capital are not more stringent than required by the applicable laws of England and Wales.
Further information
The following information is available on the Shell website at www.shell.com/investor: the terms of reference of the Audit Committee, Corporate and Social Responsibility Committee, Nomination and Succession Committee and Remuneration Committee explaining their roles and the authority the Board delegates to them; the full list of matters reserved to the Board for decision; Shell General Business Principles; Shell Code of Conduct; Code of Ethics for Executive Directors and Senior Financial Officers; and Memorandum and Articles of Association. Signed on behalf of the Board
Michiel Brandjes
The UK Financial Services Authority and Disclosure and Transparency Rules impose an obligation upon a person who acquires or ceases to have notifiable interest in the relevant share capital of a public company to notify the company of that fact within two days (excluding weekends and bank holidays) of his or her knowing of its occurrence. The disclosure threshold is 3%. The law provides that a public company may ascertain the persons who are or have within the last three years been interested in its relevant share capital and the nature of such interests. The Articles provide that in any statutory notice under the relevant legislation, the Company will ask for details of those who have an interest and the extent of their interest in a particular holding. The Articles also provide that when a person receives a statutory notice, he or she has 14 days to comply with it. If he or she does not do so or if he or she makes a statement in response to the notice which is false or inadequate in some important way, the Company may restrict the rights relating to the identified shares, following notice. The restriction notice will state that the identified shares no longer give the shareholder any right to attend or vote either personally or by proxy at a shareholders’ meeting or to exercise any right in relation to the shareholders’ meetings. Where the identified shares make up 0.25% or more (in amount or in number) of the existing shares of a class at the date of delivery of the restriction notice, the restriction notice can also contain
Company Secretary March 15, 2010
Shell Annual Report and Form 20-F 2009 Additional shareholder information
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ADDITIONAL SHAREHOLDER INFORMATION
The Company was incorporated in England and Wales on February 5, 2002, as a private company under the Companies Act of England and Wales 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 the Chamber of Commerce, The Hague, under company number 34179503. The Company is resident in the Netherlands for Dutch and UK tax purposes and its Memorandum of Association provides that 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. As at February 23, 2010, interests of more than 3% of the issued Class A and Class B ordinary share capital of the Company can be found on page 59. The business address for all of the Directors is: Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands.
Exchange [A]. The depositary receipts are issued, cancelled and exchanged at the office of The Bank of New York Mellon, 101 Barclay Street, New York, NY 10286, as depositary (the Depositary) under a deposit agreement between the Company, the Depositary and the holders of ADRs. Each ADR represents two ¤0.07 shares of Royal Dutch Shell plc deposited under the agreement. More information relating to ADRs is given on pages 90-91.
[A] At February 23, 2010, there were outstanding 360,360,720 Class A ADRs and 146,494,500 Class B ADRs representing approximately 20.32% and 10.86% of the respective share capital class, held by 8,103 and 1,089 holders of record with an address in the USA, respectively. In addition to holders of ADRs, as at February 23, 2010, there were 59,693 Class A shares and 801,580 Class B shares of ¤0.07 each representing 0.06% and 0.79% of the respective share capital class, held by 14 and 878 holders of record registered with an address in the USA, respectively.
L IS T I N G IN F ORMATI ON
Ticker symbol London Ticker symbol Amsterdam Ticker symbol New York (ADR [A]) ISIN Code CUSIP SEDOL Number London SEDOL Number Euronext Weighting on FTSE as at 31/12/09 Weighting on AEX as at 31/12/09
Class A shares RDSA RDSA RDS.A GB00B03MLX29 G7690A100 B03MLX2 B09CBL4 4.79% 12.21%
Class B shares RDSB RDSB RDS.B GB00B03MM408 G7690A118 B03MM40 B09CBN6 3.53% not included
Nature of trading market
The Company has two classes of ordinary shares, Class A shares and Class B shares. The principal trading market for the Class A ordinary shares is Euronext Amsterdam and the principal trading market for the Class B ordinary shares is the London Stock Exchange. Ordinary shares are traded in registered form. American Depositary Receipts (ADRs) representing Class A ADRs and Class B ADRs outstanding are listed on the New York Stock
[A] One Class A ADR represents two Class A ordinary shares of ¤0.07 each. One Class B ADR represents two Class B ordinary shares of ¤0.07 each.
Share capital
The authorised, issued and fully paid share capital of the Company as at February 23, 2010, was as follows:
SH ARE CA PITAL
Class A ordinary shares of ¤0.07 each Class B ordinary shares of ¤0.07 each Sterling deferred shares of £1 each Unclassified shares of ¤0.07 each
Authorised (number) 4,077,359,886 2,759,360,000 50,000 3,163,280,114
Authorised (amount) ¤285,415,192 ¤193,155,200 £50,000 ¤221,429,608
Issued (number) 3,545,663,973 2,695,808,103 50,000 Nil
Issued (amount) ¤248,196,478 ¤188,706,567 £50,000 Nil
The following is a summary of the material terms of the Company’s ordinary shares, including brief descriptions of the provisions contained in the Memorandum and Articles of Association and applicable laws of England in effect on the date of this document. This summary does not purport to include complete statements of these provisions. The unclassified shares can be issued as Class A ordinary shares or Class B ordinary shares at the discretion of the Directors. Upon issuance, Class A ordinary shares and Class B ordinary 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 Class A ordinary shares and Class B ordinary shares rank equally for all dividends and distributions on ordinary share capital declared. Class A ordinary shares and Class B ordinary 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. Class A ordinary shares and Class B ordinary shares are also admitted to listing on Eurolist by Euronext Amsterdam. Class A ADRs and Class B ADRs are listed at the New York Stock Exchange. As at December 31, 2009, trusts and trust-like entities holding shares for the benefit of employee plans of Shell held (directly and indirectly)
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Shell Annual Report and Form 20-F 2009 Additional shareholder information
119.2 million shares of the Company with an aggregate carrying amount of $3,569 million and an aggregate nominal amount of approximately ¤8.3 million.
CL AS S B S HA RE S [ A]
PENCE
Dividends
The following tables show the dividends on each class of share and each class of ADR for the years 2005–2009.
CL ASS A AN D B SH ARES $
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
2009 28.65 25.59 25.65 26.36 106.25 107.86
2008 20.05 20.21 24.54 27.97 92.77 82.91
2007 18.09 17.56 17.59 18.11 71.35 69.84
2006 17.13 17.08 16.77 16.60 67.58 66.62
2005 15.84 15.89 15.64 15.64 63.01 84.61
Q1 Q2 Q3 Q4 Total
2009 0.42 0.42 0.42 0.42 1.68
2008 0.40 0.40 0.40 0.40 1.60
2007 0.36 0.36 0.36 0.36 1.44
2006 – – – – –
2005 – – – – –
[A] Sterling equivalent. Historical data converted to Royal Dutch Shell equivalents.
CL AS S A A DRs
$
Q1
CL ASS A SHAR ES ¤
2009 0.84 0.84 0.84 0.84 3.36 3.32
2008 0.80 0.80 0.80 0.80 3.20 3.12
2007 0.72 0.72 0.72 0.72 2.88 2.81
2006 0.63 0.63 0.63 0.65 2.54 2.45
2005 0.59 [A] 0.55 0.56 0.56 2.26 3.04
Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
2009 [A] 2008 [A] 2007 [A] 0.32 0.26 0.26 0.30 0.26 0.26 0.28 0.31 0.25 0.30 0.30 0.24 1.21 1.21 1.13 1.07 1.02 1.03
2006 0.25 0.25 0.25 0.25 1.00 0.98
2005 0.23 0.23 0.23 0.23 0.92 1.21
Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year
[A] Historical data converted to Royal Dutch Shell equivalents.
[A] Euro equivalent, rounded to the nearest euro cent. Historical data converted to Royal Dutch Shell equivalents.
CL AS S B A DRs
$
2009 Q1 Q2 Q3 Q4 Total declared in respect of the year Amount paid during the year 0.84 0.84 0.84 0.84 3.36 3.32
2008 0.80 0.80 0.80 0.80 3.20 3.12
2007 0.72 0.72 0.72 0.72 2.88 2.81
2006 0.63 0.63 0.63 0.65 2.54 2.45
2005 0.57 [A] 0.55 0.56 0.56 2.24 3.10
[A] Historical data converted to Royal Dutch Shell equivalents.
Shell Annual Report and Form 20-F 2009 Additional shareholder information
89
High, low and year-end share prices
The following table shows the high, low and year-end prices for the Company’s registered ordinary shares on the principal trading markets: of ¤0.07 nominal value on the London Stock Exchange; of ¤0.07 nominal value on Euronext Amsterdam; and of the ADRs on the New York Stock Exchange for the periods specified (ADRs do not have a nominal value).
ANN U AL SH ARE PRICES
Euronext Amsterdam [A] High ¤ Royal Dutch ordinary shares/ Royal Dutch New York Shares 2005 (Jan 1 – Sep 30) RDSA/RDS Class A ADRs 2005 (Jul 20 – Dec 31) 2006 2007 2008 2009 Low ¤ Year-end ¤ High pence
London Stock Exchange Low pence Year-end pence High $
New York Stock Exchange [C] Low $ Year-end $
28.38 27.67 28.53 31.35 29.63 21.46
20.92 24.12 24.32 23.72 16.25 15.27
25.80 25.78 26.72 28.75 18.75 21.10 1,894 1,974 2,152 2,278 1,944 1,633 1,661 1,611 1,276 1,362 1,771 1,785 2,111 1,805 1,882
67.45[D] 68.08 72.38 88.31 88.73 63.75
55.37[D] 57.79 60.17 62.71 41.62 38.29
62.80[D] 61.49 70.79 84.20 52.94 60.11
Euronext Amsterdam High ¤ Shell Transport Ordinary Shares/ Shell Transport ADRs 2005 (Jan 1 – July 19) RDSB/RDS Class B ADRs 2005 (Jul 20 – Dec 31) 2006 2007 2008 2009 28.90 30.04 32.20 29.16 20.99 25.41 25.18 23.64 15.84 14.90 27.08 26.66 28.46 18.50 20.30 Low ¤ Year-end ¤ High pence
London Stock Exchange [E] Low pence Year-end pence High $
New York Stock Exchange [F] Low $ Year-end $
1,991 1,968 2,071 2,173 2,245 1,897
1,528 1,717 1,686 1,600 1,223 1,315
1,838 1,858 1,790 2,090 1,726 1,812
69.86 70.94 74.93 87.94 87.54 62.26
57.75 60.69 62.75 62.20 41.41 37.16
64.56 64.53 71.15 83.00 51.43 58.13
[A] Pursuant to the terms of the Unification, holders of Royal Dutch ordinary shares received two Royal Dutch Shell plc Class A ordinary shares for each Royal Dutch ordinary share. To assist comparison, the historical prices of the Royal Dutch ordinary shares have been divided by 2 to reflect such exchange ratio. Royal Dutch ordinary shares continued to trade on Euronext Amsterdam following the completion of the Unification until such shares were delisted on September 30, 2005. [C] Pursuant to the terms of the Unification, holders of Royal Dutch New York Shares received one Royal Dutch Shell plc Class A ADR for each Royal Dutch New York Share. Each Royal Dutch Shell plc Class A ADR represents two Royal Dutch Shell plc Class A ordinary shares. [D] The New York Stock Exchange halted trading in the Royal Dutch New York Shares on October 3, 2005, following delisting in Amsterdam, and resumed trading in the Royal Dutch New York Shares on October 31, 2005, following the joint public announcement by Royal Dutch Shell plc and Royal Dutch of the definitive terms of the legal merger between Royal Dutch and its wholly-owned subsidiary Shell Petroleum N.V., in which all outstanding Royal Dutch shares were exchanged for ¤52.21 (or the equivalent in loan notes). The table excludes trading in Royal Dutch New York Shares for the period from October 3, 2005, through their delisting on November 21, 2005. [E] Pursuant to the terms of the Unification, holders of Shell Transport Ordinary Shares (including Shell Transport Ordinary Shares to which holders of Shell Transport bearer warrants were entitled) received 0.287333066 Royal Dutch Shell plc Class B ordinary shares for each Shell Transport Ordinary Share. To assist comparison, the historical prices of the Shell Transport Ordinary Shares have been divided by 0.287333066 to reflect such exchange ratio. [F] Pursuant to the terms of the Unification, holders of Shell Transport ADRs received 0.861999198 Royal Dutch Shell plc Class B ADRs for each Shell Transport ADR. To assist comparison, the historical prices of the Shell Transport ADRs have been divided by 0.861999198 to reflect such exchange ratio. Each Royal Dutch Shell plc Class B ADR represents two Royal Dutch Shell plc Class B ordinary shares.
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Shell Annual Report and Form 20-F 2009 Additional shareholder information
QU ART E RLY S HA RE PRI CE S
Euronext Amsterdam Class A shares High Low ¤ 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 29.63 28.45 26.02 23.15 20.95 19.97 20.20 21.46 ¤ 21.04 21.68 19.50 16.25 15.27 15.93 16.56 18.92
London Stock Exchange Class B shares High Low pence 2,178 2,245 2,023 1,851 1,854 1,755 1,783 1,897 pence 1,598 1,670 1,500 1,223 1,315 1,368 1,424 1,679
New York Stock Exchange Class A ADRs High Low $ 86.41 88.73 81.14 60.11 56.07 56.12 59.75 63.75 $ 64.89 68.29 56.11 41.62 38.29 41.42 46.20 55.22
New York Stock Exchange Class B ADRs High Low $ 85.30 87.54 79.81 60.00 54.77 57.63 58.15 62.26 $ 63.42 66.55 54.58 41.41 37.16 40.80 46.40 53.73
MON THLY S HA RE PRI CE S
Euronext Amsterdam Class A shares High Low ¤ 2009 September October November December 2010 January February 20.20 21.46 21.30 21.37 21.77 20.59 ¤ 18.98 18.92 19.73 19.92 20.10 19.53
London Stock Exchange Class B shares High Low pence 1,783 1,897 1,848 1,849 1,887 1,741 pence 1,633 1,679 1,723 1,719 1,663 1,632
New York Stock Exchange Class A ADRs High Low $ 59.75 63.75 63.40 62.13 62.69 57.39 $ 54.19 55.22 58.77 57.73 55.28 53.23
New York Stock Exchange Class B ADRs High Low $ 58.15 62.26 61.81 59.95 60.71 55.41 $ 53.16 53.73 57.17 55.53 53.23 51.32
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 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 a Class A or a Class B ADR with the Depositary.
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 ADRs. The Depositary will notify holders of ADRs of shareholders’ meetings of the Company and will arrange to deliver voting materials to such holders of ADRs if requested by the Company. Upon request by a holder, the Depositary will endeavour to appoint such holder as proxy in respect of such holders’ deposited shares entitling such holder to attend and vote at shareholders’ meetings. Holders of ADRs 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, (a) shareholders may deposit their shares with the Depositary and receive the corresponding class and amount of ADRs and (b) holders of ADRs may surrender their ADRs 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 ADRs and withdraw their underlying shares or have the corresponding class and amount of shares credited to their account. The Depositary may also deliver ADRs prior to deposit of the underlying securities subject to certain conditions, including, without limitation, that such pre-released ADRs are fully collateralised and that the underlying securities are assigned to and held for the account of the Depositary.
American Depositary Receipts (ADRs)
The Depositary is the registered shareholder of the shares underlying the Class A or Class B ADRs and enjoys the rights of a shareholder under the Memorandum and Articles of Association. Holders of ADRs will not have shareholder rights. The rights of the holder of a Class A ADR or Class B ADR 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 ADRs and, where possible and on a reasonable basis, will distribute such dividends and distributions to holders of ADRs. Rights to purchase additional shares will also be made available to the Depositary who may make such rights available to holders of ADRs. 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
Shell Annual Report and Form 20-F 2009 Additional shareholder information
91
FEES PAID BY HOLDERS OF ADRs
The Depositary collects its fees for delivery and surrender of ADRs directly from investors depositing shares or surrendering ADRs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by
PE RS ON S DE POS ITI N G OR W I TH DRAWI N G S HAR E S MU ST PAY:
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.
FOR:
$5.00 per 100 ADRs (or portion of 100 ADRs)
Issuance of ADRs, including issuances resulting from a distribution of shares or rights or other property; Cancellation of ADRs for the purpose of withdrawal, including if the deposit agreement terminates. Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADR registered holders. Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when they deposit or withdraw shares. Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); Converting foreign currency to US dollars. As necessary
Registration or transfer fees Expenses of the Depositary
Taxes and other governmental charges the Depositary or the custodian has to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes
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 ADR program. The Depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The Depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or 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, 2009 to February 23, 2010, the Company received $1,089,369 from the Depositary.
first-time investors and a DRIP for the Class B ADRs available to registered ADR holders. Tax consequences of participation in any plan may vary depending upon the tax residence of the shareholder and the class of shares held. Holders of Class A ordinary shares should note that it is the net dividend that will be reinvested. To participate in one of these DRIPs, or for further information, shareholders should call their bank or broker if their shareholding is through Euroclear Nederland or The Bank of New York Mellon if enquiries relate to ADRs. Otherwise Equiniti should be contacted. The contact details of Equiniti and the Bank of New York Mellon are given on the inside back cover.
Exchange controls and other limitations affecting security holders
There is no legislative or other legal provision currently in force in England, the Netherlands or arising under the Company’s Memorandum or Articles of Association restricting remittances to nonresident holders of the Company’s ordinary shares or affecting the import or export of capital for use by the Company.
Dividend Reinvestment Plan (DRIP)
A DRIP is offered on both classes of shares and, depending on how an investor holds shares, is offered by either Equiniti or ABN AMRO trading under the name RBS (RBS). DRIPs for ADRs traded on the NYSE are offered by The Bank of New York Mellon.
EQUINITI
Taxation
GENERAL
The DRIP operated by Equiniti is available to investors in respect of shares held directly in the Royal Dutch Shell Nominee or on the Royal Dutch Shell plc share register. Shareholders will be liable for tax on dividends reinvested on the same basis as if shareholders had received the cash and arranged the purchase of shares themselves.
RBS
The DRIP operated by RBS is available to shareholders who hold their shares via Euroclear Nederland through an admitted institution of Euroclear Nederland and are expecting to receive the dividend in the default currency for Class A and Class B ordinary shares.
THE BANK OF NEW YORK MELLON
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 ADRs, subject to the provisions of any applicable tax convention or domestic law. The following sets forth the operation of the provisions on dividends on the Company’s various ordinary shares and ADRs to US and UK holders, as well as certain other tax rules pertinent to holders. Each holder should consult their tax adviser.
DIVIDENDS PAID ON THE DIVIDEND ACCESS SHARE
The Bank of New York Mellon maintains a Global BuyDIRECTSM plan for the Royal Dutch Shell Class A ADRs, available to registered holders and
There is no Dutch withholding tax on dividends on Class B ordinary shares or Class B ADRs provided that such dividends are paid on the dividend access share pursuant to the dividend access mechanism (see “Dividend access mechanism for Class B ordinary shares” on pages 83-84). Dividends paid on the dividend access share are treated
92
Shell Annual Report and Form 20-F 2009 Additional shareholder information
as UK-source for tax purposes and there is no UK withholding tax on them. Also, under UK law, individual shareholders resident in the UK are entitled to a UK tax credit with dividends paid on the dividend access share. The amount of the UK tax credit is 10/90ths of the cash dividend and the credit is not repayable when it exceeds the individual’s UK tax liability. In 2009 all dividends with respect to Class B ordinary shares and Class B ADRs were paid on the dividend access share pursuant to the dividend access mechanism.
DUTCH WITHHOLDING TAX
DUTCH SUCCESSION DUTY AND GIFT TAX ES
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 unless the shares are part of the business property of a permanent establishment situated in the Netherlands. A gift of shares of a Dutch tax-resident company by an individual, who is not a resident or deemed resident of the Netherlands, is generally not subject to Dutch gift tax.
U K STAMP DUTY AND STAMP DUTY RESERVE TAX ( SDRT)
When Dutch withholding tax applies on dividends paid to a US holder (that is, dividends on Class A ordinary shares or Class A ADRs; or on Class B ordinary shares or Class B ADRs that are not paid on the dividend access share pursuant to the dividend access mechanism), the US holder will be subject to Dutch withholding tax at the rate of 15%. A US holder who is entitled to the benefits of the 1992 Double Taxation Convention between the USA and the Netherlands and as amended by the protocol signed March 8, 2004 (the Convention) 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. 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-resident holders (that is, dividends on Class A ordinary shares or Class A ADRs, or on Class B ordinary shares or Class B ADRs that are not paid on the dividend access share pursuant to the dividend access mechanism), the dividend will typically be subject to withholding tax at a rate of 15%. Such UK holder will be entitled to a credit (not repayable) for withholding tax against their UK tax liability. However, from July 1, 2009 certain corporate shareholders are, subject to conditions, exempt from UK tax on dividends. Withholding tax suffered cannot be offset against such exempt dividends. Pension funds, meeting certain defined criteria, can however, claim a full refund of the dividend tax withheld. Also, resident corporate shareholders holding at least a 5% shareholding and meeting other defined criteria are exempted at source from dividend tax. For shareholders who are 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 shareholder’s residence.
DUTCH CAPITAL GAINS TAXATION
Sales or transfers of the Company’s ordinary shares within a clearance service (such as Euroclear Nederland) or of the Company’s ADRs within the ADR depositary receipts system will not give rise to a 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 receipts (such as ADRs) 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 amount of the consideration, normally paid by the purchaser.
CAPITAL GA INS TAX
For the purposes of UK capital gains tax, the market values of the company’s shares were:
H I STOR ICA L I N F ORM ATI ON R E L ATI N G TO : £
March 31, 1982 Royal Dutch Petroleum Company (N.V. Koninklijke Nederlandsche Petroleum Maatschappij) which ceased to exist on December 21, 2005 Share prices have been restated where necessary to reflect all capitalisation issues since the relevant date. This includes the change in the capital structure following the Unification of Royal Dutch and Shell Transport where one Royal Dutch share was exchanged for two Royal Dutch Shell plc Class A ordinary shares The “Shell” Transport and Trading Company, p.l.c which delisted on July 19, 2005 Share prices have been restated where necessary to reflect all capitalisation issues since the relevant date. This includes the change in the capital structure following the Unification of Royal Dutch and Shell Transport where one Shell Transport share was exchanged for 0.287333066 Royal Dutch Shell plc Class B ordinary shares
July 20, 2005
1.1349
17.6625
1.4502
Not applicable
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 shareholder 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.
Shell Annual Report and Form 20-F 2009 Additional shareholder information
93
FIN ANCIAL CAL ENDAR
Financial year ends Announcements Full year results for 2009 First quarter results for 2010 Second quarter results for 2010 Third quarter results for 2010 Dividend timetable [A] 2009 Fourth quarter interim Announced Ex-dividend date Record date Payment date 2010 First quarter interim Announced Ex-dividend date Record date Payment date 2010 Second quarter interim Announced Ex-dividend date Record date Payment date 2010 Third quarter interim Announced Ex-dividend date Record date Payment date Annual General Meeting
December 31, 2009
February 4, 2010 April 28, 2010 July 29, 2010 October 28, 2010
February 4, 2010 February 10, 2010 February 12, 2010 March 17, 2010
April 28, 2010 May 5, 2010 May 7, 2010 June 9, 2010
July 29, 2010 August 4, 2010 August 6, 2010 September 8, 2010
October 28, 2010 November 3, 2010 November 5, 2010 December 8, 2010 May 18, 2010
[A] This timetable is the intended timetable as announced on October 29, 2009. The Directors do not propose to recommend any further distribution in respect of 2009.
94
Shell Annual Report and Form 20-F 2009 Report on the Annual Report and Accounts
REPORT ON THE ANNUAL REPORT AND ACCOUNTS
Independent auditors’ report to the members of Royal Dutch Shell plc
We have audited the Consolidated Financial Statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively, the Group) for the year ended December 31, 2009, which comprise the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
In our opinion the Consolidated Financial Statements comply with IFRSs as issued by the IASB.
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES A CT 2006
In our opinion: the information given in the Report of the Directors for the financial year for which the Consolidated Financial Statements are prepared is consistent with the Consolidated Financial Statements; and the information given in the Corporate Governance Statement set out on pages 76-86 with respect to internal control and risk management systems and about share capital structures is consistent with the Consolidated Financial Statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: 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; or a corporate governance statement has not been prepared by the Parent Company. Under the Listing Rules we are required to review: the Directors’ statement, set out on page 80, in relation to going concern; and the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the 2008 Combined Code specified for our review.
OTHER MATTER
As explained more fully in the Report of the Directors set out on pages 57-58, the Directors are responsible for the preparation of the Consolidated Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Consolidated Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the Consolidated Financial Statements sufficient to give reasonable assurance that the Consolidated Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Consolidated Financial Statements.
OPIN ION ON FIN ANCIAL STATEMENTS
We have reported separately on the Parent Company Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2009, and on the information in the Directors’ Remuneration Report that is described as having been audited.
Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
London March 15, 2010
[A] The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com ) is 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 Consolidated Financial Statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
In our opinion the Consolidated Financial Statements: give a true and fair view of the state of the Group’s affairs as at December 31, 2009, and of its income and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.
SEPARATE OPINION IN RELATION TO IFRSs AS ISSUED BY THE IASB
As explained in Note 1 to the Consolidated Financial Statements, the Group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
Shell Annual Report and Form 20-F 2009 Report on the Annual Report on Form 20-F
95
REPORT ON THE ANNUAL REPORT ON FORM 20-F
Report of independent registered public accounting firm
TO THE BOARD OF DIRECTORS AN D ROYAL DU TCH SHELL PLC SHA REHOLDERS
In our opinion, the accompanying Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes to the Consolidated Financial Statements present fairly, in all material respects, the financial position of Royal Dutch Shell plc (the Company) and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2009, 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. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these Consolidated Financial Statements, 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 Corporate Governance Statement as set out on pages 76-86. Our responsibility is to express opinions on these Consolidated Financial Statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Consolidated Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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 Consolidated 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.
PricewaterhouseCoopers LLP
London March 15, 2010 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 2009 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2009.
96
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
97 97 98 99 100 101 101 101 106 108 109 109 110 111 112 115 116 117 117 117 118 118 122 123 126 127 128 128 128 134 136 136 138 138 139 139 139 Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Key accounting estimates and judgements Note 4 Interest and other income Note 5 Interest expense Note 6 Employees, Directors and Senior Management Note 7 Segment information Note 8 Intangible assets Note 9 Property, plant and equipment Note 10 Associated companies and joint ventures Note 11 Investments in securities Note 12 Other non-current assets Note 13 Inventories Note 14 Accounts receivable Note 15 Cash and cash equivalents Note 16 Debt and lease arrangements Note 17 Taxation Note 18 Retirement benefits Note 19 Other provisions Note 20 Other non-current liabilities Note 21 Accounts payable and accrued liabilities Note 22 Ordinary share capital Note 23 Financial instruments and other derivative contracts Note 24 Share-based compensation plans and treasury shares Note 25 Minority interest Note 26 Other reserves Note 27 Dividends Note 28 Legal proceedings Note 29 Audit fee Note 30 Earnings per share Note 31 Post-balance sheet events
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
97
CON S OL I D ATE D S TATE M E N T OF IN COME
$ MILLION
NOTES Revenue Share of profit of equity-accounted investments Interest and other income Total revenue and other income Purchases Production and manufacturing expenses Selling, distribution and administrative expenses Research and development Exploration Depreciation, depletion and amortisation Interest expense Income before taxation Taxation Income for the period Income attributable to minority interest Income attributable to Royal Dutch Shell plc shareholders All results are from continuing activities. 10 4
2009 278,188 4,976 1,965 285,129 203,075 25,301 17,430 1,125 2,178 14,458 542 21,020 8,302 12,718 200 12,518
2008 458,361 7,446 5,133 470,940 359,587 25,565 16,906 1,230 1,995 13,656 1,181 50,820 24,344 26,476 199 26,277
2007 355,782 8,234 5,760 369,776 262,255 23,219 16,449 1,167 1,822 13,180 1,108 50,576 18,650 31,926 595 31,331
5 17
E ARN IN G S PE R S HA RE
$
Basic earnings per share Diluted earnings per share
NOTES 30 30
2009 2.04 2.04
2008 4.27 4.26
2007 5.00 4.99
CON S OL I D AT E D S TATE M E N T OF COMPR E HE N S I V E IN COME
$ MILLION
NOTES Income for the period Other comprehensive income, net of tax: Currency translation differences Unrealised (losses)/gains on securities Cash flow hedging gains/(losses) Share of other comprehensive income/(loss) of equity-accounted investments Other comprehensive income/(loss) for the period Comprehensive income for the period Comprehensive income/(loss) attributable to minority interest Comprehensive income attributable to Royal Dutch Shell plc shareholders 26
2009 12,718 6,490 (143) 324 4 6,675 19,393 252 19,141
2008 26,476 (12,087) 706 (7) (2) (11,390) 15,086 (142) 15,228
2007 31,926 5,403 (279) (108) (56) 4,960 36,886 622 36,264
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
98
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
CON SO L I D ATE D B A L A N CE SH E E T
$ MILLION
NOTES Assets Non-current assets Intangible assets Property, plant and equipment Equity-accounted investments Investments in securities Deferred tax Pre-paid pension costs Other Current assets Inventories Accounts receivable Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Deferred tax Retirement benefit obligations Other provisions Other Current liabilities Debt Accounts payable and accrued liabilities Taxes payable Retirement benefit obligations Other provisions Total liabilities Equity Ordinary share capital Treasury shares Other reserves Retained earnings Equity attributable to Royal Dutch Shell plc shareholders Minority interest Total equity Total liabilities and equity
Dec 31, 2009
Dec 31, 2008
8 9 10 11 17 18 12
5,356 131,619 31,175 3,874 4,533 10,009 9,158 195,724 27,410 59,328 9,719 96,457 292,181
5,021 112,038 28,327 4,065 3,418 6,198 6,764 165,831 19,342 82,040 15,188 116,570 282,401
13 14 15
16 17 18 19 20
30,862 13,838 5,923 14,048 4,586 69,257 4,171 67,161 9,189 461 3,807 84,789 154,046
13,772 12,518 5,469 12,570 3,677 48,006 9,497 85,091 8,107 383 2,451 105,529 153,535 527 (1,867) 3,178 125,447 127,285 1,581 128,866 282,401
16 21 17 18 19
22 24 26
527 (1,711) 9,982 127,633 136,431 1,704 138,135 292,181
/s/
Simon Henry
Simon Henry
Chief Financial Officer, for and on behalf of the Board of Directors March 15, 2010
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
99
CON S OL I D ATE D S TATE M E N T OF CHAN G E S I N E QU IT Y
$ MILLION
Equity attributable to Royal Dutch Shell plc shareholders Ordinary share capital (see Note 22) 527 – – – – – 527 536 – – – (9) – – 527 545 – – – – (9) – – 536 Treasury shares (see Note 24) (1,867) – – – 156 – (1,711) (2,392) – – – – 525 – (1,867) (3,316) – – – – – 924 – (2,392) Other reserves (see Note 26) 3,178 6,623 – – – 181 9,982 14,148 (11,049) – – 9 – 70 3,178 8,820 4,933 – – – 9 – 386 14,148 Retained earnings 125,447 12,518 3 (10,526) – 191 127,633 111,668 26,277 58 (9,516) (3,082) – 42 125,447 99,677 31,331 – (5,473) (9,001) (4,866) – – 111,668 Total 127,285 19,141 3 (10,526) 156 372 136,431 123,960 15,228 58 (9,516) (3,082) 525 112 127,285 105,726 36,264 – (5,473) (9,001) (4,866) 924 386 123,960 Minority interest 1,581 252 62 (191) – – 1,704 2,008 (142) 40 (325) – – – 1,581 9,219 622 748 (8,378) (203) – – – 2,008 Total equity 128,866 19,393 65 (10,717) 156 372 138,135 125,968 15,086 98 (9,841) (3,082) 525 112 128,866 114,945 36,886 748 (13,851) (9,204) (4,866) 924 386 125,968
At January 1, 2009 Comprehensive income for the period Capital contributions from minority shareholders and other changes in minority interest Dividends paid (see Note 27) Treasury shares: net sales and dividends received Share-based compensation At December 31, 2009 At January 1, 2008 Comprehensive income/(loss) for the period Capital contributions from minority shareholders and other changes in minority interest Dividends paid (see Note 27) Repurchases of shares Treasury shares: net sales and dividends received Share-based compensation At December 31, 2008 At January 1, 2007 Comprehensive income for the period Capital contributions from minority shareholders Transactions with minority shareholders (see Note 25) Dividends paid (see Note 27) Repurchases of shares Treasury shares: net sales and dividends received Share-based compensation At December 31, 2007
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
100
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements
CON SO L I D AT E D S TAT E ME N T OF CA S H F L OWS
$ MILLION
2009 Cash flow from operating activities Income for the period Adjustment for: Current taxation Interest expense Depreciation, depletion and amortisation Net gains on sale of assets (Increase)/decrease in inventories Decrease/(increase) in accounts receivable (Decrease)/increase in accounts payable and accrued liabilities Share of profit of equity-accounted investments Dividends received from equity-accounted investments Deferred taxation and other provisions Other Net cash from operating activities (pre-tax) Taxation paid Net cash from operating activities Cash flow from investing activities Capital expenditure Investments in equity-accounted investments Proceeds from sale of assets Proceeds from sale of equity-accounted investments (Additions to)/proceeds from sale of securities Interest received Net cash used in investing activities Cash flow from financing activities Net (decrease)/increase in debt with maturity period within three months Other debt: New borrowings Repayments Interest paid Change in minority interest (see Note 25) Dividends paid to: Royal Dutch Shell plc shareholders Minority interest Repurchases of shares Treasury shares: net sales and dividends received Net cash used in financing activities Currency translation differences relating to cash and cash equivalents (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 12,718 9,297 1,247 14,458 (781) (7,138) 23,679 (18,872) (4,976) 4,903 (1,925) (1,879) 30,731 (9,243) 21,488 (26,516) (2,955) 1,325 1,633 (105) 384 (26,234) (6,507) 19,742 (2,534) (902) 62 (10,526) (191) – 27 (829) 106 (5,469) 15,188 9,719
2008 26,476 24,452 1,039 13,656 (4,071) 8,025 (11,160) 11,070 (7,446) 9,325 (1,030) (549) 69,787 (25,869) 43,918 (35,065) (1,885) 4,737 2,062 224 1,012 (28,915) 4,161 3,555 (2,890) (1,371) 40 (9,516) (325) (3,573) 525 (9,394) (77) 5,532 9,656 15,188
2007 31,926 20,076 550 13,180 (3,349) (7,038) (12,876) 13,708 (8,234) 6,955 (773) (801) 53,324 (18,863) 34,461 (24,576) (1,852) 8,566 1,012 1,055 1,225 (14,570) (455) 4,565 (2,796) (1,235) (6,757) (9,001) (203) (4,387) 876 (19,393) 156 654 9,002 9,656
The Notes on pages 101 to 139 are an integral part of these Consolidated Financial Statements.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
101
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 known as “Shell”) have been prepared in accordance with the provisions of the Companies Act 2006, Article 4 of the International Accounting Standards (IAS) Regulation and 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. The presentation of the Consolidated Statement of Income has been changed to provide additional information in relation to costs and more alignment with industry practice. The main changes are the disclosure of purchases, production and manufacturing expenses and research and development separately (previously disclosed within cost of sales). Depreciation, depletion and amortisation charges previously included in cost of sales, selling, distribution and administrative expenses and exploration are now disclosed separately. Net gains on sale of assets are now included in interest and other income. Purchases reflect all costs related to the acquisition of inventories, the effects of the changes therein, and include supplies used for conversion into finished or intermediary 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. The accounting policies set out in Note 2 below have been consistently applied in all periods presented. Certain pronouncements were adopted for the first time in 2009 and others have been issued but are not yet required to be adopted; Note 2 discusses pronouncements that have been adopted in 2009 and any that may have a future impact on these policies but have not yet been adopted. The Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities and other derivative contracts. The preparation of financial information in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying Shell’s accounting policies. The key accounting estimates and judgements are explained in Note 3 below. Actual results could differ from those estimates. The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on March 15, 2010.
2 ACCOUNTING POLICIES Nature of the Consolidated Financial Statements
The Consolidated Financial Statements are presented in US dollars (dollars) and include the financial statements of the Company and its subsidiaries, being those companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. 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. Minority interest represents the portion of income, other comprehensive income and net assets in subsidiaries that is not held by Shell.
Nature of operations and segmental reporting
Shell is engaged worldwide in the principal aspects of the oil and gas industry, and also has interests in chemicals and other energy-related businesses. These activities are conducted in over 90 countries. Segmental reporting has been changed with effect from 2009, in line with the change in the way Shell’s businesses are managed. Shell now reports its business through three (previously six) reporting segments, Upstream (previously Exploration & Production, Gas & Power and Oil Sands), Downstream (previously Oil Products and Chemicals) and Corporate. Upstream is the aggregation of two operating segments, Upstream International and Upstream Americas, which have similar economic characteristics. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shell’s insurance operations. Comparative segment information is reclassified. Sales between segments are based on prices generally equivalent to commercially available prices.
Revenue recognition
Revenue from sales of oil, natural gas, chemicals and all 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 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. For wholesale sales of oil products and chemicals it is either at the point of delivery or the point of receipt, depending on contractual conditions.
102
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 2 continued] Revenue resulting from the production of oil and natural gas properties in which Shell has an interest with other producers is recognised on the basis of Shell’s working interest (entitlement method). 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 feedstock utilised in Shell’s refinery operations are shown net in the Consolidated Statement of Income.
Property, plant and equipment and intangible assets
A – RECOGNITION IN THE CONSOLIDATED BALANCE SHEET
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 “Derivative contracts”) as applicable. The accounting for exploration costs is described separately below (see “Exploration costs”). Intangible assets include goodwill, capitalised 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).
B – DEPRECIATION, DEPLETION AND AMORTISATION
Property, plant and equipment related to hydrocarbon production activities are depreciated on a unit-of-production basis over the proved developed reserves of the field concerned (proven and probable minable reserves in respect of oil sands extraction facilities), except in the case of assets whose useful life is shorter than the lifetime of the field, in which case the straight-line method is applied. Rights and concessions 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 amortised based on factors such as the average concession term and past experience of recognising proved reserves. Other property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, which is generally 30 years for upgraders, 20 years for refineries and chemical plants and 15 years for retail service station facilities, and major inspection costs are amortised over the estimated period before the next planned major inspection (three to five years). Property, plant and equipment held under finance leases are depreciated over the lease term. Goodwill is not amortised. Other intangible assets are amortised on a straight-line basis over their estimated useful lives (for periods up to 40 years).
C – IMPA IRMENT
Other than properties with no proved reserves (where the basis for carrying costs in the Consolidated Balance Sheet is explained under “Exploration costs”), the carrying amounts of goodwill and major property, plant and equipment are reviewed for possible impairment annually, while all assets are reviewed whenever events or changes in circumstances indicate that the carrying amounts for those assets may not be recoverable. 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 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 cashgenerating 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 oil and gas properties, expected production volumes. The latter takes into account assessments of field and reservoir performance and includes expectations about proved and unproved volumes, which are risk-weighted utilising geological, production, recovery and economic projections. Cash flow estimates are risk-adjusted to reflect local conditions as appropriate and discounted at a rate based on Shell’s marginal cost of debt. Impairments, except those related to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. Impairment charges and reversals are reported within depreciation, depletion and amortisation. On reclassification as held for sale, the carrying amounts of intangible assets and property, plant and equipment are also reviewed and, where appropriate, written down to their fair value less costs to sell. No further provision for depreciation, depletion or amortisation is charged.
Exploration costs
Shell follows the successful efforts method of accounting for oil and natural gas exploration costs. Exploration costs are recognised in income when incurred, except that exploratory drilling costs 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.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
103
[Note 2 continued]
Associated companies and joint ventures
Investments in companies over which Shell has the right to exercise significant influence but not control are classified as associated companies and are accounted for using the equity method. Under the equity method, the investment is initially recognised at cost and subsequently adjusted for the Shell share of post-acquisition income less dividends received, together with any loans of a long-term investment nature. Shell has joint venture interests in jointly controlled entities and jointly controlled assets. Interests in jointly controlled entities are also recognised using the equity method. Interests in jointly controlled assets are recognised by including the Shell share of assets, liabilities, income and expenses on a line-by-line basis. Where necessary, adjustments are made to the financial statements of associated companies and joint ventures to bring the accounting policies used into line with those of Shell. Unrealised gains on transactions between Shell and its associated companies and joint ventures are eliminated to the extent of Shell’s interest in them. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Inventories
Inventories are stated at cost to Shell or net realisable value, whichever is lower. Cost comprises direct purchase costs (including transportation), cost of production and manufacturing and taxes, and is determined using the first-in first-out (FIFO) method for oil and chemicals and by the weighted average cost method for materials.
Income taxes
The charge for current tax is calculated based on the income for the period 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 taxation 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. Deferred tax assets and liabilities are calculated using the enacted or substantively enacted rates that are expected to apply when the asset or liability is recovered. They are not recognised where they arise on the initial recognition 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 taxes on possible future distributions of retained earnings of subsidiaries and equity-accounted investments where the timing of the distribution can be controlled by Shell and it is probable that the retained earnings will be reinvested by the companies concerned. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences 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 also 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 set-off within fiscal jurisdictions.
Employee benefits
A – EMPLOYEE RETIREMENT PLANS (PENSIONS)
Retirement plans to which employees contribute and many non-contributory plans are generally funded by payments to independent trusts. Where, due to local conditions, a plan is not funded, a provision is made. Valuations of both funded and unfunded plans are carried out annually by independent actuaries. For plans that define the amount of pension benefit to be provided, pension cost primarily represents the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets. Actuarial gains and losses are accounted for using the corridor method. Under this method, to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognised in income over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised. For plans where benefits depend solely on the amount contributed to the employee’s account and the returns earned on investment of these contributions, pension cost is the amount of contributions payable by subsidiaries for the period.
B – RETIREMENT BENEFITS OTHER THAN PENSIONS
Some subsidiaries provide certain retirement healthcare and life insurance benefits to retirees, the entitlement to which is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. These plans are not funded and a provision is made. Valuations of benefits are carried out by independent actuaries. The expected costs of retirement benefits other than pensions are accrued over the periods employees render service to Shell. Actuarial gains and losses are accounted for using the corridor method, as described above.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 2 continued]
C – SHARE-BASED COMPENSATION PLANS
The fair value of share-based compensation for the Performance Share Plan (the main equity-settled plan) is estimated using a Monte Carlo pricing model and is recognised in income from the date of grant over the vesting period with a corresponding increase directly in equity. The periodic change in the fair value of share-based compensation for cash-settled plans (which are those with stock appreciation rights and which is measured by reference to the Company’s share price) is recognised in income with a corresponding change in liabilities.
Leases
Agreements under which subsidiaries make payments 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 recorded as operating leases and the costs are recognised in income on a straight-line basis.
Financial instruments and other derivative contracts
A – FINAN CIAL 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. Net gains and losses arising on maturity or disposal 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 bank overdrafts, short-term bank deposits and money market funds and similar instruments that mainly have a maturity of three months or less at date of acquisition.
Receivables
Receivables are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost less any impairment.
B – FINAN CIAL LIABILITIES
Debt and accounts payable are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost, except for fixed rate debt subject to fair value hedging, which is re-measured for the hedged risk (see “Derivative contracts”). Interest expense on debt is accounted for using the effective interest method and, other than interest capitalised, is recognised in income.
C – DERIVATIVE CONTRACTS
Shell uses derivatives in the management of interest rate risk, foreign currency risk and commodity price risk, and in the management of foreign currency cash balances. These derivative contracts are recognised at fair value. Those derivatives qualifying and designated as hedges are either: (i) a “fair value” hedge of the change in fair value of a recognised asset or liability or an unrecognised firm commitment, or (ii) 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 forecasted 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 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 other comprehensive income is transferred to the initial carrying amount of the asset or liability, and for other hedged items the amount in other comprehensive income is recognised in income when the hedged transaction affects income. Subsidiaries document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking hedge transactions. The effectiveness of a hedge is also continually assessed and, when it ceases, hedge accounting is discontinued. Gains and losses on derivatives 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. Contracts to sell or purchase non-financial items that do not meet expected own use requirements, including contracts to sell or purchase commodities that can be net settled or that contain written options, are required to be recognised at fair value; associated gains and losses are recognised in income.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 2 continued] Derivatives embedded within contracts that are not already required to be recognised at fair value, and that are not closely related to the host contract in terms of economic characteristics and risks, are separated from their host contract and recognised at fair value; associated gains and losses are recognised in income.
Fair value measurements
Fair value measurements are estimates of the amounts for which assets or liabilities (generally financial instruments and other derivative contracts) could be exchanged at the measurement date, based on the assumption that such exchanges take place between knowledgeable, unrelated parties in unforced transactions. 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. Where publicly available information is not available, 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 and share-based compensation plans, 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.
Provisions
Provisions are recognised at the balance sheet date at Shell’s best estimate, using risk-adjusted future cash flows, of the present value of the expenditure required to settle the present obligation. Non-current amounts are discounted using the risk-free rate. Specific details for decommissioning and restoration costs and environmental remediation are described below. The carrying amounts of provisions are regularly reviewed and adjusted for new facts or changes in law or technology. Provisions for decommissioning and restoration costs, which are primarily in respect of hydrocarbon production facilities, are measured based on current requirements, technology and price levels and 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, by adjustment to the carrying amount of the related property, plant and equipment. Provisions for environmental remediation resulting from ongoing or past operations or events are recognised 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. Recognition of any joint and several liability is based upon Shell’s best estimate of the final pro rata share of the liability. Provisions are determined independently of expected insurance recoveries. Recoveries are recognised and reported as separate events and brought into account when virtually certain of realisation.
Treasury shares
Shares in the Company held by Shell employee share ownership trusts are not included in assets but, after deducting dividends received, are reflected at cost as a deduction from equity as treasury shares.
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, with the exception of that on buildings and major items of equipment that have alternative use.
Business combinations
Assets acquired and liabilities assumed on a business combination 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.
Acquisitions of minority interest and disposals while retaining control
Acquisitions of minority interest in subsidiaries and disposals of shares in subsidiaries while retaining control are accounted for as transactions within equity. The difference between the purchase price/disposal proceeds and the relevant proportion of the minority interest is reported in retained earnings as a movement in the Shell share of equity.
Currency translation
The dollar equivalents of exchange gains and losses arising as a result of foreign currency transactions (including those in respect of inter-company balances unless related to transactions of a long-term investment nature) are recognised in income, within interest and other income or within purchases where not related to financing. On consolidation, assets and liabilities of non-dollar subsidiaries 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 divestment or liquidation of an entity, cumulative currency translation differences related to that entity are recognised in income.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 2 continued]
Accounting standards and interpretations adopted in 2009 or not yet adopted
A – ADOPTED IN 2009
Certain accounting standards were adopted in 2009 that have an impact on the presentation of the Consolidated Financial Statements and Notes. The main change as a result of the implementation in 2009 of the revised IAS 1 Presentation of Financial Statements is the presentation of a Statement of Comprehensive Income. The main change as a result of the implementation in 2009 of revised IFRS 7 Improving Disclosures about Financial Instruments is additional disclosure about financial instruments and other derivative contracts measured at fair value using predominantly unobservable inputs.
B – NOT YET ADOPTED
Revised IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements will be implemented from January 1, 2010 with prospective effect. The revised standards apply some changes to the accounting for the acquisition of a business or for certain types of transactions involving an additional investment or a partial disposal, requiring for example the recognition in income of certain transaction costs, the recognition at fair value of contingent consideration payable and the re-measurement of existing interests held or retained. The exact impact will depend on the individual transaction concerned, with potentially different amounts being recognised in the Consolidated Financial Statements than would previously have been the case. IFRS 9 Financial Instruments, the first phase of the IASB’s project to revise the accounting for financial instruments, was issued in November 2009 and is required to be adopted by 2013. Shell’s assessment of IFRS 9 is at an early stage, but the Standard’s impact is mainly limited to its investments in securities. The full impact of the changes in accounting for financial instruments will not be known until the IASB’s project has been completed.
3 KEY ACCOUNTING ESTIMATES AND JUDGEMENTS
In order to prepare the Consolidated Financial Statements in conformity with IFRS, management of Shell has to make estimates and judgements. The matters described below are considered to be the most important in understanding the judgements that are involved in preparing these statements and the uncertainties that could impact the amounts reported in the results of operations, financial condition and cash flows. Shell’s accounting policies are described in Note 2.
Estimation of oil and gas reserves
Unit-of-production depreciation, depletion and amortisation charges are principally measured based on Shell’s estimates of proved developed oil and gas reserves. Estimates of proved reserves are also used in the determination of impairment charges and reversals. 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. Information about the carrying amounts of oil and gas properties and the depreciation, depletion and amortisation charged is given in Note 9. Estimates of oil and gas 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 Shell’s estimates of proved developed reserves affect prospectively the amounts of depreciation, depletion and amortisation charged and, consequently, the carrying amounts of oil and gas properties. It is expected, however, that in the normal course of business the diversity of the Shell portfolio will limit the effect of such revisions.
Exploration costs
Capitalised exploration drilling costs 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. In making decisions about whether to continue to capitalise exploration drilling costs for a period longer than 12 months, it is necessary to make judgements about the satisfaction of each of these conditions. If there is a change in one of these judgements in a subsequent period, then the related capitalised exploration drilling costs would be recognised in income in that period. Information on such costs is given in Note 9.
Impairment of assets
For the purposes of determining whether impairment of assets has occurred, and the extent of any impairment or its reversal, the key assumptions Shell uses in estimating future cash flows for value-in-use measures are future oil prices, expected production volumes and refining margins. These assumptions and the judgements of management that are based on them are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Future price assumptions tend to be stable because Shell does not consider short-term increases or decreases in prices as being indicative of longterm levels, but are nonetheless subject to change. Expected production volumes, which include both proved reserves as well as volumes that are
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[Note 3 continued] expected to constitute proved reserves in the future, are used for impairment testing because Shell believes this to be the most appropriate indicator of expected future cash flows. As discussed in “Estimation of oil and gas reserves”, reserves estimates are inherently imprecise. In particular, projections about unproved reserves 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 not practicable to estimate the likelihood or extent of impairments under different sets of assumptions. The discount rate applied is reviewed annually, although it has been stable in recent years. The discount rate applied in 2009 was 6% (2008: 6%). Changes in assumptions could affect the carrying amounts of assets, and impairment charges and reversal will affect income. Amounts are given in Notes 8 and 9.
Taxation
Tax provisions are recognised when it is considered probable (more likely than not) that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/or in the expected amount to be settled would be recognised in income in the period in which the change occurs. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax 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 the amounts recognised in income in the period in which the change occurs. Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognised in income both in the period of change, which would include any impact on cumulative provisions, and in future periods. Note 17 contains information on tax charges, on the deferred tax assets that are recognised, including periodic movements, and on the losses on which deferred tax is not currently recognised.
Employee retirement plans
Retirement plans are provided for employees of all major subsidiaries and generally provide defined benefits based on employees’ years of service and average/final pensionable remuneration. The plans are typically structured as separate legal entities managed by trustees. The amounts reported for Shell’s employee retirement plans are disclosed in Note 18 and are calculated in accordance with IFRS. Plan assets and benefit obligations are subject to significant volatility as market values and actuarial assumptions change. Under the IFRS methodology adopted by Shell (see Note 2 under “Employee benefits”), volatility in the amounts recognised in the Consolidated Financial Statements is reduced as the methodology provides for unexpected changes in the amount of plan assets and benefit obligations (actuarial gains and losses) to be amortised over the average remaining employee work life rather than being recognised immediately in the Consolidated Financial Statements. Local trustees manage the pension funds and set the required contributions from subsidiaries based on independent actuarial valuation rather than the IFRS measures. Pension benefit cost reported by Shell primarily represents the change in actuarial present value of the obligation for benefits based on employee service during the year and the interest on the obligation in respect of employee service in previous years, net of the expected return on plan assets. The calculations are sensitive to changes in the assumptions made regarding future outcomes. Substantial judgement is required in determining the assumptions, which vary for the different plans but are determined under a common process in consultation with independent actuaries and in the light of local conditions. The principal assumptions and their bases are as follows: rates of increase in pensionable salaries: historical outturns and management’s long-term expectation; mortality rates: the latest available standard mortality tables for the individual countries concerned. The assumptions for each country are reviewed each year and are adjusted where necessary to reflect changes in fund experience and actuarial recommendations; discount rates used to convert future cash flows to current values: prevailing long-term AA corporate bond yields, which can be volatile, chosen to match the duration of the relevant obligations; expected rates of return on plan assets: a projection of real long-term bond yields and an equity risk premium, which are combined with local inflation assumptions and applied to the actual asset mix of each plan. The amount of the expected return on plan assets is calculated using the expected rate of return for the year and the fair value of assets at the beginning of the year. The weighted average values applicable for the principal plans in Shell are given in Note 18, together with information on sensitivities. The assumptions are reviewed annually.
Provisions
Provisions are recognised for the future decommissioning and restoration of hydrocarbon production facilities and pipelines at the end of their economic lives. The estimated cost is recognised in income over the life of the proved developed reserves on a unit-of-production basis. Changes in
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[Note 3 continued] the estimates of costs to be incurred, proved developed reserves or in the rate of production will therefore impact income, over the remaining economic life of oil and gas assets. Other provisions are recognised in the period when it becomes probable that there will be a future outflow of funds resulting from past operations or events that can be reasonably estimated. The timing of recognition requires the application of judgement to existing facts and circumstances, which can be subject to change. Estimates of the amounts of provisions recognised are based on current legal and constructive requirements, technology and price levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take account of such changes. In relation to decommissioning and restoration costs, the estimated interest rate used in discounting the risk-adjusted cash flows is reviewed at least annually. The interest rate used to determine the balance sheet obligation at December 31, 2009, was 6% (2008: 6%). Information on provisions is given in Note 19. As further described in Note 28, Shell is subject to claims and actions. The facts and circumstances relating to particular cases are evaluated in determining whether it is more likely than not that there will be a future outflow of funds and, once established, whether a provision relating to a specific litigation is sufficient. Accordingly, significant management judgement relating to contingent liabilities is required since the outcome of litigation is difficult to predict. Notwithstanding the possibility of outcomes outside expected ranges, in recent years Shell’s experience has been that estimates used in determining the appropriate levels of provisions have been materially adequate in anticipating actual outcomes. Actual payments related to litigation during the three years ended December 31, 2009, have not been material to Shell’s financial condition or results of operations. A change in estimate of a recognised provision would be recognised in income in the period in which the change occurs (with the exception of decommissioning and restoration costs as described above).
Fair value measurements
Certain financial instruments and other derivative contracts, including those that contain embedded derivatives, are required to be recognised at fair value, as described in Note 2. For those items required to be carried at fair value at each balance sheet date, changes in their carrying amounts are recognised in income or in other comprehensive income. In addition, comparisons of the carrying amounts of other financial assets and financial liabilities with their fair values and the fair values of pension assets are required to be disclosed. Fair value measurements are estimated based on the amounts for which the assets and liabilities could be exchanged at the balance sheet date or for which contracts could be settled at the balance sheet date, and are therefore not necessarily reflective of the likely cash flows on their actual settlement or expiry. Where fair value measurements cannot be derived from publicly available information, they are estimated using models and other valuation methods. To the extent possible, the assumptions and inputs used take into account market pricing information and expectations. However, such information is by its nature subject to uncertainty, particularly where markets are not active, and changes arising as new information becomes available impact the amounts recognised in income and in other comprehensive income, as well as amounts disclosed. Information about key assumptions used in fair value estimates is given in Notes 11 and 23.
4 INTEREST AND OTHER INCOME
$ MILLION
Interest income Dividend income (from investments in securities) Net gains on sale of assets Other Total
2009 384 270 781 530 1,965
2008 1,012 495 4,071 (445) 5,133
2007 1,225 211 3,349 975 5,760
Net gains on sale of assets arise primarily from divestments of interests in operations including, in 2009, Downstream interests in Singapore, in 2008, Upstream interests in Germany, the UK, the USA and Nigeria and Downstream interests in France and in 2007, Upstream interests in Norway and Russia (see Note 25) and Downstream interests in the USA. Also, in 2007, gains of $952 million were reclassified from accumulated other comprehensive income following the sale of securities (see Note 26). Included in other in 2009 are net foreign exchange gains on financing activities of $440 million (2008: $699 million losses; 2007: $154 million gains). Other net foreign exchange gains of $74 million (2008: $612 million losses; 2007: $291 million gains) are included in purchases.
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5 INTEREST EXPENSE
$ MILLION
Interest incurred Accretion expense (see Note 19) Less: interest capitalised Total
2009 902 728 (1,088) 542
2008 1,371 680 (870) 1,181
2007 1,235 540 (667) 1,108
The interest rate applied in determining the amount of interest capitalised in 2009 was approximately 4% (2008: 5%; 2007: 5%). Interest incurred is stated after the impact of gains and losses on fair value hedges of debt (see Note 23). Not all of these gains and losses are eligible costs for the purposes of capitalising interest.
6 EMPLOYEES, DIRECTORS AND SENIOR MANAGEMENT A – Employee costs
$ MILLION
Remuneration Social law taxes Retirement benefits (see Note 18) Share-based compensation (see Note 24) Total
2009 10,608 818 2,679 642 14,747
2008 10,581 890 (302) 241 11,410
2007 10,021 854 98 589 11,562
In addition to the above costs, there were redundancy costs in 2009 of $1,535 million (2008: $85 million; 2007: $397 million). See also Note 19.
B – Average employee numbers
THOUSANDS
Upstream Downstream Corporate Total
2009 23 62 16 101
2008 22 64 16 102
2007 22 69 13 104
Employees working in business service centres are included in the Corporate segment.
C – Remuneration of Directors and Senior Management
$ MILLION
Short-term benefits Retirement benefits Share-based compensation Realised gains on exercise of share options
2009 31.1 3.4 32.7 0.5
2008 32.6 3.0 23.9 1.7
2007 27.6 3.1 23.3 3.5
Short-term benefits comprise salaries and fees, annual bonuses (recognised in the period for which performance is assessed) and cash, car and other benefits. Share-based compensation in 2009 includes exceptional costs recognised in respect of Executive Directors who retired or resigned during the year. In addition to the amounts presented above are termination benefits of $7.6 million awarded to an Executive Director who resigned during the year, and short-term and retirement benefits of $2.0 million in respect of the Director’s employment in the period from the date of resignation to December 31, 2009. There were five members of Senior Management at December 31, 2009 (2008: five; 2007: five).
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7 SEGMENT INFORMATION
Reflecting the change in segmentation (see Note 2), with effect from 2009 Upstream includes the previous Exploration & Production, Gas & Power and Oil Sands segments. Downstream includes the previous Oil Products and Chemicals segments, and alternative energy, with the exception of wind, which is included in Upstream. Comparative information is reclassified.
A – Information by business segment
20 09 $ MILLION
Upstream Revenue Third party Inter-segment Share of profit of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 27,996 27,144 3,852 652 9,875 792 432 (645) (8,942) 8,354 157,108 19,075 21,275
Downstream 250,104 258 1,110 480 4,399 1,616 151 (84) (195) 3,054 121,571 12,014 6,046
Corporate 88 – 14 833 184 10 – 187 835 1,310 13,502 86 273
Total 278,188 4,976 1,965 14,458 2,418 583 (542) (8,302) 12,718 292,181 31,175 27,594
During 2009, Shell’s self-insurance activities were consolidated within the Corporate segment. As a result, the 2009 earnings before tax of the Corporate segment were reduced by $422 million, with no impact on Shell’s income for the period.
20 08
$ MILLION
Upstream Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income/(loss) for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 45,975 42,333 7,521 4,124 9,906 270 – (586) (25,163) 26,506 153,208 17,745 28,958
Downstream 412,347 466 17 643 3,574 666 50 (93) 316 39 109,820 10,515 5,913
Corporate 39 – (92) 366 176 – – (502) 503 (69) 19,373 67 241
Total 458,361 7,446 5,133 13,656 936 50 (1,181) (24,344) 26,476 282,401 28,327 35,112
20 07
$ MILLION
Upstream Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation Income for the period Total assets at December 31 Equity-accounted investments at December 31 Capital expenditure 32,014 35,264 5,446 3,038 9,913 575 120 (471) (15,707) 18,094 125,979 17,150 18,605
Downstream 323,711 569 2,904 819 3,106 173 5 (68) (3,495) 12,445 130,875 11,936 5,086
Corporate 57 – (116) 1,903 161 (3) – (569) 552 1,387 12,616 67 414
Total 355,782 8,234 5,760 13,180 745 125 (1,108) (18,650) 31,926 269,470 29,153 24,105
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[Note 7 continued]
B – Information by geographical area
200 9 $ MILLION
Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 103,424 33,404
Africa, Asia, Australia/ Oceania 80,398 67,822
USA 60,721 32,082
Other Americas 33,645 34,842
Total 278,188 168,150
200 8
$ MILLION
Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 184,809 30,929
Africa, Asia, Australia/ Oceania 120,889 56,123
USA 100,818 29,821
Other Americas 51,845 28,513
Total 458,361 145,386
200 7
$ MILLION
Third party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted investments at December 31
Europe 138,089 36,673
Africa, Asia, Australia/ Oceania 90,141 49,911
USA 87,548 27,606
Other Americas 40,004 21,850
Total 355,782 136,040
With effect from 2009 the reporting of third-party revenue by geographical area has been changed to reflect better the location of certain business activities. Comparative information is reclassified.
8 INTANGIBLE ASSETS
200 9 $ MILLION
Goodwill Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 3,311 10 1 114 3,436 329 24 (65) 8 296 3,140
Other 4,060 438 1 155 4,654 2,021 281 53 83 2,438 2,216
Total 7,371 448 2 269 8,090 2,350 305 (12) 91 2,734 5,356
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[Note 8 continued]
20 08 $ MILLION
Goodwill Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 3,181 349 (37) (182) 3,311 18 311 – – 329 2,982
Other 4,299 296 (117) (418) 4,060 2,096 270 (160) (185) 2,021 2,039
Total 7,480 645 (154) (600) 7,371 2,114 581 (160) (185) 2,350 5,021
The goodwill impairment charge in 2008 of $311 million related primarily to Pennzoil-Quaker State, a lubricants business in the Downstream segment. The carrying amount of this goodwill at December 31, 2009, is $1,842 million. The recoverable amounts of the cash-generating units to which goodwill is allocated are determined at least annually by reference to their values in use. Cash flow projections used in value-in-use estimates are based on past experience and future expectations of volumes, margins and costs for an initial five-year period, as approved by management, and extrapolated for a further 15 years based on average long-term growth rates for the sector, which in the case of lubricants is assumed to be equal to the average expected inflation rate for the USA (2.3% per annum). Projections are adjusted for a variety of risks, in particular volume and margin deterioration, and discounted to their net present value using a nominal pre-tax discount rate of 6%.
9 PROPERTY, PLANT AND EQUIPMENT
20 09 $ MILLION
Oil and gas properties Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 156,075 20,888 (1,517) 10,780 186,226 79,111 9,616 (1,155) 4,903 92,475 93,751
Manufacturing and processing 44,741 4,457 (341) 2,134 50,991 24,485 2,996 (115) 1,335 28,701 22,290
Transportation and storage 4,463 31 (357) 445 4,582 2,064 153 (285) 180 2,112 2,470
Marketing and other 28,033 1,770 (2,355) 1,569 29,017 15,614 1,388 (1,953) 860 15,909 13,108
Total 233,312 27,146 (4,570) 14,928 270,816 121,274 14,153 (3,508) 7,278 139,197 131,619
20 08
$ MILLION
Oil and gas properties Cost At January 1 Capital expenditure Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net book amount at December 31 150,740 28,235 (3,904) (18,996) 156,075 86,014 9,567 (5,654) (10,816) 79,111 76,964
Manufacturing and processing 48,473 4,114 (4,425) (3,421) 44,741 28,398 2,042 (3,858) (2,097) 24,485 20,256
Transportation and storage 5,123 76 (337) (399) 4,463 2,431 95 (202) (260) 2,064 2,399
Marketing and other 30,942 2,042 (1,862) (3,089) 28,033 16,913 1,371 (1,072) (1,598) 15,614 12,419
Total 235,278 34,467 (10,528) (25,905) 233,312 133,756 13,075 (10,786) (14,771) 121,274 112,038
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[Note 9 continued] The net book amount at December 31, 2009, includes $45,113 million (2008: $31,998 million) of assets in the course of construction. This amount excludes exploration and evaluation assets, information about which is provided below. Oil and gas properties at December 31, 2009, include rights and concessions of $20,790 million (2008: $19,495 million). The minimum contractual commitments for capital expenditure at December 31, 2009, amounted to $3.0 billion (2008: $5.3 billion). In 2008, Shell acquired 100% of the equity of Duvernay Oil Corp. (Duvernay) for a total consideration of $5,013 million, plus the assumption of debt of $528 million. Duvernay undertakes oil and gas exploration and production activities in Canada and is in the Upstream segment. Duvernay’s assets comprise primarily oil and gas properties and, as a result of the acquisition, property, plant and equipment increased by $6,925 million. Goodwill of $330 million (see Note 8) and deferred tax of $1,563 million (see Note 17) and sundry other assets and liabilities were also recognised following the acquisition. The depreciation, depletion and amortisation charge for the year includes:
200 9 $ MILLION
Impairment losses Impairment reversals
Oil and gas properties 777 432
Manufacturing and processing 1,422 151
Transportation and storage 44 –
Marketing and other 144 –
Total 2,387 583
200 8
$ MILLION
Impairment losses Impairment reversals
Oil and gas properties 202 –
Manufacturing and processing 353 49
Transportation and storage 69 –
Marketing and other – 1
Total 624 50
200 7
$ MILLION
Impairment losses Impairment reversals
Oil and gas properties 577 117
Manufacturing and processing 142 4
Transportation and storage – –
Marketing and other 22 3
Total 741 124
Impairment losses and reversals have been recognised in the year in respect of a number of Shell’s cash-generating units, although no single instance is individually significant. Impairment charges in the year were driven generally by lower margins on refining and chemical products and changes in development plans. Information on the segments affected is given in Note 7. The net book amounts at December 31 include assets held under finance leases of:
$ MILLION
Oil and gas properties Manufacturing and processing Transportation and storage Marketing and other Total
2009 2,649 181 136 532 3,498
2008 2,243 228 141 420 3,032
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[Note 9 continued] Exploration and evaluation assets, which mainly comprise unproved properties (rights and concessions) and capitalised exploration drilling costs, included within the amounts shown above for oil and gas properties are as follows:
$ MILLION
2009 Cost At January 1 Capital expenditure Sales, retirements, currency translation differences and other movements At December 31 Depreciation, depletion and amortisation At January 1 Charge for the year Sales, retirements, currency translation differences and other movements At December 31 Net book amount at December 31 18,486 3,288 (1,349) 20,425 1,476 1,051 (628) 1,899 18,526
2008 11,480 9,293 (2,287) 18,486 1,678 430 (632) 1,476 17,010
Capitalised drilling costs are as follows:
$ MILLION
2009 At January 1 Capital expenditure (additions pending determination of proved reserves) Amounts charged to expense Reclassifications to productive wells on determination of proved reserves Other movements, including acquisitions, disposals and currency translation differences At December 31 3,247 2,041 (350) (931) (393) 3,614
2008 2,500 1,808 (190) (624) (247) 3,247
2007 1,708 1,606 (222) (593) 1 2,500
Exploration drilling costs capitalised for periods greater than one year and representing 187 wells amounted to $1,572 million at December 31, 2009. Information by year of expenditure is as follows:
2000 2001 2002 2003 2004 2005 2006 2007 2008 Total
$ million 15 23 60 54 45 106 168 519 582 1,572
Number of wells 1 2 6 4 4 8 44 55 63 187
Exploration activity often involves drilling multiple wells, over a number of years, to fully evaluate a project. A decision on the recognition of proved reserves in some cases may not occur for several years. These costs remain capitalised for more than one year because, for the related projects, either (a) a final investment decision has been taken but until proved reserves are booked the wells remain capitalised as exploration wells rather than development wells, or (b) drilling of additional exploratory wells in the field is underway or firmly planned for the near future, and/or (c) it can otherwise be demonstrated that progress is being made on the assessment of the economic and operating viability of the reserves. Indicators that demonstrate that progress is being made on the assessment of the economic and operating viability of unproved reserves include: formation of a dedicated project team to continue the project’s development plan; sales agreements with customers for the oil and/or gas reserves are in place or are being actively negotiated; agreements with governments, lenders and/or venture partners are in place or are being actively negotiated; proposals or requests for the development of any related facilities are awaiting approval; contractual arrangements that will permit future development are in progress; and/or firm plans are in place to carry out seismic activities (i.e. acquisition and/or (re)processing) to further appraise the discovered area.
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10 ASSOCIATED COMPANIES AND JOINT VENTURES A – Information on the Shell share of equity-accounted investments
$ MILLION
2009 Associated companies Revenue Income for the period 23,136 1,397 Jointly controlled entities 36,456 3,579 Associated companies 31,843 2,994 Jointly controlled entities 52,571 4,452
2008 Associated companies 26,638 2,485 Jointly controlled entities 43,971 5,749
2007
Total 59,592 4,976
Total 84,414 7,446
Total 70,609 8,234
$ MILLION
Dec 31, 2009 Associated companies 6,281 26,562 32,843 5,803 12,253 18,056 14,787 13,513 1,274 Jointly controlled entities 9,972 20,812 30,784 7,095 7,301 14,396 16,388 16,165 223 Associated companies 6,408 24,137 30,545 6,525 9,470 15,995 14,550 13,102 1,448 Jointly controlled entities 8,185 18,462 26,647 6,334 6,536 12,870 13,777 13,764 13
Dec 31, 2008
Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total assets less total liabilities Represented by: Interests in equity Loans (of a long-term investment nature)
Total 16,253 47,374 63,627 12,898 19,554 32,452 31,175 29,678 1,497
Total 14,593 42,599 57,192 12,859 16,006 28,865 28,327 26,866 1,461
Income for 2008 for jointly controlled entities included gains of $1,395 million from the disposal of certain operations in Germany. At December 31, 2009, Shell had capital commitments, being amounts contracted for with external parties, of $2.5 billion (2008: $2.4 billion) in respect of its joint ventures.
B – Major investments in associated companies and joint ventures
DECEMBER 31, 2009
Fair value Segment Upstream Name Aera Brunei LNG Brunei Shell NAM Nigeria LNG Oman LNG Qatargas 4 LNG Sakhalin Energy Woodside Downstream CNOOC and Shell Petrochemicals (Nanhai) Deer Park Infineum Motiva Saudi Arabia Refinery Saudi Petrochemical Showa Shell Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Associated company China USA The Netherlands USA Saudi Arabia Saudi Arabia Japan 50% 50% 50% 50% 50% 50% 35% 1,082 Description Jointly controlled entity Associated company Jointly controlled entity Jointly controlled entity Associated company Associated company Associated company Associated company Associated company Country of incorporation USA Brunei Brunei The Netherlands Nigeria Oman Qatar Bermuda Australia Shell interest 52% 25% 50% 50% 26% 30% 30% 28% 34% 10,892 ($ million)
All shareholdings in the above entities are in ordinary shares or the equivalent and are stated to the nearest percentage point. Fair value information is stated for those associated companies for which there are published price quotations, and represent the relevant share price on December 31, 2009 multiplied by the number of shares held. Although Shell has a 52% investment in Aera, the governing agreements and constitutive documents for this entity do not allow Shell to control this entity as voting control is either split 50:50 between the shareholders or requires unanimous approval of the shareholders or their representatives. Consequently this entity has not been consolidated.
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[Note 10 continued] Shell has other major Upstream joint venture activities that operate as jointly controlled assets.
C – Transactions between subsidiaries and equity-accounted investments
Transactions with equity-accounted investments mainly comprise sales and purchases of goods and services in the ordinary course of business and in total amounted to:
$ MILLION
Charges to equity-accounted investments Charges from equity-accounted investments
2009 28,399 27,494
2008 40,401 41,151
2007 30,974 28,244
Balances outstanding at December 31, 2009, and 2008 in respect of the above transactions are shown in Notes 14 and 21. Guarantees issued in respect of equity-accounted investments were $2.5 billion at December 31, 2009, (2008: $2.6 billion), mainly relating to project finance debt.
11 INVESTMENTS IN SECURITIES
Investments in securities comprise equity securities of $2,902 million (2008: $3,149 million) and debt securities of $972 million (2008: $916 million). Equity securities comprise primarily Shell’s 15% interests in each of the Malaysia LNG Dua Sendirian Berhad and Malaysia LNG Tiga Sendirian Berhad projects. Debt securities comprise a portfolio required to be held by Shell’s insurance companies as security for their activities. Equity and debt securities carried at fair value totalled $3,823 million at December 31, 2009, comprising $1,153 million that is measured by reference to prices in active markets for identical assets and $2,670 million that is measured by reference to predominantly unobservable inputs. Movements during 2009 in the carrying amounts of investments in securities measured using predominantly unobservable inputs are as follows:
$ MILLION
At January 1, 2009 Losses recognised in other comprehensive income Purchases Sales Currency translation differences At December 31, 2009
2,871 (277) 69 (2) 9 2,670
Investments in securities valued by reference to predominantly unobservable inputs are all equity securities. Valuations are based on expected dividend flows, adjusted for country and other risks as appropriate and discounted to their present value. At December 31, 2009, debt securities held for purposes other than trading, which include certain cash equivalents, are analysed by maturity below.
20 09 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2015 and Fixed rate dollar debt securities Average interest rate Fixed rate euro debt securities Average interest rate Fixed rate sterling debt securities Average interest rate Other fixed rate debt securities Average interest rate Variable rate debt securities Average interest rate Total 2010 54 3.9% – – 2 4.7% 123 4.5% 5 2.0% 184 2011 116 3.4% 45 4.6% – – – – – – 161 2012 145 3.9% 58 4.0% 9 4.6% – – – – 212 2013 33 3.8% 9 4.1% – – – – 1 7.8% 43 2014 34 3.5% 28 3.7% 9 4.5% 1 6.2% 2 2.4% 74 after 162 4.6% 172 4.4% 43 4.9% 39 4.5% 14 5.1% 430 Total 544 312 63 163 22 1,104
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
117
[Note 11 continued]
200 8 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2009 Fixed rate dollar debt securities Average interest rate Fixed rate euro debt securities Average interest rate Fixed rate sterling debt securities Average interest rate Other fixed rate debt securities Average interest rate Variable rate debt securities Average interest rate Total 130 4.1% 5 3.3% 2 5.9% 8 4.3% 28 15.4% 173
2010 53 4.2% 23 4.9% 2 4.7% 3 8.7% – – 81
2011 94 3.5% 28 4.6% – – 4 5.5% – – 126
2012 56 4.8% 48 4.0% 4 4.5% 5 5.9% – – 113
2013 2 9.8% 8 4.3% – – 1 7.9% – – 11
2014 and after 135 4.8% 197 4.4% 43 4.5% 36 5.8% 37 6.1% 448
Total 470 309 51 57 65 952
At December 31, 2009, equity securities held for purposes other than trading amounted to $4,613 million (2008: $5,013 million), comprising equity securities and shares of the Company of $1,711 million (2008: $1,867 million), held in connection with share-based compensation plans (see Note 24).
12 OTHER NON-CURRENT ASSETS
$ MILLION
Loans to equity-accounted investments Derivative contracts (see Note 23) Prepayments and deferred charges Other Total
Dec 31, 2009 1,833 2,206 1,767 3,352 9,158
Dec 31, 2008 1,545 901 1,649 2,669 6,764
The fair value of financial assets included above approximates the carrying amount. Other comprises sundry items, including sub-lease receivables (see Note 16) and investment-related deposits and receivables, none of which is individually significant.
13 INVENTORIES
$ MILLION
Oil and chemicals Materials Total
Dec 31, 2009 25,946 1,464 27,410
Dec 31, 2008 18,160 1,182 19,342
The cost of inventories recognised in income includes net write-downs and reversals of write-downs, which are driven primarily by fluctuations in oil prices. In 2009, net reversals were $1,535 million (2008: $1,770 million net write-downs; 2007: $261 million net reversals).
14 ACCOUNTS RECEIVABLE
$ MILLION
Trade receivables Amounts owed by equity-accounted investments Derivative contracts (see Note 23) Prepayments and deferred charges Other Total
Dec 31, 2009 29,872 2,098 18,250 3,010 6,098 59,328
Dec 31, 2008 30,813 1,805 39,722 4,178 5,522 82,040
The fair value of financial assets included above approximates the carrying amount. Other comprises sundry items, including tax recoverable (see Note 17) and investment-related receivables, none of which is individually significant.
118
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 14 continued] Provisions for impairments deducted from accounts receivable amounted to $692 million at December 31, 2009 (2008: $675 million). The ageing of trade receivables at December 31 is as follows:
$ MILLION
Not overdue Overdue 1-30 days Overdue 31-60 days Overdue 61-90 days Overdue 91-180 days Overdue more than 180 days Total
2009 26,515 1,825 381 101 462 588 29,872
2008 26,173 2,423 670 468 588 491 30,813
Information about credit risk is provided in Note 23.
15 CASH AND CASH EQUIVALENTS
$ MILLION
Dec 31, 2009 Cash Short-term bank deposits Money market funds and similar instruments Total 3,268 1,813 4,638 9,719
Dec 31, 2008 3,203 8,493 3,492 15,188
Included in cash and cash equivalents at December 31, 2009 are amounts totalling $439 million (2008: $367 million) that are subject to currency controls and other legal restrictions.
16 DEBT AND LEASE ARRANGEMENTS A – Debt
$ MILLION
Dec 31, 2009 Debt (excluding finance lease obligations) 1,490 2,331 3,821 26,922 30,743 Debt (excluding finance Total 1,490 2,681 4,171 30,862 35,033 lease obligations) 7,879 1,314 9,193 10,061 19,254
Dec 31, 2008
Finance lease obligations – 350 350 3,940 4,290
Finance lease obligations – 304 304 3,711 4,015 Total 7,879 1,618 9,497 13,772 23,269
Short-term debt Long-term debt due within one year Current debt Non-current debt Total
The fair value of debt approximates the carrying amount. As at December 31, 2009, debt issued by Shell International Finance B.V., a 100%-owned subsidiary of the Company, and underwritten by guarantees issued by the Company amounted to $28,120 million (2008: $16,200 million), with the remainder raised by other subsidiaries with no recourse beyond the immediate borrower and/or the local assets.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
119
[Note 16 continued] Shell has access to international debt capital markets via two commercial paper programmes (CP programmes), a euro medium-term note programme (EMTN programme) and a US universal shelf registration (US shelf registration). Issuances under the CP programmes are supported by a committed bank facility and cash. These arrangements and undrawn facilities at December 31, are summarised below:
$ MILLION
2009 CP programmes EMTN programme US shelf registration Committed bank facility 20,000 25,000 unrestricted 2,500
Facility 2008 20,000 15,000 unrestricted 2,500
2009 20,000 10,368 n/a 2,500
Amount undrawn 2008 13,675 9,976 n/a 2,500
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 annually, most recently in June 2009. During 2009, debt totalling $10,524 million was issued under this programme. 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 at the last update in November 2008 was upgraded to unrestricted, reflecting Shell’s status as a “well-known seasoned issuer”. During 2009, debt totalling $7,500 million was issued under the registration. The committed bank facility is available on same-day terms, at pre-agreed margins and is due to expire in 2012. The terms and availability are not conditional on Shell’s financial ratios or its financial credit ratings. In addition, other subsidiaries have access to short-term bank facilities totalling $3,571 million at December 31, 2009 (2008: $3,175 million).
B – Debt (excluding finance lease obligations)
In accordance with risk management policy, Shell has entered into interest rate swaps against most of the fixed rate debt due to mature after more than one year, affecting the effective interest rate on these balances (see Note 23). The following tables compare contractual cash flows for debt (excluding finance lease obligations) owed at December 31, by year of maturity, with the carrying amount in the Consolidated Balance Sheet. Contractual amounts reflect the effects of changes in currency exchange rates; differences from carrying amounts reflect the effects of discounting, premiums and, where hedge accounting is applied, fair value adjustments.
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contractual repayments (excluding interest) 2015 and Fixed rate dollar debt Average interest rate Variable rate dollar debt Average interest rate Fixed rate euro debt Average interest rate Fixed rate sterling debt Average interest rate Other fixed rate debt Average interest rate Other variable rate debt Average interest rate Total 2010 624 4.7% 775 1.3% 473 3.7% 809 5.2% 204 9.7% 936 6.9% 3,821 2011 2,525 4.3% 500 0.3% 1 4.5% – – 280 2.3% 139 5.5% 3,445 2012 503 5.0% – – 2,521 3.4% – – – – 12 4.8% 3,036 2013 1 7.3% – – 3,603 3.0% – – – – 1 8.4% 3,605 2014 2,501 4.0% – – – – – – – – – – 2,501 after 6,539 5.7% 123 0.0% 7,568 4.5% – – – – – – 14,230 Total 12,693 1,398 14,166 809 484 1,088 30,638
Difference from carrying amount 28 – 66 – 11 – 105
Carrying amount 12,721 1,398 14,232 809 495 1,088 30,743
The table above excludes interest estimated to be $1,342 million in 2010, $1,158 million in 2011, $1,033 million in 2012, $923 million in 2013, $814 million in 2014 and $714 million in 2015 and after (assuming interest rates with respect to variable rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table). Other variable rate debt expected to mature in 2010 includes $130 million of Philippine peso debt with an average interest rate of 3.9%, $292 million of South African rand debt with an average interest rate of 7.7% and $131 million of Canadian dollar debt with an average interest rate of 1.8%.
120
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 16 continued]
20 08 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contractual repayments (excluding interest) 2014 2009 6,821 2.6% 521 1.8% 530 3.0% 94 2.4% – – 18 1.2% 464 17.1% 745 8.5% 9,193 2010 506 5.2% 156 3.8% 423 4.0% – – 723 5.3% – – – – 33 11.5% 1,841 2011 1,001 5.6% 5 6.3% 1 3.1% – – – – – – 286 2.1% 143 7.8% 1,436 2012 503 5.0% – – – – – – – – – – – – 14 4.8% 517 2013 1 7.3% – – – – – – – – – – 1 12.4% – – 2 and after 3,539 5.4% 122 0.0% 2,117 4.6% – – – – – – – – – – 5,778 Total 12,371 804 3,071 94 723 18 751 935 18,767
Difference from carrying amount 290 – 163 – 23 – 11 – 487 Carrying amount 12,661 804 3,234 94 746 18 762 935 19,254
Fixed rate dollar debt Average interest rate Variable rate dollar debt Average interest rate Fixed rate euro debt Average interest rate Variable rate euro debt Average interest rate Fixed rate sterling debt Average interest rate Variable rate sterling debt Average interest rate Other fixed rate debt Average interest rate Other variable rate debt Average interest rate Total
The table above excludes interest estimated to be $827 million in 2009, $480 million in 2010, $389 million in 2011, $316 million in 2012, $290 million in 2013 and $290 million in 2014 and after (assuming interest rates with respect to variable rate debt remain constant and there is no change in aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table). At December 31, 2009, short-term debt excluding the current portion of long-term debt comprises borrowings arranged by other subsidiaries. The weighted average interest rate was 7% (2008: 4%).
C – Lease arrangements
The future minimum lease payments for finance and operating leases and the present value of minimum finance lease payments at December 31, by payment date are as follows:
20 09 $ MILLION
Total future minimum finance lease payments 2010 2011 – 2014 2015 and after Total 811 2,483 4,514 7,808
Interest 461 1,336 1,721 3,518
Present value of minimum finance lease payments 350 1,147 2,793 4,290
Total future minimum operating lease payments 4,180 8,157 4,051 16,388
20 08
$ MILLION
Total future minimum finance lease payments 608 2,008 4,076 6,692 Interest 304 1,094 1,279 2,677
Present value of minimum finance lease payments 304 914 2,797 4,015
Total future minimum operating lease payments 4,648 9,905 4,712 19,265
2009 2010 – 2013 2014 and after Total
Operating lease expenses were as follows:
$ MILLION
Minimum lease payments Contingent rentals Sub-lease income Total
2009 3,513 14 (152) 3,375
2008 3,339 68 (161) 3,246
2007 3,091 63 (138) 3,016
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
121
[Note 16 continued] Future minimum lease payments are stated before deduction of expected rental income from non-cancellable sub-leases of $666 million (2008: $53 million) in respect of finance leases and $427 million (2008: $397 million) in respect of operating leases. Finance lease obligations include obligations under certain power generation contracts (“tolling agreements”). The present value of the future minimum lease payments under these contracts is $2,475 million at December 31, 2009 (2008: $2,513 million), of which $449 million (2008: $403 million) is denominated in Canadian dollars and the remainder in dollars. The carrying amount of related assets, which are recognised as property, plant and equipment, is $1,700 million at December 31, 2009, (2008: $1,609 million). The leases mature between 2021 and 2024 and the average interest rate is 8%. Shell leases offshore production and storage equipment for use in the Parque das Conchas (BC10), in respect of which the present value of the future minimum lease payments at December 31, 2009, included within finance lease obligations, is $792 million (2008: $420 million). The leases mature in 2039 and the average interest rate is 21%.
D – Gearing and net debt
The gearing ratio at December 31 was as follows:
$ MIL L ION, E XC EP T W HE R E OTH ER W ISE IN DI CATED
Non-current debt Current debt Total debt Cash and cash equivalents Net debt Total equity Total capital Gearing ratio (net debt as percentage of total capital)
2009 30,862 4,171 35,033 9,719 25,314 138,135 163,449 15.5%
2008 13,772 9,497 23,269 15,188 8,081 128,866 136,947 5.9%
The movement in Shell’s net debt is as follows:
$ MILLION
At January 1, 2009 Cash flow Other movements Currency translation differences At December 31, 2009 At January 1, 2008 Cash flow Other movements Currency translation differences At December 31, 2008
Non-current debt (13,772) (18,231) 1,186 (45) (30,862) (12,363) (1,418) (130) 139 (13,772)
Current debt (9,497) 7,634 (2,249) (59) (4,171) (5,736) (4,009) (214) 462 (9,497)
Cash and cash equivalents 15,188 (5,575) – 106 9,719 9,656 5,609 – (77) 15,188
Net debt (8,081) (16,172) (1,063) 2 (25,314) (8,443) 182 (344) 524 (8,081)
Net debt excludes the following items:
$ MILLION
2009 Net present value of operating lease obligations [A] Under-funded retirement benefit obligations Fair value hedges related to debt [C] Cash required for operational requirements Net debt, as reported Adjusted net debt 14,798 7,118 (1,418) 2,000 22,498 25,314 47,812
2008 16,445 11,834 (481) 2,300 30,098 8,081 38,179
[A] Total future minimum operating lease payments at December 31 (see Note 16) discounted at 3% in 2009 (2008: 5%). The excess of pension and other retirement obligations over related plan assets of $3,293 million (2008: $8,340 million) and $3,825 million (2008: $3,494 million) respectively (see Note 18). [C] The fair value of hedging derivatives in designated fair value hedges, net of related accrued interest.
122
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
17 TAXATION A – Taxation charge for the period
$ MILLION
Charge in respect of current period Adjustment in respect of prior periods Current taxation Relating to the origination and reversal of temporary differences Relating to changes in tax rates Adjustment in respect of prior periods Deferred taxation Taxation charge
2009 10,912 (1,615) 9,297 (1,079) (86) 170 (995) 8,302
2008 24,841 (389) 24,452 (342) 96 138 (108) 24,344
2007 19,960 116 20,076 (717) (746) 37 (1,426) 18,650
Reconciliations of the expected tax charge to the actual tax charge are as follows:
$ MILLION
Income before taxation Less: Share of profit of equity-accounted investments Income before taxation and share of profit from equity-accounted investments Applicable tax charge at statutory tax rates Adjustment in respect of prior periods Recognition/(derecognition) of tax losses Income not subject to tax Expenses not deductible for tax purposes Taxable items deductible not expensed Taxable income not recognised Other reconciling items, including amounts relating to changes in tax rate Taxation charge
2009 21,020 (4,976) 16,044 9,634 (1,445) 21 (747) 1,263 (521) 214 (117) 8,302
2008 50,820 (7,446) 43,374 23,673 (251) 32 (1,568) 2,461 (658) 498 157 24,344
2007 50,576 (8,234) 42,342 20,323 153 (116) (1,994) 1,602 (768) 321 (871) 18,650
The weighted average of statutory tax rates was 60.0% in 2009 (2008: 54.6%; 2007: 48.0%). The increase from 2008 to 2009 was due to a change in the geographical mix of income, with a greater proportion of Upstream income in 2009 arising in jurisdictions subject to relatively higher tax rates. The increase from 2007 to 2008 was due to a higher proportion of income arising in the Upstream segment, which is subject to relatively higher tax rates than other segments. The taxation charge includes not only those of general application but also taxes at special rates levied on income from certain Upstream activities and various other taxes to which these activities are subjected. The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. The amount in 2009 relates primarily to adjustments following final settlement of multiple prior period tax returns in various jurisdictions.
B – Taxes payable
$ MILLION
Income taxes Sales taxes, excise duties and similar levies and social law taxes Total
Dec 31, 2009 5,385 3,804 9,189
Dec 31, 2008 4,917 3,190 8,107
Included in other receivables (see Note 14) is current tax receivable of $548 million (2008: $1,000 million).
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
123
[Note 17 continued]
C – Deferred taxation
Movements in deferred tax liabilities and assets during the year, taking into consideration the offsetting balances within the same tax jurisdiction, are as follows:
D E F E RRE D TA X L I A B IL I TI E S $ MILLION
Property, plant and equipment 16,022 641 (304) 1,409 17,768 17,527 (293) 1,019 (2,231) 16,022 Retirement benefits 1,382 (360) 109 126 1,257 340 1,290 89 (337) 1,382 Other provisions (4,494) (433) 64 (322) (5,185) (6,093) 66 843 690 (4,494) Other (392) (196) 594 (8) (2) 1,265 (964) (625) (68) (392) Total 12,518 (348) 463 1,205 13,838 13,039 99 1,326 (1,946) 12,518
At January 1, 2009 Charged/(credited) to income Other movements Currency translation differences At December 31, 2009 At January 1, 2008 (Credited)/charged to income Other movements Currency translation differences At December 31, 2008
DE F E RRE D TA X AS SE TS
$ MILLION
At January 1, 2009 Credited to income Other movements Currency translation differences At December 31, 2009 At January 1, 2008 (Charged)/credited to income Other movements Currency translation differences At December 31, 2008
Losses carried forward 881 224 200 55 1,360 1,146 (77) (119) (69) 881
Retirement benefits 371 14 (9) 7 383 464 (34) (30) (29) 371
Other provisions 1,145 307 53 101 1,606 541 94 781 (271) 1,145
Other 1,021 102 75 (14) 1,184 1,102 224 (394) 89 1,021
Total 3,418 647 319 149 4,533 3,253 207 238 (280) 3,418
Other movements in deferred tax assets and liabilities relate mainly to acquisitions, reclassifications between assets and liabilities and amounts recognised in other comprehensive income and directly in equity (see Note 26). Where the realisation of deferred tax assets is dependent on future profits, losses carried forward are recognised only to the extent that business forecasts predict that such profits will be available. At December 31, 2009, recognised losses carried forward amounted to $14,012 million (2008: $8,815 million). Unrecognised losses amount to $2,875 million at December 31, 2009 (2008: $2,952 million) and expire as follows:
$ MILLION
In 1 year In 2 years In 3 years In 4 years In 5 years and after, including with no expiry
2009 8 10 16 19 2,822
2008 45 6 24 31 2,846
Earnings retained by subsidiaries and equity-accounted investments amounted to $122,646 million at December 31, 2009 (2008: $120,734 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.
18 RETIREMENT BENEFITS
Retirement plans are provided for employees of all major subsidiaries. The nature of such plans varies according to the legal and fiscal requirements and economic conditions of the country in which the employees are engaged. Generally, the plans provide defined benefits based on employees’ years of service and average/final pensionable remuneration.
124
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 18 continued] Some subsidiaries have established unfunded defined benefit plans to provide certain other retirement healthcare and life insurance benefits (other benefits) to their retirees. Entitlement to these other benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period.
$ MILLION
Pension benefits 2009 2008 Change in defined benefit obligation Obligations for benefits based on employee service to date at January 1 Increase in present value of the obligation for benefits based on employee service during the year Interest on the obligation for benefits in respect of employee service in previous years Benefit payments made Actuarial losses/(gains) Other movements Currency translation differences Obligations for benefits based on employee service to date at December 31 Change in plan assets Plan assets held in trust at fair value at January 1 Expected return on plan assets Actuarial gains/(losses) Employer contributions Plan participants’ contributions Benefit payments made Other movements Currency translation differences Plan assets held in trust at fair value at December 31 Plan assets in excess of/(less than) the present value of obligations for benefits at December 31 Unrecognised net actuarial losses since adoption of IFRS Unrecognised past service cost/(credit) Net amount recognised 52,639 965 3,131 (2,862) 5,472 281 3,092 62,718 44,299 3,142 6,256 5,216 88 (2,862) 25 3,261 59,425 (3,293) 10,640 12 7,359 62,523 1,202 3,337 (2,963) (3,698) (151) (7,611) 52,639 76,198 4,974 (27,061) 1,636 75 (2,963) 80 (8,640) 44,299 (8,340) 12,085 12 3,757
2009 3,494 57 222 (138) (28) 177 41 3,825
Other benefits 2008 3,179 59 187 (134) 269 (6) (60) 3,494
(3,825) 43 48 (3,734)
(3,494) 69 14 (3,411)
$ MILLION
2009 Amounts recognised in the Consolidated Balance Sheet: Pre-paid pension costs Retirement benefit obligations: Non-current Current Net amount recognised 10,009 (5,923) (461) 3,625
Total 2008 6,198 (5,469) (383) 346
Pension benefits 2009 2008 10,009 (2,387) (263) 7,359 6,198 (2,241) (200) 3,757
2009
Other benefits 2008
(3,536) (198) (3,734)
(3,228) (183) (3,411)
ADDITIO N AL IN FORMAT ION
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2009 Pension benefits Obligation for pension benefits in respect of unfunded plans Obligation for pension benefits in respect of funded plans Total defined benefit obligation Experience adjustments as a percentage of the total benefit obligation Plan assets Experience adjustments as a percentage of plan assets Plan (deficit)/surplus Actual return on plan assets Other benefits Total benefit obligation (unfunded) Experience adjustments as a percentage of the total benefit obligation 3,087 59,631 62,718 (0.5)% 59,425 10.5% (3,293) 9,398 3,825 (1.9)%
2008 2,684 49,955 52,639 1.0% 44,299 (61.1)% (8,340) (22,087) 3,494 0.6%
2007 2,505 60,018 62,523 0.7% 76,198 1.3% 13,675 5,846 3,179 6.0%
2006 1,931 58,327 60,258 0.7% 67,479 6.1% 7,221 8,133 3,163 0.7%
2005 1,904 53,773 55,677 0.2% 54,650 10.8% (1,027) 9,290 3,143 0.0%
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
125
[Note 18 continued] Employer contributions to defined benefit pension plans during 2010 are estimated to be $2.1 billion.
B E N E F I T CO S TS $ MILLION
Service cost Interest cost Expected return on plan assets Other components Cost/(income) of defined benefit plans Payments to defined contribution plans Total
2009 965 3,131 (3,142) 1,033 1,987 269 2,256
Pension benefits 2008 2007 1,202 1,188 3,337 3,051 (4,974) (383) (818) 263 (555) (4,821) 158 (424) 233 (191)
2009 57 222 144 423 423
2008 59 187 7 253 253
Other benefits 2007 50 171 68 289 289
Benefit costs are reported principally within production and manufacturing expenses in the Consolidated Statement of Income. Weighted average plan asset allocations by asset category for the principal pension plans in Shell are:
Target allocation at Dec 31, 2009 Equities Debt securities Real estate Other Total 47% 43% 6% 4% 100%
Percentage of plan assets at Dec 31, 2009 2008 53% 40% 2% 5% 100% 49% 48% 2% 1% 100%
Long-term investment strategies of plans are generally determined by the responsible pension fund trustees using a structured asset liability modelling approach to determine the asset mix that best meets the objectives of optimising investment returns within agreed risk levels while maintaining adequate funding levels.
Assumptions and sensitivities
DEFINED BENEFIT PENSION PLANS
The weighted averages for the principal assumptions applicable for the principal defined benefit pension plans in Shell are:
2009 Assumptions used to determine benefit obligations at December 31 Expected rates of increase in pensionable salaries Discount rates Assumptions used to determine benefit costs for year ended December 31 Expected rates of increase in pensionable salaries Discount rates Expected rates of return on plan assets 5.5% 5.5% 4.4% 6.0% 6.7%
2008 4.4% 6.0% 4.0% 5.7% 6.9%
2007 4.0% 5.7% 3.9% 5.0% 7.1%
Demographic (including mortality) assumptions are determined in the light of local conditions. Mortality assumptions are reviewed annually and are based on the latest available standard mortality tables for individual countries concerned, adjusted where appropriate to reflect the experience of Shell. In 2009, new mortality tables were adopted for some countries, notably the UK. At December 31, 2009, the average total life expectancy for males and females currently aged 60 years is 86 years and 88 years respectively (2008: 85 years and 87 years respectively). The long-term assumptions for pensionable salary increases, used to determine benefit obligations at December 31, 2009, were increased by 0.75% in respect of UK plans (2008: 0.50% decrease) and by 0.25% in respect of US plans (2008: no change), reflecting market-related changes in the underlying inflation assumption for these plans. The assumptions for discount rates reflected decreases of AA rated corporate bond yields of 0.70% in the Eurozone (2008: 0.40% increase), of 0.30% in the UK (2008: 0.20% increase) and of 0.30% in the USA (2008: 0.20% increase).
126
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 18 continued] For pension benefits, the sensitivity at December 31, 2009, to a change of one percentage point in certain principal assumptions is as follows:
$ MILLION
One-percentage point Increase Decrease Expected rates of increase in pensionable salaries Change in defined benefit obligation Change in annual pension benefit cost (pre-tax) Discount rates Change in defined benefit obligation Change in annual pension benefit cost (pre-tax) Expected rates of return on plan assets Change in annual pension benefit cost (pre-tax) 2,069 241 (7,783) (127) (588) (1,837) (211) 9,762 134 588
The effect of an increase/(decrease) of one year in life expectancy would be to increase/(decrease) the defined benefit obligation by approximately $1,893 million/($1,965 million). The impact on the retirement benefit obligation reflected in Shell’s Consolidated Balance Sheet and on Shell’s annual pension benefit cost of changes in assumptions described above excludes the effects of any amortisation of actuarial gains and losses resulting from such changes. The amortisation would vary from year to year by fund depending on whether or not the cumulative unrecognised actuarial gains and losses exceed the corridor (see Note 2). Any amounts outside the corridor would be recognised in income over the expected average remaining employee working lives for the relevant fund, the average of which across all funds at December 31, 2009, is 12 years (2008: 13 years).
Other defined benefit plans
The weighted averages for the discount rate and healthcare cost trend rates applicable for the principal other benefit plans in Shell are:
Discount rates (used to determine benefit obligations) Healthcare cost trend rate in year after reporting year Ultimate healthcare cost trend rate Year ultimate healthcare cost trend rate is applicable
2009 5.9% 7.9% 4.3% 2027
2008 6.3% 8.2% 4.2% 2027
2007 6.0% 8.1% 4.6% 2013
The effect of a one percentage point increase/(decrease) at December 31, 2009, in the annual rate of increase in the assumed healthcare cost trend rates would be to increase/(decrease) the defined benefit obligation by approximately $479 million/($394 million) and the annual benefit cost (pre-tax) by approximately $34 million/($28 million).
19 OTHER PROVISIONS
$ MILLION
Decommissioning and restoration Environmental Redundancy Litigation Other Total
2009 653 365 1,492 201 1,096 3,807
Current 2008 514 321 203 249 1,164 2,451
2009 11,633 891 157 499 868 14,048
Non-current 2008 9,982 842 107 709 930 12,570
2009 12,286 1,256 1,649 700 1,964 17,855
Total 2008 10,496 1,163 310 958 2,094 15,021
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
127
[Note 19 continued] Movements in provisions are as follows:
$ MILLION
At January 1, 2009 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2009 At January 1, 2008 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2008
Decommissioning and restoration 10,496 265 (424) 638 488 823 12,286 11,226 198 (147) 609 456 (1,846) 10,496
Environmental 1,163 192 (189) 26 13 51 1,256 1,212 245 (240) 35 (5) (84) 1,163
Redundancy 310 1,535 (171) – (27) 2 1,649 561 85 (305) – (12) (19) 310
Litigation 958 196 (489) 9 8 18 700 1,116 149 (293) 6 13 (33) 958
Other 2,094 680 (776) 55 (155) 66 1,964 2,335 271 (397) 30 16 (161) 2,094
Total 15,021 2,868 (2,049) 728 327 960 17,855 16,450 948 (1,382) 680 468 (2,143) 15,021
The timing and amounts settled in respect of these provisions are uncertain and dependent on various factors that are not always within management’s control. Of the decommissioning and restoration provision at December 31, 2009, an estimated $3 billion is expected to be utilised within one to five years, $4 billion within six to ten years, and the remainder in later periods. Reviews of estimated decommissioning and restoration costs are carried out annually, which in 2009 resulted in an increase of $477 million (2008: $1,520 million) in both the provision, reported within “Reclassifications and other movements”, and the corresponding property, plant and equipment assets reported within “Sales, retirements and other movements” in Note 9. Offsetting this increase in 2008 was a reduction resulting from disposals of assets, primarily in the UK and USA, of $1,032 million. Provisions for environmental remediation costs relate to a number of events in different locations, none of which is individually significant. The additional provisions for redundancy in 2009 of $1,535 million mainly relate to around 5,000 staff who are leaving Shell as a result of a restructuring programme. Provisions for litigation costs at December 31, 2009 relate to a number of cases, none of which is individually significant. Further information is given in Note 28. In 2009, Shell concluded the settlement of claims arising from the 2004 recategorisation of certain hydrocarbon reserves. Included in other provisions at December 31, 2009, are $750 million (2008: $656 million) relating to employee end-of-service benefits.
20 OTHER NON-CURRENT LIABILITIES
$ MILLION
Dec 31, 2009 Advance payments received under long-term supply contracts Customer deposits Liabilities under employee benefit plans Derivative contracts (see Note 23) Deferred income Other Total 508 122 451 987 800 1,718 4,586
Dec 31, 2008 548 123 400 595 676 1,335 3,677
The fair value of financial liabilities included above approximates the carrying amount. Other comprises sundry items, none of which is individually significant.
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
21 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
$ MILLION
Trade payables Amounts due to equity-accounted investments Derivative contracts (see Note 23) Accruals and deferred income Other Total
Dec 31, 2009 29,379 3,412 17,755 12,540 4,075 67,161
Dec 31, 2008 25,705 3,879 38,277 13,408 3,822 85,091
The fair value of financial liabilities included above approximates the carrying amount. Other comprises sundry items, none of which is individually significant.
22 ORDINARY SHARE CAPITAL
AU TH ORISED NUMBER OF SHARES
Class A shares of ¤0.07 each Class B shares of ¤0.07 each Unclassified shares of ¤0.07 each Sterling deferred shares of £1 each
Dec 31, 2009 4,077,359,886 2,759,360,000 3,163,280,114 50,000
Dec 31, 2008 4,077,359,886 2,759,360,000 3,163,280,114 50,000
I SS U E D A N D F U LLY PAI D
NUMBER OF SHARES
shares of ¤0.07 each At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008 Class A 3,545,663,973 3,583,505,000 (37,841,027) 3,545,663,973 Class B 2,695,808,103 2,759,360,000 (63,551,897) 2,695,808,103
shares of £1 each Sterling deferred 50,000 50,000 – 50,000
N O MI N A L VA L U E
$ MILLION
shares of ¤0.07 each At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008 Class A 300 303 (3) 300 Class B 227 233 (6) 227 Total 527 536 (9) 527
The total nominal value of sterling deferred shares is less than $1 million.
23 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial instruments and other derivative contracts in the Consolidated Balance Sheet comprise investments in securities (see Note 11), cash and cash equivalents (see Note 15), debt (see Note 16) and certain amounts (including derivatives) reported within other non-current assets (see Note 12), accounts receivable (see Note 14), other non-current liabilities (see Note 20) and accounts payable and accrued liabilities (see Note 21).
A – Risks
In the normal course of business, Shell uses financial instruments of various kinds for the purposes of managing exposure to interest rate, currency and commodity price movements. Shell has treasury standards 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 derivative instruments, as well as the treasury control framework. 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 financial instruments by most subsidiaries is not permitted by their treasury policy.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
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[Note 23 continued] Other than in exceptional cases, the use of external derivative instruments is confined to specialist oil and gas 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:
MARKET RISK
Market risk is the possibility that changes in interest rates, currency exchange rates or the prices of natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products will adversely affect the value of Shell’s assets, liabilities or expected future cash flows.
Interest rate risk
Most of Shell’s debt is raised from central borrowing programmes. Shell has entered into interest rate swaps and currency swaps to effectively convert most centrally issued debt to floating rate dollar LIBOR (London Inter-Bank Offer Rate), reflecting its policy to have debt mainly denominated in dollars and to maintain a largely floating interest rate exposure profile. Consequently Shell is exposed predominantly to dollar LIBOR interest rate movements. The financing of most subsidiaries is also 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, 2009, and assuming no other changes occur (such as changes in currency exchange rates) and that no further interest rate management action is taken, an increase/decrease in interest rates of 1% would increase/decrease pre-tax net interest expense by $163 million (2008: $18 million).
Foreign exchange risk
Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream companies and those with significant cross-border business is the dollar. For Downstream companies, the local currency is typically also the functional currency. Consequently, Shell is exposed to varying levels of foreign exchange risk when it enters into transactions that are not denominated in the companies’ functional currencies, when foreign currency monetary assets and liabilities are translated at the reporting date and as a result of holding net investments in operations that are not dollar-functional. The main currencies to which Shell is exposed are sterling, the Canadian dollar, euro and Australian dollar. Each company has treasury policies in place that are designed to measure and manage their foreign exchange exposures by reference to their functional currency. Fluctuations in exchange rates can have a significant effect on income; however, the total impact is not separately quantifiable because some effects are absorbed into individual companies’ earnings as they feed through into the price of products and/or their cost base. Exchange rate 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 individual companies’ functional currency. Currency 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. Shell does not generally undertake hedging of net investments in foreign operations or of income that arises in foreign operations that are nondollar functional. Foreign exchange gains and losses arising from foreign currency transactions included in income are presented in Note 4.
Price risk
Certain subsidiaries have a mandate to trade natural gas, electrical power, crude oil, refined products, chemical feedstocks and environmental products, and to use commodity swaps, options and futures as a means of managing price and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are contained within authorised limits. Shell uses risk management systems for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Shell’s exposure to significant trading losses is therefore considered limited. Shell utilises VAR techniques based on variance/covariance or Monte Carlo simulation models and makes a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair value movements to ensure model integrity is maintained.
VAL U E - AT- RI SK ( PR E - TA X ) $ MILLION
Oil and chemicals Gas and power
High 52 20
Low 8 5
Average 17 10
2009 Year end 14 12
High 33 28
Low 5 6
Average 17 17
2008 Year end 28 15
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 23 continued]
CREDIT RISK
Shell has policies in place to ensure that wholesale sales of products are made to customers with appropriate creditworthiness. In addition, Shell has policies that limit the amount of credit exposure to any individual financial institution. There has been no significant level of counterparty default. In commodity trading, counterparty credit risk is managed within a framework of individual credit limits with utilisation being regularly reviewed. 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. In the prevailing international credit environment, Shell applies a variety of measures to reduce and diversify risk exposure. These measures include detailed credit analysis and monitoring of trading partners, restricting large-volume trading activities to the highest-rated counterparties, shortening exposure duration, and taking collateral or other security. As Shell’s treasury and trading operations are highly centralised, these measures have proved reasonably effective in controlling credit exposures associated with managing Shell’s substantial cash and cash equivalents, foreign exchange and commodity positions. 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.
LIQUIDITY RISK
Liquidity risk is the risk that suitable sources of funding for Shell’s business activities may not be available. Shell believes that it has access to sufficient debt funding sources (capital markets), and to undrawn committed borrowing facilities to meet currently foreseeable requirements. Information about Shell’s borrowing facilities is presented in Note 16. Shell’s long-term debt ratings, assigned by Moody’s Investors Services and Standard and Poor’s Ratings Services respectively, are Aa1 and AA, and its short-term commercial paper programmes are rated Prime-1 and A-1+. Shell has access to a wide range of funding alternatives at competitive rates. Surplus cash is invested in a range of short-dated money market instruments, including commercial paper, time deposits and money market funds, which seek to ensure the security and liquidity of investments while optimising yield. In all cases investments are only permitted in high credit quality institutions/funds, with diversification of investment supported by maintaining counterparty credit limits.
B – Derivative contracts
The following tables provide a summary of the carrying amounts of derivative contracts held at December 31 and a reconciliation to Shell’s Consolidated Balance Sheet.
$ MILLION
Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity swaps, options, futures and forwards Other contracts Total Included within: Accounts receivable (Note 14) Accounts payable and accrued liabilities (Note 21) Other non-current assets (Note 12) Other non-current liabilities (Note 20) Total
Asset 226 235 1,830 17,842 323 20,456 18,250
Liability (5) (258) (313) (17,349) (817) (18,742)
2009 Net 221 (23) 1,517 493 (494) 1,714
Asset 367 1,228 669 38,144 215 40,623 39,722
Liability – (594) (354) (37,475) (449) (38,872)
2008 Net 367 634 315 669 (234) 1,751
(17,755) 2,206 (987) 20,456 (18,742) 40,623 901
(38,277) (595) (38,872)
The maximum exposure to credit risk is the fair value of the derivative assets.
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[Note 23 continued] The carrying amounts of derivative contracts held at December 31, 2009, categorised according to the predominant source and nature of inputs used in determining the fair value of each contract, are as follows:
$ MILLION
Prices in active markets for identical Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity swaps, options, futures and forwards Other contracts Total assets/liabilities – – – (182) 1 (181)
Other observable inputs 221 (23) 1,517 1,289 156 3,160
Unobservable inputs – – – (614) (651) (1,265) Total 221 (23) 1,517 493 (494) 1,714
Financial instruments are used mainly as hedging instruments, although hedge accounting is not always applied. Consequently, movements in the carrying amounts of hedging instruments that are recognised in income are generally offset by movements in the underlying hedged items. In the case of currency hedges, gains and losses are offset by translation differences recognised in respect of the related transactions; in the case of commodity price hedges, gains and losses are offset by movements in the carrying amounts of the related forward contracts. Net losses before tax on these contracts, excluding realised commodity forward contracts and those accounted for as hedges, are $3,505 million in 2009 (2008: $505 million gains; 2007: $1,674 million losses). Shell has designated certain derivatives as fair value hedges which were mainly entered into to mitigate interest rate risk on certain fixed rate debt and price risk on a fixed price commodity purchase contract. Net losses on the hedged items in 2009 are $1,098 million (2008: $778 million; 2007: $216 million); net gains on the hedging instruments in 2009 are $985 million (2008: $789 million; 2007: $212 million). During 2009, accumulated losses on cash flow hedges of $318 million, previously recognised in other comprehensive income, were recognised in revenue (2008: $1 million; 2007: $201 million), as a result of previously forecast transactions that are no longer expected to occur. Movements during 2009 in the carrying amounts of derivative contracts measured using predominantly unobservable inputs are as follows:
$ MILLION
At January 1, 2009 Net losses recognised in revenue Purchases Sales Settlements Recategorisations (net) Currency translation differences At December 31, 2009
(909) (245) 1,213 (1,228) 48 (91) (53) (1,265)
Included in net losses recognised in revenue for 2009 are unrealised net losses totalling $819 million relating to assets and liabilities held at December 31, 2009.
INTEREST RATE SWAPS
Interest rate swaps held at December 31 by expected year of maturity are as follows. The variable interest rate component of contracts is generally linked to inter-bank offer rates. Interest is generally settled on a net basis.
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Dollar Contract/notional amount Average pay rate Average receive rate
2010 500 0.9% 5.1%
2011 2,500 0.8% 4.4%
2012 500 0.9% 5.0%
2013 – – –
2014 2,500 2.2% 4.0%
2015 and after 1,750 0.9% 4.7%
Contract/ notional amount 7,750
Carrying amount 221
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 23 continued]
20 08 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
2014 and Dollar Contract/notional amount Average pay rate Average receive rate 2009 500 3.9% 4.8% 2010 500 3.4% 5.1% 2011 1,000 3.1% 5.6% 2012 500 3.0% 5.0% 2013 – – – after 750 3.2% 5.2%
Contract/ notional amount 3,250
Carrying amount 367
FORWARD FOREIGN EXCHANGE CONTRACTS AND CURRENCY SWAPS
Forward foreign exchange contracts and currency swaps held at December 31, by expected year of maturity, are as follows. All of these are entered into in order to manage foreign exchange risk exposure; however, hedge accounting has not been applied to the majority of them. Cash flows exchanged for currency swaps are generally the gross amount of interest on the contract/notional amount. Average contractual exchange rates in the tables that follow are expressed as the number of units of the currency being sold for one unit of the currency being bought.
20 09 (C ONTR A CTS MAINLY MATUR E IN 201 0) $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Buy sterling/sell dollar Buy dollar/sell Canadian dollar Buy euro/sell dollar Buy dollar/sell Norwegian krone Buy dollar/sell Australian dollar Buy Canadian dollar/sell dollar Buy dollar/sell Danish krone Buy dollar/ sell sterling Buy dollar/sell euros Buy New Zealand dollar/sell dollar Buy Singapore dollar/sell dollar Buy Norwegian krone/sell dollar Buy dollar/Sell Singapore dollar Buy Qatar riyal/sell dollar Other contracts with contract/notional amount less than $500 million each Total
Average contractual exchange rate 1.62 1.05 1.47 5.74 1.11 0.95 5.03 0.62 0.69 0.71 0.71 0.17 1.40 0.27
Contract/ notional amount 7,130 6,875 3,406 2,452 1,824 1,446 1,320 1,267 894 655 650 615 599 588 2,892 32,613
Carrying amount (26) (17) (70) 17 6 8 34 (7) 5 11 – 2 – – 14 (23)
20 08 (C ONTR A CTS MAINLY MATUR E IN 200 9)
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Buy euro/sell dollar Buy sterling/sell dollar Buy dollar/sell Canadian dollar Buy dollar/sell Norwegian krone Buy dollar/sell euro Buy dollar/sell Danish krone Buy dollar/sell Australian dollar Buy Singapore dollar/sell dollar Buy Danish krone/sell dollar Buy Canadian dollar/sell dollar Buy dollar/sell Singapore dollar Buy Qatar riyal/sell dollar Buy dollar/sell sterling Other contracts with contract/notional amount less than $500 million each Total
Average contractual exchange rate 1.31 1.53 1.14 6.39 0.73 5.48 1.45 0.69 0.19 0.82 1.45 0.27 0.66
Contract/ notional amount 7,838 4,690 4,454 2,111 1,923 1,466 1,056 650 626 617 585 542 533 3,621 30,712
Carrying amount 515 (275) 281 189 (41) (47) 4 5 2 7 (5) 1 24 (26) 634
Of the total contract/notional amount at December 31, 2009, $28.1 billion (2008: $25.2 billion) relates to the outstanding forward leg of contracts in place to manage foreign currency cash balances.
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[Note 23 continued]
Currency swaps
200 9 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contract/notional amount Average contractual exchange rate Fixed to floating interest rates: Buy dollar/sell euro Buy dollar/sell Canadian dollar Buy dollar/sell sterling Buy Canadian dollar/sell dollar Buy dollar/sell Swiss franc Buy sterling/sell dollar Floating to floating Interest Rates Buy Malaysian ringgit /sell dollars Buy Australian dollar/sell dollar Buy dollar/sell Brazilian real Buy dollar/sell Thai baht Other contracts Total 0.76 1.14 0.52 0.86 1.30 1.85
2010 432 539 807 94 – –
2011 – 261 – 72 291 –
2012 2,522 153 – – – –
2013 3,603 132 – – – –
2014 – – – – – –
2015 and after 7,566 – – – – 153
Total 14,123 1,085 807 166 291 153
Carrying amount 1,724 (192) (106) 128 70 (19)
3.45 0.78 1.88 32.93
140 – 13 – 12 2,037
– 391 – – 3 1,018
245 – – 169 7 3,096
210 – – – – 3,945
– – 206 – – 206
– – – – – 7,719
595 391 219 169 22 18,021
– (64) (18) (5) (1) 1,517
200 8
$ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Contract/notional amount Average contractual exchange rate Fixed to floating interest rates: Buy dollar/sell euro Buy dollar/sell Canadian dollar Buy dollar/sell sterling Buy dollar/sell Brazilian real Buy Canadian dollar/sell dollar Buy dollar/sell Swiss franc Buy sterling/sell dollar Other contracts Floating to floating interest rates: Buy euro/sell dollar Buy Malaysian ringgit/sell dollar Buy Australian dollar/sell dollar Buy dollar/sell Thai baht Other contracts Total 0.76 1.17 0.52 2.27 0.85 1.30 1.86
2009 493 628 – 216 240 – – 26 1,071 93 – 66 – 2,833
2010 423 304 723 – 5 – – – – 140 – – 14 1,609
2011 – 184 – – 40 284 – – – – 391 – 6 905
2012 – 95 – – – – – 90 – 139 – 162 – 486
2013 – 86 – – – – – – – 36 – – – 122
2014 and after 2,114 – – 154 – – 107 – – – – – – 2,375
Total 3,030 1,297 723 370 285 284 107 116 1,071 408 391 228 20 8,330
Carrying amount 406 77 (183) (79) (3) 60 (30) 6 8 4 47 3 (1) 315
1.42 3.48 0.72 33.89
COMMODITY SWAPS, OPTIONS, FUTURES AND FORWARDS
Shell enters into derivative contracts to supply or acquire physical volumes of commodities at future dates in the course of its trading operations. Financial derivative instruments are used to manage the resultant price exposures. The fair value of the assets and liabilities arising will therefore tend to equate, irrespective of price movements, because for most contracts held for trading there are offsetting physical or financial derivative contracts to mitigate price exposure. Shell manages the liquidity risk associated with these contracts on a fair value basis. As such, the maximum exposure to liquidity risk is the undiscounted fair value of the physical and financial derivative liabilities. Commodity swaps, options and futures held at December 31, 2009, carried a total undiscounted liability of $11,158 million (2008: $27,059 million) and forward sale and purchase contracts carried a total undiscounted liability of $6,390 million (2008: $10,802 million). These contracts are generally held for trading with the majority maturing within one year. For a minority of commodity derivatives, 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 and option spread models, with assumptions developed internally based on observable market activity. Commodity derivatives are generally economically hedged as a portfolio. As such, gains and losses associated with instruments that are measured using unobservable inputs are not reflective of trends occurring in the underlying business, and are typically offset by gains and losses associated with similar instruments that are measured using quoted market prices or other observable inputs.
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[Note 23 continued]
OTHER CONTRACTS
Other contracts include certain contracts that are held to sell or purchase commodities, and other contracts containing embedded derivatives, which are required to be recognised at fair value because of pricing or delivery conditions, even though they are only entered into to meet operational requirements. At December 31, 2009, the total contract/notional amount of these contracts, which are mainly contracts for the delivery of gas, was $5,472 million (2008: $5,332 million), and their fair value was $494 million (liability) (2008: $234 million (liability)). These contracts are expected to mature between 2010 and 2025, with certain contracts having early termination rights (for either party). Valuations are derived from quoted market prices for the next two years; thereafter, from forward gas price curve formulae used in similar contracts, estimated by reference to equivalent oil prices, which are also adjusted for credit risk. Future oil price assumptions are the most significant input to this model, such that a decrease of $10 per barrel in the projected oil price would decrease the fair value of the liability estimate, and increase pre-tax income, by $380 million.
COLLATERA L
The carrying amount of financial assets pledged as collateral for liabilities or contingent liabilities at December 31, 2009, and presented within accounts receivable (see Note 14), was $311 million (2008: $739 million). The carrying amount of collateral held at December 31, 2009, and presented within accounts payable and accrued liabilities (see Note 21), was $512 million (2008: $1,985 million).
24 SHARE-BASED COMPENSATION PLANS AND TREASURY SHARES A – Share-based compensation plans
There are a number of share-based compensation plans for employees of Shell, principally the Performance Share Plan, the UK Sharesave Scheme, plans containing stock appreciation rights and share options plans (replaced by the Performance Share Plan from 2005). The total expense for share-based compensation plans was $642 million (2008: $241 million; 2007: $589 million), comprising $504 million relating to equity-settled plans (2008: $405 million; 2007: $373 million) and $138 million relating to cash-settled plans (2008: $(164) million; 2007: $216 million). The fair value of share-based compensation awarded in 2009 was $386 million (2008: $632 million; 2007: $472 million). The total liability for cash-settled plans at December 31, 2009, is $350 million (2008: $217 million). The intrinsic value of all vested cash-settled plans at December 31, 2009, is $141 million (2008: $108 million). Information on the principal plans is given below.
PERFORMANCE SHARE PLAN
Conditional awards of the Company’s shares are made under an amended long-term incentive plan that is called the Performance Share Plan when making awards to employees who are not Executive Directors. The actual amount of shares that may vest, ranging from 0-200% of the conditional awards, depends on the measurement of the prescribed performance conditions over a three-year period beginning on January 1 of the award year. For awards made in 2005 and 2006 the extent to which the awards vest depends on the total shareholder return of Shell compared with four of its main competitors (“relative TSR”) over the measurement period. For the awards made from 2007 to 2009, the extent to which the awards vest will be determined by two performance conditions. The relative TSR measure over the measurement period will be used to determine the vesting of half the award and the other half of the award will be linked to the Shell scorecard results. The following table shows, for 2008 and 2009, shares granted, vested and expired or forfeited:
PE RF OR MAN C E S H ARE PL A N
Number of Royal Dutch Shell plc shares Weighted average remaining Class A (thousands) 19,078 8,700 (2,168) (2,499) 23,111 15,305 8,498 (2,815) (1,910) 19,078 Class B (thousands) 8,781 3,558 (1,283) (1,376) 9,680 7,981 3,525 (1,670) (1,055) 8,781 Class A ADRs (thousands) 6,358 2,800 (871) (939) 7,348 5,361 2,838 (1,044) (797) 6,358 contractual life (years) 1.2
At January 1, 2009 Granted Vested Expired/forfeited At December 31, 2009 At January 1, 2008 Granted Vested Expired/forfeited At December 31, 2008
1.1 1.1
1.2
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[Note 24 continued]
OTHER PRIN CIPAL PLANS
Employees of participating companies in the UK may participate in the UK Sharesave Scheme. Share options are granted over the Company’s Class B shares at a price set at the date specified in the invitation. Options are granted on a date not normally more than 30 days after the option price is determined and are normally exercisable after a three-year or five-year contractual savings period. There are 2.0 million shares under option at December 31, 2009 (2008: 2.9 million). Certain subsidiaries have other plans containing stock appreciation rights linked to the value of the Company’s Class A ADRs. There are 0.5 million rights outstanding at December 31, 2009 (2008: 1.1 million).
SHARE OPTION PLANS (CLOSED)
Shell offered eligible employees options over shares of the Company, at a price not less than the fair market value of the shares at the date the options were granted. The options are mainly exercisable three years from grant date. The options lapse 10 years after grant or, if earlier, on resignation from Shell employment (subject to certain exceptions). The following table shows, for 2008 and 2009, in respect of the option plans, the number of shares under option at the beginning of the year, the number of options exercised and expired/forfeited during the year and the number of shares under option at the end of the year, together with the weighted average exercise price translated at the respective year-end exchange rates. Since 2005 no further grants have been made under these plans.
SH ARE O PTI ON PLAN
Royal Dutch Shell plc Class A shares Weighted average exercise price ($) 33.06 23.09 39.44 33.77 34.40 22.68 38.36 33.06
Royal Dutch Shell plc Class B shares Weighted average exercise price ($) 23.89 22.88 30.21 26.71 32.73 22.14 26.13 23.89
Royal Dutch Shell plc Class A ADRs Weighted average exercise price ($) 50.74 50.80 51.34 50.74 50.95 52.79 53.86 50.74
Number (thousands) Under option at January 1, 2009 Exercised Expired/forfeited Under option at December 31, 2009 Under option at January 1, 2008 Exercised Expired/forfeited Under option at December 31, 2008 58,992 (1,372) (3,840) 53,780 64,171 (2,426) (2,753) 58,992
Number (thousands) 23,476 (1,174) (1,054) 21,248 28,318 (4,069) (773) 23,476
Number (thousands) 11,849 (374) (6) 11,469 13,221 (1,351) (21) 11,849
The underlying weighted average exercise prices for the Company’s Class A and B shares under option at December 31, 2009 were ¤23.43 (2008: ¤23.50) and £16.55 (2008: £16.53) respectively.
VALUATION ASSUMPTIONS
A Monte Carlo option pricing model is used to estimate the fair value of the share-based compensation expense arising from the Performance Share Plan. The model projects and averages the results for a range of potential outcomes for the vesting conditions described above, 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 ten years. The assumptions applicable to Shell are as follows:
2009 Share price volatility three-year ten-year Dividend yield three-year ten-year 32.5% 27.9% 4.2% 3.8%
2008 22.9% 25.7% 3.5% 3.5%
2007 19.2% 27.0% 4.1% 3.6%
The outcomes derived using this model are discounted to their present value using the risk-free interest rate of 1.4% (2008: 2.4%; 2007: 4.6%).
B – Treasury shares
Shell employee share ownership trusts purchase the Company’s shares in the open market to meet future obligations arising from share-based compensation granted to employees. At December 31, 2009, they held 55.9 million Class A shares (2008: 54.9 million), 28.2 million Class B shares (2008: 29.9 million) and 17.5 million Class A ADRs (2008: 17.5 million). The total carrying amount of the Company’s shares, which are all held in connection with the share-based compensation plans, at December 31, 2009, is $1,711 million (2008: $1,867 million).
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Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
25 MINORITY INTEREST
TRAN SAC TION S WITH MI NORI TY SH AREHOLDERS IN 20 07 $ MILLION
Equity attributable to Royal Dutch Shell plc shareholders Retained earnings (5,445) – (28) (5,473) Minority interest (1,639) (6,711) (28) (8,378) Total equity (7,084) (6,711) (56) (13,851)
Acquisition of Shell Canada Partial divestment of Sakhalin Other changes in minority interest Total
In March 2007, Shell acquired the minority interest in Shell Canada for a cash consideration of $7.1 billion. This was reflected in the Consolidated Statement of Changes in Equity as a decrease in minority interest and in retained earnings of $1,639 million and $5,445 million respectively. In April 2007, Shell sold half of its interest in Sakhalin II, reducing its interest from 55% to 27.5%, for a sales price of $4.1 billion. As a result of this transaction, Sakhalin II has been accounted for as an associated company rather than as a subsidiary with effect from April 2007. The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest, and an increase in equity-accounted investments of $3.7 billion.
26 OTHER RESERVES
$ MILLION
Merger reserve At January 1, 2009 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Share-based compensation At December 31, 2009 At January 1, 2008 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Repurchases of shares Share-based compensation At December 31, 2008 At January 1, 2007 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Repurchases of shares Share-based compensation At December 31, 2007 3,444 – – 3,444 3,444 – – – 3,444 3,444 – – – 3,444
Share premium reserve 154 – – 154 154 – – – 154 154 – – – 154
Capital redemption reserve 57 – – 57 48 – 9 – 57 39 – 9 – 48
Share plan reserve 1,192 – 181 1,373 1,122 – – 70 1,192 736 – – 386 1,122
Accumulated other comprehensive income (1,669) 6,623 – 4,954 9,380 (11,049) – – (1,669) 4,447 4,933 – – 9,380
Total 3,178 6,623 181 9,982 14,148 (11,049) 9 70 3,178 8,820 4,933 9 386 14,148
The merger reserve and share premium reserves were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and of The Shell Transport and Trading Company Limited in 2005. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is maintained in respect of equity-settled share-based compensation plans (see Note 24), and includes related deferred taxation recognised directly in equity of $22 million in 2009 (2008: $68 million; 2007: $55 million).
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
137
[Note 26 continued] Accumulated other comprehensive income comprises the following:
$ MILLION
Jan 1, 2009 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total Pre-tax 6,698 (44) 6,654 (101) (27) (128) (37) 318 281 6,807 Tax (164) – (164) (16) 1 (15) (1) 44 43 (136)
Recognised in 2009 Share of equityaccounted After tax 6,534 (44) 6,490 (117) (26) (143) (38) 362 324 6,671 investments
Minority interest
Attributable to Royal Dutch Shell plc shareholders
Dec 31, 2009
(3,984)
74
(52)
6,512
2,528
2,679
(72)
–
(215)
2,464
(364) (1,669)
2 4
– (52)
326 6,623
(38) 4,954
$ MILLION
Recognised in 2008 Share of Jan 1, 2008 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total (11,988) (386) (12,374) 772 1,955 (117) 655 (8) (356) 9,380 1 (7) (11,726) 287 – 287 45 6 51 – – – 338 (11,701) (386) (12,087) 817 (111) 706 (8) 1 (7) (11,388) (1) (2) – 341 18 – equityaccounted investments
Attributable to Royal Dutch Shell plc Minority interest shareholders Dec 31, 2008
Pre-tax
Tax
After tax
7,781
(19)
341
(11,765)
(3,984)
724
2,679
(8) (11,049)
(364) (1,669)
$ MILLION
Recognised in 2007 Share of equityJan 1, 2007 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total 2,392 Pre-tax 6,058 (324) 5,734 626 (1,065) 2,295 (439) (133) 201 68 5,363 Tax (331) – (331) (54) 214 160 (153) (23) (176) (347) After tax 5,727 (324) 5,403 572 (851) (279) (286) 178 (108) 5,016 (62) 1 14 (28) accounted investments
Attributable to Royal Dutch Shell plc Minority interest shareholders Dec 31, 2007
5,389
7,781
(340)
1,955
(240) 4,447
(8) (56)
– (27)
(116) 4,933
(356) 9,380
138
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
[Note 26 continued] Unrealised gains on securities reclassified to income in 2007 includes $952 million relating to the sale of the equity portfolio held by Shell’s insurance companies and Shell’s interest in Enterprise Product Partners (see Note 4).
27 DIVIDENDS
$ MILLION
Interim dividends paid: $1.66 per Class A share (2008: $1.56; 2007: $1.405) Interim dividends paid: $1.66 per Class B share (2008: $1.56; 2007: $1.405) Total
2009 5,969 4,557 10,526
2008 5,458 4,058 9,516
2007 5,154 3,847 9,001
On February 4, 2010, the Directors proposed a further interim dividend in respect of 2009 of $0.42 per Class A share and $0.42 per Class B share, payable on March 17, 2010, which will absorb an estimated $2,621 million of shareholders’ funds. Dividends declared on Class A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends declared on Class B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends declared on American Depository Receipts (“ADRs”) are paid in dollars.
28 LEGAL PROCEEDINGS
GROUNDWATER CONTAMINATION
Shell Oil Company (including subsidiaries and affiliates, referred to collectively as SOC), along with numerous other defendants, have been sued by public and quasi-public water purveyors, as well as governmental entities, alleging responsibility for groundwater contamination caused by releases of gasoline-containing oxygenate additives. Most of these suits assert various theories of liability, including product liability, and seek to recover actual damages, including clean-up costs. Some assert claims for punitive damages. Fewer than 50 of these cases remain. Based on court rulings in SOC’s favor in certain cases claiming damages from threats of contamination, the claims asserted in remaining matters, and Shell’s track record with regard to amounts paid to resolve varying claims, management of Shell does not currently believe that the outcome of the remaining oxygenate-related litigation pending, as at December 31, 2009, will have a material impact on Shell.
RECATEGORISATION OF HYDROCARBON RESERVES
In 2007, Shell reached a settlement of asserted and unasserted claims arising from the 2004 recategorisation of certain hydrocarbon reserves with representatives of purchasers who both resided and purchased shares outside of the USA during the period April 8, 1999 to March 18, 2004 (Non-US Settlement). The parties to the Non-US Settlement include a shareholders’ foundation, certain of Shell’s institutional investors, and other shareholders’ rights organisations. The terms of the Non-US Settlement agreement principally include settlement relief of $352.6 million to be distributed to the non-US purchasers pursuant to a plan of distribution proposed in the Non-US Settlement, along with certain other relief. The NonUS Settlement agreement (and an amendment to it executed on February 27, 2008) was declared binding by the Amsterdam Court of Appeals on May 29, 2009. Notices informing shareholders that they may elect to opt out of the settlement and submit a claim were sent in November 2009. Funds comprising the settlement relief have been escrowed. In 2008, a consolidated shareholder class action pending in the US District Court in New Jersey alleging losses related to the 2004 recategorisations of certain hydrocarbon reserves was settled (US Settlement) and finally approved by the court. Among other things, the US Settlement provides to all persons and entities who purchased Shell shares on US markets and all US persons and entities who purchased Shell shares on non-US markets during the Relevant Period the following relief: (i) settlement relief of $82.8 million to be distributed to US purchasers pursuant to the plan of distribution; (ii) interest on settlement amounts from April 1, 2008 (and providing the same relief to participants in the NonUS Settlement); and (iii) the US purchasers and participants in the Non-US Settlement collectively will receive an additional payment of $35 million, divided in accordance with proportions determined in the two proposed settlements. Shell has paid US class counsel’s fees and expenses, will pay the costs of administering the US settlement, and has escrowed the settlement funds. Distribution of settlement funds is expected in 2010. Provisions were recognised in 2007 and 2008 for the settlement payments and attorneys fees (see Note 19).
OTHER
Shell subsidiaries are subject to a number of other loss contingencies arising from litigation and claims brought by governmental and private parties, which are handled in the ordinary course of business. 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, including for example, Nigeria. The industries in which Shell subsidiaries are engaged are also subject to physical risks of various types. The nature and frequency of these developments and events, not all of which are covered by insurance, as well as their effect on future operations and earnings, are unpredictable.
Shell Annual Report and Form 20-F 2009 Consolidated Financial Statements ? Notes to the Consolidated Financial Statements
139
29 AUDIT FEE A – Remuneration of auditors
$ MILLION
2009 Remuneration in respect of the audit of the Parent Company and Consolidated Financial Statements, including the audit of Shell consolidation returns Other audit fees, primarily in respect of audits of accounts of subsidiaries Total audit fees Total audit-related services (other services provided pursuant to legislation) Taxation services (primarily for tax compliance) Other services Total 4 53 57 2 1 – 60
2008 5 49 54 2 – 1 57
2007 4 44 48 3 – 1 52
B – Remuneration for supply of services in relation to retirement benefit plans for employees of subsidiaries
PricewaterhouseCoopers provides audit services to retirement benefit plans for employees of subsidiaries. Remuneration amounted to $1 million in 2009 (2008: $1 million; 2007: $1 million).
30 EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the income attributable to Royal Dutch Shell plc shareholders for the year by the weighted average number of Class A and B shares outstanding during the year. Diluted earnings per share are based on the same income figures. The weighted average number of shares outstanding during the year is adjusted for the number of shares related to share option schemes. Earnings per share are identical for Class A and Class B shares.
2009 2008 2007
Income attributable to Royal Dutch Shell plc shareholders ($ million) 12,518 26,277 31,331
Basic weighted average number of Class A and B shares 6,124,906,119 6,159,102,114 6,263,762,972
Diluted weighted average number of Class A and B shares 6,128,921,813 6,171,489,652 6,283,759,171
31 POST-BALANCE SHEET EVENTS
A consortium in which Shell has a 45% interest signed a 20-year agreement with the Iraqi Ministry of Oil to lead the development of the Majnoon oilfield. Another consortium in which Shell has a 15% interest signed an agreement with the Ministry to develop and expand the West Qurna-1 field in southern Iraq. The Shell Petroleum Development Company of Nigeria Limited agreed, subject to regulatory approval, to sell its interests in three production licences and related equipment in the Niger Delta. Shell and Cosan S.A. signed a non-binding memorandum of understanding, expressing the intention to form a circa $12 billion joint venture in Brazil for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels. Under the terms of the memorandum, both companies would contribute certain existing assets to the joint venture. In addition, Shell would contribute a total of $1.6 billion in cash, payable over two years. A company jointly owned by Shell and PetroChina placed a non-binding indicative offer to acquire 100% of Arrow Energy Limited (Arrow), excluding its international assets. Arrow is a company listed in Australia that supplies coal seam gas to eastern Australia. The offer comprises consideration of approximately $3 billion.
140
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas
SUPPLEMENTARY INFORMATION — OIL AND GAS [A]
Adoption of revised reserves reporting standards
As a company with significant oil and gas operations, Shell is required to present certain supplementary disclosures regarding those operations and its proved oil and gas reserves in accordance with the rules of the SEC and the Financial Accounting Standards Board (FASB). On December 28, 2008, the SEC adopted revised rules for the modernisation of oil and gas reporting requirements. In January 2010, the FASB adopted a revised standard for oil and gas reserves estimation and disclosures. Both of those revised standards are effective for annual periods ending on or after December 31, 2009. Retroactive adoption is not permitted and accordingly: all reserves disclosures for the years 2008 and 2007 are reported in accordance with the disclosure standards in effect during such periods; all reserves disclosures as at December 31, 2009, including the standardised measure of discounted future cash flows, are calculated on the basis of the revised SEC and FASB standards referred to above; and in order to show the changes effected by the revised disclosure rules for 2009, (i) the reserves balances at the beginning of the year 2009 are shown on the basis of the previous rules and (ii) the changes effected by the rules changes are included in revisions and reclassifications for previously booked proved reserves or extensions and discoveries for new proved reserves for 2009. In accordance with the revised SEC rules proved oil and gas reserves quantities at December 31, 2009 are based on a 12-month unweighted arithmetic average sales price, calculated on a first day of the month basis compared to the year-end prices used in 2008 and 2007. The tables for the current reporting period and the 2008 and 2007 historical data have been aligned to the updated SEC requirement for geographic area disclosure. Following the issuing by the SEC, on December 28, 2008, of the new rules Modernization of Oil and Gas Reporting, the proved reserves associated with synthetic crude oil are included in the quantities of oil and gas at the end of 2009. Furthermore, for the first time we included proved reserves associated with future production that will be consumed in operations. Proved reserves are shown net of any quantities of crude oil or natural gas that are expected to be taken by others as royalties in kind but do not exclude quantities related to royalties expected to be paid in cash (except in North America and in other situations in which the royalty quantities are owned by others) or those related to fixed margin contracts. Proved reserves include certain quantities of crude oil or natural gas that will be produced under arrangements that involve Shell companies in risks and rewards but do not transfer title of the product to those companies. Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgement (see Risk factors on pages 1315). These estimates remain subject to revision and are unaudited supplementary information.
[A] Reserves, reserves volumes and reserves related information and disclosure are referred to as “unaudited” as a means of clarifying that this information is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Consolidated Financial Statements or the Parent Company Financial Statements.
Reserves
Net quantities (which are unaudited) of proved oil and gas reserves are shown in the tables on pages 142-149. Proved reserves are those quantities of crude oil, natural gas, natural gas liquids, synthetic crude oil and bitumen, and sales products of other non-renewable natural resources which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible in future years from known reservoirs, and under existing economic conditions, operating methods and government regulations. Proved developed oil and gas reserves are reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods or through installed extraction equipment and infrastructure if the extraction is by means not involving a well. The unaudited proved reserves volumes reported exclude volumes attributable to oil and gas discoveries that are not at present considered proved. Such volumes will be included when technical, fiscal and other conditions allow them to be economically developed and produced.
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil, natural gas liquids, synthetic crude oil and bitumen
141
CRUDE OIL, NATURAL GAS LIQUIDS, SYNTHETIC CRUDE OIL AND BITUMEN
Shell subsidiaries’ estimated net proved reserves of crude oil, natural gas liquids, synthetic crude oil and bitumen at the end of the year, their share of the net proved reserves of equity-accounted investments at the end of the year, and the changes in such reserves during the year are set out below. Significant changes in crude oil, natural gas liquids, synthetic crude oil and bitumen proved developed and undeveloped reserves are discussed below.
The 54 million barrels of bitumen in revisions and reclassifications for bitumen is related primarily to the improved economics due to a higher commodity price for bitumen in 2009.
SHELL SHARE OF EQU ITY- ACCOUNTED INVESTMENTS Asia
The upward net revision of 200 million barrels is attributed to revisions and reclassifications in Abu Dhabi, Brunei, Russia and Qatar. These revisions are primarily related to licence agreement extensions, the positive results of new well information and better than expected well performance related to ongoing development activity and study work.
North America – USA
2009 Compared with 2008
SHELL SUBSIDIARIES
The upward revision of 73 million barrels is related to improved field performance, study activity and the improved economics due to a higher commodity price.
2008 Compared with 2007
Europe
The upward net revision of 123 million barrels in revisions and reclassifications is the result of better reservoir performance from waterfloods, development activity supported by study activity and improved economics. The increase in commodity prices resulted in the rebooking of some 49 million barrels de-booked in 2008.
Asia
SHELL SUBSIDIARIES Asia
The upward net revision of 210 million barrels is due to revisions and reclassifications in Oman, Kazakhstan and Malaysia related to on going development activity, study activity, improved performance data and improved economic conditions related to changes in commodity prices. Some 60 million barrels of the additions in Asia are estimated to be the result of applying the revised SEC rules and are related to the use of analogues in the aggregate.
Africa
The upward net revision of 174 million barrels is due to better results from development drilling in Kashagan offsetting negative tail end cutoff effects as a result of the low year end price, and re-evaluation in a number of fields in Oman following the acquisition of new performance data.
Africa
The upward net revision of 108 million barrels in revisions and reclassifications was primarily due to re-evaluations in a number of fields following the acquisition of new performance data.
North America – Canada
The addition of 241 million barrels is the result of upward net revision of 189 million barrels in revisions and reclassifications that are mainly located in Nigeria and related to ongoing development and study activity, improved economics and changes in commercial agreements and an impairment reversal in Nigeria; the 51 million barrels of extensions and discoveries are mainly associated with new bookings in fields in Nigeria.
North America – USA
The downward net revision of 58 million barrels is mainly due to economics in a number of fields in Canada as a result of the low yearend price.
In the USA the net upward revision of 146 million barrels is made up from 92 million barrels in revisions and reclassifications associated with performance improvements including waterfloods, study activity and improved economics related to the higher commodity prices. A further 54 million barrels are related to extensions and discoveries from new bookings.
North America – Canada
The total of 1,630 million barrels of additions to synthetic crude oil are made up of 1,207 million barrels in revisions and reclassifications of which 997 million barrels of proven minable oil sands. This includes the conversion of proven minable oil sands reserves to synthetic crude oil reserves that were previously included in our proven minable reserves in accordance with the revised SEC and FASB rules. Additional upward revisions are the result of completed geoscience and engineering study work as well as a further increase of 65 million barrels due to the addition of consumed in operations volumes. 423 million barrels are also related to extensions and discoveries from new mine extensions.
142
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil, natural gas liquids, synthetic crude oil and bitumen
Crude oil and natural gas liquids, synthetic crude oil and bitumen
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 009 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil Bitumen All products South America Total MILLION BARRELS
Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Minority interest in reserves of Shell subsidiaries At December 31 – – – 10 – – – – – 10 – – 10 10 22 – – – – (2) 30 526 493 200 2 18 – – (114) 599 1,830 59 12 – – – – (13) 58 135 – – – – – – – – 735 241 73 – 3 – – (29) 288 710 – – – – – – – – 38 – – – – – – – – 1,599 – – – – – – – – 57 20 1 – – – – (2) 19 57 823 308 2 21 – – (160) 994 4,031 – – – – – – – – 1,599 – – – – – – – – 57 823 308 2 21 – – (160) 994 5,687 481 123 – 7 – (1) (114) 496 1,069 210 39 15 – – (102) 1,231 65 4 – 19 – – (11) 77 598 189 1 51 – – (104) 735 347 92 – 54 – – (71) 422 40 4 – 1 – – (7) 38 – 1,207 – 423 – – (31) 1,599 8 54 – 2 – – (7) 57 12 11 – 24 – – (9) 38 2,612 633 40 171 – (1) (418) 3,037 – 1,207 – 423 – – (31) 1,599 8 54 – 2 – – (7) 57 2,620 1,894 40 596 – (1) (456) 4,693
[A] Includes 2 million barrels consumed in operations.
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 9 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil South America
MILLION BARRELS Total All Bitumen products
Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 8 9 375 420 49 39 – – 189 216 – – – – – – 19 17 640 701 – – – – 640 701 376 384 307 341 55 40 300 379 175 249 26 23 – 691 8 29 10 35 1,249 1,451 – 691 8 29 1,257 2,171
PRO V E D U N D E V E L OPE D RE S E RV E S 2 0 0 9 Australia/ Europe Oil and NGL Asia Oil and NGL Oceania Oil and NGL Africa USA Oil and NGL Oil and NGL Oil and NGL Synthetic crude oil Bitumen North America Canada Oil and NGL Oil and NGL Synthetic crude oil South America
MILLION BARRELS Total All Bitumen products
Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 2 21 118 179 10 19 – – 52 72 – – – – – – 1 2 183 293 – – – – 183 293 105 112 762 890 10 37 298 356 172 173 14 15 – 908 – 28 2 3 1,363 1,586 – 908 – 28 1,363 2,522
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil and natural gas liquids
143
Crude oil and natural gas liquids
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 008 MILLION BARRELS
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 615 13 – 9 – (21) (135) 481 26 (14) – – – – (2) 10 – Asia 996 174 23 15 – (36) (103) 1,069 609 (17) – 10 – – (109) 493 – Oceania 63 11 – 4 – (2) (11) 65 63 11 – – – (1) (14) 59 – Africa 574 108 31 5 – (4) (116) 598 – – – – – – – – 8 USA 375 35 – 7 – (1) (69) 347 297 (27) – 1 – – (30) 241 – South Canada [A] America 119 (58) – – 4 – (17) 48 – – – – – – – – – 9 12 – – – – (9) 12 30 (6) – – – – (4) 20 – Total 2,751 295 54 40 4 (64) (460) 2,620 1,025 (53) – 11 – (1) (159) 823 8
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 8
MILLION BARRELS
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 [A] Includes bitumen reserves. 470 376 7 8 Asia 329 307 442 375 Australia/ Oceania 39 55 52 49 Africa 352 300 – – USA 185 175 238 189 South Canada [A] America 74 34 – – 7 10 25 19 Total 1,456 1,257 764 640
144
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Crude oil and natural gas liquids
Crude oil and natural gas liquids
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 007 MILLION BARRELS
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 711 42 – 29 – (15) (152) 615 12 (1) 18 – – (1) (2) 26 – Asia 1,171 35 – 85 – (189) (106) 996 546 102 – 66 – – (105) 609 1 Oceania 58 18 – 2 – – (15) 63 24 50 – 1 – – (12) 63 – Africa 784 (132) 33 13 – – (124) 574 – – – – – – – – 12 USA 398 51 – 13 – – (87) 375 312 9 8 – – (1) (31) 297 – South Canada [A] America 139 (18) – 15 – – (17) 119 – – – – – – – – – 9 8 – 1 – – (9) 9 33 – – – – – (3) 30 – Total 3,270 4 33 158 – (204) (510) 2,751 927 160 26 67 – (2) (153) 1,025 13
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 7
MILLION BARRELS
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 [A] Includes bitumen reserves. 533 470 11 7 Asia 443 329 469 442 Australia/ Oceania 31 39 13 52 Africa 378 352 – – USA 204 185 256 238 South Canada [A] America 79 74 – – 9 7 24 25 Total 1,677 1,456 773 764
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
145
NATURAL GAS
Shell subsidiaries’ estimated net proved reserves of natural gas at the end of the year, their share of the net proved reserves of equityaccounted investments at the end of the year, and the changes in such reserves during the year are set out below. The volumes in the table below have not been adjusted to standard heat content. Apart from the GTL project, volumes of gas are reported on an “as-sold” basis. The price used to calculate future revenues and cash flows from proved gas reserves is the contract price or the 12 month average on “as-sold” volumes. Volumes associated with the GTL project are those measured at a designated transfer point between the upstream and downstream portions of the integrated project and reflect the composition of the gas stream at this point. Significant changes in natural gas proved developed and undeveloped reserves are discussed below.
SHELL SHARE OF EQU ITY- ACCOUNTED INVESTMENTS Europe
The net increase of 594 thousand million scf in revisions and reclassifications predominantly from fields in the Netherlands and is related to re-evaluations of reservoir performance and the inclusion of future production related to own use consumed in operations. The effect of including future production that will be consumed in operations on proved reserves was 271 thousand million scf.
Asia
The net increase of 1,008 thousand million scf in revisions and reclassifications is the combined result of additional development drilling, better performance results and study activity in Russia and Brunei, this also includes an increase of 600 thousand million scf of proved reserves volumes that will be consumed in operations.
Australia/Oceania
2009 Compared with 2008
SHELL SUBSIDIARIES
The upward revision of 862 thousand million scf was primarily due to related development and study activities in Australia and the addition of proved reserves volumes that will be consumed in operations.
2008 Compared with 2007
Europe
The net increase of 751 thousand million scf contained in revisions and reclassifications results from improved performance data, ongoing development and study activity and the inclusion of consumed in operations volumes in Denmark, Germany, Norway and the UK; this increase has been partially offset by the negative impact of lower gas prices. This includes the proved reserves associated with future production that will be consumed in operations of 226 thousand million scf.
Asia
SHELL SUBSIDIARIES Europe
The net increase of 356 thousand million scf in revisions and reclassifications is related to re-evaluations in a number of fields mainly in the UK, Germany and Denmark following the acquisition of new performance data, which more than offset the negative tail end and economic effects in some fields due to the low year-end price.
Asia
The net increase of 580 thousand million scf in revisions and reclassifications is primarily the result of additional development drilling, better performance results and rebookings in Malaysia due to higher commodity prices and further development activity in Qatar. These increases were partially offset by the negative PSC effects related to the higher product prices, predominantly in Qatar. The effect of including future production that will be consumed in operations was 603 thousand million scf.
Australia/Oceania
The net increase of 3,326 thousand million scf results mainly from development activity in Qatar GTL and positive PSC effects related to the low year-end price.
Australia/Oceania
The net increase of 273 thousand million scf in revisions and reclassifications is due to the re-evaluation in a number of fields following the acquisition of new performance data and re-evaluation of existing data. These more than offset the negative effects in the tail-end cut off and economics of some fields.
Africa
The 2,880 thousand million scf in extensions and discoveries are primarily related to new bookings offshore Australia and include future production that will be consumed in operations of 360 thousand million scf.
Africa
The combined upward revision of 1,460 thousand million scf is primarily the result of new bookings from field extensions, upward revisions as the result of development and study activity in a number of fields in Nigeria.
North America – USA
The combined net positive changes of 273 thousand million scf consisting of 143 thousand million scf in revisions and reclassifications and 130 thousand million scf relating to extensions are mainly the result of improved gas recovery factors and additions to the proved areas in a number of fields in Nigeria, more than offsetting negative year-end price effects.
North America – USA
The increase of 229 thousand million scf in extensions and discoveries is primarily due to new bookings resulting from ongoing development activity both onshore and offshore the USA. Proved reserves associated with future production that will be consumed in operations were 99 thousand million scf; this was significantly impacted by negative revisions related to lower gas prices in 2009.
The combined net positive changes of 313 thousand million scf consist of 178 thousand million scf in revisions and reclassifications and 135 thousand million scf of extensions which were the result of infill drilling and better than anticipated performance with some additions to the proved areas in a number of fields.
North America – Canada
The net increase of 408 thousand million scf in purchases is associated with the acquisition of Duvernay.
146
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
SHELL SHARE OF EQUITY- ACCOUNTED IN VESTMEN TS Asia
The net reduction of 569 thousand million scf in revisions and reclassifications is mainly the result of new reservoir data gathered from wells drilled in the Sakhalin II project in Russia and in the Qatar LNG project. The increase of 330 thousand million scf in extensions and discoveries was primarily related to the extension of the proved area of the Qatar LNG project in Qatar.
Australia/Oceania
The net increase of 330 thousand million scf in revisions and reclassifications is primarily related to the evaluation of existing and new data in a number of Australian fields.
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
147
Natural gas
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 009 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Minority interest in reserves of Shell subsidiaries At December 31 4,641 751 – 30 – – (700) 4,722 11,091 594 – 29 – – (601) 11,113 15,835 – Asia 13,556 580 – 198 – – (601) 13,733 5,256 1,008 1 71 – – (257) 6,079 19,812 15 Oceania 2,045 94 – 2,880 16 – (235) 4,800 1,055 862 – – – – (85) 1,832 6,632 – Africa 1,759 740 – 720 – – (181) 3,038 – – – – – – – – 3,038 5 USA 2,392 36 – 229 – – (399) 2,258 10 63 – 1 – – (9) 65 2,323 – Canada 1,231 (4) – 160 – – (215) 1,172 – – – – – – – – 1,172 – South America 303 (41) – 8 – – (32) 238 – 5 – – – – – 5 243 – Total 25,927 2,156 – 4,225 16 – (2,363) 29,961 17,412 2,532 1 101 – – (952) 19,094 49,055 20
[A] Includes 188 thousand million standard cubic feet consumed in operations. Includes 30 thousand million standard cubic feet consumed in operations.
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 9
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,371 3,574 9,131 8,732 Asia 2,021 2,418 852 1,973 Australia/ Oceania 1,501 1,046 575 354 Africa 593 957 – – USA 1,194 1,248 8 56 Canada 747 754 – – South America 144 173 – 5 Total 9,571 10,170 10,566 11,120
PROVE D U N D E V E L O PE D RE SE RV E S 20 09
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 1,270 1,148 1,960 2,381 Asia 11,535 11,315 4,404 4,106 Australia/ Oceania 544 3,754 480 1,478 Africa 1,166 2,081 – – USA 1,198 1,010 2 9 Canada 484 418 – – South America 159 65 – – Total 16,356 19,791 6,846 7,974
148
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
Natural gas
PRO VE D DE VE L OPE D AN D U N DE VE L OPE D RE S E RVE S 2 008 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 4,903 356 – 93 – (1) (710) 4,641 11,578 144 – 17 – (11) (637) 11,091 – Asia 10,572 3,326 – 156 – – (498) 13,556 5,678 (569) – 330 – – (183) 5,256 21 Oceania 1,884 273 – 55 40 – (207) 2,045 802 330 – – – – (77) 1,055 – Africa 1,741 143 – 130 – – (255) 1,759 – – – – – – – – – USA 2,468 178 – 135 – (7) (382) 2,392 12 1 – – – – (3) 10 – Canada 923 (3) – 52 408 – (149) 1,231 – – – – – – – – – South America 334 5 – – – – (36) 303 – – – – – – – – – Total 22,825 4,278 – 621 448 (8) (2,237) 25,927 18,070 (94) – 347 – (11) (900) 17,412 21
PRO V E D D E V E L OPE D RE S E RV E S 2 0 0 8
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,185 3,371 9,543 9,131 Asia 1,311 2,021 960 852 Australia/ Oceania 983 1,501 373 575 Africa 703 593 – – USA 1,319 1,194 8 8 Canada 687 747 – – South America 170 144 – – Total 8,358 9,571 10,884 10,566
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Natural gas
149
Natural gas
PROVE D DE VE L OPE D AN D U N DE VE L O PE D RE S E RVE S 2 007 THOUSAND MILLION STANDARD CUBIC FEET
North America Australia/ Europe Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Minority interest in reserves of Shell subsidiaries At December 31 4,951 227 – 537 – (150) (662) 4,903 11,902 244 – 22 – (29) (561) 11,578 – Asia 17,071 (1,218) – 207 – (5,046) (442) 10,572 1,419 1,888 – 2,556 – – (185) 5,678 26 Oceania 1,813 256 – 22 – – (207) 1,884 757 114 – 5 – – (74) 802 – Africa 2,272 (326) – 69 – – (274) 1,741 – – – – – – – – – USA 2,629 138 – 162 – (50) (411) 2,468 5 7 1 – – – (1) 12 – Canada 1,093 (52) – 28 1 – (147) 923 – – – – – – – – – South America 229 111 – 28 – – (34) 334 1 (1) – – – – – – – Total 30,058 (864) – 1,053 1 (5,246) (2,177) 22,825 14,084 2,252 1 2,583 – (29) (821) 18,070 26
PROVE D D E V E L OPE D RE S E RV E S 2 0 0 7
THOUSAND MILLION STANDARD CUBIC FEET
North America Europe Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 3,224 3,185 9,827 9,543 Asia 1,627 1,311 1,045 960 Australia/ Oceania 691 983 215 373 Africa 680 703 – – USA 1,504 1,319 4 8 Canada 689 687 – – South America 182 170 1 – Total 8,597 8,358 11,092 10,884
150
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) Standardised measure of discounted future cash flows
STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS
United States accounting principles require the disclosure of a standardised measure of discounted future cash flows, relating to proved oil and gas 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. For
20 09 – S HEL L SUBSIDIAR IES
the 2008 and 2007 periods, the price and costs were those at year end. 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.
$ MILLION
North America Europe 61,836 23,116 11,724 14,496 12,500 3,010 9,490 – Asia 87,327 18,367 18,429 21,254 29,277 19,848 9,429 5 Australia/ Oceania 29,353 9,169 12,977 2,955 4,252 5,319 (1,067) – Africa 48,742 18,697 5,975 10,929 13,141 3,649 9,492 105 USA 32,766 16,964 6,131 3,496 6,175 1,517 4,658 – Canada 91,855 62,287 20,303 2,969 6,296 5,306 990 – South America 2,481 1,268 444 313 456 53 403 – Total 354,360 149,868 75,983 56,412 72,097 38,702 33,395 110
Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Minority interest included
20 09 – S HEL L SHAR E O F E Q U ITY- ACCO UNTED I NVESTM ENTS
$ MILLION
North America Europe Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows are estimated. 84,784 58,794 2,624 9,105 14,261 6,530 7,731 Asia 54,598 24,105 5,679 10,576 14,238 5,485 8,753 Australia/ Oceania [A] 29,412 13,549 4,700 4,658 6,505 3,020 3,485 Africa – – – – – – – USA 15,778 7,565 2,488 2,073 3,652 1,443 2,209 Canada – – – – – – – South America 1,001 459 54 286 202 34 168 Total 185,573 104,472 15,545 26,698 38,858 16,512 22,346
[A] Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the numbers
20 08
$ MILLION
North America Europe Shell subsidiaries: Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Shell share of equity-accounted investments Minority interests included [A] Excludes synthetic crude oil. 46,960 17,007 9,848 11,188 8,917 2,186 6,731 9,921 – Asia 56,134 15,923 15,463 10,103 14,645 10,940 3,705 2,834 1 Australia/ Oceania 6,621 2,805 1,023 861 1,932 754 1,178 396 – Africa 24,059 11,107 5,727 2,360 4,865 1,078 3,787 – (19) USA 25,939 13,737 8,683 1,419 2,100 338 1,762 783 – Canada [A] 7,973 5,246 1,849 325 553 (61) 614 – – South America 1,107 429 153 170 355 137 218 66 – Total 168,793 66,254 42,746 26,426 33,367 15,372 17,995 14,000 (18)
Supplementary information (unaudited)
Shell Annual Report and Form 20-F 2009 Standardised measure of discounted future cash flows
151
200 7
$ MILLION
North America Europe Shell subsidiaries: Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Shell share of equity-accounted investments Minority interest included [A] Excludes synthetic crude oil. 107,607 28,937 14,600 40,317 23,753 7,192 108,559 20,556 20,442 31,829 35,732 23,938 11,770 3,530 1,986 1,912 4,342 1,473 55,639 16,197 5,089 20,295 14,058 3,600 48,696 19,163 6,190 8,170 15,173 4,938 12,429 7,377 1,474 1,009 2,569 660 1,611 561 117 214 719 186 346,311 96,321 49,898 103,746 96,346 41,987 Asia Australia/ Oceania Africa USA Canada [A] South America Total
16,561 10,023 –
11,794 7,470 10
2,869 2,000 –
10,458 – 245
10,235 6,434 –
1,909 – –
533 802 –
54,359 26,729 255
Change in standardised measure of discounted future net cash flows relating to proved oil and gas reserves
200 9 $ MILLION
Shell share of equityShell subsidiaries 17,995 35,269 17,898 (23) 18,267 (28,834) (27,443) 14,569 2,901 (17,204) 33,395 accounted investments 14,000 15,067 2,328 – 7,045 (6,071) (12,829) 3,861 2,994 (4,049) 22,346 Total 31,995 50,336 20,226 (23) 25,312 (34,905) (40,272) 18,430 5,895 (21,253) 55,741
At January 1 Net changes in prices and production costs Extensions, discoveries and improved recovery Purchases and sales of minerals in place Revisions of previous reserves estimates Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31
Sub si di arie s
$ MILLION
At January 1 Net changes in prices and production costs Extensions, discoveries and improved recovery Revisions of previous reserves estimates Purchases and sales of minerals in place Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31
2008 54,359 (69,345) 3,640 12,718 (759) (3,275) (48,503) 10,669 10,362 48,129 17,995
2007 43,045 59,064 9,258 5,781 (9,257) (14,601) (37,263) 10,447 6,862 (18,977) 54,359
Additional information concerning proved reserves
Proved reserves can be either developed or undeveloped. Subsidiaries’ proved reserves at December 31, 2009 were divided into 40% developed and 60% undeveloped on a barrel of oil equivalent basis. For the Shell share of equity-accounted investments the proved reserves were divided into 61% developed and 39% undeveloped. Proved reserves are recognised under various forms of contractual agreements. Shell’s proved reserves volumes present in agreements such as PSCs or other forms of economic entitlement contracts at December 31, 2009 where the Shell share of reserves can vary with commodity prices are approximately 1,318 million barrels of crude oil and natural gas liquids, and 16,035 thousand million scf of gas.
152
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities capitalised costs
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES CAPITALISED COSTS
The aggregate amount of property, plant and equipment and intangible assets 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
2009 Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. Includes synthetic crude oil activities’ net capitalised costs of $12,029 million at December 31, 2009. 151,303 20,787 5,778 177,868 88,226 1,899 2,687 92,812 85,056
2008 116,365 18,526 4,859 139,750 73,786 1,476 2,394 77,656 62,094
Shell share of equity-accounted investments
$ MILLION
2009 Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. The Shell share of equity-accounted investments’ net capitalised costs was $17,077 million at December 31, 2008. 20,552 62 1,676 22,290 22,147 40,555 891 2,991 44,437
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities costs incurred
153
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 table below. Development costs exclude costs of acquiring support equipment and facilities, but include depreciation thereon. Included in exploration costs in 2009 are $611 million (2008: $805 million; 2007: $594 million) of mainly drilling costs associated with maturing fields for which Shell has taken a final investment decision but for which no proved reserves have yet been recorded.
Shell subsidiaries
200 9 $ MILLION
North America Australia/ Europe Acquisition of properties Proved Unproved Exploration Development [A] 10 – 485 2,378 Asia 531 2 355 3,669 Oceania 99 163 385 533 Africa – 163 376 1,768 USA – 224 1,632 2,315 Canada 3 43 373 4,002 South America – 7 267 296 Total 643 602 3,873 14,961
[A] Includes capitalised asset decommissioning and restoration costs. Includes synthetic crude oil activities of $3,110 million.
200 8
$ MILLION
North America Europe Acquisition of properties Proved Unproved Exploration Development [A] 1 – 573 3,009 Asia 115 – 355 4,113 Australia/ Oceania 60 176 252 239 Africa 16 11 616 710 USA – 2,567 980 2,877 Canada 661 4,608 425 1,324 South America – – 418 193 Total 853 7,362 3,619 12,465
[A] Includes capitalised asset decommissioning and restoration costs.
200 7
$ MILLION
North America Europe Acquisition of properties Proved Unproved Exploration Development [A] – – 479 3,285 Asia – 2 315 3,573 Australia/ Oceania – 5 300 155 Africa – 124 627 2,182 USA – 611 1,065 2,315 Canada 3 65 325 922 South America – – 98 93 Total 3 807 3,209 12,525
[A] Includes capitalised asset decommissioning and restoration costs.
154
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities costs incurred
Shell share of equity-accounted investments
20 09 $ MILLION
North America Australia/ Europe Acquisition of properties Proved Unproved Exploration Development [A] – – 9 440 Asia 31 – 364 2,377 Oceania – – 109 1,720 Africa – – – – USA – – 1 316 Canada – – – – South America – – – 54 Total 31 – 483 4,907
[A] Includes capitalised asset decommissioning and restoration costs.
20 08
$ MILLION
North America Australia/ Costs incurred Europe 321 Asia 2,734 Oceania 1,208 Africa – USA 297 Canada – South America 177 Total 4,737
20 07
$ MILLION
North America Europe 308 Asia 2,217 Australia/ Oceania 1,456 Africa – USA 245 Canada – South America 91 Total 4,317
Costs incurred
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities earnings
155
OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES EARNINGS
Shell subsidiaries
200 9 [A ] $ MILLION
North America Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 2,945 8,271 11,216 2,729 322 273 2,730 (1,064) 4,098 2,886 1,212 Asia 2,449 8,170 10,619 1,113 185 208 937 (2,458) 5,718 4,744 974 Australia/ Oceania 1,001 877 1,878 177 172 196 307 (463) 563 69 494 Africa 1,613 5,524 7,137 1,285 465 532 1,233 (444) 3,178 2,370 808 USA 3,055 2,774 5,829 1,666 56 610 2,440 (653) 404 (458) 862 Canada 348 3,334 3,682 1,963 – 177 1,999 (1,075) (1,532) (572) (960) South America 119 486 605 184 68 182 124 (72) (25) (126) 101 Total 11,530 29,436 40,966 9,117 1,268 2,178 9,770 (6,229) 12,404 8,913 3,491
[A] Includes synthetic crude oil activities of earnings after taxation $249 million. Includes cash paid royalties to governments outside North America.
200 8
$ MILLION
North America Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 6,210 13,771 19,981 2,383 501 414 3,102 (440) 13,141 8,391 4,750 3,764 13,001 16,765 1,331 639 131 1,299 (2,107) 11,258 9,098 2,160 170 1,440 1,610 157 258 143 220 8 840 205 635 3,104 8,429 11,533 1,207 882 300 1,595 (20) 7,529 4,505 3,024 5,219 5,235 10,454 1,294 101 680 2,166 (76) 6,137 2,044 4,093 1,131 1,573 2,704 750 – 180 880 (330) 564 11 553 479 371 850 161 90 147 74 (41) 337 287 50 20,077 43,820 63,897 7,283 2,471 1,995 9,336 (3,006) 39,806 24,541 15,265 Asia Australia/ Oceania Africa USA Canada South America Total
[A] Includes cash paid royalties to governments outside North America.
200 7
$ MILLION
North America Australia/ Europe Revenue: Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation 3,750 11,654 15,404 2,433 401 178 3,311 107 9,188 4,961 4,227 Asia 2,961 9,097 12,058 1,313 342 141 893 (1,529) 7,840 6,499 1,341 Oceania 226 1,352 1,578 131 165 183 350 90 839 139 700 Africa 1,108 8,955 10,063 1,312 829 345 2,168 (1,670) 3,739 2,332 1,407 USA 3,099 5,765 8,864 1,242 74 675 2,183 (398) 4,292 1,488 2,804 Canada 1,322 1,021 2,343 655 – 246 514 (708) 220 (66) 286 South America 192 501 693 158 67 54 13 (44) 357 19 338 Total 12,658 38,345 51,003 7,214 1,878 1,822 9,432 (4,152) 26,475 15,372 11,103
[A] Includes cash paid royalties to governments outside North America.
156
Shell Annual Report and Form 20-F 2009 Supplementary information (unaudited) ? Oil and gas exploration and production activities earnings
Shell share of equity-accounted investments
20 09 $ MILLION
North America Australia/ Third party revenue Total Production costs excluding taxes Taxes other than income tax [A] Exploration expense Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation Europe 4,965 4,965 334 2,201 13 300 332 2,449 940 1,509 Asia 4,962 4,962 843 1,446 126 964 (76) 1,507 955 552 Oceania 1,053 1,053 148 72 92 294 30 477 194 283 Africa – – – – – – – – – – USA 1,613 1,613 454 3 1 293 342 1,204 437 767 Canada – – – – – – – – – – South America 192 192 42 9 – 297 (36) (192) 11 (203) Total 12,785 12,785 1,821 3,731 232 2,148 592 5,445 2,537 2,908
[A] Includes cash paid royalties to governments outside North America. Shell owns 34% of Woodside Petroleum Ltd, a publicly listed company on the Australian stock exchange. We have limited access to data, accordingly the numbers are estimated.
20 08
$ MILLION
North America Europe Earnings after taxation 2,519 Asia 467 Australia/ Oceania 535 Africa – USA 1,281 Canada 3 South America 165 Total 4,970
20 07
$ MILLION
North America Europe 1,667 Asia 597 Australia/ Oceania 238 Africa – USA 929 Canada 7 South America 145 Total 3,583
Earnings after taxation
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements ? Independent auditors’ report to the members of Royal Dutch Shell plc
157
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ROYAL DUTCH SHELL PLC
We have audited the Parent Company Financial Statements of Royal Dutch Shell plc (the Company) for the year ended December 31, 2009, which comprise the Parent Company Statement of Income, the Parent Company Statement of Comprehensive Income, the Parent Company Balance Sheet, the Parent Company Statement of Changes in Equity, the Parent Company Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AN D AUDITORS
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPA NIES 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 the information given in the Report of the Directors for the financial year for which the Parent Company Financial Statements are prepared is consistent with the Parent Company Financial Statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters where 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.
OTHER MATTER
As explained more fully in the Report of the Directors set out on pages 57-58, the Directors are responsible for the preparation of the Parent Company Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent Company Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMEN TS
We have reported separately on the Consolidated Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2009.
Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
London March 15, 2010
[A] The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) is 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. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Financial Statements.
OPINION ON FINANCIAL STATEMENTS
In our opinion the Parent Company Financial Statements: give a true and fair view of the state of the Company’s affairs as at December 31, 2009, and of its income and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006.
158
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
INDEX TO THE 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). 159 159 159 160 160 161 161 161 162 162 162 163 163 164 164 164 165 166 166 166 167 167 167 167 167 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Parent Company Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Finance income/(expense) Note 4 Remuneration of Directors and Senior Management Note 5 Taxation Note 6 Accounts receivable Note 7 Cash and cash equivalents Note 8 Financial instruments and other derivative contracts Note 9 Accounts payable and accrued liabilities Note 10 Ordinary share capital Note 11 Other reserves Note 12 Dividends Note 13 Earnings per share Note 14 Related party transactions Note 15 Legal proceedings Note 16 Associated companies and jointly controlled entities Note 17 Subsidiaries Note 18 Audit fee Note 19 Post-balance sheet events
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
159
STATE ME N T O F IN COME
$ MILLION
NOTES Dividend income Finance income Administrative expenses Finance expense Income before taxation Taxation Income for the period All results are from continuing activities. 3 3 5
2009 10,556 344 (37) (22) 10,841 43 10,884
2008 11,558 304 (62) (823) 10,977 (46) 10,931
STATE ME N T O F COMPRE H E N S I V E I N COME
$ MILLION
Income for the period Comprehensive income for the period
2009 10,884 10,884
2008 10,931 10,931
B A L AN CE S HE E T
$ MILLION
NOTES Assets Non-current assets Investments in subsidiaries Deferred tax Current assets Accounts receivable Cash and cash equivalents Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Total liabilities Equity Ordinary share capital Other reserves Retained earnings Total equity Total liabilities and equity 10 11 9 6 7
Dec 31, 2009
Dec 31, 2008
5
201,824 159 201,983 142 6,650 6,792 208,775
200,613 18 200,631 7,487 67 7,554 208,185
580 580 580 527 201,448 6,220 208,195 208,775
916 916 916 527 201,324 5,418 207,269 208,185
/s/
Simon Henry
Simon Henry
Chief Financial Officer, for and on behalf of the Board of Directors March 15, 2010
The Notes on pages 161 to 167 are an integral part of these Parent Company Financial Statements.
160
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements
S TATE M E N T OF CHA N G E S I N E QU IT Y
$ MILLION
NOTES At January 1, 2009 Comprehensive income for the period Dividends paid Share-based compensation Shares repurchased for cancellation At December 31, 2009 At January 1, 2008 Comprehensive income for the period Dividends paid Share-based compensation Shares repurchased for cancellation At December 31, 2008 12 11 10
Share capital 527 – – – – 527 536 – – – (9) 527
Other reserves 201,324 – – 124 – 201,448 201,180 – – 135 9 201,324
Retained earnings 5,418 10,884 (10,526) 444 – 6,220 6,886 10,931 (9,516) 198 (3,081) 5,418
Total equity 207,269 10,884 (10,526) 568 – 208,195 208,602 10,931 (9,516) 333 (3,081) 207,269
12 11 10
S TATE M E N T OF CA S H F L O WS
$ MILLION
NOTES Cash flow from operating activities Income for the period Adjustment for: Dividend income Taxation Unrealised currency exchange (gain)/loss Interest income Interest expense Decrease in net working capital Net cash from operating activities (pre-tax) Taxation refunded/(paid) Net cash from operating activities Cash flow from investing activities Dividends received Interest received Net cash from investing activities Cash flow from financing activities Dividends paid Repurchases of share capital, including expenses Interest paid Net cash used in financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 7 7
2009 10,884 (10,556) (43) (303) (32) 22 49 21 422 443 16,656 32 16,688
2008 10,931 (11,558) 46 787 (304) 109 27 38 (619) (581) 12,872 304 13,176 (9,516) (3,560) (109) (13,185) (590) 657 67
12
(10,526) – (22) (10,548) 6,583 67 6,650
The Notes on pages 161 to 167 are an integral part of these Parent Company Financial Statements.
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
161
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 International Accounting Standards (IAS) Regulation and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Company, there are no material differences with 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 accounting policies set out in Note 2 below have been consistently applied in all periods presented. The Financial Statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities and other derivative contracts. The preparation of financial information 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 could differ from those estimates. The financial results of the Company are included in the Consolidated Financial Statements on pages 97-139. The financial results of the Company incorporate the results of the Dividend Access Trust, the financial statements for which are presented on pages 171-174. The Company’s principal activity is being the parent company for Shell, as described in Note 1 to the Consolidated Financial Statements. It conducts itself wholly within the Corporate business segment (see Note 7 to the Consolidated Financial Statements). The Financial Statements were approved and authorised for issue by the Board of Directors on March 15, 2010.
2 ACCOUNTING POLICIES
The Company’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. Key accounting estimates and judgements affecting the assessment and measurement of impairment follow those set out in Note 3 to the Consolidated Financial Statements. The following are the principal accounting policies of the Company.
Presentation currency
The Company’s presentation and functional currency is US dollars (dollars).
Currency translation
Income and expense items denominated in currencies other than the functional currency are translated into the functional currency at the rate ruling on their transaction date. Monetary assets and liabilities recorded in currencies other than the functional currency are expressed in the functional currency at the rates of exchange ruling at the respective balance sheet dates. Differences on translation are included in the Statement of Income. Share capital issued in currencies other than in the functional currency is translated into the functional currency at the exchange rate as at the date of issue.
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. Shell Petroleum N.V. (Shell Petroleum) and its fiscal unit subsidiaries are part of the fiscal unit of which the Company is the parent, and the Company recognises in its financial statements the resulting current tax payable or receivable for the fiscal unit. The tax charge or credit is recognised in the Statement of Income calculated at the statutory tax rate prevailing in the Netherlands.
Investments
Investments in subsidiaries are stated at cost, net of pre-acquisition dividends receivable and any impairment. The original cost of the Company’s investment in Royal Dutch Petroleum Company (Royal Dutch) was based on the fair value of the Royal Dutch shares, transferred to the Company by the former shareholders of Royal Dutch in exchange for Class A shares in the Company during the public exchange offer (the Royal Dutch Offer). For shares of Royal Dutch tendered in the acceptance period, the fair value was calculated based on the closing price of Royal Dutch’s shares on July 19, 2005. For shares of Royal Dutch tendered in the subsequent acceptance period, the fair value was calculated based on the quoted bid price of the Company’s Class A shares on the specified date.
162
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
[Note 2 continued] The original cost of the Company’s investment in The Shell Transport and Trading Company Limited (Shell Transport) was the fair value of the Shell Transport shares held by the former shareholders of Shell Transport, which were transferred in consideration for the issuance of Class B shares as part of the Scheme of Arrangement. The fair value was calculated based on the closing price of Shell Transport’s shares on July 19, 2005. As a result of the Unification (see Note 26 to the Consolidated Financial Statements), the Company’s investments in Royal Dutch and Shell Transport now represent an investment in Shell Petroleum. This had no impact on the cost of investments in subsidiaries.
Share-based compensation plans
The fair value of share-based compensation (IFRS 2 charge) for equity-settled plans granted to subsidiary employees under the Company’s schemes is recognised as an investment in subsidiaries from the date of grant over the vesting period with a corresponding increase in equity. The fair value of these plans is estimated using a Monte Carlo pricing model. At the moment of vesting of a plan, the costs for the actual deliveries is recharged to the relevant employing subsidiaries. This is recognised as a repayment of the investment originally booked. If the actual vesting costs are higher than the originally estimated IFRS 2 charge, the difference is accounted for as a gain in the Statement of Income. Information on the principal plans, including vesting conditions and shares granted, vested and expired or forfeited during the year, is set out in Note 24 to the Consolidated Financial Statements.
Dividend income
Interim dividends declared are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport or of Shell Petroleum, in which case income is recognised on declaration date.
3 FINANCE INCOME/(EXPENSE)
$ MILLION
2009 Finance income Interest income Currency exchange gains Total Finance expense Interest expense Currency exchange losses Total 32 312 344 (22) – (22)
2008 304 – 304 (109) (714) (823)
4 REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT
The Directors and Senior Management are remunerated for their services to Shell. Remuneration of the Directors and Senior Management is paid by subsidiaries. The Company has received a recharge of $8.8 million (2008: $10.5 million) for the services of Directors and Senior Management. Remuneration of Directors and Senior Management, detailing short-term benefits, retirement benefits, share-based compensation and gains realised on the exercise of share options, is set out in Note 6 to the Consolidated Financial Statements.
5 TAXATION A – Taxation (credit)/charge for the period
$ MILLION
2009 (Credit)/charge in respect of current period Adjustment in respect of prior periods Current taxation Relating to the origination and reversal of temporary differences Deferred taxation Taxation (credit)/charge (61) – (61) 18 18 (43)
2008 38 8 46 – – 46
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
163
[Note 5 continued] Reconciliations of the expected tax charge to the actual tax charge are as follows:
$ MILLION
Income before taxation Applicable tax charge at statutory tax rate of 25.5% (2008: 25.5%) Income not subject to tax Adjustment in respect of prior periods Other tax items Taxation (credit)/charge
2009 10,841 2,764 (2,771) – (36) (43)
2008 10,977 2,799 (2,762) 8 – 46
The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. Other tax items comprise net interest of $14 million received from the tax authorities relating to overpaid taxes in prior years and $22 million relating to a tax credit received on withholding tax deductions on dividends received by entities within the Dutch Fiscal Unit.
B – Taxes receivable
$ MILLION
2009 Income taxes receivable Total 137 137
2008 501 501
Taxes receivable are reported within accounts receivable; taxes payable are reported within accounts payable and accrued liabilities. In 2009, current tax recoverable of $nil (2008: $4 million) in connection with stamp duties and commission fees relating to shares repurchased for cancellation has been recognised in equity.
C – Deferred tax assets
$ MILLION
At January 1 Recognised in income Additions during the year At December 31
2009 18 (18) 159 159
2008 18 – – 18
Prior year tax losses brought forward were utilised during the year, with the related deferred tax asset of $18 million recognised in income. The tax losses of 2009 have been partly carried back to 2008. A deferred tax asset has been recognised for the remaining losses as it is probable that these will be recovered, based on projected future available profits. The tax losses can be carried forward for relief during the next nine years ending December 31, 2018.
6 ACCOUNTS RECEIVABLE
$ MILLION
Dec 31, 2009 Amounts due from subsidiaries (see Note 14) Other receivables Total 4 138 142
Dec 31, 2008 6,986 501 7,487
Included in other receivables is $137 million (2008: $501 million) related to current tax receivables (see Note 5).
7 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise call deposits with a subsidiary (see Note 14).
164
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
8 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS
Financial assets and liabilities in the Company’s Balance Sheet comprise cash and cash equivalents (see Note 7), accounts receivable (see Note 6) and certain amounts reported within accounts payable and accrued liabilities (see Note 9). Foreign exchange derivatives are used by the Company to manage foreign exchange risk. Foreign exchange risk arises when certain transactions are denominated in a currency that is not the Company’s functional currency. There are no derivative financial instruments held at year end. The fair value of financial assets and liabilities at December 31, 2009 and 2008 approximates their carrying amount. All financial assets and liabilities fall due within 12 months.
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
$ MILLION
Amounts owed to subsidiaries (see Note 14) Withholding tax payable Accruals Unclaimed dividends Total
2009 345 228 6 1 580
2008 611 290 14 1 916
10 ORDINARY SHARE CAPITAL
AU TH ORISED NUMBER OF SHARES
Class A shares of ¤0.07 each Class B shares of ¤0.07 each Unclassified shares of ¤0.07 each Sterling deferred shares of £1 each
I SS U E D A N D F U LLY PAI D
Dec 31, 2009 4,077,359,886 2,759,360,000 3,163,280,114 50,000
Dec 31, 2008 4,077,359,886 2,759,360,000 3,163,280,114 50,000
NUMBER OF SHARES
At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008
N O MI N A L VA L U E
Class A 3,545,663,973 3,583,505,000 (37,841,027) 3,545,663,973
shares of ¤0.07 each Class B 2,695,808,103 2,759,360,000 (63,551,897) 2,695,808,103
shares of £1 each Sterling deferred 50,000 50,000 – 50,000
$ MILLION
At January 1 and December 31, 2009 At January 1, 2008 Shares repurchased for cancellation At December 31, 2008
Class A 300 303 (3) 300
shares of ¤0.07 each Class B 227 233 (6) 227
Total 527 536 (9) 527
The total nominal value of sterling deferred shares is less than $1 million. In the period from January 2, 2008 to November 7, 2008 37,841,027 Class A shares and 63,551,897 Class B shares were repurchased under the Company’s share buyback programme and cancelled. The Company did not repurchase any shares for cancellation in 2009. The Class B shares rank pari passu in all respects with the Class A shares except for the dividend access mechanism described below. The Company and Shell Transport can procure the termination of the dividend access mechanism at any time. Upon such termination, the Class B shares will form one class with the Class A shares ranking pari passu in all respects and the Class A shares and Class B shares will be known as ordinary shares without further distinction. The sterling deferred shares are redeemable only at the discretion of the Company at £1 for all sterling deferred shares redeemed at any one time, 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 the Class A and Class B shares. For information on the number of shares in the Company held by Shell employee share ownership trusts and in connection with share-based compensation plans, refer to Note 24 of the Consolidated Financial Statements.
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
165
[Note 10 continued]
Dividend access mechanism for Class B shares
GENERAL
Dividends paid on Class 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 Class B shares will receive dividends via the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for Dutch and UK tax purposes; there will be no UK or Dutch withholding tax on such dividends and certain holders (not including US holders) of Class B shares or Class B ADRs will be entitled to a UK tax credit in respect of their proportional share of such dividends.
DESCRIPTION OF DIVIDEN D ACCESS MECHANISM
A dividend access share has been issued by Shell Transport to Lloyds TSB Offshore Trust Company Limited as dividend access trustee (the Trustee). Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of Class B shares from time to time and will arrange for prompt disbursement of such dividends to holders of Class B shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends that are unclaimed after 12 years will revert to Shell Transport. Holders of Class B shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend access share. The only assets held on trust for the benefit of the holders of Class B shares will be dividends paid to the dividend access trustee in respect of the dividend access share. The declaration and payment of dividends on the dividend access share will require Board action by Shell Transport and will be subject to any applicable legal or articles limitations in effect from time to time. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate amount of the dividend declared by the Company’s Board on the Class B shares in respect of the same period.
OPERATION OF THE DIVIDEND ACCESS MECHANISM
If, in connection with the declaration of a dividend by the Company on the Class B shares, the board of Shell Transport elects to declare and pay a dividend on the dividend access share to the dividend access trustee, the holders of the Class B shares will be beneficially entitled to receive their share of that dividend 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 by way of a dividend on the dividend access share and paid by the dividend access trustee to any holder of Class B shares, the dividend which the Company would otherwise pay on the Class B shares will be reduced by an amount equal to the amount paid to such holders of Class B shares by the dividend access trustee. The Company will have a full and unconditional obligation, in the event that the dividend access trustee does not pay an amount to holders of Class B shares on a cash dividend payment date (even if that amount has been paid to the dividend access trustee), to pay immediately the dividend declared on the Class B shares. The right of holders of Class B shares to receive distributions from the dividend access 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 Class B shares. The dividend access mechanism may be suspended or terminated at any time by the Company’s Directors or the Directors of Shell Transport, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. On February 5, 2010 (Completion) the Trustee entered in to an agreement with EES Trustees International Limited (the ‘New Trustee’) whereby the benefit of certain clients of the Trustee including the Trust would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and the replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement between the Trustee and the New Trustee.
11 OTHER RESERVES
AN A LY S IS OF OTHE R RE SE RVE S $ MILLION
Share premium At January 1, 2009 Share-based compensation At December 31, 2009 At January 1, 2008 Share-based compensation Shares repurchased for cancellation At December 31, 2008 reserve 154 – 154 154 – – 154
Capital redemption reserve 57 – 57 48 – 9 57
Share plan reserve 736 124 860 601 135 – 736
Other reserve 200,377 – 200,377 200,377 – – 200,377 Total 201,324 124 201,448 201,180 135 9 201,324
166
Shell Annual Report and Form 20-F 2009 Parent Company Financial Statements Notes to the Parent Company Financial Statements
[Note 11 continued]
Share premium reserve
On January 6, 2006 loan notes were converted into 4,827,974 Class A shares. The difference between the value of the loan notes and the value of the new shares issued was credited to the share premium reserve.
Capital redemption reserve
As required by the Companies Act 2006, the equivalent of the nominal value of shares cancelled is transferred to a capital redemption reserve.
Share plan reserve
The share plan reserve represents the fair value of share-based compensation granted to employees under the Company’s equity-settled schemes.
Other reserve
The other reserve was created as a result of the Unification and represents the difference between the cost of the investment in Shell Transport and Royal Dutch 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.
12 DIVIDENDS
DIVIDE N DS PAID $ MILLION
Interim paid on March 11, 2009: Interim paid on March 11, 2009: Interim paid on June 10, 2009: Interim paid on June 10, 2009: Interim paid on September 9, 2009: Interim paid on September 9, 2009: Interim paid on December 9, 2009: Interim paid on December 9, 2009: Total paid in 2009 Interim paid on March 12, 2008: Interim paid on March 12, 2008: Interim paid on June 11, 2008: Interim paid on June 11, 2008: Interim paid on September 10, 2008: Interim paid on September 10, 2008: Interim paid on December 10, 2008: Interim paid on December 10, 2008: Total paid in 2008
$0.40 per Class A share $0.40 per Class B share $0.42 per Class A share $0.42 per Class B share $0.42 per Class A share $0.42 per Class B share $0.42 per Class A share $0.42 per Class B share $0.36 per Class A share $0.36 per Class B share $0.40 per Class A share $0.40 per Class B share $0.40 per Class A share $0.40 per Class B share $0.40 per Class A share $0.40 per Class B share
1,369 1,037 1,597 1,254 1,517 1,138 1,486 1,128 10,526 1,323 1,006 1,409 1,077 1,312 980 1,414 995 9,516
In addition, on February 4, 2010, the Directors proposed a further interim dividend in respect of 2009 of $0.42 per Class A share and $0.42 per Class B share, payable on March 17, 2010, which will absorb an estimated $2,621 million of shareholders’ funds. The dividends on the Class B shares are paid via the Dividend Access Trust (see Note 10). Dividends declared on Class A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends declared on Class B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends declared on American Depository Receipts (“ADRs”) are paid in dollars.
13 EARNINGS PER SHARE
Please refer to Note 30 to the Consolidated Financial Statements.
14 RELATED PARTY TRANSACTIONS
The Company deposited cash balances with Shell Treasury Centre Limited, a subsidiary. The Company earned interest on these balances of $2 million in 2009 (2008: $16 million). At December 31, 2009 the balance deposited was $6,649 million (2008: $67 million), consisting of sterling, euro and dollar balances. These balances are presented within cash and cash equivalents. Interest on euro balances is calculated at EONIA less 0.4% (2008: EONIA less 0.0625%), on sterling balances at LIBOR and on dollar balances at US LIBOR less 0.6% (2008: US LIBOR less 0.125%). At December 31, 2009 the Company has a net payable due to Shell Treasury Luxembourg Sarl, a subsidiary, of $296 million (2008: $611 million), presented within amounts owed to subsidiaries. The net payable comprises an interest-bearing receivable at December 31, 2009 of ¤4,416 million (2008: ¤4,237 million) and an interest-bearing payable of $6,660 million (2008: $6,581 million). Interest on euro balances is
Parent Company Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Parent Company Financial Statements
167
[Note 14 continued] calculated at EONIA less 0.4% (2008: EONIA less 0.0625%), on sterling balances at LIBOR and on dollar balances at US LIBOR. Net interest income on these balances in 2009 is $5 million (2008: $89 million). Dividend income in 2009 was $10,556 million (2008: $11,558 million). At December 31, 2009, amounts due from subsidiaries in respect of dividends were $nil (2008: $6,100 million). The main movement in investment in subsidiaries relates to the IFRS 2 charge of $501 million on equity-settled plans in 2009 (2008: $401 million), disclosed in the Consolidated Financial Statements. The Company recharged $84 million (2008: $171 million) to subsidiaries related to vested share-based compensation that was delivered to employees in 2009 on performance share plan awards that were granted in 2006 and previous years. In 2009, the Company settled balances of $255 million (2008: $nil) with Shell Petroleum. In 2009, the Company settled balances with several subsidiaries amounting to $26 million (2008: $30 million) relating to the Company’s employee costs. At December 31, 2009 a balance of $nil was owing to subsidiaries (2008: $15 million) with respect to these transactions. The Company was recharged certain administrative expenses from subsidiaries, which amounted to $26 million in 2009 (2008: $25 million). The Company recharged certain administrative expenses to subsidiaries, which amounted to $3 million in 2009 (2008: $4 million). Invoices from third-party suppliers were paid by Shell International B.V., a subsidiary, on behalf of the Company amounting to $3 million (2008: $8 million). The Company enters into forward and spot foreign exchange contracts with Treasury companies, which are subsidiaries. At December 31, 2009 there were no open contracts with these companies in respect of foreign exchange contracts. The Company settles general and administrative expenses of the Trust including the audit fees. The Company has guaranteed listed debt issued by subsidiaries amounting to $27,132 million (2008: $16,233 million).
15 LEGAL PROCEEDINGS
Please refer to Note 28 to the Consolidated Financial Statements.
16 ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
The Company has no direct interest in associated companies and jointly controlled entities. Shell’s major investments in associated companies and jointly controlled entities at December 31, 2009, and Shell’s percentage interest, are set out in Note 10 to the Consolidated Financial Statements. A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
17 SUBSIDIARIES
The significant subsidiary undertakings of Shell at December 31, 2009, and Shell’s percentage interest (to the nearest whole number) are set out in Exhibit 8. All of these subsidiaries have been included in Shell’s Consolidated Financial Statements. Those held directly by the Company are marked with an asterisk (*). A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
18 AUDIT FEE
Auditors’ remuneration for audit services during the year was $117,950 (2008: $160,000).
19 POST-BALANCE SHEET EVENTS
There are no post balance sheet events with an impact on the Company’s financial statements other than as disclosed in Note 12.
168
Shell Annual Report and Form 20-F 2009 Independent auditors’ report to Lloyds TSB Offshore Trust Company Limited, trustee of the Royal Dutch Shell dividend access trust
INDEPENDENT AUDITORS’ REPORT TO LLOYDS TSB OFFSHORE TRUST COMPANY LIMITED, TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST
We have audited the Financial Statements of the Royal Dutch Shell Dividend Access Trust (the Trust) for the year ended December 31, 2009 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. These Financial Statements have been prepared under the accounting policies set out therein.
RESPECTIVE RESPONSIBILITIES OF TRU STEE AND A UDITORS
We read the other information contained in the Royal Dutch Shell plc Annual Report, and consider whether it is consistent with the audited Financial Statements. This other information comprises the other sections of the Royal Dutch Shell plc Annual Report and Accounts and Annual Report on Form 20-F. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Financial Statements. Our responsibilities do not extend to any other information.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements. It also includes an assessment of the significant estimates and judgments made by the Trustee in the preparation of the Financial Statements, and of whether the accounting policies are in accordance with the requirements of the Trust Deed, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Financial Statements.
OPINION
The Trustee is responsible for preparing the Financial Statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Our responsibility is to audit the Financial Statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for the Trustee and the Royal Dutch Shell plc Class B shareholders as a group in accordance with clause 9.4 of the Trust Deed, and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Financial Statements give a true and fair view. We also report to you if, in our opinion, the Trust has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit.
In our opinion the financial statements: give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Trust’s affairs as at 31 December 2009 and of its result and cash flows for the year then ended.
PricewaterhouseCoopers LLP
Chartered Accountants London March 15, 2010
Shell Annual Report and Form 20-F 2009 Report of independent registered public accounting firm
169
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Lloyds TSB Offshore Trust Company Limited, 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, Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity, Statement of Cash Flows and the related Notes present fairly, in all material respects, the financial position of Royal Dutch Shell Dividend Access Trust (the Trust) at December 31, 2009 and December 31, 2008, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2009, 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. Also, in our opinion the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The trustee and the management of Royal Dutch Shell plc are responsible for these Financial Statements, 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 Corporate Governance Statement as set out on pages 76-86. Our responsibility is to express opinions on these Financial Statements and on the Trust’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Financial Statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
PricewaterhouseCoopers LLP
London March 15, 2010
170
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
INDEX TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS
171 171 171 172 172 173 173 173 173 174 174 174 174 174 174 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements Note 1 The Trust Note 2 Basis of preparation Note 3 Accounting policies Note 4 Other liabilities Note 5 Capital account Note 6 Distributions made Note 7 Audit fee Note 8 Financial instruments Note 9 Related party transactions
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
171
STATE ME N T O F IN COME
£ MILLION
Dividend income Income before and after taxation and for the period
2009 2,902 2,902
2008 2,277 2,277
2007 1,930 1,930
All results are from continuing activities.
STATE ME N T O F COMPRE H E N S I V E I N COME £ MILLION
2009 Income for the period Comprehensive income for the period 2,902 2,902
2008 2,277 2,277
2007 1,930 1,930
B A L AN CE S HE E T
£ MILLION
NOTES Assets Current assets Cash and cash equivalents Total assets Liabilities Current liabilities Other liabilities Total liabilities Equity Capital account Revenue account Total equity Total liabilities and equity
Dec 31, 2009
Dec 31, 2008
1 1
– –
4
1 1 – – – 1
– – – – – –
5
/s/
Davinia Smith
/s/
Heidi Wilson
Davinia Smith
Heidi Wilson
Signed for and on behalf of EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited (as trustee of the Royal Dutch Shell Dividend Access Trust) as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustees International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010. March 15, 2010
Signed for and on behalf of EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited (as trustee of the Royal Dutch Shell Dividend Access Trust) as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustees International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010.
The Notes on pages 173 to 174 are an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements.
172
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
S TATE M E N T OF CHA N G E S I N E QU IT Y
£ MILLION
NOTES At January 1, 2009 Comprehensive income for the period Distributions made At December 31, 2009 At January 1, 2008 Comprehensive income for the period Distributions made At December 31, 2008 At January 1, 2007 Comprehensive income for the period Distributions made At December 31, 2007
6
Capital account – – – – – – – – – – – –
Revenue account – 2,902 (2,902) – – 2,277 (2,277) – – 1,930 (1,930) –
Total equity – 2,902 (2,902) – – 2,277 (2,277) – – 1,930 (1,930) –
6
6
S TATE M E N T OF CA S H F L O WS
£ MILLION
2009 Cash flow from operating activities Income for the period Adjustment for: Dividends received Increase in net working capital Net cash from operating activities Cash flow from investing activities Dividends received Net cash from investing activities Cash flow from financing activities Distributions made Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 2,902 (2,902) 1 1 2,902 2,902 (2,902) (2,902) 1 – 1
2008 2,277 (2,277) – – 2,277 2,277 (2,277) (2,277) – – –
2007 1,930 (1,930) – – 1,930 1,930 (1,930) (1,930) – – –
The Notes on pages 173 to 174 are an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements.
Royal Dutch Shell Dividend Access Trust Financial Statements
Shell Annual Report and Form 20-F 2009 Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
173
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 Limited (previously known as The “Shell” Transport and Trading Company, plc (Shell Transport)) and Royal Dutch Shell plc (the Company). The Trust is governed by the applicable laws of England and Wales and is resident in Jersey. The Trustee of the Trust is Lloyds TSB Offshore Trust Company Limited (registration number 7748) (Trustee), PO Box 160, 25 New Street, St Helier, Jersey, JE4 8RG. The Trust was established as part of a dividend access mechanism. A Dividend Access Share was issued by Shell Transport to the Trustee. Following the declaration of a dividend by the Company on the Class B shares, Shell Transport may declare a dividend on the Dividend Access Share. The primary purposes of the Trust are to receive, on behalf of the Class B shareholders of the Company and in accordance with their respective holdings of Class B shares in the Company, any amounts paid by way of dividend on the Dividend Access Share and to pay such amounts to the Class B shareholders on the same pro rata basis. 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. On February 5, 2010 (Completion) the Trustee entered in to an agreement with EES Trustees International Limited (the New Trustee) whereby the benefit of certain clients of the Trustee, including the Trust, would be transferred to the New Trustee with effect from Completion. It is intended that the New Trustee will replace the Trustee during 2010. In the period between Completion and the replacement of the Trustee, the Trustee has granted the New Trustee a general trustee power of attorney as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement between the Trustee and the New Trustee.
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 Royal Dutch Shell Dividend Access Trust, there are no material differences with IFRS as issued by the International Accounting Standards Board, therefore the Financial Statements have been prepared in accordance with IFRS as issued by the IASB. The accounting policies set out in Note 3 below have been consistently applied in all periods presented. The Financial Statements have been prepared under the historical cost convention. 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 Trust’s accounting policies. Actual results may differ from these estimates. The financial results of the Trust are included in the Consolidated and Parent Company Financial Statements on pages 97-139 and pages 159-167 respectively. The Financial Statements were approved and authorised for issue on March 15, 2010 by EES Trustees International Limited pursuant to a general trustee power of attorney granted by Lloyds TSB Offshore Trust Company Limited as further described in Clause 2.2 of a Trust & Fund Business Administration Agreement entered into between EES Trustee International Limited and Lloyds TSB Offshore Trust Company Limited dated February 5, 2010.
3 ACCOUNTING POLICIES
The Trust’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. The following are the principal accounting policies of the Trust.
Functional currency
The functional currency of the Trust is sterling. The Trust dividend income and dividends paid are principally in sterling.
Foreign currency translation
Income and expense items denominated in currencies other than the functional currency are translated into the functional currency at the rate ruling on their transaction date. Monetary assets and liabilities recorded in currencies other than the functional currency are expressed in the functional currency at the rates of exchange ruling at the respective balance sheet dates. Differences on translation are included in the Statement of Income.
Taxation
The Trust is not subject to taxation.
174
Shell Annual Report and Form 20-F 2009 Royal Dutch Shell Dividend Access Trust Financial Statements
Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements
[Note 3 continued]
Dividend income
Interim dividends declared on the Dividend Access Share are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport, in which case income is recognised based on the record date of the dividend by the Company on its Class B shares.
4 OTHER LIABILITIES
Other liabilities include £525,602 (2008: £205,528) relating to unclaimed dividends.
5 CAPITAL ACCOUNT
The capital account is represented by the Dividend Access Share of 25 pence settled in the Trust by Shell Transport.
6 DISTRIBUTIONS MADE
Distributions are made to the Class B shareholders of the Company in accordance with the Trust Deed. Refer to Note 12 of the Parent Company Financial Statements for information about dividends per share. Unclaimed dividends amounted to £525,602 as at December 31, 2009 (2008: £205,528), which are not included in distributions made. Amounts are recorded as distributed once a wire transfer or cheque is issued. All cheques are valid for one year from the date of issue. Any wire transfers that are not completed are replaced by cheques. To the extent that cheques expire or are returned unpresented, the Trust records a liability for unclaimed dividends and a corresponding amount of cash.
7 AUDIT FEE
Auditors’ remuneration for audit services during the year was £37,250 (2008: £37,250; 2007: £35,000).
8 FINANCIAL INSTRUMENTS
The Trust, in its normal course of business, is not subject to market risk, credit risk or liquidity risk. The Trustees do not consider that any foreign exchange exposures will materially affect the operations of the Trust.
9 RELATED PARTY TRANSACTIONS
Shell Transport, a signatory to the Trust Deed, issued a Dividend Access Share to the Trustee of the Trust. The Trust received dividend income of £2,902 million (2008: £2,277 million; 2007: £1,930 million) in respect of the Dividend Access Share. The Trust made distributions of £2,902 million (2008: £2,277 million; 2007: £1,930 million) to the Class B shareholders of the Company, a signatory to the Trust Deed. The Company pays the general and administrative expenses of the Trust including the audit fees.
Shell Annual Report and Form 20-F 2009 Cross Reference to Form 20-F
175
CROSS REFERENCE TO FORM 20-F
PART I PAGES
Item 1. Item 2. Item 3.
Identity of Directors, Senior Management and Advisers Offer Statistics and Expected Timetable Key Information A. Selected financial data B. Capitalisation and indebtedness C. Reasons for the offer and use of proceeds D. Risk factors Information on the Company A. History and development of the company B. Business overview C. Organisational structure D. Property, plant and equipment Unresolved Staff Comments Operating and Financial Review and Prospects A. Operating results B. Liquidity and capital resources C. Research and development, patents and licences, etc. D. Trend information E. Off-balance sheet arrangements F. Tabular disclosure of contractual obligations G. Safe harbour Directors, Senior Management and Employees A. Directors and senior management B. Compensation C. Board practices D. Employees E. Share ownership Major Shareholders and Related Party Transactions A. Major shareholders B. Related party transactions C. Interests of experts and counsel Financial Information A. Consolidated Statements and Other Financial Information B. Significant Changes The Offer and Listing A. Offer and listing details B. Plan of distribution C. Markets D. Selling shareholders E. Dilution F. Expenses of the issue Additional Information A. Share capital B. Memorandum and articles of association C. Material contracts D. Exchange controls E. Taxation F. Dividends and paying agents G. Statement by experts H. Documents on display I. Subsidiary Information
N/A N/A 10, 88 N/A N/A 13-15 10-12, 16-17, 19-28, 38-41, 87 8-9, 11-12, 16-44, 49-52, 140-149 11, E2-E5 16-43, 50-52 N/A 8-10, 12, 16-44 45-48 18, 57, 105 8-9, 11-12, 16-21, 38-43 47 47 N/A 53-56, 77 61-75 57-59, 76-86 49-50, 109 49-50, 58-59, 63-73, 87, 104, 134-135 59, 86 59, 103, 115-116, 166-167, 174 N/A 45, 95-139, 157-174 57, 139, 167 87-90 N/A 87 N/A N/A N/A N/A 82-86 59 91 91-92 N/A N/A 2 N/A 80-82, 101-108, 116-117, 128-134, 164, 174 91
Item 4.
Item 4A. Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11. Item 12.
Quantitative and Qualitative Disclosures About Market Risk Description of Securities Other than Equity Securities
176
Shell Annual Report and Form 20-F 2009 Cross Reference to Form 20-F
PART II
PAGES
Item 13. Item 14. Item 15. Item 16. Item 16A. Item 16B. Item 16C. Item 16D. Item 16E. Item 16F. Item 16G.
PART III
Defaults, Dividend Arrearages and Delinquencies Material Modifications to the Rights of Security Holders and Use of Proceeds Controls and Procedures [Reserved] Audit committee financial expert Code of Ethics Principal Accountant Fees and Services Exemptions from the Listing Standards for Audit Committees Purchases of Equity Securities by the Issuer and Affiliated Purchasers Change in Registrant’s Certifying Accountant Corporate Governance
N/A N/A 80-82 76, 78-79 76 79, 139, 167, 174 76 47 N/A 76
Item 17. Item 18. Item 19.
Financial Statements Financial Statements Exhibits
N/A 95-139, 169-174 177
Shell Annual Report and Form 20-F 2009 Exhibits
177
INDEX TO THE EXHIBITS
Exhibit No. Description PAGE
1.1 1.2 2 4.2
Memorandum of Association of Royal Dutch Shell plc (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-4 (Registration No. 333-125037) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on May 18, 2005). Articles of Association of Royal Dutch Shell plc (incorporated by reference to Exhibit 99.3) to the Report on Form 6-K of Royal Dutch Shell plc furnished to the Securities and Exchange Commission on November 5, 2008. Dividend Access Trust Deed (incorporated by reference to Exhibit 2 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 Securities and Exchange Commission on March 13, 2007). Shell Provident Fund Regulations and Trust Agreement (incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment to Registration Statement on Form S-8 (Registration No. 333-126715) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on June 18, 2007). 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 Securities and Exchange Commission on March 13, 2006). 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 4.1 to the Registration Statement on Form F-3 (Registration No. 333-126726) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on July 20, 2005, amended from then to be dated as of June 27, 2006, and with the parties signatures). Form of Directors Letter of appointments (incorporated by reference to Exhibits 4.5 – 4.11 to the Annual Report for fiscal year ended December 31, 2006, on Form 20-F (File No. 001-325751) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on March 13, 2007). Calculation of Ratio of Earnings to Fixed Charges. Calculation of Return on Average Capital Employed (ROACE) (incorporated by reference to page 47 herein). Calculation of gearing ratio (incorporated by reference to page 9 and Note 16 to the Consolidated Financial Statements on page 121 herein). Significant Shell subsidiaries as at December 31, 2009. Section 302 Certification of Royal Dutch Shell plc. Section 302 Certification of Royal Dutch Shell plc. Section 906 Certification of Royal Dutch Shell plc. Consent of PricewaterhouseCoopers LLP, London. Consent of PricewaterhouseCoopers LLP, London relating to the Royal Dutch Shell Dividend Access Trust.
4.3 4.4
4.5
7.1 7.2 7.3 8 12.1 12.2 13.1 99.1 99.2
E1
E2 E6 E7 E8 E9 E10
178
Shell Annual Report and Form 20-F 2009 Exhibits
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 this Annual Report on Form 20-F on its behalf. Royal Dutch Shell plc
/s/
Peter Voser
Peter Voser
Chief Executive Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E1
EXHIBIT 7.1
CAL CU L AT I ON OF RAT I O OF E A R N I N G S T O F I X E D CH A RG E S $ MILLION, EXCEPT WHERE OTHERWISE INDICATED
Pre-tax income from continuing operations before income from equity investees Total fixed charges Distributed income from equity investees Less: interest capitalised Less: preference security dividend requirements of consolidated subsidiaries Total earnings Interest expensed and capitalised Interest within rental expense Less: preference security dividend requirements of consolidated subsidiaries Total fixed charges Ratio earnings/fixed charges
2009 16,044 2,397 4,903 1,088 – 22,256 1,630 767 – 2,397 9.28
2008 43,374 2,689 9,325 870 – 54,518 2,051 638 – 2,689 20.27
2007 42,342 2,380 6,955 667 – 51,010 1,775 605 – 2,380 21.43
2006 37,957 2,258 5,488 564 – 45,139 1,713 545 – 2,258 19.99
2005 37,444 1,958 6,709 427 7 45,677 1,494 457 7 1,958 23.33
E2
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 8
Significant subsidiaries
Significant subsidiaries at December 31, 2009, and Shell’s percentage of share capital (to the nearest whole number) are set out below. All of these subsidiaries have been included in the Consolidated Financial Statements of Shell on pages 97-139. Those held directly by the Company are marked with an asterisk(*). A complete list of investments in subsidiary and associated companies and jointly controlled entities will be attached to the Company’s annual return made to the Registrar of Companies.
Company name Shell Development (Australia) Proprietary Ltd Shell Energy Holdings Australia Ltd Shell China Holding Gmbh Qatar Shell Gtl Ltd Shell Deepwater Borneo Ltd Shell International Trading Middle East Ltd Shell Oman Trading Ltd Shell South Syria Exploration Ltd 3095381 Nova Scotia Company BlackRock Ventures Inc. Shell Canada Energy Shell Canada Ltd Shell Canada Upstream Shell Olie-OG Gasudvinding Danmark Pipelines Aps Shell Gabon Ferngasbeteiligungsgesellschaft Mbh Shell Energy Deutschland Gmbh Shell Erdgas Beteiligungsgesellschaft Mbh Shell Erdoel Und Erdgas Exploration Gmbh Shell Exploration and Production Libya Gmbh Shell Verwaltungsgesellschaft Fur Erdgasbeteiligungen Mbh Hazira Gas Private Ltd Shell E&P Ireland Ltd Shell Italia E&P SpA Sarawak Shell Berhad Shell MDS (Malaysia) Sendirian Berhad Shell Energy Asia Ltd Shell Nigeria E & P Company Ltd Shell Nigeria Exploration Properties Alpha Ltd Shell Nigeria Ultra Deep Ltd The Shell Petroleum Development Company Of Nigeria Ltd A/S Norske Shell Enterprise Oil Norge As Shell Tankers (Singapore) Private Ltd B.V. Dordtsche Petroleum Maatschappij Kirthar Pakistan B.V. Shell ABU Dhabi B.V. Shell Azerbaijan Exploration and Production B.V. Shell Caspian B.V. Shell E and P Offshore Services B.V. Shell Egypt Deepwater B.V. Shell Egypt N.V. Shell Energy Europe B.V. Shell EP Middle East Holdings B.V. Shell EP Wells Equipment Services B.V. Shell Exploration and Production Investments B.V. Shell Exploration B.V. Shell Gas B.V. Shell Generating (Holding) B.V. Shell International Exploration and Production B.V. Shell Kazakhstan Development B.V.
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 74 100 100 100 72 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation Australia Australia Austria Bermuda Bermuda Bermuda Bermuda Bermuda Canada Canada Canada Canada Canada Denmark Gabon Germany Germany Germany Germany Germany Germany India Ireland Italy Malaysia Malaysia New Zealand Nigeria Nigeria Nigeria Nigeria Norway Norway Singapore the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands
Principal activities Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Redeemable, Non-Redeemable
Shell Annual Report and Form 20-F 2009 Exhibits
E3
Company name Shell Olie – OG Gasudvinding Danmark B.V. Shell Philippines Exploration B.V. Shell Technology Ventures B.V. Shell Western LNG B.V. Syria Shell Petroleum Development B.V. Enterprise Oil Ltd Enterprise Oil Middle East Ltd Enterprise Oil U.K. Ltd Saxon Oil Miller Ltd Shell China Exploration and Production Company Ltd Shell Energy Europe Ltd Shell EP Offshore Ventures Ltd Shell Exploration and Production Oman Ltd Shell Gas Direct Ltd Shell Property Company Ltd Shell U.K. Ltd Shell Ventures New Zealand Ltd Pecten Cameroon Company LLC SCOGI, L.P. Shell Deepwater Royalties Inc. Shell Energy North America (US), L.P. Shell Exploration & Production Company Shell Frontier Oil & Gas Inc. Shell Gulf Of Mexico Inc. Shell Offshore Inc. Shell Oil Company Shell Onshore Ventures Inc. Shell Trading North America Company Shell Windenergy Inc SWEPI LP Shell Venezuela S.A. Shell Compania Argentina De Petroleo S.A. Shell Australia Ltd The Shell Company Of Australia Ltd Shell Western Supply & Trading Ltd Belgian Shell S.A. Shell Saudi Arabia (Refining) Ltd Shell Brasil Ltda Pennzoil-Quaker State Canada Incorporated Shell Canada Products Shell Chemicals Canada Ltd Shell Chile Sociedad Anonima Comercial E Industrial Shell Tongyi (Beijing) Petroleum Chemical Co. Ltd. Shell Tongyi (Xianyang) Petroleum Chemical Co. Ltd Shell Czech Republic Akciova Spolecnost Butagaz Sas J.P. Industrie Sas Ste D’ Exploitation De Stations-Service D’Autoroutes Ste Des Petroles Shell Sas Deutsche Shell Gmbh Deutsche Shell Holding Gmbh Shell Deutschland Oil Gmbh Shell Erneuerbare Energien Gmbh Shell Hellas A.E. Shell Hong Kong Ltd Asiatic Petroleum Company (Dublin) Ltd Shell Aviation Ireland Ltd Kenya Shell Ltd
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 75 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America Venezuela Argentina Australia Australia Barbados Belgium Bermuda Brazil Canada Canada Canada Chile China China Czech Republic France France France France Germany Germany Germany Germany Greece Hong Kong Ireland Ireland Kenya
Principal activities Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream
Class of shares held Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ltd Partnership, Partnership Capital Ordinary Partnership Capital Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Partnership Capital Ordinary Nominative Ordinary Ordinary Ordinary Ordinary Ordinary Quotas Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Nominative Ordinary Ordinary Ordinary Ordinary
E4
Shell Annual Report and Form 20-F 2009 Exhibits
Company name Shell Luxembourgeoise Sarl Shell Malaysia Trading Sendirian Berhad Shell Refining Co (Federation Of Malaya) Berhad Societe Shell Du Maroc Shell New Zealand Holding Company Ltd Shell New Zealand Ltd Shell Pakistan Ltd Pilipinas Shell Petroleum Corporation Shell Polska Sp. Z O.O. Shell Chemicals Seraya Pte. Ltd. Shell Eastern Petroleum (Pte) Ltd Shell Eastern Trading (Pte) Ltd Shell Seraya Pioneer (Pte) Ltd Shell South Africa Energy (Pty) Ltd Shell South Africa Holdings (Pty) Ltd Shell South Africa Marketing (Pty) Ltd AB Svenska Shell Shell Brands International AG Shell Chemicals Europe B.V. Shell Chemicals Ventures B.V. Shell Lubricants Supply Company B.V. Shell Nederland B.V. Shell Nederland Chemie B.V. Shell Nederland Raffinaderij B.V. Shell Nederland Verkoopmaatschappij B.V. Shell Trademark Management B.V. Shell Trading Rotterdam B.V. Tankstation Exploitatie Maatschappij Holding B.V. Shell & Turcas Petrol A.S. Shell Caribbean Investments Ltd Shell Chemicals U.K. Ltd Shell International Petroleum Company Ltd Shell International Trading And Shipping Company Ltd Shell Marine Products Ltd Shell Trading International Ltd The Shell Company Of Thailand Ltd Equilon Enterprises LLC Jiffy Lube International, Inc Pennzoil-Quaker State Company Shell Chemical LP Shell Chemicals Arabia LLC Shell Pipeline Company LP Shell Trading (US) Company SOPC Holdings East LLC SOPC Holdings West LLC TMR Company International Energy Bank Ltd Shell Bermuda (Overseas) Ltd Shell Holdings (Bermuda) Ltd Shell Overseas Holdings (Oman) Ltd Solen Insurance Ltd Shell Americas Funding (Canada) ULC Shell Treasury Hong Kong Ltd Shell Finance Luxembourg Sarl Shell Treasury Luxembourg Sarl Shell Treasury Centre East (Pte) Ltd Shell Finance Switzerland AG Solen Versicherungen AG Shell Finance (Netherlands) B.V. Shell International B.V.
% 100 100 51 100 100 100 76.1 67.1 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 70 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 99.9 100 100 100 100 100 100 100 100 100
Country of incorporation Luxembourg Malaysia Malaysia Morocco New Zealand New Zealand Pakistan Philippines Poland Singapore Singapore Singapore Singapore South Africa South Africa South Africa Sweden Switzerland the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands the Netherlands Turkey United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America United States of America Barbados Bermuda Bermuda Bermuda Bermuda Canada Hong Kong Luxembourg Luxembourg Singapore Switzerland Switzerland the Netherlands the Netherlands
Principal activities Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered, Voting Ordinary Redeemable, Non-Redeemable Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Ordinary Ordinary Partnership Capital Ordinary Partnership Capital Ordinary Membership Interest Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered, Voting Ordinary Ordinary
Shell Annual Report and Form 20-F 2009 Exhibits
E5
Company name Shell International Finance B.V.* Shell Overseas Investments B.V. Shell Petroleum N.V.* Shell Treasury Netherlands B.V. Shell Energy Investments Ltd Shell Holdings (U.K.) Ltd Shell International Investments Ltd Shell Overseas Holdings Ltd Shell Research Ltd Shell Treasury Centre Ltd Shell Treasury Dollar Company Ltd Shell Treasury Euro Company Ltd Shell Treasury UK Ltd The Shell Petroleum Company Ltd The Shell Transport and Trading Company Ltd Criterion Catalysts & Technologies L.P. Pecten Victoria Company Shell Petroleum Inc. Shell Treasury Center (West) Inc.
% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Country of incorporation the Netherlands the Netherlands the Netherlands the Netherlands United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United States of America United States of America United States of America United States of America
Principal activities Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate
Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary
E6
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 12.1
I, Peter Voser, certify that:
1. I have reviewed this Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
/s/
Peter Voser
Peter Voser
Chief Executive Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E7
EXHIBIT 12.2
I, Simon Henry, certify that:
1. I have reviewed this Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
/s/
Simon Henry
Simon Henry
Chief Financial Officer March 15, 2010
E8
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 13.1
In connection with the Annual Report on Form 20-F of Royal Dutch Shell plc (the Company) 2009, a corporation organised under the laws of England and Wales for the period ending December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer’s knowledge, that: 1. The Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not intended to be used or relied upon for any other purpose.
/s/
Peter Voser
Peter Voser
Chief Executive Officer
/s/
Simon Henry
Simon Henry
Chief Financial Officer March 15, 2010
Shell Annual Report and Form 20-F 2009 Exhibits
E9
EXHIBIT 99.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-155201, 333-155201-01) and the Registration Statements on Form S-8 (No. 333-126715 and 333-141397) of Royal Dutch Shell plc of our report dated March 15, 2010, relating to the Consolidated Financial Statements and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London March 15, 2010
E10
Shell Annual Report and Form 20-F 2009 Exhibits
EXHIBIT 99.2
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-155201, 333-155201-01) and the Registration Statement on Form S-8 (No. 333-126715) of the Royal Dutch Shell Dividend Access Trust of our report dated March 15, 2010, relating to the Royal Dutch Shell Dividend Access Trust Financial Statements, and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London March 15, 2010
CONTACT INFORMATION
REGISTERED OFFICE
Royal Dutch Shell plc Shell Centre London SE1 7NA United Kingdom Registered in England and Wales, Company number 4366849 Registered with the Dutch Trade Register under number 34179503
RETAIL SHAREHOLDERS
Enquiries from retail shareholders: Shareholder Relations Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR The Hague The Netherlands +31 (0)70 377 1365 +31 (0)70 377 4088 +31 (0)70 377 3953 or Shareholder Relations Royal Dutch Shell plc Shell Centre London SE1 7NA United Kingdom +44 (0)20 7934 3363 +44 (0)20 7934 7515 [email protected] www.shell.com/shareholder
INVESTOR RELATIONS
Enquiries from institutional shareholders: Investor Relations Royal Dutch Shell plc PO Box 162 2501 AN The Hague The Netherlands +31 (0)70 377 4540 +44 (0)20 7934 3856 (UK) or Investor Relations Shell Oil Company PO Box 2463 Houston, TX 77252 USA +1 713 241 1042 +1 713 241 0176 [email protected] [email protected] www.shell.com/investor
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